Description

Thesis

Joyy (YY) is a global live streaming / social media company with Chinese roots but where 85% of its revenue comes from outside of China.  Its core business is growing revenues at over 20% and has just inflected to profitability (GAAP and adjusted) in the latest quarter.  It also trades at a valuation approximately equal to the current substantial cash balance and its stake in another publicly listed company.  This situation partly exists because the sale of their legacy Chinese live streaming business to Baidu has been held up by Chinese regulators.  If the deal is completed and they receive the rest of the cash they are contractually due, YY’s current price represents a 34% discount to its future cash and public securities value. This approach assigns no value to the remaining social media business, the aps of which are routinely ranked by third parties as among the top 10 social media applications in terms of downloads and revenues.

None of this is new.  YY has been considered undervalued and cash rich for some time.  What’s new is that management is addressing the valuation disconnect by instituting a dividend (4.5% yield) and a massive $1.2B buyback.  This new buyback plan (which has a one year expiry) would, if executed, represent 32% of the market cap or 45% of the float.  The company’s upcoming report in March will provide an update on repurchase progress and could serve as a catalyst for the shares. An upside valuation scenario where the core remaining business gets valued at 3 EV/R could see shares trade to $175, representing an upside of 280%.

Brief Background and Timeline

YY has been written up a few times so I will keep this brief for those new to the story.  YY’s CEO (David) Xueling Li is a self-made billionaire and serial entrepreneur who’s greatest creation is the legacy YY Live live streaming business.  For live streaming, basically think people live streaming themselves on Youtube but the viewers tip instead of being forced to watch ads.  Joyy was a pioneer of this very common business model in China.  Joyy started a video game livestream service Huya (think Twitch) which it partially spun out.  Li then left to start an international version of YY Live in Singapore called Bigo which Joyy later acquired.  Li was building these businesses but when YY Live started to plateau and become a cash cow he sold it to Baidu.  Most of the Huya stake was sold as well, leaving the faster growing, internationally focused BIGO as the remaining piece.  This is where the cash has come from (though YY Live was also highly profitable).

• March 2019 - Joyy purchases Bigo (now the core business)

• April 2020 - Joyy sells $262 MM of its Huya stake to a Tencent subsidiary

• Q2 2020 - Huya is deconsolidated from YY’s financial statements

• Q3 2020 - Joyy starts paying a dividend

• August 2020 - Joyy sells another $810MM of its Huya stake to Tencent

• November 2020 - Joyy reaches an agreement to sell its legacy YY Live business to Baidu for $3.6B in cash

• November 2020 - 2 days later Muddy Waters publishes a short report on YY Live alleging the business is fraudulent

• Q4 2020 - YY Live results are moved into discontinued operations and later deconsolidated

• February 2021 - Joyy announces the results of its external auditor probe of the MW allegations, saying they are unsubstantiated.  Joyy and Baidu both announce that the acquisition “has been substantially completed, with certain customary matters remaining to be completed in the near future”.  Baidu pays Joyy $2 B

• August 2021 - both companies announce the official close date of the merger has been pushed back.  The final $1.6B due to Joyy that was supposed to be paid by now will presumably be paid upon the deal closing, whenever that is

• Fall 2021 - Massive buybacks announced

Buybacks

YY has been written up a few times before so I will focus initially on what is new: the buybacks.

In August 2019 the company announced a buyback authorization for $300 MM worth of shares.  A year later this program was 99% completed, importantly illustrating management’s previous commitment to complete announced plans.

In September 2021, the company announced a one year $200MM buyback authorization to replace the just completed once.  They executed $16MM of this plan in the first month.

In November 2021, the company announced a one year $1 B buyback authorization to in addition to the recently announced September plan..

I have owned YY on and off over the years but to me this large buyback is what makes this investment interesting today and answers the “why now?” question.

Commenting on a previous write up, Value1929 rightly questioned, “A rational capital allocator CEO that doesn't do anything nefarious could easily organically produce a multi-bagger from here. So it just strikes me as highly unusual that with all this cash and ownership in YY that he isn't out in the market buying stock?” The announcement of this buyback addresses these concerns.

Though the stock is down, lately it has been showing significant relative strength versus other Chinese internet stocks, perhaps illustrating how they are out in the market executing this repurchase.

Valuation

I won’t spend much time on valuation, as the shares are clearly cheap if you believe the deal will close (or, if it unwinds, that YY Live was worth anything close to what Baidu agreed to pay for it).

