We expect YY to deliver solid 3Q19E results in Nov. We forecast its topline to grow 64% YoY in 3Q19E, and bottom line to decline 40% YoY, in line with consensus. We view its upcoming results as positive, coupled with user sequential growth. Overseas expansion performed well, but investors still digest its competition landscape and TAM. We keep our financial forecasts unchanged. Maintain BUY with unchanged TP of US$74. Valuation at 10.6x FY20E P/E is attractive.
- Expecting solid 3Q19E. We expect YY’s revenue to grow 64% YoY to RMB6.7bn in 3Q19E, and adj. net income at RMB469mn, largely in line with consensus. We view its upcoming result as positive, on both solid financials and user metrics. Excluding Huya, YY Live & Bigo’s 3Q19E revenue was estimated to accelerate to 60% YoY (vs. 57% YoY in 2Q19).
- YY Core on track; Bigo strong momentum to continue. We forecast YY Core revenue to grow 10% YoY in 3Q19E, in which Hago accounted for less than 2% of Bigo Core revenue. Both YY Core and Bigo might see user sequential growth in 3Q19E, in our estimates. We keep confident on its overseas monetization potential, mainly on: 1) paying ratio still far lower than industry average, despite already-high ARPU; and 2) IMO and Likee to explore diversified monetization in 2020E. We think market concern lies 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, with net loss of US$126mn/US$110mn.
- Margin dilution priced in. We expect 3Q19E adj. net margin to decline 1ppts QoQ to 7.1%, for 1) higher S&M/Rev ratio, due to heavier promotion for Likee; and 2) decreasing gross margin with increasing bandwidth for Bigo and higher revenue mix from Huya. In our estimates, YY Core’s gross margin will decline 1ppts QoQ to 45%, and OPM down 3ppts QoQ to 22%. We believe near-term margin pressure from overseas expansion is well priced in, and the market eyes more on Bigo’s narrowing loss trend.
- Maintain BUY. We keep our financial forecasts unchanged. Maintain BUY with unchanged TP of US$74. Our TP is equivalent to 15x/13.6x FY19/20E P/E, based on: 1) YY Live (7x FY19E P/E); 2) Huya (based on mkt cap) and 3) Bigo (2x FY19E P/S). The stock is now trading at 12.3x/10.6x FY19/20E P/E. Valuation is attractive in our view.
