HUYA: What To Expect For Q4 Results And 2023 Performance (NYSE:HUYA)

Elevator Pitch

I continue to rate HUYA Inc.’s (NYSE:HUYA) stock as a Hold. My earlier article for HUYA published on January 1, 2023 touched on its gross margin expansion in prior quarters, and risk factors relating to recent regulatory developments.

After I preview HUYA’s Q4 2022 financial results and evaluate the company’s prospects for full year 2023, I came to the conclusion that there is no reason to change my existing Hold rating for HUYA. HUYA’s Q4 2022 results release shouldn’t throw up any big surprises, while the company isn’t expected to turn profitable this year yet.

Analysts Expect HUYA To Have Performed Badly In Q4 2022

HUYA will disclose the company’s financial performance in the fourth quarter of the prior year next week on March 21, 2023, before trading hours. The sell-side isn’t optimistic about HUYA’s Q4 2022 financial results, as consensus financial figures point to expectations of top line contraction and losses for the company.

In specific terms, the market sees HUYA’s revenue declining from RMB2,809 million for Q4 2021 to RMB2,135 million in the most recent quarter.. In other words, HUYA’s YoY top line contraction in local currency terms is expected to worsen from -20.1% in Q3 2022 to -24.0% for Q4 2022.

The analysts also predict that HUYA will reverse from a positive normalized net profit of +RMB106 million for the third quarter of 2022 to report a non-GAAP adjusted net loss of -RMB502 million in the final quarter of last year. In contrast, HUYA suffered from a narrower net loss of -RMB242 million in Q4 2021.

In the next section, I discuss if the sell-side analysts are justified in having a dim view of HUYA’s Q4 2022 performance.

My Prediction Is That HUYA Will Report In-Line Fourth Quarter Results

I hold the view that HUYA’s actual Q4 2022 financial results should be in line with the market is currently anticipating.

Towards the end of 2022, China started to pivot away from its long-standing COVID-zero policy which drove a big spike in pandemic cases. A December 23, 2022 Bloomberg article highlighted that close to 18% of the people living in China were infected with COVID-19 in the first three weeks or so of December last year. It is reasonable to assume that a significant number of live streaming hosts in China would have caught the COVID-19 virus as well during this same period.

Separately, HUYA admitted at the company’s Q3 2022 earnings briefing in mid-November last year that the positive impact of “S-12” or League of Legends World Championship 2022 Season 12 (held in November) on its “mobile MAU (Monthly Active Users) may not be as obvious as in previous years.”

As such, there is a high probability that HUYA witnessed a substantial decrease in revenue and also suffered from losses for Q4 2022. However, the current sell-side analysts’ consensus fourth quarter financial projections should have already factored in the headwinds which HUYA faced in the final quarter of the prior year. In the past three months, 11 of the 16 analysts covering HUYA’s shares have reduced their FY 2022 top line forecasts after the company reported Q3 2022 results in November last year.

License Agreement Change Has A Major Impact On HUYA’s 2023 Outlook

On January 12, 2023, HUYA issued a 6-K filing revealing that there have been changes made to its “license agreement for broadcasting League of Legends matches with a Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) affiliate.” This recent development has a mixed impact on HUYA’s prospects in the current year.

HUYA’s top line for this year will be hurt by the absence of sub-licensing revenue contribution from League of Legends for the next three years between 2023 and 2025. This is because HUYA will only have non-exclusive broadcasting rights (as opposed to exclusive rights in the past) for Seasons 13 to 15 of League of Legends World Championship. Based on my calculations, HUYA should have previously earned a few hundred million RMB from sub-licensing revenue associated with League of Legends every year.

On the other hand, the content-related expenses for HUYA relating to League of Legends are expected to decrease going forward. Specifically, HUYA’s yearly licensing fee incurred for League of Legends will be lowered from around RMB400 million in the past to RMB150 million in the subsequent three years.

The financial effects of the League of Legends licensing deal changes are reflected in the sell-side’s consensus 2023 financial forecasts for HUYA. According to S&P Capital IQ data, HUYA’s top line is projected to decrease by -7.1% to RMB8,572 million in fiscal 2023, while its normalized net loss is estimated to narrow from -RMB334 million in FY 2022 to -RMB71 million for FY 2023.

Concluding Thoughts

A Hold investment rating for HUYA is justified based on the company’s financial outlook and the stock’s valuations.

HUYA’s P/S (price to sales) valuation metric has rebounded strongly from its historical trough of 0.33 times (source: S&P Capital IQ) on October 25, 2022 to 0.83 times as of March 13, 2023. But the stock’s P/S ratio is still much lower than its three-year average of 1.60 times.

Although the company’s normalized net loss is forecasted to be narrower in 2023 vis-a-vis 2022, HUYA was actually profitable for the FY 2019-FY 2021. Also, HUYA’s consensus FY 2023 top line decline of -7.1% pales in comparison with the company’s +30.3% revenue growth (in RMB terms) for FY 2021.

In my view, HUYA is fairly valued now and the stock should be rated as a Hold.