Huya Operates a Mediocre Business, but We See Value in Its Cash Balance

Senior Equity Analyst

Ivan Su

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Live streaming

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Huya is China's largest game livestreaming platform with over 80 million monthly active users. As the market leader for years, Huya has maintained an edge over competitors on game content by signing exclusive licensing deals with esports tournaments. While this enhances user loyalty to the platform, we believe competition on licenses remains fierce, as peers will likely bid up for top events at time of renewals. In addition, we think slowing revenue growth will pressure Huya to sublicense some of its events to competitors, bridging the gap on content. 

To alleviate the risk of losing major licenses, Huya has expanded its livestreaming content by tapping into areas such as leisure games and other forms of entertainment. The strategy has limited upside, in our view, as platforms with more users and richer content arrays like and Bilibili are already popular among users. Also, we think Huya’s self-produced esports events will not gain as much traction as licensed content, at least in the near term. Due to competition and the saturation of the esports market, Huya will find it difficult to expand its user base, in our view. 

In contrast to some peers, Huya has not aggressively increased revenue shared with livestreamers to retain them. That said, we expect the firm to increase its payments to streamers as streamers tend to join platforms with higher pay. As some streamers of Huya have been poached by rivals, we believe Huya will need to provide better incentives to retain the top streamers.

We think investments in exclusive game streaming licenses will weigh on Huya’s long-term run-rate margins. While high fixed content costs could translate into cost leverage, we are skeptical that this will rapidly materialize amid slowing user expansion. Although Huya has rationalized research and development and promotional spending, it needs revenue to growth in order to improve margins. Therefore, we expect the firm to remain marginally breakeven over the next decade.

Business Strategy & Outlook

We assign a no-moat rating to Huya because we expect it will be a long time before the company generates excess economic profit. From 2019 to 2021, Huya's average return on invested capital has been mostly negative, averaging around negative 250% versus a weighted average cost of capital of 12%. Despite its stronghold in esports event livestreaming, Huya has lost market share to peers like Bilibili and Kuaishou as it is less popular in leisure games and other types of entertainment content. In addition, we have low conviction that exclusive broadcasting deals for top esports tournaments will provide a durable competitive edge, as Huya will face more intense price competition from other streaming platforms at the time of renewal.

Huya is the largest gaming livestreaming platform in China, with an edge over close peer DouYu in monthly active users. In the third quarter of 2022, Huya's MAU amounted to 86 million versus 57 million for DouYu. That said, the network scale of Huya materially lags that of peers like Kuaishou or Bilibili, which have been keen on expanding their footprint in game streaming. Over the past few years, Huya has ramped up livestreaming viewership through top esports events, but growth in other entertainment categories has been slow due to the lack of a first-mover advantage. As a result, Huya’s user community is less diversified than those formed by Kuaishou or Bilibili. While users on Huya demonstrate stickiness to esports events, with average revenue per user higher than some larger steaming platforms, we don’t think higher user spending has offset the differential in user scale. In June 2022, Huya’s number of paying users was only 10% of Kuaishou's and 57% of Bilibili's.

Livestreaming viewers tend to develop high loyalty to their favorite streamers, but there are few or no structural switching costs, and streamers can sign with any platforms that offer highest incentives. While Huya strives to retain top streamers through exclusive contracts, those streamers hold the cards in negotiations, and they could push back with nonexclusive terms or shorter durations of exclusivity. In addition, some streamers of Huya have been poached by rival platforms with higher incentives and larger user bases, and this could lead to some short-term share loss as cultivating top streamers takes time. Moreover, we do not view Huya’s streaming functions as being greatly differentiated from its peers. While Huya could provide higher-definition and lower-latency live videos, we do not think its video qualities are meaningfully superior to those offered by DouYu, Kuaishou, or Bilibili. 

We believe Huya enjoys some advantages in top esports game content, thanks to exclusive multiyear esports livestreaming deals with tournaments like League of Legends Pro League. While Huya could exclusively stream those events on its own platform, it will likely sublicense to selected competitors, as it did when it licensed the LPL broadcast rights to Bilibili. Although Huya obtained streaming right from Bilibili’s exclusive events in return, this arrangement has created a somewhat level playing field on esports content among sector peers. Exclusive agreements are often for two to five years with no renewal option, so we do not believe these exclusive deals provide a long-term competitive advantage to Huya.

Hefty investment in esports content has weighed on profitability. Due to elevated fixed costs on major esports events, Huya's gross margin averaged 18% from 2019 to 2021, versus 40% for Kuaishou and 21% for Bilibili. Cost of sales (mainly revenue-sharing and content costs) has constantly exceeded 65% of total revenue and has trended up over past few years, which has translated to subdued operating profit margin at 2% on average and negative ROICs from 2019 to 2021. While most competitors were also loss-making over the same period, we think Huya had less pronounced cost leverage as revenue growth has seen a marked slowdown under stalled paying user numbers. Even if Huya ceases to burn cash through exclusive deals, its margins will not see a meaningful pickup, since revenue-sharing costs will remain heightened with stiff competition for top streamers and content.

To alleviate the impact of competition on game content, livestreaming platforms have grown deeper in streaming other forms of entertainment, such as singing and dancing, but Huya’s progress has been slower due to lower traction among entertainment streamers and viewers than Kuaishou and Bilibili. We estimate that game streaming accounted for around 50% of Huya’s total streaming revenue in 2021, which is unlikely to decline substantially over time. Per iResearch, game streaming represented less than 20% of China livestreaming revenue in 2021 and its growth is expected to temper. We expect Huya’s market share to shrink gradually as its entertainment streaming revenue will grow slower than peers'.

None

Economic Moat

HUYA Inc - ADR

HUYA, Inc. is a holding company, which engages in the development of game live streaming platform. The company provides live streaming content for mobile, personal computer, and console games. It also offers content to other entertainment genres, such as talent shows, anime, and outdoor activities. The company was founded in 2014 and is headquartered in Guangzhou, China.

Earnings data Q2 2021

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HUYA reports Q1 2023 earnings, focuses on user engagement and revenue recovery

HUYA's Q1 2023 earnings call addressed performance, strengths, challenges, and opportunities. The company emphasized user engagement, revenue recovery, and compliance efforts while acknowledging challenges in revenue decline and regulatory impact.

HUYA Inc. reports solid Q2 earnings and focuses on e-sports for growth

HUYA Inc. reported solid financial performance in Q2 2023, with a focus on sustainable business development and a strategic shift towards game-related services. While facing challenges in user base expansion, the company's strong user retention rates and emphasis on e-sports events present opportunities for future growth.

Huya reports mixed Q3 results, focuses on game-related services

Huya's Q3 2023 performance showed mixed results with strong revenue but a net loss. The company's strategic focus on game-related services and the success of the share repurchase program demonstrate confidence in its future. However, it faces challenges in maintaining profitability and managing event costs. The company sees opportunities in e-sports growth and aims to expand its game-related services business.

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HUYA, Inc. is a holding company, which engages in the development of game live streaming platforms. The company was founded in 2014 and is headquartered in Guangzhou, China.

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