YY - YY Inc.

[king888]

YY

 

Business model of YY is very interesting and profitable.

 

The press calls YY a gaming platform or social network site . But that is not what YY really is .

 

YY is a live streaming platform that any user can create a room to broadcast his/her content and viewer can join the room and chat, text or buy a virual item for the room owner.

 

The usages are variety. In the past until recent , most rooms are for singing shows or playing MMORPG . And users who are famous can make more than $10,000/month by just singing in YY .

 

Now YY is trying to broaden the usages of its platform. The company can create live room for a conference . The private room for training session for employee . And the next big thing is "Online Education" . EDU uses YY to broadcast the online course and viewers have to pay before join the course.

 

YY has the infrastructure to support the streaming and also the payment system to help content creators monetize. This is a real winner in this space . If YY can execute this model overseas , it can be even bigger than Youtube .

 

http://www.techinasia.com/yy-david-li/

 

http://www.forbes.com/sites/tomiogeron/2012/06/11/yy-com-chinas-unique-real-time-voice-and-video-service-with-a-virtual-goods-twist/

 

 

[claphands22]

Hey King,

 

There was a great Seeking Alpha article on YY that expanded on a short thesis: http://seekingalpha.com/article/1593492-yy-do-you-know-what-you-own 

 

On top of that article, I would check out YY's prospectus -- read their related party transactions, and where they originally got their adverting revenue.  I have put way too much time on trying to figure out how YY actually makes money and I can't figure it out. Definitely check out YY.com website and try to be a consumer of the content...it's...special. 

 

 

[SnarkyPuppy]

Does anyone follow this?  Looks extremely cheap - you're getting a business growing 20% per year at ~2-3x FCF.     
 
There's a writeup on VIC which explains the business/background - I won't rehash but some high level headlines:

• YY Live (core business) is a Chinese live streaming/broadcasting operator.  Musicians, dancers, gamers, etc perform live and in return receive tips from viewers.  YY earns 50% of the tips and shares the other 50% with the artists/artist agents. 
  
• Dominate position - strong network effects as top artists attract more viewers who attract more top artists.
  
• Chairman and CEO is the founder - David Li (returned to CEO spot in 2017).  Owns 12% of the company (and 71% of voting rights)
  
• Financials -> GM and EBIT margins masked because of consolidation of recently IPO'd business 'Huya'
  
• Off balance sheet asset in 'Bigo'
  

 

At 98.43 per ADS you're paying (USD figures):

• 65mm fully diluted SO
  
• MC = $6.4bn
  
• Cash = $1.7bn
  
• Mezz Equity and NCI = $2mm (note: the financials show $79mm of mezz equity, but this is held at HUYA which is discussed further below)
  
• EV = $4.7bn
  

 

So for $4.7bn you get 3 assets (Huya, Bigo, and core YY live):

 

Huya

• Live streaming for video games.
  
• IPO'd in May 2018 - YY effectively sold off it's 100% ownership (to tencent) via the IPO.
  
• YY retained 45% ownership of the company. Tencent has a right, exercisable between March 8, 2020 and March 8, 2021, to purchase additional shares in HUYA Inc. to reach 50.1% of HUYA Inc.’s total voting power. 
  
• HUYA's financials are currently consolidated within YY's as YY has > 50% voting control.  This will change if/when Tencent exercises it's right to purchase more of HUYA as described above
  
• FY2017 38.8mm Monthly Active Users
  
• 4 year non compete w YY Live
  
• HUYA trades at $36.93 = $7.4bn market cap.  YY's ownership (45%) = $2.35bn
  

 

Bigo

• Bigo Live is another live streaming platform based in Singapore.  Focus is on Southeast Asia, with significant market share gains in Thailand, Vietnam, Indonesia, Singapore, Malaysia and the Philippines. The company is now entering other key markets where the app is gaining good traction. This includes South America, North America, Europe, Russia and the Middle East.
  
• Hidden asset for YY - completely off balance sheet/P&L
  
• Founded in 2016.  David Li (CEO of YY) is the founder/CEO of Bigo. It looks to be his expansion of the YY Live business model to international markets
  
• Revenues of $300mm in 2017 and profitable as of October 2017
  
• The company is forecasting $1bn in revenue and $200mm in profit for FY2018. 
  
