Douyu’s Upcoming IPO on Nasdaq

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Douyu’s Upcoming IPO on Nasdaq

Jessemy

15 July 2019

 

Douyu International Holdings , a game-centric live-streaming online platform, will launch an Initial Public Offerings on the Nasdaq Stock Market on 17 July, 2019 (New York Eastern time). According to the latest SEC filing on 9 July [1], Douyu planned to raise up to $1.08 b through this offering, by issuing 67,387,110 American Depositary Shares (ADS), each with an estimated offering price between $11.5 and $14.0.

According to Douyu [2], the funds raised by the IPO will be mainly for: investment in eSports content (35%); R&D in technologies and big data analytics to enhance operational efficiency (30%); marketing activities (15%); general corporate purposes (20%), which includes potential strategic acquisitions and alliances.

About Douyu: service lines, competitive dynamics, operating history

 

Douyu is an interactive live-streaming platform founded in 2014, based in Wuhan, China. Its users could video-stream their everyday life and view the content by other users’ through this platform. Although focused on video-game live-streaming, Douyu has a variety of content available on its platform, such as sports, entertainment, and outdoor activities. The video-game segment of the live streaming market achieved a market size of 9.147 b in 2018, with a growth rate of 5.3% since 2017 [3]. Within this segment, Douyu and Huya operate as duopoly, with a market share of 40.0% and 51.0% respectively in 2018 [4]. Huya, which is Douyu’s main competitor in the market, was founded in 2012 and launched its IPO on the New York Stock Exchange in May, 2018. On a broader scale, Douyu’s competitors are not limited to game live-streaming companies. Targeting users aged between 15 and 30 [5], Douyu faces competition from other online platforms focusing on this age group, such as short-video platform Douyin and Kuaishou, video-sharing platform Bilibili and social media Xiaohongshu (RED). The thriving of these online platforms may attract users away from Douyu, potentially limiting Douyu’s revenue-generating capability. Prior to its IPO, Douyu already reached completed Series-D funding by 2017 [6].

Revenue, Costs and Profitability
Douyu has a net revenue of 3.65 b for the year ended in 2018. As Douyu’s main revenue stream, live-streaming services consisted of 86.1% of the total revenue in 2018, while advertising and game promotion generated the remaining 13.9% of revenue [7].

Leading live-streamers are indispensable to Douyu, who contribued to approximately 50% of its live-streaming revenue in 2018. With large following bases, these top streamers generate revenue from the sale of virtual gifts as well as promotion activities during live streaming, and they are able to attract users to stay with Douyu as well [8]. In order to attract top streamers, Douyu paid high fees to sign contracts with non-compete clauses with these streamers, which raised its cost of revenues significantly. Among Douyu’s cost of revenues, revenue sharing fees and content cost consisted of the largest portion, which was 79.6% in 2018. This included the cost of recruiting top streamers and purchasing content right, as well as payments made to streamers based on their popularity and the sale of virtual gifts. For Douyu’s operating costs, sales & marketing expenses made up of 53.3% [9].

Until the end of 2018, Douyu suffered from net losses for three consecutive financial years, despite the rapid increase in revenue. The net loss was 78.3 b, 61.3 b, and 87.6 b respectively from 2016 to 2018. Prior to its IPO, Douyu achieved a net gain of 18.2 m for the first quarter of 2019 [10].However, it should be noted that Douyu still had a loss from operations of 48.5 m,  while the net gain mainly resulted from its foreign exchange gain and interest income, with a value of 32.1 m and 34.0 m respectively [11]. This means that Douyu’s net revenue has been unable to cover its cost of revenues and operating expenses, which must be addressed if Douyu aims to generate profits sustainably.

Regulatory Risks
As a platform of millions of users including many streamers, Douyu is subject to increasing regulatory risks. To start with, users may have involved in activities that might be judged as gambling, which is heavily regulated in China. For instance, some users participated in the exchange of virtual currency “Yuwan” for money on Douyu, in hope of an increase in the price of “Yuwan”. Furthermore, Douyu’s users, especially the influential streamers, may display inappropriate, abusive behavior on the platform. Although beyond Douyu’s direct control, inappropriate behavior by its users could lead to penalties by the Chinese regulatory authorities or even lead to the removal of Douyu App. For example, in 2016, Douyu was fined 60 k due to certain socially undesirable content on the platform [12].

