Summary. YY delivered mixed 2Q19 results, with topline beat but margin miss. Overseas expansion performed well, but market concern remains on competitive landscape and TAM. We trimmed its adj. net profit by 10%/22% in FY19/20E, and adjusted TP to US$74. Valuation at 11x FY19E P/E is attractive.
- Mixed 2Q19 result with margin miss. 2Q19 revenue grew 67% YoY, 3% above consensus. However, Adj. net profit declined 36% YoY, 3% below consensus. Mgmt guided 3Q19 revenue at RMB 6.6-6.8bn (midpoint +62.5% YoY), 3% above consensus. Excluding Huya, YY Live & Bigo? 3Q19E revenue guidance accelerated to 58%-62% YoY (vs. 57% YoY in 2Q19). Mgmt announced a share repurchase plan up to US$300mn over the next 12 months.
- International expansion with rich app portfolio. We are impressed by its overseas app performance, with 433.5mn global MAU (in which 78% from overseas). Bigo Live served as its largest revenue contributor, while Likee and IMO put user growth as priority. Mgmt are confident in its overseas monetization potential, mainly on: 1) paying ratio far below industry average, despite already-high ARPU; and 2) IMO and Likee to explore diversified monetization. Market concern might lie on its difficulty to cross check overseas data and global competition (e.g. Tiktok). We estimate Bigo to generate revenue of US$667mn/US1.2bn in FY19/20E and net loss of US$126mn/US$110mn. Mgmt guided Bigo to achieve single-month breakeven in FY20E, and overall breakeven in FY21E.
- Near-term margin pressure. 2Q19 adj. net margin dropped 5.4ppts QoQ, mainly on: 1) heavier promotion for Likee; 2) increasing bandwidth for Bigo; and 3) higher revenue mix from Huya. We expect 3Q19E adj. net margin to continuously decline 1ppts QoQ to 7.1%, for higher S&M/Rev ratio and decreasing gross margin. We cut FY19/20E adj. net margin by 1.1ppts/2.6ppts, to reflect more aggressive overseas promotion, and correspondingly trimmed ad.net profit by 10%/22% in FY19/20E.
- Maintain BUY. We adjusted SOTP-based TP to US$74 from US$91, under our new estimates. Our new TP is equivalent to 15x FY19E P/E, based on: 1) YY Live (7x FY19E P/E); 2) Huya (based on mkt cap) and 3) Bigo (2x FY19E P/S).
