YY Inc. (YY, Financial), a Chinese online streaming platform, is in the spotlight. The stock is up around 25% over the last 30 days alone. Interestingly, it seems like YY is not done yet. The company has witnessed strong mobile user growth during the current quarter. It is also an attractive acquisition target amid industry growth, small market cap and cheap valuation. Above all, the stock is priced cheaply compared to its peers.
China’s live streaming market is trending upward
Industry observers are painting a favorable picture for China’s live streaming market. Fueled by teenagers’ craze for online presence, online performers are increasing exponentially. On the other hand, due to lack of entertainment alternatives, China’s rural areas are keeping the demand alive. PWC projects live streaming apps in China draw around 200 million monthly active users. Renaissance Securities anticipates the market to reach approximately $12 billion by 2020, an increase of 31% p.a. between 2016 and 2020. iResearch is also bullish with 43% p.a. growth between 2017 and 2019.
Source: Renaissance Securities
To review, the market is set to witness very high double-digit growth. This bodes well for YY as the company generates more than 86% of its revenue from live streaming.
YY is a potential acquisition target amid industry’s consolidation potential
Acquisitive interest is higher due to high industry growth and changes in regulation. China’s Ministry of Culture has been auditing streaming players lately. Regulators are inspecting in order to unravel any offensive content, including pornography. As live streaming is prone to such activities, more regulation is being set in place to avoid such instances; foreign performers are not being allowed without the MOC’s permission, and platform operators are required to keep the streaming record for 60 days.
The point is increasing regulation and inspections will increase administrative and compliance costs, making it difficult for smaller players to survive. This, naturally, will lead to industry consolidation alongside removing smaller players from the market.
The prospects of industry consolidation make YY a potential target. The question is why. The reason is YY is a front runner, yet it has a small market capitalization. The company caters to 64% of the market, followed by 23% of the market controlled by Momo Inc. (MOMO, Financial). Nonetheless, it has smaller market cap than Momo. Companies like Alibaba (BABA, Financial), Baidu (BIDU, Financial) and Tencent (TCEHY, Financial) can be potential acquirers.
A strong uptick has been observed in mobile active users
During fiscal 2016, the company's mobile monthly active users (MAUs) stood at 56 million. By the end of first-quarter 2017, MAUs increased to 62.6 million, translating into a sequential growth of 11%. This is way above Momo’s mobile MAU growth of 5% during the same period. Momo’s absolute mobile active users stand at around 85.2 million. The slowdown in Momo’s growth indicates YY is gaining users at the expense of Momo. This is good news as the company competes directly with Momo in live streaming.
The company is a bargain compared to its peers
Not only has growth picked up pace, but YY is priced cheaply compared to Momo based off of relative users. See the comparison below:
| Â | YY Inc. | Momo Inc. |
| Market cap | $4060 million | $8680 million |
| Mobile active users | 62.6 million | 85.2 million |
| Value per user | $64.9 | $101.9 |
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The table shows a single YY user is valued at $64.9, compared to $101.9 for Momo. In actuality, this should be other way around or both companies should be valued equally because YY registered comparable or higher user growth over the last couple of quarters. Moreover, revenue per user is also higher for YY, making its users more valuable.
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The chart shows YY generates more revenue per mobile user, indicating the company’s value over Momo. Note that based on total revenue and total users, YY’s revenue per user is approximately $8.7. However, YY is aggressively shifting toward mobile while Momo is an all-mobile player. Therefore, mobile to mobile comparison is more relevant.
From a relative valuation perspective, YY is cheaper on a price-earnings (P/E) basis.
EVA also reveals upside.
| Projections | Â | Â | 2017 | 2018 | 2019 | 2020 | 2021 | Perpetuity |
| Net Income | $ in millions | Â | $297.17 | $343.36 | $353.66 | $364.27 | $375.20 | $386.46 |
| Â | Cost of capital | r*capital invested | $54.58 | $72.77 | $93.07 | $112.61 | $131.49 | $149.76 |
| Â | Â | Â | Â | Â | Â | Â | Â | Â |
| Adjusted net income | Â | Â | $242.59 | $270.59 | $260.60 | $251.66 | $243.71 | $236.69 |
| Discount factor | Â | Â | 1.00 | 0.93 | 0.87 | 0.80 | 0.75 | 11.52 |
| Economic value added | Â | Â | $242.59 | $251.71 | $225.50 | $202.58 | $182.49 | $2726.69 |
| Period | Â | Â | 0 | 1 | 2 | 3 | 4 | 5 |
| Â | Â | Â | Â | Â | Â | Â | Â | Â |
| Â | Â | Â | Â | Market value added | $3832 | Â | ||
| Â | Â | Â | Â | Invested capital | $728 | Â | ||
| Â | Â | Â | Â | Value of the equity | $4559 | Â | ||
| Perpetual growth in residual earnings 0.4% | Price target | $81.9 | Â | |||||
Focus Equity Estimates
Bottom line
China’s live streaming market is booming. Going forward, double-digit growth is in the cards. YY will benefit from the growth given its leading position in the live streaming market. A move toward mobile is also benefiting YY. Potential industry consolidation is also a positive for the company, leading to strong acquisition potential. Mobile growth is indicative of the company’s strong presence. Moreover, a cheap valuation compared to its peers is another plus for the company. All in all, YY seems like a good buy if you are looking for Chinese streaming exposure.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
