"There have been rumors again about the potential merger between Huya and Douyu on the market.

"Recently, 36Kr Games reported that informed sources revealed that Tencent's investment department had met separately with senior executives from Huya and Douyu to discuss the merger, but subsequent verification with both parties denied any relevant plans."

Although the official denial, this news still attracted people's attention.

It may be that the internal high-level discussions on merger-related matters are still in the discussion stage, and it is not appropriate for the officials to speak out at this time? Or it could be that the so-called informed sources are unreliable. In any case, this news has made investors who follow Huya somewhat concerned.

Regarding the merger of the two companies, rumors have been circulating for several years, and it may be that Tencent, the parent company, was concerned about antitrust issues, and the matter was temporarily shelved.

Today, with the tide having receded, live streaming giants like Huya and Douyu are no longer the dominant players. The rise of e-commerce live streaming, as well as Bilibili and Douyin's gaming live streaming, have caught up, and perhaps there is a new opportunity for a merger.

In August, in the article "Huya's Unremarkable Second Quarter Report: Why Dare They Be So Bold with Dividend Payouts?", the Internet industry insiders team suggested that Huya and Douyu could consider merging, which might be more imaginative than their current state.

As industry observers, let's explore what would happen if Douyu and Huya merged. And would a merger between Douyu and Huya boost Huya's valuation in the secondary market, especially after Chen Shaojie's arrest for alleged casino operations?

These questions are worth delving into.

01

Under performance pressure, merging with Douyu is one of the few viable options for Huya

With Tencent's facilitation, rumors of a merger between Huya and Douyu have persisted in the market, but previous attempts at a merger were halted due to antitrust concerns.

According to Tianyancha APP, Huya Live attempted a strategic merger in 2020, but the transaction amount was not disclosed.

During the years when Huya and Douyu were preparing for a merger, the internet traffic dividend was booming, with short videos and live streaming gaining immense popularity. At that time, Douyin was still locked in a dispute with Tencent over the content of its game "Honor of Kings," while Douyu maintained a law-abiding and legitimate business model.

Today, the situation is quite different.

After Chen Shaojie's incident, a merger with Douyu may not be a lucrative option for Huya. On the one hand, if the allegations of money laundering and casino operations are proven true, the Douyu brand could become a "negative asset." On the other hand, the loss of major streamers may not yield significant tangible business benefits from a merger with Douyu.

In today's increasingly competitive gaming live streaming industry, the combined position of Huya and Douyu is not as strong as before. Especially after Chen Shaojie, the founder of Douyu, was arrested on suspicion of operating a casino, many of the platform's top streamers suddenly stopped broadcasting overnight, leading to a significant loss of talent to other platforms.

Saying that it is not easy for Huya to merge with Douyu is not just because Chen Shaojie's involvement in the casino scandal has affected Douyu's brand reputation but also because the scandal has affected a large number of streamers, shaking the foundation of the content ecosystem.

After the confirmation of Chen Shaojie's arrest, Douyu's share price plummeted by 10%. Compared to its IPO price, Douyu's market value has evaporated by as much as 90%. The market's attitude is clear.

For Huya, the issue is not so much about achieving a larger scale but about what it will cost to acquire Douyu's users and traffic. Will the competition among streamers lead to changes in Huya's existing live streaming ecosystem?

In contrast, platforms like Douyin, Kuaishou, and Bilibili are aggressively recruiting streamers to strengthen their gaming content ecosystems.

Taking Douyin as an example, the platform now boasts popular streamers like Zhang Daxian, Xu Xubao, and Feng Timo. Kuaishou also has numerous contracted unions, and the number of contracted streamers is growing rapidly.

Douyin, Kuaishou, and Bilibili are well-positioned to capitalize on the growing demand for gaming live streaming. On the one hand, under the trend of internet interconnectivity, Tencent's gaming content ecosystem is becoming more open, putting pressure on the core gaming live streaming business of Huya and Douyu.

On the other hand, platforms like Douyin, Kuaishou, and Bilibili are "kill time" apps that cover more scenarios than Huya and Douyu, making it easier for them to expand into live streaming content.

Both Douyin and Kuaishou have strong user habits and can easily extend from entertainment content to gaming content. Bilibili, with its gaming business and educational focus, is also well-positioned to convert learning traffic into gaming content traffic.

Under the triple pressure of traffic from Douyin, Kuaishou, and Bilibili, the biggest challenge facing Huya and Douyu is their performance.

If you look at Huya's second-quarter financial report this year, it can be summarized in one word: "slump." In the second quarter, Huya's revenue was 1.542 billion yuan, a year-on-year decrease of 16.1%, marking the 11th consecutive quarter of decline. Operating profit was still in the red, at -26.04 million yuan, with net profit attributable to shareholders finally turning positive thanks to interest income.

While financial struggles can potentially be addressed through cost-cutting measures, a decline in traffic volume may indicate that the traditional gaming live streaming trend is on the decline.

One of the most critical aspects of the live streaming business is traffic. A concerning point in Huya's second-quarter report is that its traffic pool is nearing its ceiling.

According to statistics, as of the end of 2020, Huya Live's mobile MAU was 76 million, rising to 80.9 million in 2021, 84.3 million in 2022, and 84.1 million in 2023. In the second quarter of this year, Huya Live's average mobile monthly active users (MAU) increased to 83.5 million, up from 82.9 million in the same period of 2023.

It is evident that Huya's mobile user base seems to have reached saturation. What does this mean? Huya's user activity, or the size of its traffic pool, may have peaked.

Reaching the upper limit of the traffic pool may also indicate that the commercialization potential has peaked.

