Description

Executive Summary

Joyy (YY) is an APAC and EMEA live streaming/social media holding company founded by current chairman David Li.  The company has been pitched twice on VIC - and therefore this pitch will focus on the current situation and attractive risk/reward.  Please refer to the prior two writeups for background on the operating businesses and management. 

YY owns the following
a) cash representing 174% of the current market cap,
b) 17.5% ownership in Huya (Chinese live streaming platform focused on gaming and e-sports operating in a duopoly with DouYu), and
c) Bigo, YY's operating business which primarily owns live-streaming app Bigo Live and short video app Likee. 

Given recent investor sentiment in anything and everything related to Chinese businesses, YY is a cigar-butt style investment with an attractive risk/reward profile. 

The core tenets of the thesis are as follows:

• Investor sentiment in anything and everything related to China has plummeted with recent Chinese regulatory announcements.  Investor sentiment in China constantly ebbs and flows - investors were paying $140 per share for YY less than 5 months ago.  Chinese equities have sold off en-masse.  The question should be whether there is a price at which these businesses have more than priced in Chinese regulatory risk from an individual securities upside/downside perspective.  YY's remaining core business segment, Bigo, derives 80% of its revenue from outside of China.  Additionally, YY has recently sold its legacy business (YY Live) to Baidu for $3.6bn of cash (which by itself is 92% of YY's market cap).  YY has already been paid the majority of this cash, although a final regulatory approval is required to remove all contingencies.  You can assume China confiscates the cash from this deal and YY receives no value and still have 33% upside on this stock (assuming very conservative multiples for the Bigo business).

• The stock is extremely cheap and is an attractive cigar butt investment.  YY's stock trades at a 57% discount to cash.  Said another way, you are being paid ~$3.2bn to receive shares in the remaining Bigo segment.  YY has 74% upside to its cash alone.  Should investors also give credit to its Huya shares and apply a reasonable 3x P/S multiple to its core Bigo business (which includes a top 10 global mobile app) YY shares have 225% upside.   Further upside scenarios exist should Bigo's revenue growth re-accelerate and investors pay a P/S multiple closer in line with global internet competitors as sentiment shifts yet again.

• The Bigo segment has ~$2.3bn in 2021E revenues, has grown revenues 99% yoy and GP 21% yoy, is at profitability inflection and has evidenced consistent operating leverage.   Bigo Live has been among the top 10 global apps for revenue almost every month since March of last year.  David Li, Founder and Chairman of YY, recently reinserted himself into an operational role at the Bigo segment.  David Li has a strong history of operational success and should augment Bigo's growth and profitability inflection. 

• Management has enhanced its capital allocation - signaling a reversal of poor minority shareholder treatment in the past.  Management is returning ~10% of the company annually to shareholders at current prices.

Net Asset Value

Investors purchasing shares in YY receive the following:

Total cash and cash equivalents

On November 16, 2020, Baidu acquired YY's domestic video-based live streaming business (YY Live) for $3.6bn.  The sale was completed on February 8, 2021 - subsequent to a short report that Muddy Watters issued in Q4 2020. 

Disclosed in YY's annual filing is the following payment schedule:

- $2 Billion at the close of the acquisition (i.e. February 2021)

- $1 Billion by April 30, 2021

- $300 million by June 30, 2021

- $300 million based on certain conditions.

As such, Baidu has already paid YY $2bn as of the 3/31/2021 filing.  This is confirmed by reviewing the "accrued liabilities and other current liabilities" line on YY's balance sheet which shows a $2bn increase between Q4 2020 and Q1 2021.   Total cash and cash equivalents as of 3/31/2021 are $5.2bn, indicating that $3.2bn of excess cash is held unrelated to the Baidu acquisition.  

Management discloses the status of the acquisition as "(the) acquisition has been substantially completed, with certain customary matters remaining to be completed in the near future.”  China's (SAMR) anti-monopoly agenda has delayed deal approvals and has created a backlog hence the delay.  The regulatory approval is likely a customary formality (but we contemplate a scenario where this cash is valued at $0 further below to illustrate the asymmetry of the current valuation) - to the extent China wants to ban video streaming entirely it's not clear why Baidu versus YY's ownership is relevant.  It is likely that shares have sold off due to a confluence of the following rather than accurately pricing in the risk of the Chinese government reversing the transaction AND killing YY Live's business entirely:

• Muddy Waters short report in Q4 - largely irrelevant given the fact that Baidu did due diligence subsequent to this report and decided to continue with the acquisition. 

