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mid-cap

2 Speculative US Stocks Under Investors' Radar: HUYA and PAYS

May 28, 2021 | Team Kalkine
2 Speculative US Stocks Under Investors' Radar: HUYA and PAYS

 

HUYA Inc.

HUYA Inc. (NYSE: HUYA) operates game live streaming platforms in China. It also offers non-game entertainments such as talent shows and outdoor activities.

Investment Rationale for Valuation – Speculative Buy at USD 15.05

  • HUYA is a leading player in China’s game streaming market, and the DouYu acquisition would boost its market share.
  • To jointly handle technological initiatives like data security, HUYA formed a joint venture with Tencent.
  • HUYA plans to expand internationally, which could provide years of sustainable growth.
  • On the profitability front, HUYA’s net margin in Q1 FY2021 is higher than the industry median of negative 1.7%.
  • On the liquidity front, the current ratio since FY2020 is consistently above the industry median of 1.89x. On the leverage front, the debt/equity ratio is zero, which is consistently below the industry median of 0.24x since FY2020.
  • From a technical standpoint, 14-day RSI stood at around 36.95, moving towards the oversold zone, which means the stock price could move upward in the short term.

Key Risks

  • The DouYu acquisition may not bring the desired synergy to the Company.
  • China’s government is investigating monopoly/antitrust concerns for the DouYu acquisition.
  • The games sector is exposed to various government regulations.
  • Disruptive technologies from competitors could pose a threat.

Financial Highlights (for three months ended 31 March 2021 (Q1 FY2021), as of 18 May 2021)

(Source: Company Website)

  • Live streaming revenues were up in Q1 FY2021 by 5.2% YoY, driven by the rise in the average spending per paying user on Huya Live.
  • Advertising and other revenues were also up in Q1 FY2021 by 54.6% YoY due to revenues from licensing of content.
  • It led to an overall top-line surge of 8.0% YoY in Q1 FY2021 to USD 397.6 million.
  • However, the cost of revenues also increased 7.9% YoY to USD 319.1 million, mainly due to a rise in revenue-sharing fees and content costs.
  • Similarly, research and development expenses rose by 27.6%, driven by increased personnel-related expenses.
  • However, the increase in revenues outweighed the rise in costs, and net income rose by 8.4% to USD 28.3 million.
  • Driven by net cash provided by operating activities of USD 25.4 million, the net cash position rose by 1.7% from FY2020. 

One Year Share Price Chart

(Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

As per the industry experts, the global game streaming market is expected to grow at a CAGR of 9% till 2026. Also, China is expected to dominate the game streaming market. HUYA is already a leading force in the Chinese game streaming market, and DouYu acquisition would give it a significant boost. The Company did well during the Covid-19 lockdown as there was more demand for games, and it is ready to continue the momentum in FY2021 with further investment and expansion. The stock made a 52-week low and high of USD 14.32 and USD 36.33, respectively. On the technical chart, the next important support level is USD 12.39.

Based on decent prospects of the Company and industry, favourable profitability, liquidity and leverage profile of the Company, its favourable prospect driven by DouYu acquisition, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on HUYA Inc. at the closing market price of USD 15.05 (as of 27 May 2021), with a lower double-digit upside potential based on 35.49x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

Paysign Inc.

Paysign Inc. (NASDAQ: PAYS) is a support services company providing payment solutions. The Company offers payment processing, prepaid cards and digital banking.

Investment Rationale – Speculative Buy at USD 3.33

  • During Q1 FY2021, PAYS added three new plasma centres to its portfolio and signed agreements with four new players in the plasma collection space.
  • PAYS plans to add 60 new plasma centres in FY2021. It expects to have at least 400 plasma centres at the end of FY2021.
  • Management is optimistic that the business would rebound with more vaccinations and the lifting of restrictions which is happening in the US.
  • PAYS is well-capitalized with USD 6.6 million of unrestricted cash and zero debt.
  • On the leverage front, the debt/equity ratio is zero, which is below the industry median of 0.46x. Hence, PAYS could raise adequate liquidity at a lower rate.
  • From a technical standpoint, 14-day RSI at 44.26 is close to the oversold zone. Hence, there could be an uptick in the stock price in the short term.

Key Risks

  • In the US, plasma supply is regulated by the FDA, and only US-sourced plasma could be used domestically.
  • PAYS could incur further costs due to the class action defence for alleged securities laws violations.
  • Covid-19 is having a profound impact on the Company’s operations.
  • There are also risks from potential supply chain disruption..

Financial Highlights (for three months ended 31 March 2021 (Q1 FY2021), as of 11 May 2021)

  • Due to fewer plasma donations and dollars loaded to cards, which happened as a result of Covid-19, plasma revenue was down 26.7% YoY in Q1 FY2021.
  • Pharma revenue also declined dramatically by 70.8% YoY, mainly due to a change in accounting estimate.
  • This downfall in both plasma and pharma revenue led to the overall revenue decline of 40.6% YoY in Q1 FY2021.
  • As most of the plasma transaction costs are variable in nature, the decline in plasma transactions resulted in the cost of revenues declining 29% YoY in Q1 FY2021.
  • However, operating expenses rose 3% YoY, primarily due to severance-related costs and legal fees for class-action defence.
  • Due to the above factors, net income turned negative with a net loss of USD 1.6 million.

One Year Share Price Chart

(Analysis done by Kalkine Group)

Conclusion

Plasma is the Company’s main growth driver, and global demand for plasma is expected to grow in the future. Once there are more vaccinations in the US and no further stimulus distributions and unemployment subsidies, the incentive to donate plasma would return. The Company would add 60 new plasma centres in FY2021. With zero debt and substantial liquidity, the Company is ready for growth and weather any further adverse impacts. The stock made a 52-week low and high of USD 2.87 and USD 10.98, respectively. On the technical chart, the next important support level is USD 2.63.

 

Based on decent growth prospects of the Company and potential rebound of the industry’s prospects, the Company’s planned expansion initiatives, its favourable liquidity and leverage position, we have given a “Speculative Buy” recommendation on Paysign Inc. at the closing market price of USD 3.33 (as of 27 May 2021).

 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).