Is DouYu swimming towards being acquired?

The livestreamer’s business continued to deteriorate in the second quarter, as it remained without long-term leadership after the arrest of its chairman and CEO last year

Key Takeaways:

• DouYu’s revenue fell 26% in the second quarter, as the company reported its third consecutive quarterly loss
• The livestreaming company could be an attractive acquisition target due to its low valuation, rich experience and big cash reserves

By Doug Young

Former livestreaming hotshot DouYu International Holdings Ltd. (DOYU.US) is drowning, and its slow-motion death showed no signs of abating in its latest quarterly results released on Thursday. But as one of China’s oldest livestreamers, with a history dating back a decade to the start of the country’s livestreaming craze, the company still has plenty of value in its rich experience and relatively large customer base.

At the same time, there’s no denying DouYu, whose name means “fighting fish,” is fighting an upstream battle without a proper head, following the arrest of its co-founder, Chairman and CEO Chen Shaojie, last November on suspicion of setting up illegal casinos. The company is taking its time finding new top brass, reflected by the attendance of a notably un-executive sounding trio of finance vice president Cao Hao, Chief Strategy Officer Su Mingming and vice president Ren Siming on its latest earnings call.

All that raises the possibility that perhaps DouYu could be shopping around for a potential suitor that could use the company’s long experience and user base. After all, the company is still worth $240 million, based on its latest market value, even after a 14% dive for its stock on Thursday following the release of its latest results.

If it was looking for a suitor, the buyer almost certainly wouldn’t be former archrival Huya (HUYA.US), though such a marriage would make lots of sense since the two have similar profiles and are both backed by gaming giant Tencent (0700.HK). The pair already tried to merge once back in better times in 2021, in a deal encouraged by Tencent. But that marriage was ultimately nixed by China’s anti-trust regulator over anti-competitive concerns.

Much has changed since the deal was nixed. Most notably DouYu’s revenues have nearly halved from a 2020 peak as both it and Huya face growing competition from short video companies like Kuaishou (1024.HK) and Douyin, the Chinese version of TikTok, encroaching on their livestreaming space. Then, of course, there’s the slowing Chinese economy, which is making livestreaming fans rein in their spending, and was cited by DouYu numerous times as a major factor behind its ongoing woes.

We’ll return to the M&A question a little later, including who some potential bidders could be and what kind of a price the company could fetch. But first we’ll review some of the highlights, or perhaps “lowlights” is more appropriate, from DouYu’s latest results that show the company continues to sink fast.

DouYu’s revenue fell 26% year-on-year to 1.03 billion yuan ($145 million) in the three months to June, which improved from the 30% decline in the first quarter but was worse than the 22% decline for all 2023. That seems to show the company’s situation continues to deteriorate without any signs of when things might stabilize.

“We face two primary challenges, intense market competition and macroeconomic headwinds,” said Chief Strategy Officer Su said on the earnings call. “(Growing) market competition, particularly the surge of gaming content and services on short video game platforms, has drawn users with short viewing hours and low stickiness away from our platform.”

Streaming away

Most worrisome for DouYu in the second quarter was a 37% year-on-year plunge for its core livestreaming revenue, which fell below the 1 billion threshold to 790 million yuan during the quarter from 1.26 billion yuan a year earlier.

That plunge was partly offset by an 81% year-on-year rise to 242 million yuan for revenue from the company’s innovative businesses and advertising. That raised the innovative businesses segment to 23.4% of DouYu’s total revenue, up sharply from 9.6% a year earlier. The segment includes things like voice-based social networking services and sales of game-related props, and is part of DouYu’s recent strategy of collaborating more with the livestreamers and game developers that are active on its platform to find new revenue sources.

The company’s cost of revenue is quite high due to the heavy fees DouYu has to pay for content and the cuts it gives to its livestreamers. Those costs totaled 948 million yuan in the second quarter, or 92% of revenue. What’s worse, that percentage was up significantly from 86% a year earlier, showing DouYu is having to spend increasingly more money for every yuan of revenue it takes in.

In addition to the big growth in its innovative revenue, one other slightly positive sign was a stabilization in the company’s paying monthly user base, which has been dropping steadily over the last few years. That figure totaled 3.4 million in the second quarter, the same as the first quarter, though it was down from 4 million in the second quarter of 2023. Average revenue per user also dropped 26% year-on-year to 243 yuan from 326 yuan, reflecting increasing cost-consciousness among DouYu’s users.

All those negative factors caused DouYu’s operating loss to balloon to 120 million yuan from a 7.5 million yuan loss a year earlier. It also swung into the red on its bottom line with a 49.2 million yuan net loss, its third consecutive quarterly loss, reversing a 6.8 million yuan profit a year earlier.

DouYu is clearly a black sheep in China’s livestreaming family in the eyes of investors, with a price-to-sales (P/S) ratio of just 0.39. That’s less than half the 1.08 for Huya, and less than a third of Kuaishou’s 1.30. Which brings us back to the acquisition question we raised earlier.

At its current market value of $240 million, the company looks quite affordable for many larger names like Kuaishou, Douyin or even a more mid-sized livestreaming player. What’s more DouYu is quite cash rich with 6.56 billion yuan in cash and short-term investments at the end of June, or nearly triple the company’s current market value. That means a buyout at twice the company’s current stock price or even more wouldn’t be unthinkable.

Investors clearly haven’t considered the possibility of an acquisition yet, as evidenced by DouYu’s continued stock declines. But the company’s lack of hurry to find new top executives, combined with weak business trends that look unlikely to improve anytime soon, certainly make it look like a strong potential acquisition for the right buyer.

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