Elevator Pitch
I rate HUYA Inc. (NYSE:HUYA) shares as a Buy.
My prior November 15, 2023 write-up reviewed HUYA's financial performance for the third quarter of last year. The current update analyzes HUYA's recently announced Q4 2023 financial numbers.
I have decided to upgrade my investment rating for HUYA to a Buy. I am impressed with HUYA's above-expectations top line performance and the declaration of a significant special dividend. The stock's valuations don't seem to be demanding as well.
Fourth Quarter Results Were Ahead Of Expectations
On March 19 before the market opened, the company released its earnings results for the final quarter of the previous year.
HUYA's YoY revenue contraction in local currency or RMB terms narrowed from -30.7% for Q3 2023 to -27.8% in Q4 2023. Its actual fourth quarter top line amounting to RMB1,529.8 million was +1.8% higher than the market's consensus sales forecast of RMB1,503.4 million as per data obtained from S&P Capital IQ.
The company reported a normalized net loss of -RMB189.7 million in the fourth quarter of 2023. This was better than its actual Q4 2022 non-GAAP adjusted net loss of -RMB438.7 million and the analysts' consensus bottom line projection of -RMB230.3 million (source: S&P Capital IQ).
I previously mentioned in my mid-November 2023 article that HUYA "has been diversifying its sales mix by exploring new revenue streams such as the selling of in-game items and the downloading of new game titles during gaming live streams." This was the most important factor that drove the company's top line beat for the latest quarter.
The live streaming business saw its segment revenue fall by -32.0% YoY to RMB1,343.5 million for Q4 2023, but this was partially offset by a +29.2% YoY growth in its advertising and other revenues to RMB186.3 million in the most recent quarter. In its latest quarterly results announcement, HUYA mentioned that it witnessed higher "game advertising and distribution revenues as we deepened cooperation with game companies" in Q4 2023.
Also, HUYA indicated in its fourth quarter results release that it had put in "efforts to improve cost efficiency and operational performance" last year, which explained why the company's recent quarterly net loss was narrower on a YoY basis and better than what the sell side had anticipated. In specific terms, HUYA's revenue sharing fees paid and content-related expenses, and sales & marketing costs declined by -39.4% and -10.8%, respectively on YoY terms for Q4.
Special Dividend And Step-up In Buybacks Were Positive Surprises
HUYA surprised the market in a positive way with respect to its actual capital return initiatives disclosed as part of its fourth quarter results release.
The company doesn't pay a regular dividend. But HUYA chose to declare a special dividend per ADS (American Depositary Share) of $0.66, which is equivalent to an impressive one-off dividend yield of 14.0%.
Separately, the amount of monies that HUYA spent on share buybacks increased from $9.0 million in Q3 2023 (between mid-August 2023 when the $100 million repurchase plan was initiated and end-September) to $19.8 million for Q4 2023. More significantly, HUYA had completed 28.8% of its share buyback plan in the first three and half months since the repurchase program initiation. This means that it is on track to allocate the full $100 million to share repurchases within a year by mid-August 2024 as planned.
Assuming that the full $100 million is spent on buybacks and the $0.66 per ADS special dividend is paid in early May as per schedule, the company would have returned roughly a quarter of a billion dollars (equivalent to more than a fifth of its market capitalization) within a year.
The Stock's Valuations Are Enticing
The market is currently valuing HUYA at 1.1 times consensus fiscal 2025 price-to-revenue.
Based on the current consensus financial estimates taken from S&P Capital IQ, the sell side analysts are of the view that HUYA will see its top line contraction narrow meaningfully to a low single digit percentage this year, before delivering a positive high single digit revenue expansion next year.
I take the view that these consensus numbers are realistic. HUYA emphasized at its Q4 2023 results briefing (transcript sourced from S&P Capital IQ) that it "saw encouraging signs of growth (for game-related services) in Q4" and it "expects that trend to strengthen" this year. The company also shared at its most recent quarterly analyst briefing that it is "seeing live streaming revenue trends starting to stabilize." Therefore, it is reasonable to think that an improvement in HUYA's top line performance going forward is likely.
Separately, it is worth noting that game-related services have a relatively higher gross margin than live streaming revenues as per management's comments. As such, the company's future profitability will be boosted by a more favorable sales mix with rising revenue contribution from game-related services.
As a reference, HUYA used to command a consensus next twelve months' price-to-sales multiple in the 2-4 times range in the first half of 2021 when it was still registering a high single digit YoY sales increase for Q1 2021 and Q2 2021.
Final Thoughts
HUYA has found new sales growth drivers such as game-related services. At the same time, the company's shareholder capital return has improved, considering the special dividend and the step-up in share repurchases. As such, I have turned positive on the stock, and that translates into a Buy rating.
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