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Should You Chase Huya's Post-IPO Rally?

By Leo Sun – May 15, 2018 at 5:30PM

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Investors should pay attention to this “pure play” on China’s booming e-sports market.

Shares of Huya (HUYA -2.16%), often called the "Twitch of China", went public at $12 per share on May 11 and raised $180 million. The stock rallied 34% by the end of the day, marking one of the most successful Chinese IPOs in recent history. But should investors chase this high-flying stock?

Understanding Huya's business

Huya was spun off from social networking company YY (YY -0.32%). YY's core business focuses on non-gaming streams from social media celebrities, which generate revenues for YY via sales of virtual gifts.

Huya's streaming platform.

Image source: Huya.

YY remains Huya's controlling shareholder after the IPO, although Huya's tech infrastructure remains independent from YY's. YY could eventually cede control of the company to Tencent (TCEHY -0.21%), which acquired a 34.6% stake in Huya in March. Tencent also gained the right to buy up to 50.1% of Huya between March 8, 2020 and March 8, 2021.

Tencent, the largest video game publisher in China (and the world), plans to integrate Huya's live streaming features into its gaming portfolio. That partnership will last for three years, and will be renewable "under certain conditions." Huya also signed a four-year non-compete agreement with YY, in case its former parent wants to launch a new game streaming platform.

Huya's average monthly active users (MAUs) rose 30% to 83.4 million in 2017, while its mobile MAUs surged nearly 75% to 36.2 million. The average time spent daily on its mobile app per MAU also grew from 91 minutes in 2016 to 98 minutes in 2017.

Huya's average number of monthly active broadcasters fell 15% to 560,000 last year, due to new real-name rules implemented by Chinese regulators. However, Huya rebounded from the dip during the fourth quarter of 2017, with its average monthly active broadcaster number rising 11% annually to 610,000.

How does Huya make money?

Last year, Huya generated nearly 95% its revenue from virtual gifts, which viewers buy for their favorite broadcasters to unlock special features. Huya then splits those proceeds with its broadcasters. The rest of Huya's revenue came from ads and other services.

A man plays a video game in an e-sports stadium.

Image source: Getty Images.

Huya's total number of paying users rose 63% annually to 2.8 million in the fourth quarter of 2017. The company plans to keep that momentum going by adding more social media features and developing a "more attractive" rewards system for paid viewers.

Huya's revenue surged 174% to 2.18 billion RMB ($335.8 million) in 2017, while its cost of revenue only rose 76% to 1.93 billion RMB ($296.6 million). The company remains unprofitable, but its net loss narrowed from 625.6 million RMB in 2016 to just 81 million RMB ($12.4 million) in 2017.

Huya was valued at $3.2 billion after its post-IPO surge. This means that it now trades at nearly ten times last year's sales -- which might be a reasonable valuation for a company with triple-digit sales growth.

The tailwinds and headwinds

China is the world's biggest gaming market. Frost & Sullivan estimates that the number of gamers in China could rise from 646 million in 2017 to 917 million in 2022. Its e-sports market also had 229 million gamers last year, and that figure could hit 537 million by 2022.

If Huya remains at the top of this market, its could become one of the hottest growth stocks in China's tech market overall. The support of Tencent could help it remain a top streaming platform for top games like League of Legends, Arena of Valor, and the mobile version of PUBG.

However, Huya doesn't have an iron grip on this market yet. Tencent is also a major investor in Douyu, Huya's biggest competitor. Douyu had just 13 million MAUs last year, according to research firm Analysys, but a separate study by iiMedia Research found that a higher percentage of Douyu's registered users are active.

Huya's previous loss of broadcasters also indicates that it remains vulnerable to Chinese regulators. Government demands for real-name registration, restrictions on streamed content, and new regulations for virtual currencies could all throttle Huya's growth.

The bottom line

Huya is a high-risk play, but it could generate high rewards. Investors who believe that the e-sports industry will keep growing should take a closer look at Huya, since it's the only "pure play" e-sports stock on the market today.

Leo Sun owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.

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