YY - JOYY: Staying On The Sidelines

2023-07-18 06:12:10 ET

Summary

• JOYY's second quarter results release in late August is unlikely to throw up positive surprises, as I think that YY's Q2 performance will be as weak as what the market expects.
• On the other hand, YY had indicated that it might buy back more of its own shares in the second quarter of the current year.
• I stick with my existing Hold rating for YY, after taking into consideration JOYY's expected second quarter results and the possibility of more aggressive buybacks.

Elevator Pitch

I still assign a Hold investment rating to JOYY Inc. (YY) stock. I previously wrote about YY's prospects for the current year and the potential catalysts for the stock in my May 8, 2023, update .

In this latest article, I analyze JOYY's potential financial performance and shareholder capital return activities in the short term. My analysis suggests that YY's Q2 2023 results are likely to be poor, while there is the potential for JOYY to execute on significant share repurchases for the near term. Considering YY's mixed outlook in terms of both buybacks and results, I am staying on the sidelines and maintaining my Hold rating for JOYY.

Q2 2023 Is Expected To Have Been A Tough Quarter For YY

JOYY is expected to reveal its financial performance for the second quarter of fiscal 2023 in late August . I am of the view that YY would have delivered a poor set of results in Q2 2023.

When JOYY reported its Q1 2023 financial results at the end of May, the company guided for its second quarter revenue to be in the $520-541 million range. The mid-point of YY's Q2 2023 top line guidance at $530.5 million fell short of the market's prior consensus sales projection of $576.0 million by as much as -7.9%. This implies that the company expects its revenue to decrease by -11.0% YoY and -9.1% QoQ in Q2 2023. The sell-side analysts' current consensus Q2 revenue estimate of $537.8 million is just slightly higher (+1%) than JOYY's second quarter top line guidance.

The weaker than expected Q2 2023 management guidance also had a negative effect on the analysts' expectations of its full-year performance. The consensus FY 2023 top line and bottom line for JOYY were lowered by -18.1% and -6.8% , respectively in the past three months.

YY didn't offer specific quantitative guidance relating to its profitability and earnings when it released its first quarter results. But JOYY did indicate at its Q1 2023 results call that "a sequential decline in our margins" is likely. YY's management comments are aligned with market expectations. Based on consensus data taken from S&P Capital IQ , the sell side sees JOYY's normalized operating margin declining by -250 basis points QoQ from 4.8% for Q1 2023 to 2.3% in Q2 2023.

It is reasonable to expect that JOYY's financial performance will have been lackluster in the second quarter of the current year. At the company's first quarter results briefing, YY noted that it will "streamline some of our non-core operations" in Q2, and also highlighted that its business operations in "Middle East" and "some Southeast Asian countries" might be impacted by "Ramadan" for the second quarter. National Geographic refers to Ramadan as "the ninth month on the Islamic calendar, which marks important holidays and events for Muslims." In other words, JOYY's Q2 2023 results are very likely to be negatively affected by corporate restructuring activities and a major holiday period for some of its key foreign markets.

In conclusion, I think that YY's Q2 2023 results release in late August will be a non-event with no positive surprises, as I don't see JOYY registering above-expectations revenue and earnings in the second quarter of this year.

A Faster Pace Of Buybacks Could Limit The Downside For JOYY's Shares

YY has disappointed investors with the company's execution on its share buyback plan in the past, but things might change for the better going forward.

JOYY had previously put in place a $1 billion share repurchase program which was proposed to be in effect for a year starting in November 2021. In the end, YY only managed to utilize 20% of its share buyback plan in a year, having spent $200 million on share repurchases between November 2021 and November 2022.

YY subsequently extended the expiration of this share buyback program (with $800 million of share repurchase authorization) for another year to November 2023. However, JOYY allocated a mere $16 million to share repurchases between November 2022 and March 2023.

In summary, JOYY had plans to buy back $1 billion worth of its own shares when it initiated a new share buyback plan in November 2021. In a 16 months period, YY's actual share repurchases amounted to slightly over a fifth or 21.6% of its original $1 billion target. As such, it is reasonable to claim that JOYY's prior share buybacks have been significantly below expectations.

On the bright side of things, YY appears to have the intention to repurchase more of the company's own shares in the very near term. At its Q1 2023 earnings call, JOYY stressed that it will "step up our share repurchases in the second quarter" of 2023 taking into account "the current market circumstances and our current cash position."

YY was likely referring to its depressed valuations when it mentioned "market circumstances" as a justification for a faster pace of buybacks. JOYY's consensus forward FY 2024 and FY 2025 Enterprise Value-to-Revenue multiples were 0.53 times and 0.40 times, respectively as per S&P Capital IQ data. Separately, JOYY has the financial capacity to allocate more capital to share repurchases. YY boasted a cash balance of $4.29 billion as of end-Q1 2023, which is above its current market capitalization of approximately $2.4 billion.

Assuming 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 to some extent.

Closing Thoughts

JOYY's share buybacks could limit the potential downside for its stock, but the company's Q2 2023 results are unlikely to be a positive share price driver for YY. In that respect, I continue to take the view that a Hold rating is appropriate for JOYY.

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