• 200mm users as of February 2018 and monthly active users of 37 million. 
  
• June 2018 - YY Invested $272mm in series D prefs shares of Bigo.  Total series D was $365mm.  YY was an existing investor - became largest shareholder.  YY management personally bought $70mm. 
   
  
• YY has the right to purchase more than 50.1% of voting power in June 2019.
  
• YY % ownership isn't disclosed, but YY was a 20% investor headed into series C and became the largest shareholder after the series D.  I loosely estimate their ownership at 30% which is probably on the low end
  
• A company growing revenue 3x yoy is probably worth more than 5x profit, but a 5x multiple would value this at $1bn which means YY's ownership (~30%) is worth $300mm
  

 

YY Live (core business)

 

• Music/Dancing/Talk Shows - largest contributor to revenue (2018).  Other categories:  gaming, dating shows, finance, outdoor activities/sports, animation/comics themes
  
• 78mm monthly active users as of 2018Q1
  
• 46% gross profit margins (direct costs include sharing revenue 50% with broadcasters/agencies)
  
• Sales/Marketing = 6% of revenue;  G&A = 5% of revenue
  
• $434mm EBIT FY2017
  
• FY16 Revenue YoY% = 34%;  FY17 Revenue YoY% = 30%
  
• FY17 EBIT = $434mm; Net Income = $400mm
  
• Should easily do $500mm+ by FY19
  

 

So putting the above together, at 98.43 you're paying $6.4bn and you're getting:

• $1.7bn cash
  
• $3.35bn stake in Huya
  
• $300mm stake in Bigo (although probably worth a lot more)
  
• Remaining = $1bn for a business doing $400-500mm in FCF growing 20% a year
  

 

There's some regulatory risk here  (New regulations were put in place during 2017 by the Ministry of Commerce (MOC) and the State Administration of Radio, Film and TV (SARFT) limiting the behavior of live streamers and raising accountability for platforms. Agents mentioned that restrictions included no midriff (area between chest and waist) exposure, no filming on beds and limited cleavage, to name just a few. Implementation of these rules has only recently been enforced with many sanctions since February 2018).  Seems that YY is fine so far and if anything, the larger streaming operators may benefit from some regulatory entrenchment. 

 

But, the key risk here IMO is a combination of competition and agency consolidation:  Agency (supplier) negotiating power & competition -> spending pressures to retain agencies/broadcasters (these are direct costs for YY as they split revenue 50% with agencies/broadcasters).  This will take some time to get comfortable with - but at the current valuation you're basically paid back in 2-3 years. 

 

Curious if others have spent time on this?

[gaia10]

Hey SnarkyPuppy,

 

Could you share your source on management's Bigo revenue and profit projection? Btw, I agree with you on most of these points.

[DooDiligence]

Does Amazon talk about the economics of Twitch in annual and quarterly filings?

[villainx]

From my limited understanding, none of the various business/operating units or even any other companies in the various live stream business has come out as a dominant/leading platform/player, right?

 

So any of Huya/Bigo/YY platform are at risk of being left behind by another company/platform?  My simple analogy would be Tencent/Sina on which weibo platform would dominant.  At the time, I sided with Sina/Weibo, but the sheer adoption rate of WeChat and QQ overcame the supposedly more upscale Weibo.  Or is that a bad analogy?

[Spekulatius]

Does Amazon talk about the economics of Twitch in annual and quarterly filings?

 

I haven’t seen any, but I haven’t looked to closely either. From a user perspective, it seems that Twitch loses to YouTube. I watch some streams from gamers every once in a while and most games stream using Twitch and YouTube simultaneously. You can typically hw many users are on which platform and typically 80-90% are on YouTube. YouTube als seems better at setting up donations or chatting. Hence I doubt that Twitch is a meaningful business for AMZN.

[SnarkyPuppy]

From my limited understanding, none of the various business/operating units or even any other companies in the various live stream business has come out as a dominant/leading platform/player, right?

 

So any of Huya/Bigo/YY platform are at risk of being left behind by another company/platform?  My simple analogy would be Tencent/Sina on which weibo platform would dominant.  At the time, I sided with Sina/Weibo, but the sheer adoption rate of WeChat and QQ overcame the supposedly more upscale Weibo.  Or is that a bad analogy?

