JOYY (YY) – Expected Privatization Offer – 45% Upside

Current Price: $59.6

Target Price: $85

Upside: 45%

Expiration Date: TBD

Press release

This idea was shared by Tom.

 

This is a short note as the situation could be timely. Yesterday (August 26th), rumors appeared that the two largest shareholders of Chinese live streaming leader Joyy intend to take the company private. The alleged consideration stands at $75-$100/share, which at the current YY price results in a 29%-72% spread. The respective shareholders are chair/founder David Li (owns 23.2% economic and 76% voting power) and Xiaomi founder Lei Jun (owns 7.8% of YY). The stock is up only 5% since these rumors became public reflecting the market's skepticism regarding the potential transaction as well as the general overhang from the Chinese tech crackdown. Aside from the privatization thesis, the company looks quite cheap, trading at a 22% discount to cash and a negative EV.

The key risk is that these rumors are fake/incorrect as it has already happened with rumored takeovers of Weibo (Reuters) and Didi (WSJ) - in both instances these were denied on the same date by the representatives of the respective companies. I'm not sure if this is a positive sign, but Joyy has not made any announcements yet. Also the downside might be larger than appears at the first glance - YY price continued to increase from the $40/share lows since the release of Q2'21 results on the 19th of August and at least part of the gains might also be rumor related.

I am setting my target price at $85/share, around the middle of the rumored range and slightly above share buyback levels in Nov-Dec'20.

 

Short background

Joyy is a pioneer in Chinese live streaming services. Its operating business - Bigo - include:

  • Bigo Live - top-grossing live streaming app worldwide with 29.5m MAU;
  • Likee - TikTok competitor, 92.3 MAU;
  • IMO - conference call app;
  • Hago (gaming-focused live streaming, 11.8m MAU.

Worth mentioning that Bigo is based outside of China with 80% of its revenues being non-PRC (Southeast Asia, but also entering other markets recently). Bigo had 1.6m paying users as of Q2 and in H1'20 generated $1.3bn in revenues.

Aside from the operating business, Joyy also holds 17.5% stake in Huya (Chinese Twitch.tv), which is also down 50% YTD.

Joyy has recently sold its legacy domestic live streaming business YY Live to Baidu for $3.6bn. The transaction has been virtually completed already back in Feb'21. Joyy has received $2bn payment, however, the remaining $1.6bn is contingent on SAMR (Chinese antitrust) approval, which got delayed due to the recent Chinese tech crackdown. In August, both companies adjourned the long-stop date once again without providing further details. Antitrust issues are unlikely as Baidu is not in the live-streaming business and this is a relatively small merger for China. The company has also been portraiting the same idea, saying that the remaining issues are only "customary" (Q2 report):

Subsequently, the sale was substantially completed on February 8, 2021, with certain customary matters remaining to be completed in the near future.

Joyy also pays dividends with around a 3.5% yield.

 

There are several aspects suggesting that the privatization rumors could actually be true

  • The timing is highly opportunistic due to the prolonged U.S.-listed Chinese stocks sell-off following the government's crackdown on its major tech companies. PGJ ETF is currently down 33% YTD and 48% since Feb'21. Since the COVID outbreak, YY used to trade at around $80-$100/share reaching $135/share in Feb'21. After that the stock went straight down due to both Archegos liquidation and the above-mentioned sell-off.
  • Due to the sell-off the company now looks cheap trading at a 22% discount to cash and at a negative $1bn EV - see the table below. Even if one assumes that YY Live merger fails (unlikely) and the company has to return the already received $2bn in cash (not entirely sure how things would work out in that scenario), at current prices one is still paying 1x run-rate EV/revenues for a leading live-streaming business that is on the brink of profitability and getting YY Live on top of that for free:

  • The company is facing regulatory pressure from both sides - U.S. and China. Since Trump's bills to delist Chinese stocks last year both countries are still continuing to tighten the oversight of U.S.-listed Chinese stocks. The SEC has recently increased the risk disclosure requirements for Chinese companies, while China has also announced a crackdown on U.S.-listed domestic companies and now plans to ban U.S. IPOs for data-heavy tech firms. All of this has resulted in a wave of similar going-private transactions for smaller stocks. Given these tensions, the move to privatize Joyy at an absurdly low valuation and then list Bigo on the domestic market (as the rumors suggest) is not surprising.
  • Raising financing shouldn't be an issue here at all as the company is loaded with cash and, according to the rumors, plans to use it as collateral.
  • The company has been buying shares way above the current price recently. In the last two months of 2020, the company repurchased over 1.1m of shares at above $81/share average valuation.

 

Other points

  • Apparently, chair/founder David Li has already tried to take Joyy private in 2015 at $68.50/share price. However, one year later the offer was withdrawn due to "unfavorable market conditions".
  • The stock has long had an overhang of potential fraud, especially after the Muddy Waters report last November. The research claimed that Joyy businesses are fake with 84% of revenues being fraudulent and 90% of YY Live revenues fraudulent. I think most of these allegations have been rebuked since then, especially after Baidu went on and purchased YY Live.
  • If the rumors turn out to be true, this will be another major confirmation of Joyy business legitimacy that should get reflected in the stock price even if the merger itself fails.

