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Analysts: HUYA's stake in MTG esports unit provides alternate revenue stream

A minority stake in the esports unit of Sweden-based event organizer Modern Times Group and a joint venture could open another source of revenue for Chinese livestreaming platform HUYA Inc., analysts said.

HUYA struck a binding term sheet with MTG to acquire a minority stake in its esports business Turtle Entertainment GmbH, or ESL, for US$30 million on Sept. 2.

HUYA and ESL also plan to form a joint venture to help ESL expand into China. ESL will issue new shares worth US$22 million to partially fund the joint venture, as well as to facilitate further expansion.

The transaction represents a new strategy for livestreaming platforms like HUYA which typically rely on top streamers to bring in revenue.

"The strategy of acquiring event organizers could prove to be more cost-effective than acquiring top streamers as it requires a lot less expenditure," said Ke Yan, co-head of research at Aequitas Research.

"ESL is one of the largest event organizers and has connections to top players worldwide, so bringing them to China would be good for Chinese esports fans looking to support homegrown teams against foreign players."

Carlton Lai, director of equity research at Daiwa Capital Markets, added that the minority stake will help HUYA "gain greater exposure along the esports value chain" and help secure "new, quality content" for the Chinese livestreaming platform.

ESL, which is owned by digital entertainment company MTG, was founded in 2000, has 242 million fans globally, and has held tournaments and ladders for esports fans with a total of 8.4 million playing members. According to analytics service Esports Charts, ESL has organized 220 tournaments to date, coming in second after Activision Blizzard Inc.'s Blizzard Entertainment Inc. with 260 tournaments.

Locked in battle

HUYA primarily competes with DouYu International Holdings Ltd. The two Chinaese Tencent Holdings Ltd.-backed platforms have been locked in an intense battle to capture the lion's share of China's booming US$210 million esports market and to become the country's Twitch, Inc.'s market-leading gameplay streaming platform.

HUYA and DouYu listed on the New York Stock Exchange in May 2018 and July 2019, respectively, in moves analysts said were to increase their war chests.

Since March 2018, revenue from livestreaming accounted for an average of 95.2% of its total monthly revenue, with advertising and others contributing the rest, according to the company's filings. HUYA's second-quarter results showed that cost of revenues, however, increased by 92.1% to 1.67 billion yuan in the second quarter of 2019 from 872.0 million yuan in the same period of 2018, primarily due to the increase in revenue sharing fees and content costs, bandwidth costs, as well as the increase in headcount.

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Acquiring event organizers could be a better strategy than vying for top streamers, because top streamers can easily shift allegiances between platforms, said Arun George, IPO, M&A and TMT analyst at Global Equity Research.

"There is no guarantee a top streamer this year will remain a top streamer next year, but a top event typically remains a top event for some time," he said, adding that it makes sense to partner with ESL because the barrier to entry for a rival event organizers to attract top streamers/teams is high as it takes time to build the brand, reputation, audience and prize money of the event.

Lai noted that while top streamers can attract substantial new users or fans, partnering with ESL will "diversify revenue streams, away from simply tipping."

A large portion of total revenue for HUYA comes from the sales of virtual gifts that viewers tend to buy as "tips" for their favorite streamers. However, top streamers typically keep a large cut of virtual gift revenues from livestreaming platforms, Yan said.

The analysts said HUYA's strategy "paves the way" for more acquisitions between esports event organizations and livestreaming companies.

"I would not be surprised if DouYu follows suit with a deal of their own," Lai said.

The transaction values ESL at an enterprise value of $425 million, according to a Sept. 2 statement.

The deal, which is subject to customary due diligence and negotiation of definitive transaction documents, is expected to be signed during the fourth quarter. MTG will remain ESL's majority owner post-completion.

As of Sept. 10, US$1 was equivalent to 7.11 Chinese yuan.