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  • Writer's pictureIshfaaq Peerally

DouYu Stock Down 60%

📉 I'm down 40% on my DouYu $DOYU position. Last time I said that it was because Chinese stocks $MCHI are down in general but when we look at the two other Chinese stocks in my portfolio, Qudian $QD and China Mobile, I'm profitable on both of them. DOYU is the only one doing poorly. Even if DouYu is acquired by HUYA we will lose money as the spread on the arbitrage is not enough to cover current losses.

🎮 DouYu is known as the 𝙏𝙬𝙞𝙩𝙘𝙝 𝙤𝙛 𝘾𝙝𝙞𝙣𝙖. The Chinese gaming market is the largest in the world and growing at about 35% per year. In the US and the rest of the world, one can livestream on YouTube or Twitch $AMZN but these are banned in China. The market there is dominated by DouYu, Huya and Tencent and together they have 80% of market share. DOYU increased their revenues by 10X in 4 years.

Last earnings, however, were not that great compared to the first quarter of 2020. This is mainly because first quarter of 2020 was exceptional in China with the pandemic and many people staying home. But MAU increased by 21%.

🤝 The main reason why I bought DOYU was because of the 𝙖𝙧𝙗𝙞𝙩𝙧𝙖𝙜𝙚 𝙤𝙥𝙥𝙤𝙧𝙩𝙪𝙣𝙞𝙩𝙮. DouYu is going to be acquired by Huya in an all-stock transaction. The spread on the arbitrage is currently 40%.

The spread is so big because the market thinks the Chinese authorities won't allow Huya and DouYu to merge because Tencent is a major shareholder in both companies and they eventually want to merge their own live streaming business to the new Huya. We know that there's an antitrust probe against Alibaba $BABA . That's why the market is a little scared.

🇨🇳Another reason why the shares are going down is because of a 𝙨𝙚𝙡𝙡𝙤𝙛𝙛 𝙞𝙣 𝙧𝙚𝙘𝙚𝙣𝙩 𝙬𝙚𝙚𝙠𝙨 𝙤𝙣 𝘾𝙝𝙞𝙣𝙚𝙨𝙚 𝙨𝙩𝙤𝙘𝙠𝙨 . Being a small cap emerging tech Chinese stock, it was hit by this selloff.

If the deal doesn't go through, then I believe that DouYu is an undervalued stock. Therefore, even if we can't make money by arbitrage, over the long-term, it would still be a good investment. However, if the deal goes through today, the arbitrage won't be enough to cover our losses. Should we be worried about it? Not really. It will happen sometimes that you lose money on an investment. I could buy more of DouYu since I still believe that the stock is undervalued but I have enough exposure for now, so I'm only holding.

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