8 COMMENTS

  1. nostradamus

    “in both instances these were denied on the same date by the representatives of the respective companies”

    Joyy apparently denied having received an offer in Chinese media. This doesn’t directly contradict anything, as the shareholders are supposedly preparing to make an offer and haven’t made one already, but still relevant I think.

    2
  2. rukun

    Short base is ~ 10%. Why do you think they’re throwing out a $75-$100/sh indication? – shouldn’t their incentive be to take private at the lowest price they can? – what’s the point in setting expectations so high?

    1
  3. Zulu Investor

    I have owned this company for years. IMO, I am not overly excited about the $75-100. I think the price is fair to slightly under what I would like to see (especially towards $75). The company is cash rich, and I believe initiated a 3 year dividend last year.

    My take on it comes from the fact that the stake in HUYA is currently about $430m. I believe this to be undervalued And probably to be worth closer to $1b – 1.5b. At some of the current growth rates I’ve seen. This company, which is a leading livestream company, will trade somewhere around 3-4x by 2024 after adjusting for cash and its short term investments of $1.6b. A little too low IMO and deserves a revaluation at some point.

    Add up the cash ($4.6b~), HUYA($1.0b, which is still too low), and the YY live consideration ($1.6b) and you get $7.2b~, and $6.2b after subtracting the $1b of debt. Depending on what you believe HUYA is to be worth, you get a company that is being bought out at a 33-50% SOPT discount to its net cash and stake held.

    This doesn’t even consider BIGO or any of the actual business which has been growing very well. Revenue estimates for YY is $2.6b. Apply a 2-4x revenue and you get anywhere from $5.2b to $10.4b. 4x is still pretty low for a company that has its main segment BIGO growing at 39% YoY). We can say its worth somewhere in the middle at around $8b.

    So in sum, the whole thing is worth about $14.2b ($6.2b + $8b) and that is a 200%+ upside from todays market cap. (Comes to about $180~ per share.)

    Just some back of the envelop calculations I did and my thoughts on it. They have every incentive to make this privization work. At this price range. Its a steal. If I were buying this stock, I would buy it not because its about the privatize, but because this stock is just so undervalued.

    Disclosure I am long most of the Chinese tech companies (YY included).

    (https://seekingalpha.com/symbol/HUYA/earnings/estimates#figure_type=annual)

    https://seekingalpha.com/symbol/YY/earnings/estimates?s=yy&figure_type=annual

    1
    1. Tomuk

      Thanks, Zulu, this helps. Just wanted to add that in 2015 Li tried to acquire the company for $4bn EV, while the company was generating around $900m revenues and growing at 60%-100%. Now, at the lower range price ($75/share) they could buy it at $352m EV, while the run-rate revenue stands at $2.6bn. Last two quarters were growing 40%-90% YoY. Even if they canceled YY Live acquisition, at the $75/share price the offer would stand on $4bn EV, which is somewhere under 1x revenues (YY Live generated $1.7bn+ in 2019). The valuation definitely seems absurd, so I expect offer announcement shortly.

      1. nostradamus

        It’s probably important to note there have been doubts with regards to Joyy’s earnings. For example, this report from Muddy Waters: https://www.muddywatersresearch.com/research/yy/1/, which makes a pretty good case YY Live is mostly fake. Which was then seemingly contradicted by Baidu buying said YY Live for billions (a transaction that is still awaiting SAMR approval btw, why is this taking so long?).

        I’m not taking sides here, but imo it’s important to know both exist.

        1. Zulu Investor

          What about it makes it a good case from your perspective may I ask? Personally I think all the talk about the revenue gifting being fake was likely not true, or exaggerated greatly. Here are my thoughts on the short article by MW I journaled last year:

          Even if they did cycle gifts and revenue, you can’t deny the huge cash position that they have and furthermore, where did the cash come from? Someone had to pump money into it and there doesn’t seem to be any existing obligations to transfer the cash out to a third party so it doesn’t really strike me as a money laundering scheme. They did say were open to third party audits for this. A pretty bold statement for a company teetering on fraud.

          Revenue is one thing but to fake FCF and the actual cash held itself is much harder. YY is open to being audited so doesn’t seem like they are too worried about faking the cash. I just find it hard to believe that a BIDU would allow itself to buy a $3.6B without any basic DD and unlike MW, they likely were granted access to a lot more proprietary info since private sellers are usually more willing to share information to potential buyers.

          When it comes to the fake IMEI and IP addresses… the claims seem dubious and I just look at the basics – 1) management hasn’t sold a single share and they own quite a bit of the company (33%~ correct me if I am wrong). (for LK, they were unloading like crazy for reference and context), 2) they did a 300m buyback and another 300m dividends payout for the next three years…. so at least 600m is likely not faked…and 3) YY is profitable unlike most of the fraud companies that were actually found guilty. Also, I believe that you can’t capture the IMEI data in a way that can provide any meaningful interpretation with respect to legitimacy of the users. The data they presented doesn’t seem valid to me to use.

          1
    1. Zulu Investor

      It just makes indicates the stock is undervalued to me. Hard to say about the privization. The stock is down 15%. No idea why. Likely will add today.

Leave a Reply