Revaluating YY Inc And Its Preferred Shares

This an update  to my original YY Inc analyst post. As the recent Hyflux downfall also focus on it's perpetuals bonds, I decided to look into YY Inc's preferred shares. You can about it from this article from The Edge Singapore. Huya Inc issue Series A and B preferred shares in 2018, both were non-cumulative.

Preferred Shares
I am still new to these perpetual securities, will  try my best to explain the best to my understanding. Preferred Shares are like perpetuals bonds where it has priority over common shares. They will receive dividends  instead of coupon payment before common shareholders

Non-cumulative preferred shares - If  YY Inc is unable to pay the dividends, no dividend will be payout

Cumulative preferred shares - If  YY Inc is unable to pay the dividends, the suppose dividend will be cumulated to the next fiscal year. Mean payout to be like double next year.

Series A and B preferred shares
Series A total capital rises = USD$852Million
Series B total capital rises = USD$709Million
Dividend to be payout to Series and B at no less than 8%.YY Inc payout dividend for Series A but not Series B in FY2018. This payout is about 20% of Operating Cash Flow (OFC). If Series B is also payout, that will cost about  40% of OFC. YY Inc has no other debts which I wonder why they need to issue out these shares. I guess they already have plans to buy over Bigo Inc.

OFC/Dividend come out ot be 2.77x, as Bigo Inc get integrated into the business, the cash flow looks more than enough to cover this interest expenses.

Revaluation
In my inital coverage, the SOTP give a US$90 for the business. This exclude YY core Business. My DCF give me an intrinsic value of US$111.89 with a discount rate of 12%, this is however this does not include the increase revenue from Bigo Inc.Hence by adding the SOTP value of Bigo ($25.86), I have an intrinsic value of US$137.75. 

Do note the preferred shares belongs to Huya Inc and are still loss making, hence if HUYA are to be write off, there should be no material impact on YY Inc, instead the bottom line should improve. The preferred shares are not till perpetual like bonds, and is not mandated to payout dividend, as such I will take it as a one off payout for now. Due to the preferred shares taken up by Tencent, converting them to common shares in the future, YY Inc may lose the control to Tencent.

Vested at US$76. 

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Live Streaming Business, YY Inc

I chanced upon YY Inc on the latest Edge Singapore issue this week (March 11). The name made me curious to make a search on the company and got my interest. Social media as we know it has been evolving, from profiling( Friendster) to Text wall (Facebook/Twitter) to Photos (Instagram) and Video (YouTube) to streaming social media platform (Twitch.Tv).

A streaming social media platform has a much bigger audience. Facebook and Instagram are more personalize social platform. One such video social platform is twitch which cater to the gaming audience and also you tube live. However China has bring this to a whole new level, to anything you can think of, Talkshow hosts, dancing, eating, outdoor activities, gaming,  reading a book/manga even online tution.

YY Inc catogories them as follows:

• Music, Dance, and Talk Shows. Users can watch music, dance, and talk shows on the YY Live platforms. Viewers may show support and appreciation by purchasing and giving virtual gifts.
• Game Broadcasting. Users can live stream their online games, either casual or competitive. Professional teams and commentators often attract many viewers, who may show support and appreciation by purchasing and giving virtual gifts.
• Dating Shows. Users host, participate in, or live stream dating shows through live video or audio, during which participants and audiences can purchase and give virtual gifts to the host or other participants. The format of our online dating show is based on a popular dating TV show in China.
• Finance (Zhiniu Finance, www.zhiniu8.com). Users interested in finance and investment can stream finance shows hosted by financial experts that cover a wide range of investment-related topics, from stock market trends to the basics of investment.
• Outdoor Activities and Sports. Users can live stream outdoor activities, such as camping, hiking, travel, and tourism, as well as professional sports, such as basketball, football and snooker.

Business Model

Revenues comes from Internet Value-added Services (IVAS) and advertising. For IVAS, offers a variety of virtual items on the platform, which users can purchase to gain privilege status or give to performers or channel hosts to show support and appreciation YY takes a proportion of the revenues generated from selling of the virtual items.

IVAS businesses, including music and entertainment, online games (In game items or advantage) , online dating, live game broadcasting and the membership program. In online education, we generate revenue through charging students tuition fees for accessing premium content. As a small part of the business, we also generate income from third party online advertising on our separate game media website Duowan.com.

HUYA Inc
HUYA Incis the No.1 game live streaming platform in China, with cooperation with e-sports event organizers, as well as major game developers and publishers, have developed e-sports live streaming as one of the most popular content on the platform. Huya also furhter extended our content to other entertainment genres, such as talent shows, anime and outdoor activities. HUYA Inc had recently IPO in NASDAQ. 

BIGO Inc
Bigo is a fast-growing global tech company. Headquartered in Singapore, Bigo owns BIGO LIVE, a leading global live streaming platform excluding China. Bigo has created a video-based online community for global young generation users. It has established footprints with a strong presence in South-Eastern Asia, Southern Asia, the Middle East and America, paving the way for further global expansion. Their Product Line Includes Live-Broadcasting, Vocal Social Media, Short Video Platform Video editing, Anime Social App and live game streaming many more. YY Inc to acquire 100% of Bigo Inc announced on 4th March 2019.

YY Inc Acquired 100% of Bigo Inc announced on 4th March 2019

Business Growth
Just like Instagram, YY Inc give millennials another tools to express themselves. Bigo presence globally could bring in more profit than YY Inc operation in just china. And ultimately like all social platform when it mature, advertisement may be a future growth segment.

Business Risk
High competition for quality content performers,  YY Inc paying more to the performers to keep them on the platform from competitors such as MOMO Inc. Gross Profit Margin and Operating Margin has been falling. Acquiring Bingo should mitigate this, Bingos market are outside china.

Revenue come from virtual gifts from content viewers, revenue will be affected if the group of user stop spending. However, judging from how crazy Chinese/Japanese/Koreans are to their idols or anime. Check out those go gaga over virtual idols like Natusmi Miku and the new ones in China. The audiences should growth. But these guys will follow where the content is so market share is important.

Cash Flow
YY Inc, even though the margin is lowered, it is still generating healthy cash flow, contributing to its coffers. Cash and investment assets have been increasing throughout the years.
Free Cash Flow (FCF) = Net Profit - CAPEX 
Adjusted FCF = Net Profit + Non-Cash items + Borrowings - CAPEX
All $ in RMB, Millions

Sum of The Parts Valuation (USD)

Total worth of YY Inc's subsidiaries and cash is worth almost USD$90 and the current stock price is USD$76 as of writing. This would mean buying YY inc core business for free and its subsidiaries at a cheap valuation.

Conclusion
We know how successful Facebook and Twitch.Tv originated from the West, now come the Video streaming madness from Asia. However YY has no moat, its main contributor, the broadcaster will shift to diff platform depending on where they can earn more. Just like uber and grab.

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