Further China reduce – Sell YY

I have had a extra close eye on YY for a while now. The reason is that it had surpassed my conservative valuation in my analysis (YY Full analysis) of 56 USD. Actually I still wanted to squeeze out some more of the juice and believed we could see the stock trading up towards 70-80 USD. Especially considering how well other tech stocks are doing. But one of the concerns that I listed was a potential government crackdown on live-streaming. This is also something mainland Chinese people have warned me about when I have discussed the YY investment case. As an investor in China I have the fullest respect for what the government says and plans to do, in-fact many of my investment has China’s long term plans as a nice tailwind for the investment case.

On the 22 June a State administration announced it had requested to suspend several video portals due to lack of licenses. The largest company affected was Weibo and two others, this was not at all related to YY. Later on information came out that the number of services that had been named was larger than the initial 3. Today before opening the market realized this crackdown is more serious than initially expected. I haven’t myself managed to get to the bottom of this, just reading news articles like these ones:

SCMP – Weibo disables video uploads longer than 15 minutes, amid regulator scrutiny

Chinese authorities put the brakes on a surge in live streaming

Quite often these things just blow over, forgotten in 3 months and everything is back to normal. But sometimes it’s the real deal and nothing will be the same again. Given that I reached my target price and YY has not traded down drastically on this, I take it as an opportunity to both further reduce my China exposure and sell my holding close to my base-case target price, and a very healthy profit.

 

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YY.com – Full Analysis

General Intro

This is a follow-up on my previous post where I initiated a position in YY.com. I have already directed you (Here is the link again) to an excellent article on the whole live-streaming phenomena in China. As I stated before, I believe in this going forward both as a phenomena and YY’s revenue model of virtual gifts. I think this works especially well in China where the people aged 15-35 spend more and more of their time in front of computers/video-games/mobile phones. A lot of people are getting seriously dysfunctional in normal social interaction and feel loneliness. The need to interact is still there and these platforms become the ultimate way to relieve that frustration. On top of that we have a lot of old people, who also feel lonely, especially in China where the one child policy has created a lot of elderly which don’t have a big group of youngsters to interact with. In the case of YY, it’s also a city tier story, the people living in Tier 3 cities are very curious of the lives of people living in Tier 1 cities. Digging in to the figures the best future prospects for revenue growth comes from online-dating and educational platforms. But let’s not get ahead of ourselves, let’s move over to the company Intro.

Company introduction

The founder David Li has a long history in China Internet Tech. In 2003 David worked for Sohu as the IT head editor, later he join NetEase. In 2005 David start his own business duowan.com, the homepage quickly became China’s largest game information website, with over 100 million page views per day. Mr. Lei Jun, an angel investor in YY is was the CEO of Kingsoft Corporation later he founded XIAOMI technology-a smart phone company, Lei Jun is considered among China’s 10 wealthiest. David Li and Lei Jun owns both about 17.5% of the company each. In July 2008, the company launched the YY Client, a PC-based software that allows users to create individual channels for any live social gatherings. YY Client quickly gained a vast user base and emerged as one of the most popular voice communication tools. In 2010 a mobile app Mobile YY was introduced and in 2012 a web version. YY was listed on the NASDAQ in November 2012.

It should also be mentioned that David Li and Lei Jun quite recently tried to take the company private: “YY received a non-binding “going private” proposal from its Chairman Mr. Jun Lei and its CEO Mr. David Xueling Li, proposing to acquire all of the outstanding shares of YY for US$68.50 in cash per American depository share (ADS).”

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YY.com in Ctrip out

To not increase my China exposure, which is at somewhat uncomfortable high, I decided that for every China exposure holding going in, another one has to go out. This means to make space for my new holding YY.com which I’m very excited about, I have to throw out one. The Chinese holding I have not yet done a full due dilligence on is Ctrip, and for no other reason than that, it is the weakest card in my portfolio. So out goes Ctrip in in comes YY.com at the same dollar values (approx 5% weight), as of today’s close.

From Vlogs to Live streaming

I have been very fascinated about the whole Vlog (Video log) scene, and how big it has grown in just a few years in western countries. I find myself watching more and more quality content on YouTube, but also spending more time on “crap”. With crap I mean following some person through their daily life or just someone doing silly things online. China has managed to take this to the next level through online streaming, where hosts interact with their audience. YY.com and their competitors have implemented a very clever system in terms of how viewers pay. I’m very sure people get hooked on it, and I’m sure we are just at an initial stage of growth. What I’m less sure of is if YY.com is the right horse to bet on, but as far as I have been able to gather, they are. As I said I’m excited about this holding and I hope to find the time to write a full report on the stock this weekend.

Until then, this is a very excellent piece on the topic and I will base a lot of my post about YY on this article: Livestreaming Trend in China

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