Hall of Shame
DouYu International Holdings Ltd (DOYU US)
DOUYU INTERNATIONAL HOLDINGS LIMITED is a China-based company principally engaged in the operation of its own live streaming platforms. The Company operates its platform on Personal Computer (PC) and mobile apps, through which users can enjoy immersive and interactive gaming and entertainment live streaming. The Company operates through two segments: Live Streaming segment as well as Advertisement and others segments. The Company mainly operates its businesses in the domestic market.
It listed on the NASDAQ in July 2019 and raised US$774.95M in its IPO.
January 14, 2021 Grizzly Research published a report "DOYU – Massive Risk with Suspected Online Gambling Business and Industry-Wide Reform". Grizzly believed that DouYu was hosting illegal activities and it was actively encouraging their users to gamble on its platform to boost revenue. With Chinese regulators becoming more stringent, Grizzly believed there was a large risk to the company. The main issues raised in its report were:
- Grizzly believed DouYu had been involved with illegal online gambling on their platform. Its research indicated that not only was DouYu hosting these illegal activities, but it was actively encouraging their users to gamble on their platform to boost revenue,
- Recent policy announcements, in China, indicated a more stringent regulatory environment that is cracking down on online gambling, order brushing and faking operating numbers. Grizzly believed the full scale of the policy reform would be massive,
- Momom Inc., another online streaming platform based in China, recently presented terrible financial performance in light of “structural reform”. Grizzly believed this was an indicator of what was to come to DouYu
- DouYu had opted to not give revenues guidance for Q4/2020 for the first time since it went public, likely due to the dim quarter following the crackdown of many DouYu streamers due to illegal online gambling. Grizzly modelled out Q4 guidance based on streamer performance data and projected a decrease on both a YoY and QoQ basis. Grizzly believed further deterioration was soon to follow, and the impact would be long lasting.
- Grizzly identified additional evidence of order brushing and suspected pornography on DouYu, both of which were subject to more stringent regulatory control in China.
- Recently Huya Inc. and DouYu announced their business combination. However, Grizzly believed Huya was not without problems either. Its research indicated that Huya might have also hosted illegal online gambling. Regard-less of whether the deal went through or not, Grizzly believed both companies would be trading at much lower valuations.
- On the day this report was released, Chinese media reported that DouYu’s second most prominent streamer had been arrested by the police due to suspected online gambling. The problems seemed to be massive on DouYu’s platform.
Grizzly concluded saying it believed a major change of the online streaming sector in China was under way, due to more stringent regulation. It laid out in its report in detail why it believed DouYu was the worst online streaming platform and actively encouraged illegal gambling activities. It was Grizzly's opinion that DouYu’s business model and monetisation mechanism would collapse due to the increasing regulatory scrutiny, therefore causing revenue and profits to plummet. Additionally, Grizzly believed DouYu’s reported online gambling involvement could also cause management facing criminal investigations from regulators, which was a huge risk for the company. While Grizzly believed that other companies in the sector like Huya Inc, Momo Inc, and JOYY Inc would face short term headwinds, it concluded that DouYu was the worst actor in the Chinese streaming industry. Grizzly saw about 40% downside for DouYu.
Grizzly Research: Massive Risk with Suspected Online Gambling Business and Industry-Wide Reform, 14 Jan 2021
DouYu International: Annual Report - YE Dec. 2019
DouYu International: Prospectus, 16 Jul 2019