Description

Overview: YY is the No. 1 live streaming social media platform in China, as ranked by QuestMobile based on monthly and daily active users,  as total time spent of users that directly accessed the platforms of the relevant industry players, in December 2017. YY operates YY Live and Huya platform, which are leading live streaming and game live streaming platforms in China, respectively. YY’s highly engaged users contribute to a vibrant social community by creating, sharing and enjoying a vast range of entertainment content and activities, including entertainment live streaming, game live streaming, games, e-learnings and etc. YY enables users to interact with each other in real-time through online live media, and offers users a uniquely engaging and immersive entertainment experience. Such experience in turn fuels further content creation, fostering a virtuous cycle that sustains YY’s growth. YY have a large and highly engaged user base. YY’s mobile products attracted 76.5 million average monthly active users in the fYY’sth quarter of 2017, a 36.6% increase from the corresponding period in 2016.

Investment thesis: YY owns ~45% of recent IPO, HUYA (if interested see the other pitch). YY’s market cap is $6.5B, its cash balance (on a pro-forma basis adjusted for the sale of ~35% to Tencent) is approximately $2B. HUYA was actually a drag on profits. Unlike other sum of the parts analyses which there is a part that is in secular decline or with a huge issue, YY Live is grew at 42% in Q4’17, and I expect it to generate roughly $500M in free cash flow in the next twelve months.

To sum it up, you are paying $6.5B, you are getting $2B of cash (including sale to Tencent), 45% of HUYA, which is currently valued at $1.5B (YY’s stake), so for the $3B left, you are getting about $500M annual free cash flow growing at ~40%, you should be break even in about 4 years.

The key to this investment is understanding the power of YY. And that is tough to do so in a pitch. You almost have to see it and experience it to believe it. YY is part of China’s answer to Youtube. Virtual tokens, the way that YY makes money might seem absurd, but it is growing and even Youtube is copying the same format. People love to follow these influencers. It is a massive shift in spending downtime.

After a lot of thought, I do not know what is the key to make a “Westerner” comfortable with this business model. And this is why this stock trades at this massive discount. I’ll say a couple of things: it seems that Youtube is copying the virtual model playbook.

Valuation: It is tough to value a company that is growing a segment at 40% and the other at 145%, generating 15% FCF yield…. There is just a massive mispricing, in my opinion. The way I see it, YY’s current EV is $3B and it is generating $500M a year, and should grow at a 20% CAGR for the next 5 years. Assuming a 5% FCF yield, this stub piece should be worth $10B, making YY an easy double. Given that the company is growing so fast, I feel comfortable “waiting” for a reasonable valuation. Based on my expectations, I expect the stock to double within 2-3 years. 

--- Why does this opportunity exist? YY trends quite a bit. The stock went from $40 to $140 in less than a year. Tencent bought 35% of HUYA from YY, with the opttion to buy 51% in 2020 at HUYA's then market price. Tencent bought these shares for very, very little. ~$7.50 a share. HUYA IPO'd on Friday and shares are trading north of $16. So what happened? 

A couple of things. Tencent got a ridiculous deal. HUYA needs licensing and permission to live stream Tencent's games. Also, part of the monetization coming from Twitch, might be selling games or in-game purchases. For more information on HUYA, please see my pitch on that. Then, the market sort of forgot with Trump/China and everything in between. 

Disclosure: Explaining what Live streaming is to someone who is not familiar to it, might sound terribly silly. I am not sure what I could say to give the reader more comfort, but it is similar to telling them about facebook when they have never seen it.  

Company Background: Founded as an online game YY portal in 2005, YY’s company has transformed into a live streaming social media platform in the past decade. In July 2008, YY launched YY’s core product YY Client, a PC-based free software that allows users to create individual channels for any online live group activities that covers a broad range of interests and topics. To increase the accessibility and usage of YY Client, YY introduced a mobile application, Mobile YY, in September 2010 and a browser-based version of YY’s services in October 2012. To accelerate the monetization of YY’s mobile platform, YY introduced virtual item purchase functions on Mobile YY in October 2013. YY also endeavor to diversify and expand the contents on YY’s platform. For example, in February 2014, YY launched a dedicated education platform, 100 Education, for YY’s original education business. In 2014, YY acquired two education businesses, focusing on online professional training and English language test preparation, respectively, to further expand YY’s educational services offerings. Since the beginning of 2015, YY have been operating YY’s game live streaming business under a stand-alone brand, Huya, which includes Huya.com and its corresponding mobile application Huya APP. In August 2015, YY launched a new brand, Zhiniu, with its own domain name Zhiniu8.com and mobile application Zhiniu Finance, for the finance related contents on YY’s platforms. YY also continue to innovate YY’s products and services to attract younger generation users and to enhance user engagement and consumption on YY’s live streaming social media platform. For example, with YY’s YY Live 7.0, a milestone version of YY Live launched in the third quarter of 2017, YY transformed the showcase-focused model of live streaming, where audiences watch the performance of the hosts in a more passive manner, to participant-focused live streaming, where audiences experience personalized interactions with their hosts and feel accompanied by their hosts in talent shows, exploration, sports events or games.

