YY - JOYY: Murky Outlook Supports A Hold Rating

2023-09-29 04:17:23 ET

Summary

• I am positive on JOYY's continued share buybacks and the company's profitability outlook.
• But I am concerned about YY's revenue prospects, and the delay in regulatory approval relating to the sale of its domestic livestreaming business.
• My Hold rating for YY stays unchanged, as I deem the outlook for JOYY to be murky.

Elevator Pitch

JOYY Inc. (YY) shares are still rated as a Hold.

Earlier, my write-up for JOYY published on July 18, 2023, was focused on the preview of the company's financial results for the second quarter of this year. Following the publication of my article in July, YY's stock price has gone up by +11.6% (source: Seeking Alpha price data) as compared to a -4.9% decline for the S&P 500.

With the current update, my analysis suggests that the stock price outlook for JOYY is murky, which warrants a Hold rating. Sustained share repurchases and a favorable profitability guidance are positive factors for YY. On the flip side, JOYY's weak top line growth prospects and the uncertainty over the YY Live divestment deal are key negatives for the company.

Shareholder Capital Return

I previously noted in my July 2023 article that if "JOYY does execute on share buybacks in a more aggressive manner in the short term, this might help to provide support for YY's stock price." This is exactly how things have turned out to be.

In its Q2 2023 results press release , YY revealed that it had allocated approximately $214 million worth of funds to share buybacks in the most recent quarter. Thanks to the substantial share repurchases in Q2 2023, JOYY's total shareholder capital return (including dividends) for 1H 2023 amounted to as much as $300 million. As a comparison, YY only spent $16 million on share buybacks in the period between November last year and the end of Q1 2023.

There is more good news for the shareholders of YY. JOYY guided at the company's Q2 2023 earnings briefing that "will continue to actively utilize share buybacks in the following quarters to reward support of our shareholders."

It will be reasonable to expect YY to buy back a meaningful proportion of the company's shares in the second half of this year. As of June 30, 2023, JOYY has more than half a billion dollars, or $570 million to be exact, remaining from its current share buyback authorization that expires in November this year. In other words, YY's remaining share repurchase authorization as of end-Q2 2023 represents close to a quarter of the stock's market capitalization.

Profitability

JOYY's above-expectations profitability was also a positive surprise for the market, apart from larger-than-expected share repurchases as highlighted in the previous section of the article.

The actual Q2 2023 non-GAAP adjusted operating profit for JOYY was $34.4 million , which was much higher than the sell-side analysts' consensus quarterly operating income forecast of $12.5 million as per S&P Capital IQ data.

Moving ahead, YY disclosed its expectations at the second quarter results call that the fiscal 2023 "non-GAAP operating profit margin of BIGO", its livestreaming business, will "remain roughly stable" vis-a-vis FY 2022 as a result of "operational efficiency improvement." JOYY's positive outlook relating to profitability is another factor supporting the company's share price, on top of sustained share buybacks.

But there are also issues that could potentially limit JOYY's capital appreciation potential as detailed in the subsequent two sections of the article.

Top Line Growth

The mid-point of YY's most updated Q3 2023 top line guidance is $552 million, which is -6% lower than the market's consensus revenue estimate of $586 million . JOYY's guidance also translates into a potential -6% YoY top line contraction for the company in the third quarter of this year.

With my prior July 18, 2023 update, I specifically highlighted that "corporate restructuring activities" associated with "some of our non-core operations" will be a key revenue headwind for JOYY.

It seems that such restructuring moves will have a negative impact on YY's top line for a longer-than expected period of time. JOYY mentioned at its second quarter earnings briefing that "adjustments" to its non-core businesses might affect the company in a negative manner for "Q2 and the following quarters."

In other words, JOYY could have to endure greater "short term pain" before it can enjoy the "long-term positives" relating to the company's corporate restructuring initiatives.

Valuations And Cash Balance

JOYY's valuation isn't as cheap what it appears to be, considering the company's cash and a pending asset divestiture.

YY currently trades at a negative enterprise value , taking into account its market capitalization of $2.4 billion (source: S&P Capital IQ ) and net cash of $2.9 billion (source: S&P Capital IQ )

In the company's most recent Q2 2023 10-Q filing issued in end-August, JOYY noted that there are "certain matters remaining to be completed in the future, including necessary regulatory approvals from government authorities" relating to its $3.6 billion sale of its China livestreaming business YY Live to Baidu (BIDU).

YY also highlighted in its 10-Q filing that it has received "advance payments" as part of the deal consideration, amounting to roughly $2 billion . Given that the YY Live divestment has still yet to be given the go-ahead by Chinese regulators since 2011, there is a risk that this transaction might be terminated with JOYY having to return the cash proceeds to BIDU.

If one excludes the cash received from Baidu, JOYY will be no longer trading at negative enterprise value and its valuations will be much less attractive. As such, unfavorable developments (e.g. potential deal termination) relating to BIDU's purchase of YY Live might be a de-rating catalyst for JOYY.

Concluding Thoughts

It is tough to assign a clear-cut Buy or Sell rating to JOYY. There are both favorable and unfavorable factors which could impact the company's future business and share price performance. As such, I take the view that a Hold rating for YY is appropriate.

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