Web Games And Music Platform YY Serenades Wall Street

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Chinese Internet companies have been among the stock market's biggest gainers over recent months as investors adopt a more bullish attitude on growth prospects in China.

One of the beneficiaries isYY ( YY ), which operates an online social communication platform that lets users take part in group activities through voice, text and video. They can play games, watch shows and concerts, sing along to karaoke songs, and chat with other users using real-time audio and video.

Shares of YY have risen more than 300% since the beginning of May. The stock has risen more than 40% so far in 2014, notching new record intraday highs Wednesday, Thursday and on Friday, when it opened at 72.78 before settling back.


YY joins other Chinese Internet stocks -- includingBaidu ( BIDU ),SouFun Holdings ( SFUN ) andBitAuto ( BITA ) -- in establishing new stock-price highs in 2014.

These gains are partly the result of a rapidly expanding online market in China, analysts say, helped by accelerated adoption of smartphones and other mobile devices.

Revenue for Chinese search services in 2013 rose 40% from the prior year to 39.32 billion yuan, or about $6.5 billion, according to a report by Chinese online data service iResearch Consulting Group.

A Triple Play

YY itself has been growing in triple digits as it continues to expand its user base and product mix. Its interactive/entertainment platform serves the mainland and includes YY Client, the YY.com and Duowan.com Web portals, Mobile YY and Web-based YY. It offers free services as well as paid memberships.

Most of its business comes from online games and music, though YY also gets revenue from online advertising, online education and other sources.

"YY offers a rich-media platform which allows large-scale communications in real time," JPMorgan analyst Alex Yao noted in a report last year initiating coverage on the stock. "Expansion of monetization into other activities, such as education, should increase the payment ratio and drive revenue growth over the next few years."

On a third-quarter conference call with analysts, YY CEO David Xueling Li sounded particularly upbeat about prospects for the company's education platform. It lets teachers broadcast classes and host small group discussions afterward.

During the third quarter, the number of teachers on the platform increased by 29% from the previous quarter to 125,000.

"We are confident both in the long-term growth prospects associated with the online education sector in China, as well as our internal capabilities to successfully expand deeper into this vertical," Li said.

For now, much of the attention is on YY's core products such as YY Music, a streaming music and karaoke site that has grown at a staggering rate in recent quarters.

During the third quarter, revenue from YY Music grew 161% year-over-year as the number of users more than doubled to 771,000.

Sound Of Success

Expectations for YY Music are so high that even those numbers weren't enough to satisfy Wall Street. YY stock fell 11% the day the company reported its Q3 results -- partly because YY Music's revenue growth didn't keep pace with 184% and 246% gains logged in the second and first quarters respectively.

That was about the only sour point during the quarter. YY reported earnings of 47 cents a share, topping views for 31 cents. Sales more than doubled to $79.6 million, above estimates for $71.3 million.

In a note, Morgan Stanley analyst Timothy Chan pointed out that YY's music and game-playing users grew 90% year over year and have "ample" upside potential.

"YY is in the initial stages of monetizing its user base," Chan noted. "New services, such as education, game broadcasting and group conference calls, may provide monetization opportunities."

Another highlight of the quarter was development of YY's partnership with Hunan Satellite Television and EE Media, announced in June, to bring the 2013 season of China's popular "Happy Boy Show" singing talent competition to YY's interactive Internet platform.

"Close cooperation with Hunan TV on 'Happy Boy' bolstered both user engagement and monetization for YY Music, which helped YY promote its branding with mainstream media and lay the foundation for further hybrid social TV content," Citigroup analyst Ravi Sarathy noted.

Meanwhile, YY continues to grow its number of mobile users. During the third quarter, monthly active users of the company's mobile platform increased 19% quarter over quarter and 94% year over year to more than 17 million.

YY also launched its mobile gaming platform during the quarter, and has been busy building its gaming portfolio.

"In this beginning stage, we remain more focused on the development of the platform and the expansion of its user base," CEO Li said on the company's quarterly conference call with analysts. "As we head into 2014, we will continue to focus heavily on suggesting our monetization efforts on the mobile front."

Analysts polled by Thomson Reuters expect YY to log EPS of $1.49 for all of 2013. They see EPS rising to $2.19 in 2014 and $2.67 in 2015.

YY is the 16th largest name in IBD's Internet-Content industry group, whereGoogle ( GOOG ) is the largest by market cap, of 46 stocks. The group ranks No. 6 of 197 IBD tracks.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BIDU , BITA , GOOG , SFUN , YY

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