Huya, DouYu Flounder in First Quarter, With Worse to Come

Key Takeaways:

• Huya and DouYu, which were once set to merge, reported losing money and revenue declines in the first quarter
• Both companies will continue struggling in current quarter after announcement of new restrictions on online tipping last week

By Doug Young

New quarterly results from top gaming livestreamers Huya Inc. HUYA and DouYu International Holdings Ltd. DOYU are a sea of red ink, with nearly all major metrics shrinking in the three-month period. Each company takes pains in its report to point out the one or two indicators that are still growing, even as gloom is the overriding theme.

And the gloom is just beginning, as both companies point out in nearly identical statements accompanying the results. That’s because the livestreaming sector, one of many in China that has been saddled with a new wave of regulation over the last year, took another hit just last week when four government agencies announced new measures to curb spending by minors.

The new rules will ban minors from tipping their favorite livestreaming hosts – a major source of revenue for platform operators. What’s more, platforms will be banned from displaying rankings of the biggest tippers, again targeting a young group of users that has a very limited concept of money and who like to compete over who can tip the most. Lastly, the new rules say certain interactive functions like tipping will be limited between 8 p.m. and 10 p.m., one of the most popular viewing times for both minors and working young adults.

The irony here is that the new rules won’t even show up in both companies’ results until the current quarter, meaning they can’t blame their poor first-quarter results on this latest wave of regulation. Still, both companies highlighted the development with nearly identical statements, suggesting regulators probably had a hand in crafting the message.

“The company expects the (new rules) and the compliance measures to be taken will have negative impacts on the livestreaming service of the industry players, including that of the company, which may in turn adversely affect the company’s business operations and financial condition,” DouYu said in its statement.

Shares of both companies now trade near all-time lows, which is the norm these days for U.S.-listed Chinese stocks that have been battered by uncertainties both at home and in the U.S. over the last year. But in an interesting divergence, shares of Huya, the larger of the pair with a slightly more-diverse revenue makeup, actually rallied 5.6% in the two trading days after it announced its latest results. That includes a 3.3% rise on Wednesday, even as the broader market fell by 4% – its worst decline since the start of the pandemic two years ago.

DouYu was much more in line with the market, falling 8.6% after announcement of its results on Wednesday.

Like many of China’s other internet companies, Huya and DouYu were once internet superstars that rose to prominence on the back of live broadcasting that has become all the rage in China. The pair both had a major backer in internet giant Tencent (0700.HK), which engineered a plan to merge the companies in 2020. But China’s market regulator vetoed that deal last year, in the first of many setbacks for the pair since then.

Glimmers of hope?

We’ll spend the second half of this space looking at the two companies’ latest reports and any potential glimmers of hope they may offer for when they might return to growth. Frankly speaking, that time doesn’t appear to be on the near-term horizon, though it’s possible things could stabilize and turn around by next year. And there’s also the possibility that a bigger player like Kuaishou (1024.HK) might see this period of weakness as a buying opportunity and launch a takeover bid.

DouYu is the smaller and weaker of the pair, slipping into the red in the fourth quarter of 2020 and the revenue contraction column the following quarter. Huya managed to stay positive until last year’s fourth quarter, when it also began reporting revenue contraction and a net loss.

Those trends continued in the latest quarter, with DouYu reporting a 17% revenue decline to 1.8 billion yuan ($267 million), while Huya’s revenue fell by a milder 5% to 2.5 billion, according to their latest reports. DouYu’s loss actually narrowed 15% year-on-year to 86.9 million yuan, in a slightly positive sign for the company. Huya reported a small 3.3 million yuan loss, reversing a 186 million yuan profit from a year earlier.

Neither company gave a very detailed explanation for their revenue declines, though DouYu vaguely blamed “the implementation of prudent operating strategies in anticipation of a tightening regulatory environment.” Neither company provided any guidance for the current quarter, which is understandable in the face of so much uncertainty.

One of the few bright spots for DouYu was an improvement in its gross margin, which rose to 13.6% in the first quarter from 12.1% a year earlier. That might help to explain the company’s narrowing losses.

Huya’s gross margin actually deteriorated quite a bit, falling to 13.5% in the first quarter from 19.7% a year earlier. One of Huya’s bright spots was its mobile monthly average user (MAU) count for its Huya Live service, which managed to post 8.5% growth during the quarter year-on-year. Its quarterly paying users were flat, outpacing DouYu’s 9% decline for that metric.

Huya also looks slightly better than DouYu in terms of revenue diversity, which is perhaps why investors are slightly less bearish on the former versus the latter. Huya got 88% of its revenues from livestreaming in the latest quarter, compared with 96% for DouYu. The remaining revenue for both came from advertising, which is less likely to take a hit from the latest regulation.

Both companies currently trade at anemic price-to-sales (P/S) ratios, though, again, Huya is slightly ahead with ratio of 0.46 to DouYu’s 0.35. The companies are nearly identical in price-to-book (P/B) terms, both with ratios of about 0.5. The bottom line is that while some China tech stocks might start to rebound in the second half of this year, this pair of companies is almost certain to continue floundering until their situations stabilize and they find new, more diverse revenue sources.