China social media sites: When it comes to retail investors making use of fresh SEC filings, 13D and 13Gs offer insight into big-time trades as they occur. Hedge funds and other prominent investors issue these filings, and generally speaking, activists file 13Ds and their more passive counterparts use 13G forms. For readers simply searching for novel investment ideas, the latter provides a good launching point for further research.
With that in mind, Robert Pitts and Steadfast Capital recently filed an amended 13G for its stake in YY Inc (ADR) (NASDAQ:YY), and it’s worth taking a look at the position. According to the filing, Steadfast owns about 4.7% of the Chinese social video network, good for about 8.4 million shares. Although peers Tiger Global and Richard Driehaus do hold small positions in YY, there isn’t an extremely high level of interest from other top-tier hedge funds, so this begs the question: why is Steadfast so bullish?
After doing some digging, we think there are four simple reasons why Steadfast is buying.
Momentum
Since going public in late November of last year, YY shares have risen by 342.7%, and this isn’t simply hype-driven appreciation. In its first three quarters post-IPO, the company has more than tripled its earnings—from $0.10 per share in Q4 2012 to $0.35 per share last quarter. We’ll get into the determinants of the earnings growth below, but it’s important to understand that this trend is a result of revenue per user growth and an overall growth in the user base.
In its latest conference call, YY’s CEO David Xueling Li told listeners that average revenue per user statistics “saw solid growth” due to stronger user involvement. Total ARPU is nowup 16% year-over-year and amounts to RMB346 ($56.53). Li shared that YY Music, whose number of paying users increased by more than 180% year-over-year, was a big part of this growth.
YY executives also said that the total number of paying users grew 60.6% from last year, and now amounts to 440,000. A full year ago, YY’s user base totaled 400.5 million, and now reasonable estimates place user figures close to the450 million-500 million mark. By comparison, SINA Corp (NASDAQ:SINA) had around 400 million registered users at a nearly the exact same time last year. Skype has over 650 million users, while Tencent QQ has at least 780 million. That’s good company to be in, but it’s the next point that sets YY apart.
Innovation
YY, which gives users the ability to socialize via video chats, has branched out beyond the traditional realm of friend-to-friend chat room services and gaming with YY Music. Within the platform, The New Yorker likens each musician’s live video page to a “theatre,” which “can seem something like a combination of a pop concert and a peep show.” YY’s revenues come from user-specific actions within these theatres, such as if a user buys a performer a virtual lollipop or rose, for example. For each virtual sale, YY typically keeps almost 70% of the transaction (with the rest going to the recipient artist).
While there’s sometimes controversy over the ethics of some of YY and YY Music’s more risqué segments, the actual idea behind a social media network that allows users to pay to socialize is ingenious. Charging users to message a friend on a site like Facebook Inc (NASDAQ:FB) would feel almost avaricious. On YY Music, however, users are receiving an artistic service in exchange for their digital payment. Sex appeal or no sex appeal, it’s an economically justifiable transaction.
Value and profitability
All of the aforementioned highlights wouldn’t mean squat, however, if the stock didn’t have good growth or earnings prospects. Something investors like Steadfast have probably noticed is that YY has a bit of both. Despite their meteoric post-IPO rise, shares of the company trade at a mere 12 times trailing earnings and—more importantly—a lowly price-to-earnings growth multiple of 0.26.
With the sell-side projecting bottom line growth of 47.1% a year over the next half-decade, YY’s valuation hasn’t caught up with its potential just yet, even though it sure as heck is trying to. No debt and gross margins above the 50% mark are icing on the proverbial cake, and give credence to the possibility that if ARPU and user growth figures continue on a fairly upward trajectory, Wall Street’s lofty EPS forecasts are within reach.
In short, YY easily scores a perfect 4-for-4 when it comes to momentum, innovation, value and profitability, so it wouldn’t a bad idea for individual investors interested in mimicking Steadfast here to perform more research on these four factors. Check back on Insider Monkey for more updates on China’s social media sites.
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