• Archegos margin call sell off in Q1

• General sell-off of Chinese equities over the past month
    

Bigo Segment

Bigo has three main products: live-streaming app Bigo Live, short video app Likee and video conference app imo (Please refer to GCA's 9/19/2019 pitch of YY on VIC for background on each of these three apps.)  The majority of revenue comes from Bigo Live & Likee.

At current prices you are being paid to own the Bigo segment.  I don't know exactly what it is worth, but there are some attractive characteristics:  

• Bigo Live has been among the top 10 global apps by revenue almost every month since March last year, according to app stats compiler Sensor Tower.   Bigo Live is another live streaming platform based in Singapore.  It’s 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 (40x growth in the middle east last year). This includes South America, North America, Europe, Russia and the Middle East.   David Li is the founder of Bigo- it looks to be his expansion of the YY Live business model to international markets (Singapore being the first).

• 144 MAUs between Bigo Live and Likee.  Bigo's MAUs are steadily growing (24% QoQ in Q4 and 9% QoQ in Q1 2021).  Likee's MAUs have had headwinds given the fact that it competes with the widely popularized Tik Tok app, although this does not mean the app is worthless.  In Q1 2021 management disclosed Likee had 420% YoY revenue growth.  Specific regions are growing at incredible rates - disclosed in Q1 2021:  "on a year-over-year basis Likee's revenue from the Middle East multiplied by 40.3 times, with paying users increasing by approximately 10 times, while its revenue from the Southeast Asia region multiplied by 1.6 times, with paying users increasing by 1.7 times"

• The Bigo segment should do something like ~$2.3bn in revenue in 2021E and be ~breakeven on operating margin (this is compared to only $300mm in revenue in 2017!).   Live streaming revenue is up 99% since Q1 2020 and up 14% since Q4 2020 (gross profit grew faster at 21% since Q4 2020).  Paying users is up 72% YoY and ARPU is $290 per user (up 26% YoY).    Over the following years, operating income will inflect positively - Bigo's business naturally exhibits operating leverage as revenues scale faster than each opex category (R&D, G&A, and S&M).   Bigo is an its profitability inflection point and shares should rerate as the business begins to print positive operating margins.  I've included some metrics below as well as a chart on operating margins over time:  

• YY's Founder and Chairman David Li, while having a contentious history of using YY's low share price to self-deal, has an indisputable history of successfully creating and managing operating businesses.  He has successfully created $3.6bn in value in YY live and has recently built Bigo from nothing to a $2.3bn revenue company in under a decade.  In May 2021, Li inserted himself into a management role in the Bigo segment which is bullish given his history of operational success.  The following article has a few interesting tidbits https://www.yicaiglobal.com/news/founder-of-chinese-live-streaming-site-joyy-takes-control-at-overseas-unit-bigo   "Li began to cut costs after taking over the business, according to the report. Likee laid off nearly 20 percent of its employees, mainly from the algorithm team, a person familiar with the matter said. The loss-making business imo is also being shaken up."   To the extent that Hago (the third major app owned in this segment) is losing and money and is shut down, profitability inflection at the segment level should accelerate.   A shutdown of non profitable/failing apps within this segment is not priced in.

• While Chinese regulatory news is likely the primary cause behind the recent share price action, the majority of Bigo's revenue is earned outside of China

Huya

YY owns a 17.5% stake (38mm shares) in Huya, a Chinese live streaming platform focused on gaming and e-sports operating in a duopoly with DouYu.  While Huya shares have sold off with the broader Chinese market sell-off, I value this at current market price given the Huya stake is not material to the thesis.  Huya is a good business operating in a difficult regulatory environment, and may be worth multiples of its current price in the event that regulatory sentiment normalizes.  Kerrcap has a great writeup on Huya posted on VIC in December 2019.  

Scenario Analysis

There is a price for any business.  There are clear risks to YY and the probability of realizing these risks is uncertain - the market hates uncertainty and therefore there is opportunity in thinking through the worst case scenario and comparing it to realistic upside scenarios.  

