DouYu Stock Analysis


Business Description:


DouYu operates a similar business to Twitch by enabling gamers to livestream while they are playing. Since Twitch and YouTube are banned in China, the market is really dominated by three main players, Huya, DouYu and Tencent video game streaming business. These three businesses are now going to merge.


Users can watch live streams for free but will need to be a paid user to live stream themselves. DouYu also makes money from ads with 91% of revenues coming from live streams in 2019 (vs 86% in 2018)


Both DouYu and Huya claim to be the market leader based on different metrics. If we look at revenues then Huya is bigger, although DouYu has more users and MAUs.


As of December 2019, DouYu had 337 million users with monthly MAUs of 165.8 million (vs 150.2 million for Huya) with 17.5 million paying users. Average MAUs in the third quarter of 2020 was 194.0 million.


DouYu also organizes tournaments and signs contracts with top streamers, which is different from what Twitch does in the West.


Catalyst:


China has the largest eSport market in the world with $37.9 billion in revenues in 2018 (vs $30.4 billion for the US) and is growing at 25% annually. As the market co-leader along with Huya, they are set to win from this trend even if the two companies don’t merge.


However, we need to look at the merger and if there’s opportunity for arbitrage.


The deal is an all stock one where each ADS of Douyu will be converted into 0.730 ADS of Huya. It is a merger of equals and the pro-forma company will have two co-CEOs (the current CEOs of each company). Tencent will own 68% of the new company. This deal is facing scrutiny from the Chinese Antitrust authorities.


On the day of the merger, both DouYu and Huya will each pay a special cash dividend of $60 million and $200 million respectively.


Right now the spread on the deal is 22.6% and since it is an all-stock deal, is dependent on the stock price of Huya.


Read the full analysis: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/27998689



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