DouYu Finds Itself in Unfamiliar Waters as Business Shrinks

Key Takeaways:

• DouYu has reported its revenue slipped 8% in the third quarter, while also reporting its fourth consecutive quarterly loss
• Company has faced multiple challenges recently, including collapse of its planned merger and regulator’s recent freeze on new game title approvals

By Doug Young

Once a big fish in China’s online game streaming sector, DouYu International Holdings Ltd. DOYU – whose Chinese name means “fighting fish” – is finding itself in increasingly uncomfortable waters these days.

Nearly all the numbers in the company’s latest quarter report look quite gloomy, reflecting a steady stream of bad news for a company that was once set to merge with larger rival Huya HUYA to form an undisputed leader in China’s hot market for streaming games. That merger collapsed in July as China’s “summer of regulation” was kicking into high gear and the market regulator declined to approve the deal first announced last fall.

The merger’s nixing wasn’t a huge surprise, since cracking down on internet monopolies was one of Beijing’s first campaigns in its ongoing wave of new regulation. That campaign reached a crescendo earlier this year with a record $2.8 billion fine against e-commerce juggernaut Alibaba BABA in April.

But the bad times weren’t finished yet for DouYu.

In September, media reported that China’s game regulator had slowed, or even suspended, the approval of new titles in a bid to tackle gaming addiction by Chinese youth. Nobody knows how long that suspension will last. But if the past is any indication, a previous similar suspension in 2018 lasted for nearly a year, wreaking havoc on the industry.  

A Chinese media report this week said the latest suspension could be much shorter, with new approvals resuming as soon as the end of this month.

Speaking on the usual earnings conference call to discuss his company’s latest results, DouYu CEO Chen Shaojie confirmed that the suspension is indeed happening. He downplayed the impact by saying DouYu hasn’t seen “any significant impact” on its existing users, while also confirming that one or two new game launches had been affected.

He made no mention of a lifting of the suspension, which isn’t too surprising since company executives have learned not to raise the ire of regulators by predicting how they might act. But he did try to put a brave face on how the landscape will change when the suspension is eventually lifted. Specifically, he said that going forward DouYu expects to see “more…high-quality games launched into the market, which will be beneficial for us, and for the whole gaming industry in the long run.”

Investors weren’t too excited about any of the latest disclosures, which sparked an 8% drop in DouYu’s shares on Wednesday in New York. Not surprisingly, the stock has taken drubbing this year, and has currently lost about 80% of its value from a February peak. A big part of that decline came after the Huya merger was officially scrapped in July.

At its current price, DouYu has become a relative minnow with a market value just a tad above $1 billion. Thus, any further declines could strip the company of its “unicorn” status – a development that is mostly symbolic, but still significant, since Chinese tech companies seem particularly fond of touting such status.

Shrinking Business

From the bigger industry picture, we’ll shift gears and dive down into DouYu’s latest quarterly report that shows its business largely shrinking in nearly every direction.

The shrinkage begins on the top line, which saw overall revenue fall 8% year-on-year to 2.3 billion yuan ($361 million) in the three months through September. Revenue tied to livestreaming fees, which accounts for the vast majority of the total, fell by a slightly milder 6%. Advertising revenue that accounts for the remainder plunged 30%.

The revenue declines date back to the first quarter of this year, and analysts don’t see the trend reversing anytime soon.

The bottom line wasn’t any better, with DouYu posting a third-quarter net loss of 144 million yuan, compared with a 59.6 million yuan profit a year earlier. The drop into the red dates back roughly to the time that revenue began contracting, with the company reporting net losses for each of the last four quarters.

In terms of users, DouYu was keen to point out that its 61.9 million monthly active users (MAU) in the third quarter was up 3.9% year-on-year, and was also up from the 60.7 million MAUs in this year’s second quarter.

But the more important figure for paying quarterly users actually fell nearly 10% year-on-year to 7.2 million in the latest quarter. In one slightly encouraging sign, the number of paying users has actually been growing on a sequential basis in the last two quarters, rebounding from a trough of 7 million in this year’s first quarter.

The company discussed a number of initiatives designed to reignite its growth on its conference call, including growing momentum for an international expansion whose first stop is gaining some momentum in Japan. But most of the moves seemed largely incremental and are unlikely to provide the kind of boost DouYu needs to jumpstart its revenue growth in the near-term.

The drubbing of its shares means that DouYu’s stock now trades at a relatively strong discount to many of its peers. The company trades at a price-to-sales (P/S) ratio of just 0.85, well below the 1.4 for Huya, which is about twice DouYu’s size, and 4.9 for online video giant Kuaishou (1024.HK). Most of the big international peers are part of much larger corporations, though Sony SONY, whose PlayStation is a key part of its business, trades at a higher P/S 1.8 – roughly double DouYu’s.

Analysts aren’t particularly jazzed on the company either. Of the nine polled by Yahoo Finance, six have a “hold” rating on the stock – a significant number for analysts who are usually quite bullish on China tech plays. Two have a “buy” rating, and one has a “strong buy.”

With so many factors playing against it, it’s hard to see DouYu returning to investor favor anytime soon. The company looks destined to go it alone due to the regulator’s anti-monopoly stance, so doesn’t look like a potential acquisition target. Thus, it will need to show some new initiatives with significant growth potential before it can win back favor.