The stock market works in mind-boggling ways at times. For example, an unprofitable stock like Douyu can announce a dividend yield of 78%. Douyu (NASDAQ: DOYU) is a game-centric live streaming platform in China, and the business has not been doing well after the regulatory clampdown on gaming in China. So how can it afford to distribute such high dividends?
The reason is that Douyu is cash-rich. It didn’t spend much of its IPO proceeds, and the cash has been sitting in the company for years.
According to its 1Q24 balance sheet, Douyu’s total cash value amounts to US$925.854 million, while its total liabilities are just US$214.467 million. This results in a net cash value of US$711.387 million, or approximately US$22.25 per share. This amount is almost double its share price of US$12.59 prior to the dividend announcement.
The fact that the stock was trading below its net cash value is another mind-boggling aspect of the stock market. How can this be logical? It illustrates that stocks don’t trade based on logic but on sentiment. The sentiment toward Chinese stocks has been so poor that they were sold down to ridiculous levels.
Last July, I wrote about Douyu and its sister company, Huya, trading significantly below cash value, presenting a good deep value opportunity. Read more here.
However, I didn’t know what the value-unlocking event would be. I believed that a merger between Huya and Douyu could be the catalyst. Little did I expect a huge dividend distribution to be the event that caused Douyu’s share price to jump 42% in a day.
But even at a share price of US$17.94, the company is still undervalued compared to its cash value of US$22.25.
As this is a China-domiciled company, the dividends will be subject to a 10% dividend tax, which is not as hefty as the US 30% dividend tax. Nevertheless, a huge dividend payout like this will contribute a significant paycheck to the taxman, around US$30 million in this case.
The better approach might be to sell the stock and reap the capital gain to avoid the tax. However, the share price is still trading below the cash value, which isn’t enticing enough to realize the full gain. The good news is that the Ex-Dividend date is on August 21, 2024, giving investors time to pay more attention to the stock, hopefully seeing its value and bidding the prices higher.
I’m not confident that the stock will trade fully at its cash value because other investors will likely think the same way and sell close enough to the cash value. In this case, selling close enough is good enough, I suppose. Alternatively, investors may consider holding and waiting for the next catalyst. Douyu may still give out another bumper dividend, considering it will still have over US$400 million in cash after distributing this round of dividends.
All eyes will be on Huya next, another game streaming platform in China with loads of cash. Its total cash value in 1Q24 was US$1,303.245 million, with total liabilities of US$422.818 million. The cash value per share is about US$3.70. However, Huya no longer trades below its cash value today.
Huya actually distributed dividends earlier than Douyu, in March 2024, announcing a US$0.66 dividend per ADS, a 14% dividend yield at that point. It wasn’t as exciting as Douyu’s 78% yield, so the share price didn’t rally as much as Douyu on the day of the announcement.
Nevertheless, these are classic examples of deep value stocks. Due to negative sentiments, share prices get beaten down way below their intrinsic value. Investors can pay pennies on the dollar, and a positive change can suddenly cause the share price to rebound significantly.
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Last JULY,U discovered it,I hope U best it.
such WOW.
I say there’s more than meets the eye. The $300 million dividend payout is strangely large. My take is management may take this private or a BO/merger is in play. Like you mentioned as well, it’s too hard for DOYU to trade at it’s cash value so by paying out a $300 million dividend, this will lower than BV for more realistic buyout scenarios.
I wont mind a delisting offer!