Joyy cut at BofA, while Huya sees rating upgrade to Buy

BofA downgraded Singapore-based social media platform provider Joyy (NASDAQ:YY) to Neutral, and separately upped the rating on Chinese live streaming content provider Huya (HUYA) to Buy.

Joyy: A team of analysts led by Lei Zhang said that they downgraded Joyy due to matured live streaming business with limited revenue and margin upsides; uncertainties in shareholder returns due to the termination of Baidu deal and the potential return of $1.9B in cash related to Baidu deal; and new business is still in early stages and burns cash.

Joyy posted a 6% year-over revenue decline in 2023 with 4% decline in overseas live streaming business (versus -15% year-over-year in 2022), 8% decline in major app use, and a largely stable core business profit trend amid the business maturing, the analysts noted.

Its new business, Shopline, should take time to grow and has limited revenue contribution (below 5% estimated), remains loss making and burns cash. Solid cash position, shareholder return pending Baidu deal Joyy has net cash of US$1.1B (versus market of $1.9B) - excluded cash of US$1.9B related to the Baidu deal, which is under a restricted account as Joyy is in discussions with Baidu on terminating the agreement on Jan. 1, 2024, the analysts noted.

Despite Joyy being in a solid cash position, further shareholder returns are pending for resolving the company's Live/Baidu deal, which remains uncertain. Joyy has extended the share purchase plan of $530M till November 2024 and intends to be more regular and active, while its historical track record has not been consistent (repurchased only $25M of $530M in 2023) and it is hard to estimate the potential impact of share repurchases, Zhang and his team said in a note.

The analysts believe a Neutral rating is currently apt, given the unresolved Baidu deal dispute, matured core business and a very early-stage new business.

Huya: BofA upgraded Huya to Buy from Neutral due to solid cash position and positive cash dividend plan, and that new business is likely to help offset the decline of game streaming business, along with margin improvement in 2024-2025.

Huya ended FY23 with revenue decline of 25% year-over-year due to ongoing business adjustments, and the changing competitive and the regulatory environment of the game streaming industry, said Zhang and his team.

However, the company broke even in non-GAAP net profit on content cost optimization and opex control. Into 2024/25, the analysts expect the game streaming business to remain under pressure given the tightened regulatory environment and intense competition in the game streaming market, as Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) strengthened its cooperation with ByteDance's (BDNCE) Douyin for eSports content from the second half of '23.

On the positive side, the analysts see new initiatives, including game distribution and game operation, and the advertising business, which have some growth potential given Huya has core game-related users and deepening cooperation with game developers including its shareholder Tencent.

The analysts expect new business to start contributing meaningful revenue in 2024-2025 (20% of revenue in 2024-2025 from 5% in 2023).

The analysts model group revenue of -9%/+6% year-over-year and a net margin of +5%/+9% in 2024/25 on further cost control and downsizing of the game streaming business.

The analysts believe Huya is still focused on capital markets despite the tough business transition, and it announced two shareholder return initiatives — a special cash dividend for the first time of $150M ($0.66/ADS); and stock buyback up to $100M till December 2024, indicating another 10% yield if the buyback goes on track.