The TTM Revenue of the remaining business was $2.66B and should probabl be worth more than nothing. The enterprise value is highly negative if the deal is completed.

I would also like to mention that Huya is probably highly undervalued itself at this point given its own market capitalization is $1.3B versus its cash and equivalents of $1.7B and negligible debt.  While it is doubtlessly being affected by Chinese government pronouncements on online gaming, it is still showing MSD revenue growth in recent quarters and is profitable on both a GAAP Net Income and cash flow basis.

It doesn’t make a huge difference to the YY valuation but I think its more than fair to value it at $15 a share in my upside scenario.

I get to my upside price target of $175 by assuming the deal closes and Joyy gets the rest of their cash, the remaining Bigo business gets a 3 EV/R multiple, and Huya is valued at $15.

If you're into net-nets, here's your chance to buy one (assuming the deal closes of course).

Realistically, the deal might not close, and Bigo is unlikely to receive a 3 EV/R valuation anytime soon.  However, YY Live was a highly profitable cash cow so even if the deal is reversed it is not the end of the world and I would expect shares to trade back into at least the $70s on receiving some sort of certainty in either direction.  In the meantime one would hope Joyy’s management is out there, reducing the share count buying dollar bills for seventy five cents.

Quick Update on the Bigo Business

For an introduction to Bigo’s various businesses one can see my 2019 write up.  Management originally expected the Bigo division to achieve profitability by year end 2020 but they were thrown in a curveball when in Q2 2020 the Indian government began banning many Chinese-affiliated apps.  This had a huge effect on their user numbers (Likee and Hago lost tens of millions of users over the succeeding quarters) but less of an effect on revenues because most of the profits come from Bigo Live users residing in richer countries. Likee seems to have failed in its bid to be a rival TikTok clone and so they are pulling way back on the marketing spend and attempting to make it a niche live streaming funnel app instead.  This pullback on sales and marketing is part of why MAU trends have been weak lately in Likee and Hago but also why the group has reached profitability.  Bigo segment achieved positive operating profits in Q2 ‘21 and the full group in Q3 ‘21.

KPIs are shown below. The red line represents the start of the India ban.

Addressing Pushback

• What if the deal blows up?

• This is indeed a legitimate concern as the stock would likely trade down on the announcement of a deal blow up.  I will be sizing my position accordingly and will be prepared to buy more in this event.  YY Live was probably doing close to $400 MM USD equivalent cash flow prior to the deal so the company is still cheap in my mind even if they return the $2B already paid to Baidu and the current EV becomes $2B.  Though I am still in the process of trying to determine what an unwinding would look like, if YY Live hasn’t completely deteriorated in the last year (neither company reports on it), then I would expect the shares to trade into the $70 range.

• What about the Muddy Waters report?

• In the months following the Muddy Waters report alleging the entire YY Live business was fraudulent, Joyy claimed they hired external auditors and outside counsel to investigate the matter and it was put to bed.  More importantly, Baidu had another 3 months for due diligence before they announced the deal was substantially complete and paid $2B to Joyy. It has been over a year now.  Do we really believe that Baidu hasn’t investigated or found the fraud yet?

• How much of the cash is USD and can thus be returned to shareholders?

• This had been a concern of mine, but as of the 2020 year end report, only about 36% of their cash and equivalents was in onshore renminbi.  This percentage has doubtlessly shrunk due to the subsequent $2B payment by Baiduand subsequent revenue being highly skewed to non-PRC.

• What about a take under by management?

• This is a risk to the upside valuation scenario, but it is significantly mitigated by management’s apparent willingness to return cash to shareholders via stock repurchases.

Catalyst

• 2021 Earnings Release in March

• If the company announces that they have made substantial progress on their buyback (5% of the shares outstanding wouldn’t surprise me) it could cause a sea-change in how the company is perceived. A change in perception here could lead to a lot of upside.

• Since their annual report is the only substantial information release of the year it is possible we will get more clarity on a number of factors.  I think this stock is priced cheap enough such that more information of any sort would likely be positive for the stock.

• The deal is completed

• If the deal is completed it will remove a huge overhang on the stock as it clears up the cash position and also addresses the Muddy Waters short report.

• Additionally, Joyy has stipulated in the Baidu agreement that they will change their ticker when the deal is completed.  I think completing the rebranding from YY to Joyy would make it less of a Chinese company and be generally helpful for investor perception.  Their nominal headquarters is in SIngapore and if they were really able to become a Singaporian company they might be able to get back into India.