Felix Wang: Short $YY | A "Smelly Cat"

05/28/21 11:06AM EDT

Below is an excerpt from a complimentary research note by our China analyst Felix Wang. Please contact sales@hedgeye.com to read more of our China research.

Felix Wang: Short $YY | A "Smelly Cat" - zcaca

As a superfan of the sitcom, "Friends", I just finished watching the 2021 Reunion on HBOMax and sang along to its hit song, "Smelly Cat". When I saw JOYY's Q1 earnings hit the wires a few minutes later, I was much less enthusiastic.

There is always something smelly about YY's financials e.g. negative share-based compensation for HAGO. But give management credit for eliminating weird boosts to EPS, as seen in previous quarters. Well, maybe because JOYY reported another loss so no adjustments are needed. 

Without the profit center of YY Live (sold to Baidu), more losses are coming for JOYY, despite BIGO turning profitable for the first time.

As I've mentioned before, BIGO's revenue expectations remain too high because of competition. Poor Q2 revenue guidance will lead to Street cuts to their 45%+60% BIGO revenue growth expectations for 2021. 

BIGO's growth should experience deceleration in both Q2 2021 and Q3 2021. Perhaps that's why there was a shuffle in BIGO's management.  Moreover, by reducing advertising spend for Likee, JOYY is focusing more on profitability rather than user growth. 

I don't buy the theory that Likee is only hurt by the India ban - my channel checks suggest the weakness is worldwide.  As expected, BIGO achieved profitability in Q1 2021 but JOYY as a whole still reported a wider loss.  

That's because of higher HAGO non-marketing costs. In addition, deferred revenue fell again QoQ. 

I expect price target cuts from the 100% buy ratings. While it's less attractive of a Short after a big correction in the past few months, I see no reason for estimates to rise either. I remain Short YY. 

Felix Wang: Short $YY | A "Smelly Cat" - YY

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