Prior to IPO
Douyu’s IPO did not progress as smoothly as many would have imagined. By the end of April 2019, Douyu initially filed with the SEC to launch an IPO on the New York Stock Exchange, where its main competitor Huya was traded on [13]. However, the IPO that was originally due 16 May was postponed twice to mid-July. According to the latest SEC filing submitted in early July, Douyu switched from the New York Stock Exchange to the Nasdaq Stock Market [14]. Moreover, Douyu’s existing shareholders sold approximately 10% of total ADS through this offering, with its co-founder Wenming Zhang selling 38.7% of the shares he owned [15]. Douyu’s sudden change of stock exchange and the large proportion of shares sold by existing shareholders might indicate a lack of confidence by existing shareholders on Douyu’s growth prospects.

As mentioned above, despite its growing popularity and increasing revenue, Douyu currently has limited profit-generating capabilities and suffers from regulatory pressures, which are among the greatest concerns by potential investors.



Bibliography

[1] Securities and Exchange Commission. (2019) Form F-1/A Douyu International Holdings Ltd. [Online] Securities and Exchange Commission.
Available at: https://sec.report/Document/0001047469-19-004144/#eo77301_related_party_transactions
[Accessed: 16 July 2019]

[2] Securities and Exchange Commission. (2019) Form F-1/A Douyu International Holdings Ltd. [Online] Securities and Exchange Commission.
Available at: https://sec.report/Document/0001047469-19-004144/#eo77301_related_party_transactions
[Accessed: 16 July 2019]

[3] ASKCI. (2016) IIMedia Research: Report of the Chinese Live-Streaming Industry in 2016. [Online] ASKCI.
Available at: http://www.askci.com/news/hlw/20160530/14394022583.shtml
[Accessed: 14 July 2019]

[4] ASKCI. (2016). IIMedia Research: Report of the Chinese Live-Streaming Industry in 2016. [Online] ASKCI.
Available at: http://www.askci.com/news/hlw/20160530/14394022583.shtml
[Accessed: 14 July 2019]

[5] Shidai Weekly News. (2019) Douyu started to make a profit prior to its IPO. [Online] Sina Finance.
Available at: https://tech.sina.com.cn/i/2019-07-16/doc-ihytcitm2258427.shtml
[Accessed: 16 July 2019]

[6] Baidu.com. Douyu TV. [Online ]
Available at: https://baike.baidu.com/item/斗鱼TV/13464367?fromtitle=斗鱼&fromid=17199575
[Accessed: 14 July 2019]

[7] CNFOL. (2019). Douyu will soon realize its IPO dream: Stories of Douyu. [Online] CNFOL.
Available at: http://news.cnfol.com/chanyejingji/20190711/27582330.shtml
[Accessed: 14 July 2019]

[8-11] Securities and Exchange Commission. (2019) Form F-1/A Douyu International Holdings Ltd. [Online] Securities and Exchange Commission.
Available at: https://sec.report/Document/0001047469-19-004144/#eo77301_related_party_transactions
[Accessed: 16 July 2019]

[12] Sina Games. (2016). Douyu’s was fined 6 k by regulatory authorities due to socially undesirable content. [Online] Sina Games.
Available at: https://games.sina.cn/pi/gp/2016-05-09/detail-ifxryhhi8547448.d.html?from=wap
[Accessed: 15 July 2019]

[13] Qi, S. (2018). Douyu Changed SEC Filing and Stock Exchange It Will be Listed On. [Online] Huashangwang.
Available at: http://finance.hsw.cn/system/2019/0712/291990.shtml
[Accessed: 16 July 2019]

[14-15]
Securities and Exchange Commission. (2019) Form F-1/A Douyu International Holdings Ltd. [Online] Securities and Exchange Commission.
Available at: https://sec.report/Document/0001047469-19-004144/#eo77301_related_party_transactions
[Accessed: 16 July 2019]

[Others]
Dumou. (2019) Douyu’s IPO: What Are the Obstacles? [Online] 36Kr.
Available at: https://36kr.com/p/5211862
[Accessed: 14 July 2019]

Renaissance Capital. (2019). Let the games begin: Douyu files for a $500 million US IPO. [Online] Nasdaq.
Available at: https://www.nasdaq.com/article/let-the-games-begin-douyu-files-for-a-500-million-us-ipo-cm1132875
[Accessed: 15 July 2019]

Qianzhan Industry Research Institute. (2018). An analysis of the development of game live-streaming. Duopoly structure already formed. [Online] Qianzhan Industry Research Institute.
Available at: https://bg.qianzhan.com/report/detail/458/180919-b6e33f4c.html
[Accessed: 14 July 2019]
 

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