<Editor's Pick>How can Tencent-backed Huya break through again in the game live streaning market?

Focus

• With the entering of Bilibili, online live game industry will not return to the cash-burning era of the thousand-broadcast wars.

• The fundamentals of Huya have always been sound, both financial and business.

• The future or dislocation competition pattern, match point lies in the balance ability of refined operation and diversified layout.

The online live game industry, which has been quiet for a long time, is now on its way back.

Bilibili spent 800 million yuan to get the exclusive copyright of League of Legends (LOL) in the next three years. At the same time, the company also spent amount of money to sign Feng Timo, the famous camgirl with high popularity in the live streaming industry. Haishi, the lead network anchor of King of Glory, who has been banned for more than half a year, is coming back in a high-profile manner.  According to the Kuaishou data, the daily active users of the mobile terminal in the station are more than 35 million.

There is no doubt that the future of online live games is bright, and the entry of cross-border players shows that it is a valuable gold mine. According to the forward-looking forecast, the online live game industry will maintain a rapid growth rate of more than 13% from 2018 to 2022, and by 2022, the market scale of online live game will reach about 30 billion yuan.

But it is also such a situation that makes the lead platform encounter the worry of the capital market: there is a battle in front of us. This time, will the online live game industry collectively enter a new era of high cost?

In particular, whether the first mover represented by Huya will be impacted, and whether the current capital market response is excessive?

The online live game has gone through the first stage of barbaric growth and the second stage of the first half of the bubble clearing. Although the platform strives for development vigorously, it is clear that there will be no "easy mark". Whether it is Huya, Douyu or Bilibili, which have been listed, or Kuaishou, ByteDance, which have been troubled by all kinds of listed rumors, everyone is facing the capital market inspection. Every move of them is considered overall, cautious and detailed.

In other words, in such a background, the experiences of first entrants such as Huya are actually a healthy ecological competition. It is a very normal strength competition in the business world. In addition to the competition and the anchors, the next longer-term battle actually falls on the endurance challenges of standardized and refined management.

From the current situation, the possibility of dislocation competition among different platforms in the future is still greater. It is also a new opportunity for the real live platforms such as Huya.

Have another look at Huya 

From the investors’ perspective, from the prospectus of Huya to the quarterly financial report, its financial and business data are very stable.

Take the latest third quarter as an example, the total revenue of Huya’s Q3 increased by 77.4% year on year to RMB 2265.1 million, which exceeded the expectation for the sixth consecutive quarter since its listing. Under the Non-GAAP, the net profit attributable to Huya was 206.4 million yuan, a year-on-year increase of 70.5% to a new high, achieving profits for eight consecutive quarters. In terms of user data, Huya's Q3 domestic average MAU (monthly active users) and mobile average MAU (monthly active users) were 146.1 million and 63.8 million respectively, with year-on-year growth of 47.6% and 29.1%, continuing strong growth.

For a company in high growth, 77.4% of revenue growth, and a single quarter profit of about 200 million yuan, to tell the truth, is quite eye-catching.

The first is revenue and profitability.

There is no doubt about the advantages of Huya in this sector. When other companies are still losing money, the financial data of Huya is pretty good. A visible trend is that when the industry enters the era of giant game, funds are often only tickets, and refined operation is the key of the future. It has set a precedent in both the sports industry where LETV has focuses on copyright in the past, and the video website industries which have been in trouble recently.

In this quarter, the total revenue of Huya live streaming was 2.156 billion yuan, up 77.2% year on year. Online live game revenue is still the most important revenue source of Huya, which accounts for 95.2% of the total revenue. Revenue from advertising and other businesses was 110 million yuan, with an increase of 81.3% over the same period last year.

It is worth noting that the growth rate of online live game revenue of Huya in this quarter is much higher than that of its paying users, with a 26.2% year-on-year growth of paying users. It indicates that the growth of the company's revenue is not only from the contribution of new users, but also better operation of existing users.

