Two years ago, Tencent (TCEHY -0.92%) acquired a 34.6% stake in Huya (HUYA -3.43%) ahead of its spinoff from JOYY (YY -2.14%). JOYY remained Huya's top shareholder, but Tencent gained the right to boost its voting stake to 50.1% anytime between March 8, 2020 and March 8, 2021.

Tencent recently exercised that option, and raised its stake to 50.1% by buying 16.5 million class B shares of Huya for about $262.6 million. That massive purchase reduces JOYY's voting stake from 55.5% to 43%. Lindong Huang, who currently leads Tencent's interactive entertainment group, was appointed as the new chairman of Huya's board. Three other Tencent executives -- Zhi Cheng, Hai Tao Pu, and Guang Xu -- also joined Huya's board.

A gamer plays a PC game.

Image source: Getty Images.

Tencent will consolidate Huya's financial results with its own, but Huya will continue to operate independently and remain listed on the NYSE. Let's see what this shakeup means for Tencent and JOYY.

Tencent gains a high-growth video platform

Tencent's WeChat remains China's top messaging and Mini Program platform, but its advertising business faces intense competition from ByteDance's TikTok and Toutiao. It countered ByteDance with short video apps like Weishi and Hotpot Video, but none of those efforts curbed the start-up's weed-like growth.

Tencent's core gaming business also faces tough competition from NetEase and other rivals in the crowded Chinese market, and it's battling iQiyi for the top spot in China's streaming video market.

Tencent has long considered esports as a unifying market for its social networking, gaming, and video streaming businesses. It sponsored esports teams and tournaments, and acquired major stakes in esports companies like Huya and DouYu.

Huya's revenue surged 80% to 8.37 billion yuan ($1.2 billion) last year, and its monthly active users rose 29% annually to 150.2 million in the fourth quarter. Its growth is gradually decelerating, but it still expects its revenue in the first quarter -- which bears the full impact of the COVID-19 outbreak in China -- to rise 45%-47%.

Integrating Huya's high-growth video platform into its broader ecosystem could win back Gen Z users who are leaving WeChat for youth-oriented platforms like TikTok, Toutiao, and Bilibili. There's also a chance that Tencent will execute a similar takeover of DouYu and merge the two top game streaming platforms.

But what does this shift mean for JOYY?

JOYY's diverse portfolio of live streaming services includes YY Live, a live video platform for entertainment, music, sports, and e-learning videos, the streaming app Bigo Live, Bigo's Likee short video app and IMO video chat app, the mobile gaming social network Hago, and Huya.

A young woman streams a video on a smartphone.

Image source: Getty Images.

JOYY's revenue surged 62% to 25.6 billion yuan ($3.7 billion) last year. Like Huya, its live video businesses seem well-insulated from the coronavirus crisis. It expects its first-quarter revenue, which will bear the brunt of the lockdowns, to rise 41%-43% annually.

Last quarter, 44% of JOYY's revenue came from YY, 32% came from Huya, and the remaining 24% came from Bigo. YY and Huya are both profitable, but YY's operating profit accounted for over 100% of JOYY's operating income last quarter. The profitability of those two units offset its losses at Bigo, which has remained unprofitable ever since its acquisition last March.

Huya will continue generating revenue for JOYY, but its share will dip as Tencent takes over the company. JOYY also loses its ability to dictate Huya's future strategies, but the company was already operating independently after its IPO.

In other words, the financial impact to JOYY should be minimal. Huya's growth will still bolster JOYY's overall growth and offset its losses at Bigo's newer services.

The key takeaways

Tencent's takeover of Huya is a big vote of confidence for the game streaming platform. Tencent gains a high-growth video platform that resonates with younger viewers and complements its gaming and social networking businesses, and Huya gains more direct support from the world's biggest game publisher.

JOYY loses control of Huya, but that shift could also free up more resources to expand Bigo's popular Likee app -- which was the seventh-most downloaded app worldwide last year, according to App Annie -- into a new growth engine.