Current Price: $59.6
Target Price: $85
Expiration Date: TBD
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.
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.
- 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.