 

It's definitely a risk.  Maybe too simplistic, but at what price would you pay for a business w/ this risk? At some point it's a good stock regardless of its terminal value.  ~2-4x cash flow seems reasonable to me. 

[villainx]

It's definitely a risk.  Maybe too simplistic, but at what price would you pay for a business w/ this risk? At some point it's a good stock regardless of its terminal value.  ~2-4x cash flow seems reasonable to me. 

 

Thanks for the response.  Just trying to understand the competitive landscape.  It's hard 1) because I'm too old to understand appeal of live streaming and 2) relating that to what's happening in China magnifies. 

 

YY has it's hand on several different niches it seems.  But is it a race for scale, and at what point does it become clear who is the leader.  Is it a winner takes all type of model? 

 

 

 

[abyli]

https://seekingalpha.com/pr/17243913-yy-reports-second-quarter-2018-unaudited-financial-results

 

Second Quarter 2018 Highlights

 

Net revenues increased by 44.6% to RMB3,773.2 million (US$570.2 million) from RMB2,609.0 million in the corresponding period of 2017.

Non-GAAP net income attributable to YY1 increased by 51.6% to RMB873.2 million (US$132.0 million) from RMB576.2 million in the corresponding period of 2017.

[SnarkyPuppy]

~$300mm USD loss in P&L due to GAAP accounting noise (GAAP requires YY to book a paper loss for the option sold to Tencent to sell HUYA)

 

Implied 8% revenue growth guidance for YY live for Q3 (vs upper 20% for last few quarters).  On call, management says this is largely due to the World Cup being shown at the same time as peak YY hours - and they've already seen a reversal back to normal trends post-world cup (per management conference call). 

 

My SOTP with YY at $80 per share and HUYA at $30 per share (all figures in USD):

- $2bn Cash

- $1.9bn HUYA (45% ownership, 30% holdco discount)

- $300bn BIGO (see post above)

- ($800bn) NCI to back out HUYA-standalone cash (HUYA reports standalone publicly now)

= Implied remaining value for YY live of $1.6bn = ~3x FCF (FY19 sell side estimates of $500mm).

 

Viewed another way, YY live earned ~$400mm pretax or ~$280mm FCF over the TTM (5.7x implied YY live price).  This is a growing and capital light business. 

 

In terms of a margin of safety, if you value the cash, HUYA, and BIGO at $0 then YY live trades at ~13.8x TTM FCF. 

 

Price seems absurd to me.   

 

[ZenaidaMacroura]

Does Amazon talk about the economics of Twitch in annual and quarterly filings?

I know this is late but twitch loses money.  It's value is mostly strategic currently and they are going to try somethings to change that in 4th quarter...

[MrB]

YY's Hidden Asset: BIGO

https://seekingalpha.com/article/4231324-yys-hidden-asset-bigo

[Aqul]

~$300mm USD loss in P&L due to GAAP accounting noise (GAAP requires YY to book a paper loss for the option sold to Tencent to sell HUYA)

 

Implied 8% revenue growth guidance for YY live for Q3 (vs upper 20% for last few quarters).  On call, management says this is largely due to the World Cup being shown at the same time as peak YY hours - and they've already seen a reversal back to normal trends post-world cup (per management conference call). 

 

My SOTP with YY at $80 per share and HUYA at $30 per share (all figures in USD):

- $2bn Cash

- $1.9bn HUYA (45% ownership, 30% holdco discount)

- $300bn BIGO (see post above)

- ($800bn) NCI to back out HUYA-standalone cash (HUYA reports standalone publicly now)

= Implied remaining value for YY live of $1.6bn = ~3x FCF (FY19 sell side estimates of $500mm).

 

Viewed another way, YY live earned ~$400mm pretax or ~$280mm FCF over the TTM (5.7x implied YY live price).  This is a growing and capital light business. 

 

In terms of a margin of safety, if you value the cash, HUYA, and BIGO at $0 then YY live trades at ~13.8x TTM FCF. 

 

Price seems absurd to me. 

 

I was going through the 20F today and 2017 FCF exceeds 400mm USD (after counting SBC as an expense). With over 2Bn of net cash as of the latest balance sheet, this things is approaching a 20% FCF yield. Chinese equities have dislocated, but this seems too good to be true. I'll keep doing more work on this and see if there is something glaring that I am missing.

