What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing if you've been paying attention to international stocks. Lately, you've probably seen the recent disaster around china's ride-hailing company dd on june 30th, dd ipo'ed up 14 per share, giving them a 70 billion valuation. Almost immediately after the shares started trading. The chinese government decided to crack down on the company they banned didi from the app store for supposed data privacy violations.

This has caused shares to plummet more than 20 since the ipo, the dd controversy has caused investors to dump their holdings of all chinese stocks across the board. Since the dd disaster unfolded, the cqq chinese technology etf has lost about 10 percent of its value and is currently down almost 30 percent. Since its highs in february. Blue chip mega cap tech stocks, including alibaba and baidu, are down double digits from their all-time highs.

But as warren buffett says, the best time to be greedy is when other people are fearful in this video we're going to talk about one overlooked. Chinese stock that has been unfairly beaten down by the recent sell-off. Keep in mind that we are not financial advisors and this video is, for entertainment purposes, only make sure to do your own research and consult with a professional before making any investment decision also feel free to check out our free discord. Server link in the description below the stock, we're talking about is chinese live streaming company hui to say that this stock is beaten down is an understatement.

It is declined 58 from its all-time highs and more than 10 from its ipo price in 2018. Huiyat is a video game streaming platform where live streamers play games such as league of legends and world of warcraft. You can think of it as a chinese version of twitch. The proximate cause of huia's recent stock decline is its failed merger with the chinese tech giant.

Tencent tencent owns a stake in both huya and rival, live streaming company. Do you they wanted to merge the two companies together to create a dominant live streaming player for the chinese market. The combined entity would have 70 market share. Recently, chinese antitrust regulators blocked the proposed merger, saying that would be anti-competitive.

This triggered a free fall in the share prices of both companies with huya down 58 from its recent highs and doe. U down a whopping 76 percent, despite the failure of the merger. Huya still has a dominant 40 market share and is poised to benefit from china's secularly growing esports industry. As china's economy is developing, more and more people are gaining access to high-speed internet.

This has led to an explosion in video games. As of 2020, there were 665 million people in china who play video games. If chinese gamers made up their own country, it would be roughly double the size of the united states. China has become the world's largest esports market, with the government's general administration of sports, declaring it an official sport since 2003., events such as the league of legends championship have become hugely important in chinese society and are on par with the super bowl in the u.s.

Huiya has benefited massively from this growth, with monthly active users growing every single quarter to reach 178 million in the fourth quarter of 2020.. In the first quarter of 2021, they stopped disclosing total monthly active users as they focus more on mobile. Their mobile monthly active users increased to 75 and a half million from 74.7 million in the prior year. The user growth has translated to strong revenue, growth and profitability.

In the most recent quarter, they generated 2.6 billion rmb of revenue, which represents an 8 increase over the prior year. Rmb is a chinese currency, while their revenue did decrease from the prior quarter. This can largely be attributed to seasonal factors. The fourth quarter is generally the strongest in the year.

They also exhibit strong profitability with positive net income. Every single quarter for the past two years, similar to twitch huion, makes the vast majority of its revenue from virtual gifts that fans give to their live. Streamers fans buy the gifts with real money and the live streamers cash them out for real money. Huya identifies up-and-coming streamers and signs multi-year exclusivity agreements, so they can only stream on huya.

They make individualized revenue sharing agreements where huya typically takes about 25 of the money they have deep connections within the live streaming talent pool as they have relationships with tens of thousands of talent agencies in china. In addition to video game streaming, people also stream lifestyle - videos such as dancing these streamers are mostly female and can derive huge amounts of donations from their fans. In addition to live streaming gift revenue, they also make revenue from advertisements on the websites promoters of esports competitions. Pay them to promote the events on their live streaming platform.

Historically, they focused almost exclusively on live streaming, which made up 94 of their total revenue in 2020. But advertising represents a major underpenetrated opportunity to drive growth going forward. We built a discounted cash flow model to project their earnings and come up with a price target. Arguably, the most important metric for hui is the monthly active users or maus.

They ended the year of 2020, with 178.5 million maus. While they have experienced strong growth in recent years, they'll eventually become saturated within china and growth will slow. We have mau's peaking in 2026 at 218.6 million and staying constant thereafter. In 2020, they made about 58 rmb of live streaming revenue per monthly active user.

We estimate that this will gradually grow to 78 rmb by 2030, as they build out new features and consumers incomes rises. Currently, they only make a miniscule amount of advertising revenue per average user. We think that this can grow strongly off of its low bays and they'll make 14 rmb of advertising revenue per user in 2030.. Currently, they make a gross margin of 21 percent.

Most of their cost of revenue is the live streamers share of the donations as advertising becomes a larger portion of their revenue mix. Their gross margins can increase modestly to 22 percent. In 2020, their operating expenses were equal to 77 of their gross profit, with the biggest expense being research and development, as their business scales they'll benefit from operating leverage. We estimate operating expenses will decline to 60 percent of gross profit by 2030..

These assumptions produce steadily rising operating income, which will reach an estimated 1.7 billion rmb by 2030.. Huya has a massive net cash position with almost 4 billion rmb. They invest this into short-term income varying investments. We assume that they continue to make 300 million rmb per year on these investments, which is in line with what they made in 2020 and 2019..

This investment income is added to operating income to get income before taxes. We assume a constant tax rate of 17 huya owns a private equity fund where they invest in privately held mobile game developers. They make these investments for strategic reasons and they are pretty small in the context of the company's consolidated financials. They recognize the net profit of these portfolio companies in their income statement, for conservatism, we'll assume that they make no money from these investments, but it does represent a potential upside from our estimates.

Based on our estimates, they will make 3.18 rmb of earnings per share in 2021., that translates to 48 cents by 2030. This will grow to an estimated one dollar and eight cents. We apply a relatively high discount rate of 10 to discount the earnings into present value. The present value of the discounted earnings from 2021 through 2030 is 5.51.

We also assume a terminal growth rate of 3, which is conservative, given china's high gdp growth rate. This gives us a terminal value of 16.72 cents. Adding these two numbers together gives a price target of 22.23 cents, which represents 54 upside at the time of recording this video. Given the long-term growth outlook of the chinese video game live streaming, industry and huio's dominant 40 market share, the current price seems significantly undervalued.

The main risk of the investment is possible regulatory scrutiny from the chinese government. The regulators have been quite active recently in stemming the power of tech monopoly such as alibaba and tencent. While huia is the biggest player in the industry, they have a credible competitor in the form of do you, which has 30 percent market share. Huya is a relatively small company with a 3.4 billion dollar market cap.

The chinese regulators definitely have bigger fish to fry and there's no reason to believe that any actions will be taken against huya, alright, guys that wraps it up for this video. What do you think about huya? Are there any other stocks that you like better? Let us know in the comments section below, if you enjoy this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.