HUYA - Recent HUYA Buyback Authorization Could Close The Massive Discount To Net Cash

2023-08-22 10:17:30 ET

Summary

• HUYA is still deeply undervalued with a 62% discount to net current asset value, 58% discount to net cash, and an absurdly negative enterprise value of -$628M.
• I wrote a previous article outlining the undervaluation, and shared my entry and exit points with my readers, with a total profit of 61% on the trade last year.
• Management is finally showing an effort to close the discount, with the recent announcement of a $100M share buyback authorization, representing 20% of the stock's market cap.
• Share buybacks would be immediately accretive by increasing the company's share of net cash, and boost underlying NCAV per share by reducing outstanding share count and increasing NCAV per share.
• Q2 earnings show continued marginal profitability, ensuring that the underlying asset value is stable while we wait for a convergence between stock price and asset value.

HUYA Still Deeply Undervalued Based on Net Current Asset Value (NCAV), Net Cash, and Negative Enterprise Value

I wrote an article in October 2022 rating HUYA a "Strong Buy" when shares were at $1.98, on the basis that enterprise value was absurdly negative and that shares were trading at deep discounts to net cash and NCAV (net current asset value). My preferred investment style is to purchase shares of companies at substantially below net asset value or theoretical liquidation value, and the opportunity to do so was strong with HUYA in October 2022.

A month after my article came out, HUYA reported earnings of ~$15M for Q3'22, which I thought was good but nothing to be surprised by. The stock shot up to $3.18, for a gain of ~61%, after which I sold out of most of my position and informed the Seeking Alpha audience in my comment section:

I missed most of the upside as the stock moved up to slightly above $6, which was slightly above its NCAV (net current asset value) of $5.81 per share and its net cash of $5.18 per share.

The Chinese game live-streaming platform is now only 9% higher than the price at which I published my previous article, and is still deeply undervalued based on its balance sheet.

See below for changes in NCAV per share, net cash per share, and other balance sheet components.

Source: HUYA SEC Filings

At a stock price of $2.22 per share, discount to NCAV per share is now 62% and discount to net cash per share is 58%. Enterprise Value is also still absurdly negative. The company is trading at an enterprise value of negative $628M, meaning that a theoretical acquirer could buy the business, and could walk away with the $628M in cash.

My level of conviction has increased based on the recent stock buyback authorization released alongside Q2 earnings.

Analysts were Missing the Forest for the Trees

Questions being asked on previous earnings calls revolved around user behavior, MAUs (monthly active users), cost control initiatives, profitability trends, and regulatory environment - all of which are immaterial to the company's valuation. If the company was still trading in the $10-30 a share range as it was from 2018 to 2021, then these questions would be relevant to justify the company's valuation.

With the stock now trading below net cash and NCAV at $2.22, the most immediate concern for shareholders is making use of the company's cash pile and closing the discount between the company's intrinsic asset value and its stock price.

Management Finally Signals to the Market Intent to Close the Discount via Stock Buyback Authorization

HUYA has $1.43B in cash and short-term investments, on which they only made $14M in interest income in Q1 2023. Annualized this is a 3.9% yield, right above the Chinese Central Bank Rate of 3.55%.

I mentioned in my previous article that HUYA should take advantage of the stock's discounted valuation to engage in highly accretive stock buybacks. HUYA could afford to buy back the entirety of the $647M in market cap of common shares if it wanted to. Even a modest share buyback would be immediately accretive by increasing the company's share of net cash and would boost underlying NCAV per share by reducing outstanding share count and increasing NCAV per share.

The company finally just announced a $100M share buyback authorization , which amounts to 20% of HUYA's market cap. This authorization lasts for the next 12 months. Hopefully, management sees that it is a no-brainer to buy back shares at this price and acts accordingly. There is always risk that the buyback authorization does not result in actual buybacks. In this case, the stock price might keep fluctuating below net cash.

Continued Profitability Shown in Q2 Earnings Results

Going into Q2 earnings, I was looking for continued profitability, even if marginal and/or near zero. This is to ensure that we are not investing in a company that is discounted but slowly losing underlying net asset value. Q2 earnings did in fact show marginal profitability, with net income of $3.2M in Q2'23.

Potential Limited Window for Buyback Execution

Chinese rules around stock buybacks are much more strict than those in the United States. Currently, buybacks can only be triggered when the company's stock falls 30% within 20 consecutive trading days. There were draft rules going around in Q4 of last year about dropping the trigger to 25%, but it seems that this change was never approved.

HUYA is down 35% since July 31, which was 15 trading days ago.

This means that HUYA can buy back stock within the next 5 trading days. If it doesn't, then it would likely need to wait until the next 30% decline over 20 trading days, if that ever occurs.

Given the deep discount to net cash, I am bullish on HUYA at current prices. I think the stock buyback authorization is exactly what shareholders have been waiting for, and HUYA has an opportunity to buy back shares this week given the recent decline in stock price.

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