KeyStone’s Your Stock Our Take: HUYA Inc. (HUYA:NYSE) and The Bank of Nova Scoatia (BNS:TSX).
In our Your Stock Our Take Segment we two very different but equally topical stocks. Our fist company is one of the Big 5 Canadian Banks, The Bank of Nova Scotia (BNS:TSX), which reported its Q2 2020 earnings this week. ScotiaBank, who’s shares have dropped significantly year-to-date in 2020 along with Canada’s other big banks, saw quarterly earnings plunged 41% after the lender set aside a record amount for loan losses, giving investors their first indication of how the COVID-19 pandemic will affect fiscal second-quarter results at Canadian banks. We give our quick take on the stock and the segment following the earnings numbers.
The second is high growth leading game live streaming platform in China, “HOOYA” HUYA Inc. (HUYA:NYSE). The company cooperates with e-sports event organizers, as well as major game developers and publishers, and has developed e-sports live streaming as one of the most popular content genres on its platform.
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Cannabis Sector and Stocks
We note that over the past 12-18 months, share prices in the segment have been decimated – particularly in Canada.
Companies such as CannTrust Holdings Inc. and James E Wagner Cultivation Corp. are among the seven pot companies that filed for creditor protection or signaled they would be undergoing restructuring this year. Another five cannabis companies filed for creditor protection last year. This year, the are blaming it on COVID-19. We say it is a poor excuse –These businesses were never profitable and the way they were constructed they had no hope of profitability given the overbuild and poor rollout in the industry in Canada. And we have been saying this for 2-years.
One of the hundreds of examples we can provide – a company we have reviewed on this Podcast as a Dog no less than three times is, The Green Organic Dutchman Holdings Ltd. (TGOD:TSX) – traded at over $7 dollars at legalization with a billion dollar market capital has collapsed to $0.50.
Of the 210 Cannabis related companies in our recent update on the segment only a couple have actually produced gains over this period. Over 95% have seen their share drop, in most cases dramatically, destroying investor capital.
The one company that has continued to perform was our sole full recommendation from the 200+ companies we reviewed in the Cannabis space over the past 2 years.
Highlight Aurora Cannabis (ACB:TSX).
Just this past week, Aurora Cannabis, one of this biggest names in the space, posted a deeper-than-expected loss in its third quarter. The Edmonton-based producer reported a $137.4 million net loss – on the bright side, this was a huge an improvement from the $1.3 billion lost in the prior three months.
Aurora saw net revenue climb 35 per cent to $75.9 million in its latest quarter, topping analyst expectations. The company reported an adjusted EBITDA loss of $50.9 million.
Like most in the segment, Aurora has had a tough year as the company fell short of promised profitability targets, risked breaking debt covenants, and diluted its share count by turning to the market for equity financing. The company debt-heavy balance sheet has been a persistent concern for investors. Just over a year ago, post-consolidation, Aurora traded at $146.00. Today it is in the $21 range. An 86% drop and a massive destruction of investor capital.
The company completed a 12-for-one share consolidation on Monday, responding to a delisting threat from the New York Stock Exchange after its stock traded below $1.
While there is significant revenue growth, the stock remains unprofitable and even after the drop, still sports a $2.37 billion market cap. It is not cheap. Without profitability, it remains un-investable from our perspective.
HUYA Inc. (HUYA:NYSE)
Current Price: $16.36
Market Cap: $3.59 billion
What does the company do?
HUYA is a live streaming gaming platform in China with a large and active live streaming community. The company cooperates with e-sports event organizers, as well as major game developers and publishers, and have developed e-sports live streaming as one of the most popular content genres on its platform. And the company has also extended its content to other entertainment genres, such as talent shows, anime and outdoor activities.
The share price has been on a downward trend since mid 2019 from where it traded around $26.
The company has been growing rapidly and is one of the main live streaming gaming companies in China – with its other main competitor named DUYA. HUYA’s biggest global competitors are Amazon’s Twitch and Facebook streaming but it should be noted that Twitch and Facebook are banned from operating in China.
And since I am slightly brushing the topic of political risk, in recent days, US lawmakers, government agencies and stock exchanges have taken steps aimed at limiting Beijing’s access to America’s vast capital markets with the US Senate unanimously passing a bill that would prevent companies that refuse to open their books from listing on Wall Street. The bill’s goal is to “kick deceitful Chinese companies off US exchanges.” – And after this announcement most Chinese stocks did see their share price slide.
Now looking at the company’s Q1 financial results released on May 20th.
Recent Financial Results: (Q1, 2020)
- Revenue was up 40%, to $340.6 million compared to the same quarter last year. But sequentially, revenue actually decreased by 3.9% which was the first sequential decline in over 9 consecutive quarters. So, we do know that revenue growth is decelerating.
- HUYA’s Adjusted Earnings came in at $37.2 million, an increase of 89.8% compared to the same quarter last year.
- Looking at their balance sheet the company is certainly cash rich with a net-cash position of $1.44 billion, or $6.57 per share.
- And the company’s current Adj. P/E multiple is around 30x, but taking into consideration the company’s large net cash balance – they are trading at only 18x adjusted earnings.
- Lastly just looking at the company’s Monthly Active Users (MAU), we are still seeing some growth with it increasing 22% from the same quarter last year. But again, growth is slowing.
Being a gamer myself and personally owning a twitch account (not that I am a big streamer by any means) I do see the opportunity in the industry as some analysts are expecting the live streaming gaming market to be massive. But just because someone says a market is going to be massive doesn’t mean the company is worth investing in. (ie, Cannabis stocks).
On an ex cash valuation basis, HUYA is trading at an attractive multiple given its growth. But we are certainly concerned about the political risk the company is faced with given the US clamp down on Chinese listed stocks. If someone wanted exposure to the live streaming gaming industry, it could certainly be a name to invest in. But due to the company’s political risk it is a name that we refrain from recommending at this time and will continue to monitor.