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On Friday, HSBC made a significant adjustment to its stance on shares of HUYA Inc. (NYSE:HUYA), downgrading the company's stock from Buy to Hold. The firm also revised the price target to $4.70, down from a previous target of $5.42. The change reflects a more cautious outlook on the live-streaming sector, which is expected to face ongoing challenges.
The downgrade was prompted by a deterioration in the live-streaming landscape, which could persist for an extended period. HSBC analysts have lowered their revenue projections for HUYA from 2024 to 2026 by 3-4%, acknowledging a steeper decline in the average revenue per paying user (ARPPU). Observations from July to August indicated a slow recovery, which further weakened in September.
HUYA's response to the lower live-streaming revenue has involved operational adjustments to protect its gross profit margin. This includes cost-cutting measures such as reducing expenses for League of Legends streaming rights by a total of RMB 70 million for the years 2024-25, trimming sales and marketing expenses, and optimizing its workforce. Consequently, HSBC has reduced its earnings forecast for the years 2025 and 2026 by 11%, although the 2024 earnings estimate remains unchanged.
Despite the challenges, HUYA has demonstrated resilience, outperforming the China internet sector represented by KWEB US by 40% year-to-date. In 2024, the company distributed a substantial dividend of $400 million, which represented a 46% dividend yield based on the market capitalization at the start of the period. Following the October dividend payout, HUYA retains a cash balance of $880 million, with $400 million held offshore, equating to 41% of the company's market cap.
Investors are advised that potential catalysts for HUYA may be limited until the possibility of another dividend announcement, which is likely to occur during the fourth-quarter results in March 2025. The new price target set by HSBC is based on a 0.8x 2024 estimated PEG ratio, indicating a more conservative valuation approach given the current market conditions.
In other recent news, HUYA Inc. reported a rise in total net revenues to RMB 1.54 billion, primarily driven by its game-related services, advertising, and other segments. Despite facing macroeconomic challenges that affected live streaming revenue, HUYA's non-GAAP net income exceeded analysts' forecasts by 21%, reaching RMB 97.0 million. Jefferies, maintaining their Buy rating on HUYA, anticipates a slight sequential increase in total revenue for the fourth quarter, driven by new initiatives.
The company also announced significant management changes, appointing Mr. Raymond Peng Lei as the new Acting Co-Chief Executive Officer and Chief Financial Officer. In response to these developments, Citi upgraded HUYA from Sell to Buy, further supported by HUYA's announcement of a US$250 million special cash dividend and its ongoing share buyback program.
Looking into the second half of 2024, Citi expects the live-streaming segment to show sequential stability and the momentum in game-related revenues to continue. These are recent developments in HUYA's financial performance and management structure, offering insights into the company's strategic direction and financial health.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on HUYA's financial position and market performance, complementing HSBC's analysis. As of the last twelve months ending Q2 2024, HUYA's revenue stood at $858.59 million, with a concerning revenue growth decline of -24.38%. This aligns with HSBC's observations of a challenging live-streaming landscape and their decision to lower revenue projections.
Despite the revenue challenges, InvestingPro Tips highlight that HUYA "holds more cash than debt on its balance sheet" and "liquid assets exceed short term obligations." This supports HSBC's note on HUYA's substantial cash balance post-dividend payout, which could provide a financial cushion during this period of industry headwinds.
Interestingly, while HSBC has downgraded HUYA to Hold, InvestingPro data shows a strong price performance, with a 96.55% total return over the past year and a 31.7% return in the last month. This robust performance, despite operational challenges, suggests that investors may be valuing HUYA's strong balance sheet and potential for future dividends.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for HUYA, providing a deeper understanding of the company's financial health and market position.
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