YY — NASDAQ:YY

About YY

YY, Inc. engages in managing a communication social platform, which enables users to join real-time online group activities through voice, text, and video. Its services include music and entertainment, online games, online dating, live game broadcasting, online education, and advertising. The company was founded by Xueling Li and Jun Lei in April 2005 and is headquartered in Guangzhou, China.

$46.70
Entry Price
$132.96
Share Price
+185%
Trade Return
442
Trade age — days

Overview

YY is a Chinese live video streaming mobile social network, similar to Snapchat - except profitable :)

User numbers are consistently growing at 5%+ QoQ.

Revenue and earnings is consistently growing inline with user growth, however there is some seasonality involved (Q4 CY is highest earning by far).

Revenue is via in-app virtual goods purchased and exchanged by members. The company is also growing a diversified content portfolio that will challenge traditional pay TV networks.

Another competitor and key Chinese player in this space is MOMO who has exceptional growth at the moment, but is valued much higher (PE=30).

Huachuang Securities estimated the mobile livestreaming market opportunity to be a $1.8B industry last year (2016), expanding to $15.9B by 2020

Credit Suisse stated in its September research report (2016) that it believes the Chinese personal livestreaming market will be $5B next year — already just $2B less than China’s movie box office total ($7B) and half the size of its mobile gaming market.

Growth Drivers

  • Chinese live streaming has taken off and is forecast to be a $16 billion industry by 2020 (up from 1.8 billion in 2016)
  • Increased regulation will drive out smaller players and leave YY well positioned as a market leader
  • New products being launched that are more inline with traditional media (eg: TV shows), increase margin and ARPU

Risks

  • The live streaming industry in China is an emerging space and is subject to Chinese government regulation that may change in the future.
  • The company is Chinese and is subject to ownership laws, so the NASDAQ listing is faciltated via contracts that could be voided.
  • There is a general dislike of Chinese companies by US investors due to concerns of cooking the books. This can limit the valuation, however companies like Alibaba and Sino are challenging this stereotype.
  • Mobile live streaming may be a “fad” in China

Valuation Metrics

  • Assume 12m FY earnings of $6 places the company on a forward PE of 7.8
  • Trailing earnings is $4.98, which gives earnings growth of 20%

There is also scope for faster earnings growth as margins should increase with user numbers and with the introduction of new media streaming products. As such, a PE of 25 seems reasonable.

This produces a valuation of $150 and a return over 200%.

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