Shrinking DouYu Emerges As Leaner And Meaner 'Fighting Fish'

Key Takeaways:

• DouYu’s revenue fell 24% in the second quarter, but it still posted a third consecutive profit thanks to even sharper spending cuts
• The company appears to be honing its focus on hardcore gamers as China clamps down on excessive gaming by minors

By Doug Young

Cao Hao, CFO of livestream gaming company DouYu International Holdings Ltd. DOYU, has a strange understanding of the word “steady.”

“In the second quarter of 2023, our financial performance remained steady,” Cao said in remarks with the company’s latest quarterly results released before markets opened on Monday. Is that “steady” as in DouYu’s 24% revenue decline during the quarter? Or perhaps it’s a reference to the company’s 40% plunge in paying users.

But despite those big declines, the company still managed to post its third consecutive quarterly profit for the period, ending a steady string of losses for most of last year.

Steady or not, a more appropriate name these days for DouYu, which means “fighting fish,” might instead be “the incredible shrinking fish.” That’s because the company managed to slash its operating expenses even more than its tanking revenue, which allowed it to record the profit for its latest reporting period.

There are two major pieces to DouYu’s story and why it appears to be gaining investor favor lately over larger rival Huya HUYA.

The biggest piece is DouYu’s rapid downsizing, which is being driven by a rapidly deteriorating environment for game operators in China. Driving the turmoil are China’s various regulators, which have steadily clamped down on gaming companies over the last two years to limit a past-time they see as harmful to Chinese youth.

A new rule in 2021 forbade minors from playing video games for more than three hours a week, instantly slashing the amount of time some of DouYu’s most enthusiastic users could spend on their hobby. Then in May last year, regulators announced new tightened rules that limited how much young gamers could tip their favorite livestreaming hosts, dealing a second blow to one of DouYu’s other major revenue sources.

As all of that happened, DouYu’s revenue growth went into reverse and began contracting at the start of 2022. That trend continued in the second quarter, as DouYu reported its revenue fell to 1.39 billion yuan ($192 million), down 24% from a year earlier and about 40% lower than its peak in the third quarter of 2021.

But DouYu didn’t just sit back and do nothing. Instead, it embarked on an aggressive cost-cutting campaign as it tried to “right-size” itself to a more sustainable size. The company cut its operating costs by 32% last year with across-the-board reductions in its marketing, R&D and general and administrative spending. It also reportedly reduced its headcount by 30% during the year, amid a broader wave of job cuts by Chinese internet companies.

DouYu accelerated the cost cutting in the latest quarter, with total operating expenses plunging by 40% to 204 million yuan from 340 million yuan a year earlier.

As a result of that “right-sizing” and resulting cost savings, DouYu was able to report its third consecutive quarterly profit of 6.8 million yuan for the latest period, ending a string of quarterly losses for most of last year as it went through its difficult adjustment. Its adjusted net income, which excludes stock-based compensation for employees, did even better, more than doubling in the latest quarter to 61.4 million yuan.

The positive effects of downsizing also showed up in the company’s coffers, as its cash rose slightly to about 7 billion yuan at the end of June from 6.8 billion yuan at the end of last year.

Chasing The Hardcores

With that larger downsizing theme in mind, we’ll spend the second half of our review looking more closely at the second major piece of DouYu’s recent story. Put simply, the company appears to be ditching its previous strategy of gaining users for the sake of reporting big numbers, and instead is focused on chasing the hardcore gamers. That latter group is easily the most profitable due to the longer times such players spend online and their greater willingness to pay for things like virtual accessories and tips for their favorite players and hosts.

“We focused on successfully maintaining our core users, launching more high-quality, highly interactive content to boost interactions in our community and further elevated the user experience,” CEO Chen Shaojie said in the announcement, in what appears to be a reference to this greater focus on hardcore gamers.

Further evidence of that focus is apparent in DouYu’s latest user numbers, which dropped dramatically in the latest quarter, apparently as the company emphasized quality of its users over quantity. The company had 50.3 million average mobile monthly active users (MAUs) during the quarter, down about 10% from 55.7 million a year earlier.

But the most dramatic drop was for its paying quarterly active users, which tumbled nearly 40% to just 4 million from 6.6 million a year ago. By comparison, the company’s livestreaming revenue – which accounts for about 90% of total revenue – fell by a milder 29% year-on-year during the quarter. That suggests many of the departing paying users were relatively low spending.

Investors seem to like DouYu’s downsizing efforts with the new focus on more serious gamers. The company’s stock rose nearly 2% in Monday trade after the announcement, though it’s still down about 21% this year. But significantly, DouYu’s price declines are a bit milder than those for the larger Huya, which, together with DouYu, control about 70% of China’s livestream gaming market.

Huya was previously the clear investor favorite over DouYu for years, probably due to its larger size at about twice that of DouYu in market value terms. But following the smaller stock declines for DouYu this year compared with Huya, the two companies now trade at a nearly identical price-to-sales (P/S) ratios of about 0.45. Before anyone gets too excited, however, we should also point out that both of those ratios are quite low, and larger short video company Kuaishou (1024.HK) currently trades at a much more tech-like P/S ratio of 2.3.

Both DouYu and Huya are quite depressed right now in valuation terms due to all the uncertainty in China’s gaming market. But if you believe the recent regulatory clampdown may be easing and you like the more focused DouYu, the company could be well positioned to emerge as a meaner and leaner fighting fish on China’s huge but volatile gaming scene.