In addition to YY’s continuous product innovation, the growth of YY’s user base and increasing level of user engagement is also driven by the breadth of entertainment content and activities featured on YY’s platform. YY continuously expand YY’s content categories to cover both traditional and popular genres such as music, dancing, talk shows and online games, as well as to feature emerging and long-tail categories such as outdoor, finance, sports and ACG (animations, comics and games). YY’s platform also features highly engaging activities to attract more users and to better engage them, including online dating shows, live performer battles,  as trendy casual games collection platform Happy Go. Furthermore, YY continued to increase user interaction and explore new monetization opportunities through innovative functionality. For example, in 2017, YY embedded into YY’s live showrooms a new functionality, Happy Contest¸ which enables live streaming hosts to connect and compete with each other across different showrooms.

YY’s Platforms

YY currently offer live streaming services primarily through YY’s YY Live platform and Huya platform.

YY Live

In June 2016, YY revamped YY’s online music and entertainment live streaming services to YY Live. With the increasing popularity of and growing contents in YY Live, it has been transformed into an interactive and comprehensive live streaming social media platform. Users of YY Live may enjoy the live streaming services on YY Live APP, YY Live, YY website, or YY Client and stream the content in various channels, including, among others, music and dance show, talk show, outdoor activities, sports, anime and games.

Huya

In November 2014, YY launched Huya broadcasting, with a focus on livestream of game playthroughs. After years of coverage expansion and user accumulation, Huya broadcasting has become a comprehensive live streaming platform covering online games, console games, mobile games, entertainments, sports and etc. Users of Huya broadcasting may access content on Huya through Huya APP, or Huya YYbsite, YY Client or Huya APP, Huya’s dedicated mobile application.

YY’s Products

YY offer YY’s services primarily through YY’s YY Live platform and Huya platform. Users of YY’s services could stream the contents on those two platforms through (i) YY’s mobile applications, including, among others, YY Live APP and Huya APP, (ii) YY’s YYbsites, YY.com, Huya.com, and other PC YYbsite and YYb-based products, (iii) YY’s PC client, YY Client, and (iv) YY’s online game center on YY Client.

Mobile Applications

YY develop mobile applications to provide a variety of live streaming contents to YY’s users through mobile operating systems and make live streaming services available at finger tips. While YY continue to develop and upgrade YY’s platforms, YY rebranded Mobile YY, YY’s first and main mobile application, into YY Live APP, which primarily provides users access to YY’s live streaming content offered on YY’s YY Live platform. To better accommodate the increasing demands of YY’s users to access more content on YY’s YY Live platform, YY developed a number of additional mobile applications, each of which dedicates to a specific type of content or functions. Users can access contents on YY’s YY Live platform through all these mobile applications, and retrieve contents most suitable to individual preferences and interests.

In 2017, YY developed a series of new features and functionalities into YY Live to attract younger generation users and to enhance user engagement and consumption on YY’s live streaming social media platform. For example, YY launchedAccompany Me, an on-demand live streaming service that allows long-tail hosts to offer more customized services to users, including singing, dancing, chatting and other various forms, similar to a live streaming version of taxi-hailing. YY also launchedHappy Basketball, a casual game embedded with an augmented-reality feature that user can control the basketball shootings through their face movement.

Meanwhile, YY further explored opportunities in the field of casual games to satisfy increasing demand arose out of users’ fragmented time. In the second quarter of 2017, YY launched Happy YYrewolf Kill, a small-room voice based online social game, which YY further upgraded into a casual game collection platform Happy Go in the fYY’sth quarter of 2017. YY have introduced over 40 casual small games onto YY’s Happy Go platform.

With the growth of users on YY’s Huya platform, YY launched Huya APP in 2014, for streaming comprehensive game live streaming contents and other entertainment live streaming contents operated under HUYA Inc.

YY will continue to focus on developing enhanced features for YY’s mobile applications going forward.

Contents on YY’s Platforms

YY offer various contents on YY’s live streaming platforms, which cover a broad range of interests and topics. Through YY’s mobile applications, YYbsites and PC clients, users can stream the below contents on YY’s live streaming platforms, YY Live and Huya platform.

Catalyst

YY went from $140 to $90 when they announce that they sold a portion to HUYA at ~$7.50 a share. HUYA IPO'd at ~$16.