Should You Exit From This Chinese Entertainment Stock- DOYU

Jan 28, 2022 12:00 AM PST | Team Kalkine
Should You Exit From This Chinese Entertainment Stock- DOYU

DouYu International Holdings Limited

DouYu International Holdings Limited (NASDAQ: DOYU) is a Chinese live-streaming platform focused on games. Users can enjoy immersive and interactive games and live entertainment streaming via the company's platform, available on PC and mobile apps. It makes money through live broadcasting and advertising. As of January 27, 2022, DOYU has 324.41 million American Depository Shares (ADS) listed and outstanding, with every ten ADS representing one ordinary share.

Why Should Investors Exit?

  • Declining Fundamentals: Net revenues fell 7.80% YoY to RMB 2.35 billion in Q3FY21 (ended September 30, 2021) from RMB 2.55 million in Q3FY20. It also reported a net loss of RMB 143.53 million in Q3FY21, compared to a net profit of RMB 59.60 million in Q3FY20.
  • Drop-in QAPUC: The company announced that the quarterly average paying user count (QAPUC) in Q3FY21 was 7.2 million, compared to 7.9 million in Q3FY20. If this downward trend continues, the company's topline may suffer significantly.
  • Political and Regulatory Risk: The Chinese authorities' crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent the company's operations. This is after the passage of a bill in the US, which could lead to the delisting of some Chinese companies from the country's exchanges (in case the US authorities cannot satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.
  • Weak Technical: On a daily basis, DOYU's stock price is sustaining below the falling trend line resistance level of USD 2.79 and is confronting the same resistance. Furthermore, prices are trading below the trend-following indicators 21-period SMA and 50-period SMA, both of which could operate as resistance levels. The stock's main support level is at USD 1.60, while the critical resistance level is at USD 2.90.

 Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

DOYU's share price has declined 80.94% in the past twelve months and is leaning towards the lower-band of its 52-week range of USD 1.98 to USD 20.54. Also, its shares are hovering in a steep bearish zone with price traded well below its crucial long-term as well as short-term support levels of 50-day and 200-day SMA. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 2.40.

Given the harsh regulatory environment between the US and China, the continued reduction in stock price, deterioration in fundamentals, and other technical indicators, we recommend a "Sell" rating on the stock, which closed at USD 2.52, up 14.03% as of January 27, 2022.


DOYU Daily Technical Chart (Source: REFINITIV)

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

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