10 Sep Huya Inc (HUYA)

With a global pandemic shutting down most domestic and international sporting events for much of 2020 it’s been a tough year for sporting organisations around the world. Most of the world’s biggest sports have either shut down entirely, been played in front empty seats, or at best been subjected to restricted and socially distanced crowds. It’s brought many global events to the brink of bankruptcy and in the absence of a vaccine, this may continue for some time to come.

However, there’s one sporting segment that has been growing at an unbelievable rate over the last few years and has been almost entirely unaffected by the coronavirus pandemic. It is the world of e-sports. Now many of you, not unlike myself, will be dubious to the fact that playing video games can actually be considered a sport. Like me, you’re probably picturing a twelve-year-old sitting in his parent’s basement eating Doritos and playing Tetris or Space Invaders. But let me assure you, the industry has moved on and it is a multi-billion dollar business that is becoming more popular by the second.

E-sports (or electronic sports) take the form of organised multiplayer video game competitions played between professional players, in both individual and team formats. The internet was responsible for taking online gaming into “basements” across the world. So that now, someone in Australia can take on anyone in the world without leaving his or her own home. Since the early 2000’s, and especially since 2010 onwards, players have been battling it out in games such as League of Legends, Dota, Counter-Strike, Overwatch, Fortnite, and Starcraft amongst many others. There are national and world championships for most games and sponsored leagues played out all over the world, watched by audiences of thousands in stadiums, and millions more at home online.

The global e-sports audience is currently sitting at around 300 million and is expected to double to 600 million over the next three years. The live streaming platform Twitch, which was purchased by Amazon (AMZN) in 2014 for almost $1 billion, had over 3.8 million players streaming their games in February of 2020, with 15 million viewers a day, and 140 million a month. This level of viewership is much larger than what the major television networks get in the US. In fact, many of the networks have begun investing in the sector to try and grab a share of the huge audience numbers that have been leaving traditional media.

In 2018 a League of Legends tournament held in Adlershof and Paris brought in 60,000,000 viewers online who watched an incredible 2,077,897,606 hours (that’s over 2 billion) of the competition in total, as 14 teams battled it out for nearly $1.5 million in prizemoney. Those sorts of viewership levels are off the charts and its why advertisers are tripping over themselves to get involved. It’s also why Wall Street is finally starting to take notice of this fledgling new industry and senses there are huge profits to be made here.

Our stock report subject today, Huya inc, owns one of China’s largest streaming platforms and was recently taken over by the Chinese multinational technology conglomerate Tencent Holdings. It has been growing at a phenomenal rate over the last few years, boosting revenue by 113% in 2018, and a further 80% in 2019.

In it’s latest earnings on August 11, earnings per share were up 90.91% year on year at $0.21c, while revenue was up 30.36% on last year and beat estimates by a healthy $4 million. It also grew users by 26.5% up to 4.9 million. As with many technology companies, most of its income comes from online streaming which hasn’t been affected by the stresses caused by the global pandemic.

With Tencent now owning the top two streaming services in China, Huya and DouYu (DOYU), there is a very strong chance that the two could be merged in the near future to create a streaming giant to take on the likes of Twitch. The synergies are obvious, and by merging employees and systems, the combined company would become more efficient, cost-effective, and the perfect business to service China’s rapidly growing e-sports industry. Surely it would be much more beneficial to join forces rather than compete with each other for business. It’s not a done deal yet but it is a very tempting proposition for both sets of shareholders.

Of course, while the future looks bright there are headwinds. The Chinese government is used to sticking its nose into new industries and e-sports have been under the spotlight recently for spreading “vulgar” content. China’s Cyber Administration recently froze main channel updates, and suspended new user registrations demanding live streaming platforms fulfil their “corporate responsibility” and provide better cultural products and services for users. I don’t see this as an issue that can’t be easily addressed, but it is something to keep in mind when investing in a Chinese stock.

There is also the risk that the US could potentially ban Chinese listings on US exchanges as proposed by the current President back in June. Any new bill would have to clear parliament and you would imagine Wall Street would be heavily against such a move. It’s hard to imagine politicians would be keen to get around such a motion but you never really know. Again, I think the risk is small but it is definitely something you need to consider.

Overall, I think the risks are eclipsed by the potential the e-sports industry has as a whole, especially in China where the industry is taking off in popularity and where Huya stands to benefit most. Especially in a time when home entertainment has come to the forefront of consumer’s recreational options. Revenue and profits continue to grow for this company, and I believe the pandemic will only boost the expansion into China and around the rest of the world.