In terms of profit, the gross profit of Huya in the third quarter was 406 million yuan, with the gross profit rate reaching a record high of 17.9%. The increase of the company's gross profit margin is mainly due to the scale effect, which was gradually reflected by the expansion of the business scale. Meanwhile it is because the company's share and content cost can be controlled at a relatively low level.

In the third quarter, the company's share and content cost accounted for 70.0% of the live broadcast revenue, the lowest level in this year. On the other hand, the scale of advertising business with higher gross profit continues to increase, which also improves the gross profit level of the company to a certain extent.

For the net profit, under Non-GAAP in the third quarter, the net profit attributable to shareholders was 206 million yuan, with a net profit margin of 9.1%, also the highest level in this year.

With the continuous expansion of the user scale of the online live game industry, the company's customer acquisition cost is increasing. The companies in the whole online live game industry are under greater pressure on the profit side. However, while Huya's income is rising rapidly, its net profit margin is still rising, which reflects a healthy operating efficiency.

In terms of shareholder level earnings, the diluted earnings per share (PerADS) of Huya in the third quarter was 0.87 yuan, which was also a record high and exceeded analysts' expectations.

It is particularly noteworthy that the dynamic return on net assets (TTM ROE) of Huya Non-GAAP over the past 12 months has shown a continuous upward trend in the past two years.

Return on net assets is the ratio of net profit to shareholders' equity, which reflects the level of return generated by shareholders' equity. The higher ratio means the higher return generated by the capital investment of shareholders.

The second is user growth.

In the third quarter, the number of monthly active users in Huya was 146 million, a year-on-year increase of 47.6%. The average number of monthly active users in mobile terminals was 63.8 million, a year-on-year increase of 29.1%. And the number of paying users was 5.3 million, a year-on-year increase of 26.2%. In the third quarter, the ARPU value of Huya's paying users exceeded 400 yuan for the first time, reaching 406.8 yuan. The in-depth mining of the stock users is an important standard to measure the competitiveness of the platform.

In the current market environment, investors pay more and more attention to the company's operation and profitability for users. Whether users can pay and continue to pay is a key indicator. After all, the era of burning cash to buy growth has passed. It is the key of the new era to refine operation and generate more returns from investment.

In this regard, Huya can be very calm. According to the public data, the users' payment ability of Huya (the average reward amount of paid live users) is indeed much higher than that of Douyu and Bilibili.

It must be pointed out that in terms of cash, the net cash flow of Huya's business activities in the third quarter was 302 million yuan. It is far higher than its Non-GAAP operating profit. At the same time, the company's total cash reserve balance at the end of the third quarter reached an amazing 9.537 billion yuan.

Huya is not afraid of heavyweight rivals in the competition for game events, lead anchors and star teams in the market because of its sufficient capital reserve.

On such a stable basis, Credit Suisse has set a target price of $30, and Goldman Sachs has set a target price of $28, which are much higher than the current stock price of Huya.

Huya's online live game enters a new opportunity period

However, a sound financial situation can only show the current situation of the company. The future of a company depends on its long-term strategic planning and whether its track is Chaoyang.

The online live game industry is on the rise, and the user bonus has not been fully released. According to the report of IResearch, in 2018, China's online live game market reached 13.9 billion yuan, with 260 million users. In 2019, the market scale is expected to reach 17.77 billion yuan, with 310 million users. According to the prediction of Shengang Securities, the industry revenue reached a year-on-year growth of 62.5% in 2018, and it is expected to maintain a compound growth rate of 20-25% in the next five years.

Small and medium-sized platforms have gradually withdrawn. With the suspension of new capital investment, the industry concentration has increased. The performance of top players will be driven by the dual logic of industry growth and market share increase. Let's work together to cultivate the user's habits. It's not a good thing to  "make a big pie".

Compared with cross-border players, Huya also has many differentiated advantages: more hard core users, richer host resources, more game copyright reserves and more targeted technical solutions.

While the online live game is in full swing, Huya is also carrying out its "cross-border".

