YY:London Asia Internet Conference 2017;2Q preview

Spurring user growth.

    YY Inc attended our London conference last week and re-emphasized itsbusiness focus on user growth. YY is maintaining its strategy to deepencontent, refine short-form videos, and launch more social games for the younggeneration. The company is re-branding itself from a pure music entertainmentplatform to a more diverse content platform. Market consolidation is likely tocontinue amid the tightening of regulations and content requirements by thegovernment. YY will likely see an increase in marketing cost in 2H with newproduct launches, but should still enjoy an operating leverage. We roll forwardour valuation year to FY18 and lift our target price to US$69. Maintaining Buy.

    Tightening regulatory requirements.

    The Ministry of Culture (MOC) recently rolled out a new round in the scrutiny of50 major online performance platforms, together with law enforcement agenciesin Beijing, Shanghai, Guangdong and Zhejiang. Government departments shutdown 12 platforms and fined 30 (e.g. Huya, YY Live, Longzhu, Miaopai, Inke). YYInc claims the fine (DBe RMB20-30k) related mainly to violent/bloody scenes ingame broadcasting content. We expect minimal revenue impact on YY. Thestringent scrutiny should continue. YY has leveraged its machine learningcapability and 100+ staff as a team to monitor streaming content in real-time.

    Please join us for our summary call on Wednesday, 5 July 2017 at 10am ET.

    Conference ID: 44575809. US toll-free dial-in: (800) 309 8606, US international: +1(706) 679 0645; HK: +852 800 966 253; France: 0800 909322; Germany: 08001815287; UK: 0800 0288438; Japan: 00663 3830624; S Korea: 0030 8123627.

    Lifting TP by 4.5% to US$69 on roll-forward to FY18E; maintaining Buy.

    We largely maintain our FY17/18/19 forecasts and roll forward our valuationbase year to FY18. We derive our target price from unchanged 1.0x PEGagainst FY18E EPS and FY18-20E EPS CAGR. Risks: tightening regulation,rising competition, slower user growth.