DouYu: A headless fighting fish swimming against the tide

The livestreaming game operator’s revenue fell 30% in the first quarter, accelerating from a 23% decline the previous quarter, as its chairman remains missing amid a criminal investigation

Key Takeaways:

• Most of DouYu’s key metrics fell by 20% or more in the first quarter, including a 30% revenue decline and 24% drop in its average revenue per user
• The company has been led by a three-member interim management committee since its chairman and CEO was detained last November on suspicion of illegal gambling activity

By Doug Young

Its name means “fighting fish,” but these days DouYu International Holdings Ltd. (DOYU.US) seems more like a fish without a head that’s simply fighting to keep swimming in a Chinese gaming market teeming with competition and regulatory risk. Those challenges were front and center in the company’s first-quarter results released on Wednesday, led by plunges of 20% or more in nearly all of its major metrics.

The company was already swimming in choppy waters after its planned merger with chief rival Huya (HUYA.US) was vetoed by China’s market regulator in 2021. That deal was engineered by Tencent, which is a major backer of both companies. As the smaller of the pair, DouYu appeared to face the bigger challenge to survive.

The company’s revenue peaked in 2020 and has been falling since then as it struggled to maintain its place in the market under growing competition from short video services that increasingly encroached on its livestreaming turf. Making matters worse, DouYu was also hammered by a series of regulatory crackdowns over the last three years designed to limit gaming activity by minors.

Its woes deepened further last November when co-founder, Chairman and CEO Chen Shaojie was arrested in the city of Chengdu on suspicion of setting up illegal casinos. In its annual report filed in late April, the company said it was unaware of any charges that had been filed against Chen, and it appears to be waiting for more definitive news before making any decision on whether to name a new or acting CEO or chairman.

In the meantime, the company has been run by a three-person interim management committee whose only “C-level” member is Chief Strategy Officer Su Mingming. It has never had a CFO since its 2019 IPO in New York, and instead its top financier is Cao Hao, its vice president of finance and one of the three management committee members. The committee’s third member is Ren Simin, who was only named as a vice president at the time of the committee’s formation.

DouYu’s other co-founder Zhang Wenming stepped down as its co-CEO back in 2021.

All that leads to our assessment that DouYu looks a lot like a ship without a captain at this critical juncture in its development. That led to an acceleration in its plunging metrics during the first quarter, headlined by a 30% revenue decline to 1.04 billion yuan ($144 million) from 1.48 billion yuan a year earlier. Notably, the drop represented an acceleration from the 23% revenue decline in last year’s fourth quarter, the last period when Chen was still playing an active role at the company.

Investors weren’t too impressed with the latest report, bidding down DouYu’s shares by 2.3% in Thursday trade. Despite all the problems, the stock is actually up about 6% year-to-date and has risen by about 50% since late March on a broader rally for U.S.-listed Chinese stocks.

But even after those gains, the company still trades at a meager price-to-sales (P/S) ratio of just 0.45. Huya trades at nearly three times that amount with a ratio of 1.22, while Kuaishou (1024.HK), one of China’s leading short video platforms, trades even higher at 1.89.

Falling metrics

DouYu’s 30% revenue decline was indicative of trends for just about all of its major metrics during the first quarter. The company is rapidly hemorrhaging users, and the users it has retained are spending less.

Revenue from its core livestreaming business tumbled 41.5% to 801 million yuan from 1.36 billion yuan a year earlier, still making up 80% of its total. “While we shore up our fundamentals, we continue to face revenue pressures from soft macroeconomic conditions and ongoing adjustments to the livestreaming business, as well as operating uncertainties,” said Cao Hao.

The company’s average mobile monthly active users (MAUs) fell 10% to 45.3 million year-on-year, with executives blaming competition from short video sites. Even more worrisome, quarterly paying users fell by a steeper 24% to 3.4 million from 4.5 million a year earlier. Those remaining paying users were also spending less on the platform, reflected by a 24% drop in quarterly average revenue per user (ARPU) to 238 yuan from 314 yuan year-on-year.

The one slight bright spot in the company’s report was a doubling of revenue from its “advertising and other” category, which rose to 239 million yuan, making up 23% of its revenue from only 7.7% a year earlier. Executives said most of the big progress came from newer services such as voice-based social networking services.

But that brief bit of good news was offset by DouYu’s disclosure that it had to “voluntarily return” 111.7 million yuan to the government during the quarter related to “historical illegal activities” by “certain third-party streamers.” The company said it recorded the amount as an operating expense during the quarter. It didn’t elaborate further, though the timing looks related to the casino investigation involving Chen.

The company said the voluntary return of the funds had “no material impact” on its business. But that doesn’t mean it couldn’t face future penalties or other regulatory action, which could remain another potential risk going forward.

That added expense, combined other factors, undermined DouYu’s gross profit, which fell 38% to 109 million yuan, as its gross margin fell 1.4 percentage points year-on-year to 10.5%.

The bottom line was the company reported an 88 million yuan net loss for the quarter, representing its second consecutive quarterly loss after reporting four consecutive quarters of profitability before that. The company shouldn’t have to worry about a cash crunch anytime soon, since its 6.76 billion yuan in cash at the end of March was down just slightly from 6.86 billion yuan at the end of last year.

Still, the slump back into the red marks a big setback for the company, and roughly corresponds to Chen’s disappearance. Accordingly, we wouldn’t be surprised to see the flow of red ink continue until Chen’s situation is resolved and the company can regain a proper captain to steer its ship through the current difficult waters.

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