Based in Guangzhou, China, HUYA Inc. (HUYA) is one of the largest game streaming platforms in China. It delivers  a library of games, including mobile, PC, and console games, and other entertainment genres. Its dynamic content and technological innovations have made it a popular platform with young people. These qualities have helped its stock gain 62% over the past year.

However, HUYA  has been making headlines since Chinese regulators began  paying closer attention to its recent proposal to acquire game-streaming rival DouYu International Holdings Ltd. Although the COVID-19-pandemic-induced demand for online gaming platforms has helped the stock gain 70.7% year-to-date, if HUYA’s  proposed deal with DouYu fails to win regulatory approval, HUYA stock could witness a pullback.

Here is what we think could influence the performance of HUYA in the near term:

DouYu-HUYA Merger Faces Investigation

On October 12, 2020, HUYA and DouYu International Holdings Limited entered into a merger agreement under which HUYA will acquire all the outstanding shares of DouYu for $6 billion. However, the merger plans have been put on hold after Chinese regulators said they intended to review the acquisition proposal as part of an antitrust crackdown.

Beijing’s aggressiveness in regulating internet-sector deals is  evidenced by its latest actions regarding Alibaba Group Holdings’. (BABA) and Tencent Holdings’ (TCEHY)  past acquisition deals. So, there remains a strong  possibility that the proposed merger will face a roadblock as part of  the government’s ongoing anti-monopoly drive.

Favorable Analyst Estimates

Analysts expect HUYA’s EPS to rise 29.8% in the current year and at a rate of 6.7% per annum over the next five years. A consensus revenue estimate of $2.05 billion for fiscal 2021 represents  a 20.1% improvement year-over-year.

Unimpressive Financials

Although HUYA’s revenue has increased 24.3% from its  year-ago value to RMB2.8 billion, its sales and marketing expenses increased 17.6% year-over-year to RMB143.8 million in the third quarter ended September 30, 2020. Also,  the company’s general and administrative expenses increased 23.3% year-over-year to RMB118.7 million, due  mainly to  increased professional fees associated with HUYA’s ongoing merger process. Its interest income declined 12.3% from the prior-year quarter to RMB75.92 million.

Lower Profitability

The company’s trailing-12-month gross profit margin of 20.8% is 57.2% lower than the industry average 48.5%. In fact, its EBITDA margin also compares unfavorably with the industry average. HUYA’s cash from operations in the trailing 12 months is 55.8% lower than the industry average  $486.96 million.

Stretched Valuation

In terms of forward p/e, HUYA is currently trading at 41.25x, which is 118.6% more expensive than the industry average  18.87x. Its trailing-12-month EV/EBITDA of 60.40x is 424.5% higher than the industry average  11.52x. Also, its trailing-12-month price/cash flow of 37.17x is 321.2% higher than the industry average  8.82x.

POWR Ratings Indicate Uncertain Prospects

HUYA has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, HUYA has a B grade for Momentum, which is consistent with its impressive price gains year-to-date.

However, it has a C grade  Value, given its stretched valuation.

HUYA is currently ranked #31 of 85 stocks in the C-rated China group. In addition to the grades I’ve highlighted, you can check out HUYA’s POWR Ratings for Growth Stability, Sentiment and Quality here.

If you’re looking for better stocks in the China group, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

We think that despite HUYA’s impressive gains year-to-date based on solid user engagement with  its dynamic gaming platform, its sky-high valuation and  Chinese government’s potential anti-monopoly actions against the company  cloud its future growth prospects.

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HUYA shares were trading at $31.47 per share on Wednesday morning, down $2.27 (-6.73%). Year-to-date, HUYA has gained 57.90%, versus a 4.70% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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