The core revenue streams for gaming live streaming platforms are primarily user donations and game promotion.

In terms of donations, due to economic factors, the number of users willing to donate may not be significant. However, Huya's paid user count has increased slightly quarter-on-quarter, though the sustainability of this growth trend remains to be seen.

Game promotion is also a crucial aspect of Huya's business. Huya has reported significant growth in its overall commercial revenue, with a 1,800-fold increase in prop sales revenue, a 12-fold increase in game distribution revenue, and a 2-fold increase in game advertising revenue from August 2023 to April 2024.

While these figures suggest robust commercial growth, Huya's position as a gaming promotion platform is rapidly eroding.

For example, in the case of the highly popular game "Black Myth: Wukong," Douyu may not be the biggest beneficiary. Topics and content related to the game have also gained significant attention on Bilibili and Douyin, with their traffic to some extent contributing to the game's breakthrough success.

For game developers, breaking through new circles means acquiring new users, which is the primary direction for promotion efforts.

If a gaming platform fails to maintain its position as the primary hub for the industry's biggest hits, it risks losing users to platforms like Douyin and Bilibili, making it challenging to retain its traffic pool.

Under these circumstances, merging with Douyu may be one of the few viable options for Huya. At the very least, it demonstrates to the market that the management is seeking change.

On the one hand, while Huya's traffic volume has also reached its ceiling, a merger with Douyu could lead to the reintegration of streamer resources, reducing necessary costs and improving financial performance. On the other hand, Tencent's strengths in the gaming industry could better support the commercial development of the merged platform.

In summary, both companies' financial performance and secondary market valuations are far from ideal, which is undesirable for investors. If a merger can bring about positive changes, why not pursue it?

02

"Saving for a while" is easy, but "saving forever" is difficult. Has Huya hit rock bottom in terms of valuation?

It must be said that live streaming is a profitable business, and Huya is still making money.

As of June 30, 2024, Huya held over 8 billion yuan in cash and cash equivalents, short-term deposits, short-term investments, and long-term deposits.

Despite a lackluster second-quarter performance, the management chose to announce a substantial dividend payout to stabilize market confidence.

After announcing its financial results, Huya declared a special dividend of $250 million, or $1.08 per ADS. Including the $150 million special dividend paid out in previous months, Huya has distributed a total of $400 million in special dividends in the past six months, equivalent to $1.74 per ADS.

Additionally, the company stated that it still had $43.3 million remaining from its $100 million repurchase authorization granted in August 2023, extending the repurchase deadline to the end of March 2025.

The market tends to favor companies that make generous dividend payouts. Following the announcement, Huya's share price surged by as much as 14.13% on U.S. exchanges.

While generous dividend payouts and a potential merger with Douyu can provide temporary relief to Huya's valuation, the question remains: how can the company ensure long-term stability? Observing the market reaction, it is evident that Douyu's share price on U.S. exchanges has retreated to around $4, indicating lingering doubts among investors.

One source of market skepticism may lie in the persistent rumors of a merger, with investors wondering whether the deal will materialize or remain just a rumor.

Following CEO Chen Shaojie's arrest last November, Douyu's board of directors formed an interim management committee. During this transitional period, a merger with Huya could be a desirable outcome for Tencent, the majority shareholder.

Another concern among investors may be how Huya can transform its business model to establish a new growth paradigm and drive a rebound in valuation. Currently, Huya's market value is less than half of its peak.

The market is rational and willing to assign higher valuations to companies with high-quality operations and stable growth models. However, gaming live streaming platforms may not have yet reached the bottom of their valuation cycle.

On the one hand, can mergers and acquisitions solve the underlying problems?

After all, under the pressure from platforms like Douyin, Kuaishou, and Bilibili, it may be difficult to tap into new growth opportunities for the gaming live streaming business. While event streaming generates traffic, it lacks incremental value.

Where can Huya find new growth? This is a question that requires deep consideration.

On the other hand, can Huya find new avenues for growth within its live streaming business?

In reality, even a merger with Douyu may not immediately boost Huya's short-term valuation. The reason is that both Huya and Douyu are stuck in old business models and growth patterns, which may have already reached their valuation ceilings.

From a valuation perspective, the old era of live streaming platforms was about gaming, while the new era is about e-commerce.

The biggest crisis facing gaming live streaming platforms is traffic, which is objectively caused by the loss of streamers but also reflects the need for an iteration of the traditional live streaming model.

What is the core value of gaming live streaming?

It's content and social interaction. Viewers tune in because they are interested in the content, leading to engagement, donations, and social connections with streamers. This is what makes Douyu valuable.

Currently, the highest-valued live streaming platforms are not those focused solely on content and social interaction but those closer to transactions, such as Douyin and Kuaishou.

Perhaps the key to Huya's valuation recovery lies in its ability to evolve from gaming to e-commerce and from content to transactions, completing a new iteration of its business model.

Of course, the management team is not entirely without options.

Additionally, as an established live streaming platform with a strong reputation in entertainment and gaming, Huya has a core competitive advantage.

Ultimately, the deciding factor will be the cultivation of top-tier streamers who can drive sales. It is crucial for Huya to develop its own "Little Yang Brother."

After all, the initial soil of gaming live streaming still has some incubation capabilities. It remains to be seen whether the platform can nurture more valuable streamers in the future, which warrants continuous attention.

Disclaimer: This article is based on publicly disclosed information and company filings but does not guarantee the completeness or timeliness of the information. Additionally, investing in stocks involves risks, and investors should exercise caution. This article does not constitute investment advice, and investors should make their own decisions regarding investments.