Editor's Note: Below is a flashback on our short Joyy (YY) research calls from our China analyst Felix Wang. To access our institutional China research email sales@hedgeye.com.

FLASHBACK | Best Idea Short → $YY - 04.04.2018 China cartoon  2

What Felix Wrote Today 

Muddy Waters (MW) and I both see fishy BIGO data for JOYY.  There are some allegations in the report that could have serious consequences.  In addition, I wonder if BIDU will now reconsider its purchase of YY Live; that US$3.6bn transaction is expected to close in 1H 2021.  

I wrote a YY note called "Headscratchers" back in August 2020, emphasizing my skepticism on BIGO's ARPU growth, large discrepancies between BIGO's giant revenue growth and continued quarterly losses, weird MAU data particularly on Likee, and financial engineering on YY's EPS. 

While YY's Q3 2020 KPIs were mostly in-line with my estimates, Likee's figures ex India still look exaggerated to me, given the enormous global competition from the short videos.  

I agree with MW that there are some things that don't make sense on YY, and in many ways, we differ on what those are.  Nevertheless, at the very least, their short report creates uncertainty for YY investors.  YY remains a Best Idea Short mainly due to long-term competitive pressures, stalling user growth and skepticism on Likee's and IMO's monetization potential.

Below, I lay out my thoughts to some of the other points MW raised, most of which I brush aside…


JOYY reported high BIGO revenue growth, which I underestimated, but let's look at some head-scratchers from their Q2 earnings report.   

1) Giant revenues from BIGO but only in-line net loss 

180bps sequential deterioration in gross margins and elevated G&A are mostly to blame.  Management suggested margins will not improve in 2H 2020.  Based on this, I doubt profitability expectations in BIGO will change at all.  I continue to expect quarterly losses in BIGO until Q2 2021.

2) What drove the big jump in BIGO's ARPU?

ARPU grew 83% YoY in Q2, a big acceleration from Q1.  It's unclear why, as management only said "it was strong everywhere" when a few analysts asked what were the drivers.  I expected higher MAUs from BIGO Live to drive the revenues but BIGO Live MAUs only grew 10% QoQ.  For simplicity, I"m assuming 100% of livestreaming revenues came from BIGO Live.  

3) Something special happen to Bigo Live MAU + Likee MAU?

Hedgeye Algo had a tight correlation with Bigo and Likee MAUs since Q2 2019 but saw wide discrepancies in Q2 2020.  The fact that Likee improved its MAUs 14% QoQ is particularly strange given heightened competition from Kwai and TikTok in Q2 2020.  

4) What's with the weird EPS boost every quarter?

Some financial engineering here?  In Q2 2020, it was 0.20 RMB, when calculating EPS by dividing non-GAAP net income by non-GAAP diluted shares.