[SnarkyPuppy]

~$300mm USD loss in P&L due to GAAP accounting noise (GAAP requires YY to book a paper loss for the option sold to Tencent to sell HUYA)

 

Implied 8% revenue growth guidance for YY live for Q3 (vs upper 20% for last few quarters).  On call, management says this is largely due to the World Cup being shown at the same time as peak YY hours - and they've already seen a reversal back to normal trends post-world cup (per management conference call). 

 

My SOTP with YY at $80 per share and HUYA at $30 per share (all figures in USD):

- $2bn Cash

- $1.9bn HUYA (45% ownership, 30% holdco discount)

- $300bn BIGO (see post above)

- ($800bn) NCI to back out HUYA-standalone cash (HUYA reports standalone publicly now)

= Implied remaining value for YY live of $1.6bn = ~3x FCF (FY19 sell side estimates of $500mm).

 

Viewed another way, YY live earned ~$400mm pretax or ~$280mm FCF over the TTM (5.7x implied YY live price).  This is a growing and capital light business. 

 

In terms of a margin of safety, if you value the cash, HUYA, and BIGO at $0 then YY live trades at ~13.8x TTM FCF. 

 

Price seems absurd to me. 

 

I was going through the 20F today and 2017 FCF exceeds 400mm USD (after counting SBC as an expense). With over 2Bn of net cash as of the latest balance sheet, this things is approaching a 20% FCF yield. Chinese equities have dislocated, but this seems too good to be true. I'll keep doing more work on this and see if there is something glaring that I am missing.

 

1. government risk

2. competition risk (direct, other streaming types)

3. supplier cost risk (e.g. streamers in a strong position to, over time, ask a larger % of the gross profit - mitigated somewhat by network effects)

 

20%+ FCF yield with growing revenues makes it interesting but those are the key downside variables I'd focus on

[Aqul]

Right, those are key diligence items. I wanted to ensure this company isn't a melting ice cube (or has some other dramatic issue), before spending more time on it.

[Gregmal]

I really like this the more I look into it. No position yet, what I need to get a better grasp on is the stickiness of their market position. Otherwise this kind of seems like its potentially a mini IAC type of company in China... Its hard to argue against the cash and equivalents aspect of the SOTP. The question really comes down to what is the catalyst? I don't see one short term.

[Aqul]

Here's an interesting framework from Andreessen Horowtiz: https://a16z.com/2018/12/13/16-metrics-network-effects/

 

Agree on the lack of catalyst, but if this is a natural oligopoly space, and this company is one of the winners, then you don't need a short-term catalyst at these prices. The cash build alone will get you a great return.

[constala]

if you need a catalyst, there is a clear one. They have the option to buy 100% of BIGO. That would use their idle cash + consolidate a very high growth business, giving them (even) better valuation optics.

[MrB]

David Li interview

https://996.ggvc.com/2018/10/27/episode-23-david-li-of-yy-on-pioneering-live-streaming-in-china/

[MrB]

if you need a catalyst, there is a clear one. They have the option to buy 100% of BIGO. That would use their idle cash + consolidate a very high growth business, giving them (even) better valuation optics.

As argued by this guy too.

https://seekingalpha.com/article/4231324-yys-hidden-asset-bigo

(previously posted link and needs subs)

[gaia10]

I have written a investment report on YY. I would love to hear your comments and feedback.

 

https://snowballvalue.wordpress.com/2019/03/01/yy-growth-at-a-cheap-price/

[MrB]

YY Announces Completion of Acquisition of BIGO

http://ir.yy.com/news-releases/news-release-details/yy-announces-completion-acquisition-bigo

Not ecstatic about the shares issued at these levels, but timing was a nice surprise.

 

 

 

YY Reports Fourth Quarter and Full Year 2018 Unaudited Financial Results

http://ir.yy.com/news-releases/news-release-details/yy-reports-fourth-quarter-and-full-year-2018-unaudited-financial

[SnarkyPuppy]

Ridiculous for them to issue undervalued shares vs using cash on balance sheet.  Oh well.  Cheap is cheap.

[Sergio8]

My understanding is that they can't buy BIGO at this valuation with cash on hand, as a big chunk of the cash is in Huya.

 

Though I guess the CEO makes a gift to himself through the share issuance, it removes conflicts of interest in the future.