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Huya-Douyu merger would cement gaming giant Tencent’s position in China, experts say

Tencent is reportedly driving discussions to merge China’s two biggest video game livestreaming platforms, Huya and Douyu.

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A merger between China’s biggest video game livestreaming platforms, Huya and Douyu International Holdings, could help cement Tencent Holdings’ lead as the largest video game company in its home country amid a turbulent geopolitical environment, experts say.

On Wednesday, Bloomberg reported that Tencent – which owns a 37% stake in Huya and 38% of Douyu—was driving discussions to merge the two game-streaming platforms, according to people familiar with the situation.

The deal would create an online giant with more than 300 million users and a combined market value of USD 10 billion, and Tencent is looking to become the largest shareholder in this entity, according to the report.

Tencent and Douyu declined to comment on the report. Huya did not immediately respond to queries.

Talk of the deal comes at a time when Chinese tech companies are under heavy scrutiny in the US and other markets, and experts say it could be a strategic move for Tencent to secure its position in its home market by expanding its control across the gaming supply chain.

Thomas Rosenthal, general manager of Asia-Pacific for game publisher 505 Games, said Tencent may be looking to turn the livestreaming sites into all-in-one gaming platforms by combining livestreaming, e-commerce and cloud gaming in a single place.

“Think about them showing you a game and then allowing you to buy it and play it on the platform immediately,” he said. “This is very powerful.”

Cloud gaming—which enables gamers to play games streamed online without having to download them—will open up more revenue options for all three companies by transforming Huya and Douyu into Tencent’s downstream customer acquisition arms, said Vincent Fernando of investment research firm Zero One.

Read this: Why is Tencent making a move to buy search engine Sogou?

“Assuming [Huya and Douyu] have a total 250 million unique monthly active users, then at just RMB 10 (USD 1.44) per month of cloud gaming subscription fees Tencent would already be earning an additional RMB 30 billion of annual revenue, representing a 26% revenue uplift from its 2019 online gaming figure,” Fernando said.

Rosenthal said that given tense relations between the US and China, he suspects that if New York Stock Exchange-listed Huya and Nasdaq-listed Douyu are merged, both companies may exit US stock markets.

“Chinese gaming companies go public in the US so that they can have an international brand,” he said. “But almost all industry executives agree that the returns in terms of funding from their stock listings in China are definitely more interesting than overseas.”

US-China tensions

This comes as more US-listed Chinese companies are considering secondary listings closer to home or delisting from the market entirely in recent months amid deteriorating relations between the US and China.

In May, US lawmakers introduced sweeping legislation that could put US-listed Chinese firms at risk of losing access to the world’s largest capital markets. If it becomes law, Chinese companies will be required to hand over company audits to be inspected or face being delisted.

US President Donald Trump has also threatened to put Chinese-owned short video app TikTok “out of business” in the country if its Beijing-based parent company ByteDance does not sell its US operations by September 15, citing national security concerns.

“After the TikTok case, Chinese entertainment companies are not safe in the US,” said Ming Lu, head of China technology, media, and telecom research at Singapore-based Aequitas Research. “Hong Kong could be the first choice [for such companies to list].”

In India, Tencent’s hit game PUBG Mobile is said to be among 275 Chinese apps regulators are scrutinizing for national security and user privacy violations, after the country first banned 59 Chinese apps including TikTok and Tencent’s ubiquitous app WeChat in June following a deadly border clash.

Faced with challenges in overseas markets, Tencent may be directing more of its attention back to its home country, which in any case is the world’s largest market for video games.

No better place than home

China’s video game livestreaming market is estimated to have an audience of 340 million users and will generate RMB 23.6 billion (USD 3.4 billion) in revenue this year, according to Shanghai-based research firm iResearch.

Rosenthal said that while the current geopolitical situation is a huge factor, the maturity of the market is also a reason for Chinese companies looking to list back home instead of the US.

“The knowledge investors in China have of the [domestic] games market and their ability to understand what value they can get from investing in these companies is much higher than that overseas, particularly if such companies are giant players in China,” Rosenthal said.

He added that other Chinese gaming companies such as Giant Interactive Group, CMGE Technology, and iDreamSky Technology Holdings have pulled out of the US in favor of listing in mainland China or Hong Kong in past years.

Douyu and Huya both reported tremendous year-on-year growth in the first quarter of this year. Douyu reported a net profit of RMB 297 million, more than sevenfold the figure from the same period last year, while Huya recorded RMB 171 million in profits, representing 169.8% growth year-on-year.

But other Chinese video platforms are also closing in on the increasingly lucrative gaming market, according to Chenyu Cui, a senior research analyst for games at London-based consultancy firm Omdia.

“Although Tencent is dominant in the e-sports ecosystem with games and streaming platforms, it faces threats from short video streaming platforms such as Kuaishou and TikTok as well as ACG (Anime, Comic and Games) platforms like Bilibili,” she said.

In July last year, Tencent-backed short video app operator Kuaishou announced its support for about 1 million video game broadcasters on its Twitch-like livestreaming service.

In December, Shanghai-based streaming video service Bilibili, in which Tencent also invested more than USD 300 million in 2018, reportedly paid USD 113 million to exclusively stream the League of Legends World Championships for three years.

This article was originally published in the South China Morning Post