Bear Case

Let's assume that China not only blocks the Baidu/YY Live deal but also confiscates the cash that's already been paid to YY.  Let's also assume China bans esports streaming and effectively makes HUYA worthless.  Let's assume Bigo is completely worthless despite having 144 MAUs across Bigo Live + Likee apps generating $2.3bn in revenue right at operating profitability inflection.   Let's also apply a 20% discount to the remaining cash for conservativism. 

In this clearly draconian scenario, you are paying $3.9bn today and receiving back $2.5bn in cash equating to downside of 35%. 

Base Case 1

Let's keep the bear case scenario but add back HUYA at current market value (w/ a 20% holdco discount) and add back Bigo at a 1x P/S multiple, cheap for an asset-light growing app that consistently is within the top 10 of mobile apps globally.   In this scenario, you are paying $3.9bn today and receiving back $5.2bn in value - upside of 33%.  As a reminder, this assumes that China blocks the YY live deal and confiscates the entire business (i.e. YY receives $0 of the $3.6bn value that Baidu has offered).  This scenario is to illustrate that you do not need to have a strong view on the Baidu deal to find current prices attractive.

Base Case 2

Same scenario as above, except now we assume that the Baidu/YY Live deal does go through as management has indicated.  Let's also assume a P/S multiple of 3x, which is still well below multiples paid globally for asset light internet companies despite Bigo segment's latest 14% QoQ growth in Q1.  As a reminder, YY already has received $2bn of the $3.6bn payment as of 3/31/2021.   In this scenario, you are paying $3.9bn today and receiving back $12.7bn in value - upside of 225% (27% CAGR over 5 years).

Bull Case

Investor sentiment ebbs and flows - especially for Asian stocks.  As recently as February 2021, investors were bidding ~$140 for the same company AFTER the Muddy Waters short report came out.  Given the constant rapidly changing sentiment, it would not be surprising for a fast growing asset light top 10 app company hitting operating profit inflection to achieve a 5x P/S multiple over the next few years.  n this scenario, you are paying $3.9bn today and receiving back $17.3bn in value - upside of 343% (35% CAGR over 5 years).

I added some generic probabilities to each scenario and came up with a weighted target price.  Adjust accordingly based on your views.  Very difficult to get a price lower than the current price using this method.   

Risks

The most likely realistic risk here is a takeunder by management while the stock price is low.  These thoughts are lifted from GCA's Q3 2019 VIC writeup which I'll paraphrase below. 

• YY acquired Bigo primarily with YY stock which had just declined 50% over the previous 12 months resulting in 22% dilution.  These YY shares were paid to the previous owners of Bigo, the largest of which was YY CEO David Li.  Not a great deal for YY minority shareholders at the time. 

• David Li also tried to take the company private in 2015 at $68 a share with the intention to do so and the re-list in mainland China at the encouragement of Beijing.  This came to a halt when the Chinese stock market crashed and new IPOs were no longer welcome (according to IR). 

Mitigant - Positive Capital Allocation Signaling

• In May 2020 the board extended an existing repurchase program allowing repurchase up to $300mm between August 2019 and August 2021. As of March 31, 2021, the Company had repurchased approximately US$196.8 million of its shares (5% of current market cap). I would expect continued buybacks to be reported in the upcoming quarterly and a new repurchase program to be announced.   $58mm was repurchase in Q1 2021 alone (1.5% of current market cap).  

• In November 2020, management announced a quarterly dividend of $0.51 per share (4.1% dividend yield at current prices). 

Adding annualized Q1 share repurchases of $58mm ($2.9 per share annualized) and annualized dividends ($2 per share) results in management returning $4.9 per share, or 10% of the market cap, to investors.  While far from a perfect mitigant, it suggests some willingness to return capital to all shareholders. The way I think about this risk in general is that it's real and should be accounted for - but you're unlikely to experience prices far below where we currently are.  This risk must be weighed against more optimistic scenarios to have a full view of risk/reward.   

Catalyst

• Operating margins inflecting positive
• YY Live/Baidu Deal approval in 2H 2021
• Continued announcements on share repurchases/dividends 
• Change in investor sentiment re: Chinese securities