eSports

Douyu prepares US IPO in the face of industry headwinds

The Chinese video game streaming site filed its listing application shortly after Beijing resumed review of new game applications and will need to show how it plans to monetise the business.

Douyu is set to join the list of Chinese companies looking to float their shares in the US this year after the video-streaming platform filed a later-than-expected initial public offering that aims to raise up to $500 million. 

As  one of China’s most popular live-streaming platforms for video games, Douyu has disclosed its IPO filings shortly after China’s State Administration of Radio, Film and Television started accepting new game applications on Monday, putting an end to a prolonged suspension since September last year.

The suspension on game applications could potentially cause delays to new game launches.

Any delay could impact Douyu’s viewership, which in turn affects its revenue. The platform generated 86.1% of its revenue last year from live-streaming of games – mostly in the form of virtual gift sales, according to its preliminary prospectus.

From a capital markets perspective, Douyu also appears to have missed the best window to launch the share sale.

While the timetable for the IPO has yet to be finalised, the transaction is expected to complete more than a year after its closest rival Huya scored a massive success with its share sale in May last year. Huya’s stock price more than tripled within months of this listing and is still 87% above its IPO price.

Market prospects appear less propitious this time around. This is reflected in Douyu’s estimated fundraising target of $500 million, which is half the proceeds most equity analysts believed the company would raise when it first sounded out a share sale early last year.

Still, while China’s live-streaming industry remains highly competitive despite a wave of closures in the last two years, Douyu has retained its hold over many viewers due to its focus on video gaming and eSports, which is increasingly becoming a sub-culture among young people.

In its preliminary prospectus, the six year-old company said its had 153.5 million monthly average users as of the end of last year, which is about half the size of Twitter’s far more assorted user base.

CHALLENGES

One of the main considerations for prospective investors is whether Douyu is able to monetise its business and become profitable. While its 2018 revenue nearly doubled year-on-year to Rmb3.65 billion ($531 million), the business remained in the red with a net loss of $128.4 million last year.

That will partly hinge on whether the company can diversify its income sources beyond live-streaming and advertisements.

Douyu has been trying hard to develop its own game streamers – or internet celebrities, as they are often known in the online community – in order to take a share of the income generated from their gaming promotions and events. 

Such a strategy could help the business to harness some of the huge spending on independent internet celebrities that is increasingly becoming common practice.  In China, live-streaming sites have been paying big cheques to popular internet celebrities in order to stop them from broadcasting on rival platforms.

Douyu could also potentially make money by organising gaming tournaments and events. The company is already one of the biggest gaming broadcasters in China, having obtained exclusive streaming rights to 29 tournaments and streamed about 337 events last year, according to its prospectus.

However, it is unlikely that Douyu will organise tournaments on its own since that would mean  going head-to-head with game developers. Instead, it is more likely to partner with them or act as a sponsor for gaming events.

Tencent, which participated in Douyu’s series B, C and E rounds of private funding, is the company’s largest shareholder with a 40.1% stake. Sequoia Capital owns 9.8%, according to Douyu’s prospectus.

Douyu is expected to be the biggest Chinese IPO this year, at last compared with the current known pipeline, which includes the likes of Luckin Coffee, social e-commerce site Yunji and healthcare portal So-Young International, which are all preparing for a US listing this year.

They will be launching their deals on the back of a robust year for Chinese companies listing in the US. Last year, there were multiple billion-dollar IPOs of Chinese firms in the US including electric car maker Nio, e-commerce site Pinduoduo and video-streaming site iQiyi

Morgan Stanley, JP Morgan and Bank of America Merrill Lynch are joint underwriters of Douyu’s IPO.

This article has been amended to reflect China started reviewing new game applications on Monday.

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