YY Inc: Zacks’ Bull of the Day Play

Chinese Internet stocks certainly took a beating in the weeks leading up to the Alibaba (BABA) IPO. But many became bargains in the process.

One such Zacks #1 Rank is YY Inc. (YYSnapshot Report) a $4 billion interactive social platform where users can engage in one-on-one or group activities including games, music, online dating, broadcasting, and education.

While the stock has run hard since trading below $15 in January 2013, its 120% EPS growth this year and 40% growth projected for next year are still attracting aggressive investor attention.

And the 20% slide in shares to around $77 this month has brought the forward P/E down to a respectable 26X this year’s $3.27 consensus and only 18X next year’s $4.27 estimate.

Is YY the Little Facebook (FBAnalyst Report) of China?

Here is the company described in their own words…

“YY is a revolutionary rich-communication social platform that engages users in real-time online group activities through voice, text and video. With the capacity to support over one million participants concurrently, our platform allows users to create and organize groups of varying sizes to discover and participate in a wide range of online group activities, such as karaoke, online games, game broadcasting, online dating, E-learning covering language, finance, programming, and other subjects, live shows and conference calls.”

Using high-quality voice and video technology, YY has created a large scale community for social interactions and activities. According to iResearch, YY had an 87% market share in the real-time online group voice communications market in China in terms of user time spent in 2013.

Segments and Structures

YY Platform consists of YY Client, the YY.com and Duowan.com web portals, Mobile YY and Web-based YY.

YY Client, launched in China in July 2008, is their PC-based user software that provides real-time access to online activities groups, which they call “channels.”

YY.com is their online portal and guide to channels, events and content available across the platform.

Duowan.com is a dedicated game media website that provides comprehensive information on online games and other resources for users and online game players.

YY User Metrics

773.4 million registered users accounts as of June 30, 2014

Over 100 million Monthly Active Users as of the second quarter 2014

On average, each active user spent 49+ hours on YY Client as of June 30, 2014

521 billion voice minutes spent on YY Client in the first nine months of 2013

A “voice minute” means a minute in which the user is using our voice and video-enabled services, such as listening to or talking on YY channels.

2nd Quarter Growth

In early August, YY reported for Q2 and investors were impressed enough to send the stock to new all-time highs above $90. Here were the headline numbers…

2Q14 Net Revenues Up 105.6% YOY to $135.6 million

2Q14 Net Income Up 139.0% YOY to $35.8 million

2Q14 Non-GAAP Net Income Up 106.6% YOY to $41.6 million

The top-line jump was primarily driven by a 118.3% increase in revenues from Internet value-added services, or IVAS revenues.

Mr. David Xueling Li, YY’s CEO, had these comments in the quarterly report…

“We are excited about our strong performance in the second quarter of 2014, as we continue to grow and strengthen our interactive social platform. Our online music and entertainment business once again exceeded our expectations, as revenues grew by 202.7% year-over-year and paying users grew by 77.6% year-over-year.

In addition, this quarter witnessed the ascension of our online dating business, with revenues surging by 299.2% quarter-over-quarter. By utilizing our unique and powerful online communication capabilities, we continue to build new business lines that will broaden our product offering, elevate our brand and pave the way for further growth.

Having attracted over 100 million average monthly active users through the second quarter of 2014, we are tirelessly working to build new and innovative products, providing a comprehensive services marketplace that caters to our users’ ever-changing demands.”

Analyst Outlook

The Zacks Rank quantitative model is robust because it uses only Wall Street analysts earnings estimate revisions (EER) in a specific formula to compare relative EPS trends and momentum.

The Rank relies heavily on two components of analyst EER, Agreement and Magnitude. What’s good to see in the case of YY is not only the rapidly rising Magnitude of EER but also more Agreement as new analysts begin to cover the company.

Take a look at the EPS summary tables below and you’ll see how analyst coverage double from 2 to 4 between this year and next.

Also note the rapidly rising estimates in the Magnitude section where 2014 consensus projections have gone from $2.36 to $2.97 in the past 60 days — a 26% increase — and 2015 numbers launched from $3.25 to $4.27, a 31.4% jump.

Clearly, Wall Street analysts are catching on to the growth story here in YY. And that’s good news for anyone skeptical about the safety of investing in Chinese companies. The more analyst eyeballs we have on their financial statements and verifiable business metrics, the more confidence we can gain from these growth projections.

One prominent brokerage research firm in particular is especially optimistic about the YY story. JPMorgan Asia analysts put out a note after YY’s last quarterly report in which they gave the shares an Overweight rating and raised their PT to $118 citing that the company’s “new initiatives demonstrate platform scalability.”

I think this 20% pullback to support above the 200-day moving average in the $70-75 area is a great place to start a position. And that’s what I did last week.

Disclosure: I own YY shares for the Zacks FTM Portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks.com where he runs the Follow The Money Portfolio.


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