Huya Earnings: Lowered Guidance on Livestreaming Weakness, but First-Ever Buybacks Boost Confidence

Huya HUYA reported mixed second-quarter earnings, but more important, the board finally announced a $100 million share buyback program that amounts to a whopping 16% of the firm’s market capitalization. We think management is taking the right step to improve the capital allocation decisions. With shares currently trading at just 42% of net cash, we believe the share buybacks, if executed properly, will bring significant upside to Huya’s share price. We have fine-tuned our near-term forecasts, but we maintained our fair value estimate of $7.70. The bulk of Huya’s value stems from its net cash position of $6.3 per share as of end-June 2023.

While revenue for the quarter came in behind our estimates, net profit was significantly ahead. Huya’s livestreaming business saw a 16% year-on-year decline in revenue following the decision to preemptively disable features that contain games of chance across its mobile apps. Tipping in streams was also negatively affected by deteriorating macroeconomic conditions in China. Despite the large drop in revenue, gross margin clocked in at 15% (compared with 9.6% last year), reflecting continued progress of cost initiatives.

To us, the biggest surprise that came out of Huya’s earnings release was the share repurchase program that authorizes the company to buy up to $100 million worth of its shares over the next 12 months—marking the first time Huya returns capital to shareholders since its IPO in 2018. In our opinion, the lack of distribution in the past was the main reason Huya has been trading at an almost 60% discount to the company’s net cash position. However, with Huya finally committed to buybacks, minority shareholders should feel more assured that excess cash will be used to improve shareholder returns. We might also consider lifting our Capital Allocation Rating from Poor to Standard if the $100 million share repurchase program delivers positive shareholder returns or if Huya commits to an appropriate dividend policy.