In June this year, Huya and Izzue jointly held an offline meeting of popular anchors. Through the "star + anchor" e-sports, it applies the innovative interactive of online live to street fashion marketing. In the same month, Guying, a Huya anchor, appeared in Swarovski's offline flash event, and played two matches with the new idol Roy Zuo in King of Glory 5V5. Driven by the platform, the two anchors got out of the live broadcast room and radiated their influence offline. At this moment, the game and fashion broke their barriers. The cooperation not only shortens the distance between the brand side and the young users, but also allows the anchor to be closer to his fans, increase the affinity and successfully "out of the circle".

For a long time, Huya has been promoting the development of the online live industry into a younger, more diversified, healthier and stable cultural industry with positive social value around the change of young users' needs. It is understood that Huya will also hold the annual "Star Festival" on January 11, 2020, which will create an online live splendid feast integrating elements such as "e-competition, game, music, dance, outdoor, technology, quadratic".

In the past, the outside world has always questioned the "single profit model" of the online live game industry. However, in fact, Huya has made progress in the overseas market, game distribution and advertising business under the background of financial health, efficient operation model and continuous expansion of the scale of paying users.

In the second quarter financial report call, executives revealed that nearly half of Huya's active users also watched non-game content on the platform. The non-game content also contributed about 45% of the online live game revenue. This proportion explains why Huya, as a platform for online live game, can integrate content diversification into long-term strategy while developing game and video competition content.

From the perspective of revenue, in addition to game revenue, Huya's advertising revenue bucked the trend in a very severe environment. In the third quarter, the revenue from advertising and other businesses was 109 million yuan, with an increase of 81.3% year on year. It achieved the first break of 100 million yuan in a single quarter.

Just in August this year, Huya launched a new advertising system, which provides more abundant advertising forms (such as entry advertising, live broadcast timing advertising, etc.) outside of the regular resources. This update is the first time that precision delivery, competitive ranking and other means are integrated in the advertising system of the live broadcast platform, which is a further upgrade of Huya's advertising monetization ability.

It can be expected that in the future, such elements as the rapid development of e-sports, the scale of users, and the length of high users, the form of live broadcast + anchor + interaction can determine Huya's future of advertising business, which can still maintain a high growth in the future.

From a regional perspective, at the international business level, the expansion plan of overseas online live platform Nimo TV under Huya is progressing smoothly. In the third quarter of 2019, the global total MAU of Nimo TV increased to about 17 million. In October, Nimo TV officially launched in Argentina, which is a further expansion in the Spanish region after its launch in Mexico. The management said that it would continue to increase the number of game coverage. It would introduce more types of games, and continue to explore the monetization opportunities in the overseas market.

Huya's overseas strategy also includes game release.

There is no need to talk about the role of release in the game industry chain. In the process of release, professional game promotion resources and marketing programs are very important. This is just the advantage of the online live game platform - accurate users, targeted channels, and diversified forms of interaction.

Twitch started to release games in 2017, with numerous successful cases and smooth scenes from live broadcast to game consumption. And the game distribution business of Bilibili is also smooth. Whether it's machine armour + young girl's Final Gear or Girl Cafe Gun with interactive video and virtual anchor as marketing, both have good results.

In September this year, Huya released a 3A masterpiece of remedy studio, action adventure game Control, in Southeast Asia, Hong Kong and Taiwan. The release of this game is a key in the diversified development of Huya's business. In addition to its continuous investment in the field of e-sports events, as well as the ever-increasing cooperation with game publishers, Huya is moving towards the industrial chain. At the same time, the idea of pushing the game business ecology to a new height is being implemented.

Based on the above, it can be seen that with the conclusion of the first phase agreement between China and the United States, and the influence of Christmas market at the end of the year, the three major indexes of American stocks have gone out of a wave of rising market in the past month, continuing the overall trend of 2019. In the long run, with the further clarity of the industry pattern, the layout effect of Huya is further revealed, and the future imagination space is still infinite.

This is an article from WeChat official accounts Deep Echo(ID:deep-echo),  written by Wang Xuange, translated by Chris Yuan.