HUYA - HUYA: Market Is Watching Earnings Beat And Buybacks

2023-11-15 12:31:08 ET

Summary

• HUYA achieved positive and above-expectations normalized earnings for Q3 2023, but this was largely driven by a substantial increase in interest and investment income.
• HUYA trades below its cash and deposits, but the company is buying back shares at a slower pace than what I would have expected.
• My Hold rating for HUYA remains intact, as I evaluate the company's underlying operating performance and its actual share repurchases.

Elevator Pitch

I have a Hold rating assigned to HUYA Inc. (HUYA) stock.

In my previous article for HUYA written on August 1, 2023, I highlighted the unfavorable regulatory developments for the live streaming industry in Mainland China, and mentioned the various ways that the company can narrow the valuation discount assigned to its shares. My focus is on the review of HUYA's Q3 2023 financial results and key metrics in this latest write-up.

HUYA's headline results for the third quarter exceeded expectations. But the company's Q3 2023 underlying operating performance was poor, and its actual share repurchases between mid-August and end-September were less than what I would have anticipated. These are the key issues that the market should be concerned with, and I have decided to stick with my existing Hold rating for HUYA after considering these factors.

The Market Initially Expected HUYA To Record Lower Revenue And A Net Loss For Q3

Before HUYA revealed its actual third quarter performance on November 14, 2023 before trading hours, the sell side analysts projected that the company would witness a significant drop in its top line and be loss-making for the most recent quarter.

With respect to HUYA's top line, the market's consensus financial forecasts pointed to the company's revenue decreasing by -35% YoY and -15% QoQ to RMB1,544 million in Q3 2023 as per S&P Capital IQ's consensus data.

In terms of the company's bottom line, Wall Street predicted that HUYA would suffer from a normalized net loss of -RMB52 million (source: S&P Capital IQ ) in the third quarter of this year. As a comparison, HUYA had delivered positive non-GAAP adjusted earnings of +RMB106 million and +RMB115 million in Q3 2022 and Q2 2023, respectively.

HUYA's actual results for the third quarter of the current year surpassed the analysts' expectations as detailed in the subsequent section.

HUYA Reported Above-Expectations Headline Numbers For Third Quarter

HUYA's Q3 2023 revenue and bottom line were better than what the sell side had previously estimated.

Actual revenue for the company decreased by -9% QoQ and -31% YoY to RMB1,648 million in the third quarter of 2023. HUYA acknowledged in its Q3 2023 results release that "a soft industry environment" hurt its top line. This is reflected in the fact that the number of paying users for HUYA's live streaming business plunged by -24% YoY from 5.5 million in Q3 2022 to 4.2 million for Q3 2023.

However, HUYA managed to register a decent +7% revenue beat. In its third quarter earnings release, HUYA specifically mentioned that it is "targeting a shift in our commercialization focus with more game-related services." In other words, the company 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. Previously, HUYA has set a goal of having gaming services represent 30% of its top line in three years time. Therefore, the company's better-than-expected Q3 revenue indicates that it could be moving closer to achieving its mid-term revenue mix optimization target.

Also, HUYA generated a normalized net profit of RMB103 million in the most recent quarter, which defied the market's expectations of a non-GAAP net loss of -RMB52 million for the company in Q3.

The +78% YoY jump in HUYA's interest and investment income to RMB128 million was the most important factor driving the company's third quarter earnings beat. HUYA would have been loss-making for the third quarter, excluding the interest and investment income. In the next section, I elaborate on HUYA's underlying operating performance.

But HUYA's Underlying Operating Performance Wasn't That Good

HUYA reversed from a non-GAAP operating profit of RMB57 million for the third quarter of 2022 to report a normalized operating loss of -RMB18 million in the third quarter of this year. These numbers don't include non-operating items such as interest and investment income.

In its Q3 results press release, HUYA made specific reference to the company's "continuous operational optimization efforts." But the -21% YoY decline in HUYA's aggregate operating costs was insufficient to offset the -31% YoY fall in the company's top line for the recent quarter.

The company also noted in the third quarter earnings release that "the increase in offline entertainment activities" was one of the key factors that reduced "the time spent by long-tail users on HUYA's platform." This seems to imply that HUYA's operating performance has deteriorated with "Work-From-Home" tailwinds (relating to the pandemic) dissipating.

In the prior section, I also mentioned that HUYA's paying users have declined on a YoY basis in the most recent quarter.

Company Could Have Spent More On Share Repurchases

In the one and half months following the authorization of a new $100 million share buyback plan, HUYA allocated $9 million to share repurchases.

The current share repurchase program is in effect for a year between mid-August 2023 and mid-August 2024, which translates into an average monthly buyback quantum of $8.3 million (or $12.5 million for a 1.5 months period) assuming that buybacks are done evenly over 12 months. Therefore, it is fair to say that HUYA's actual share buybacks between August 15, 2023 and September 30, 2023, were slightly below expectations.

HUYA's cash and deposit balance as of end-Q3 2023 amounted to $1,453 million, and this is significantly above the stock's market capitalization of around $0.8 billion. With the stock trading below cash, there is every reason for HUYA to be much more active when it comes to buying back its own shares.

Concluding Thoughts

HUYA registered above-expectations top line and earnings for Q3 2023. But the company's third quarter bottom line was boosted by non-operating items like interest and investment income. It also comes as a disappointment that HUYA didn't allocate a larger amount of capital to share buybacks.

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