PART I [Key Information](index=6&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section outlines JOYY Inc.'s financial performance, capital structure, and risk profile, emphasizing live streaming revenue growth and key business, regulatory, and structural challenges [Selected Financial Data](index=6&type=section&id=A.%20Selected%20Financial%20Data) The company's net revenues significantly grew to RMB 25.6 billion in 2019, driven by live streaming, with net income reaching RMB 3.4 billion and total assets expanding to RMB 52.2 billion due to the Bigo acquisition Selected Consolidated Statements of Operations Data (2017-2019) | | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | | (RMB thousands) | (RMB thousands) | (RMB thousands) | | **Total net revenues** | **11,594,792** | **15,763,557** | **25,576,204** | | Live streaming | 10,670,954 | 14,877,667 | 24,028,299 | | Others | 923,838 | 885,890 | 1,547,905 | | **Gross profit** | **4,568,390** | **5,746,423** | **8,427,854** | | **Operating income** | **2,699,231** | **2,639,690** | **1,067,955** | | **Net income attributable to common shareholders** | **2,493,235** | **1,641,958** | **3,379,330** | Selected Consolidated Balance Sheet Data (As of Dec 31, 2018 & 2019) | | 2018 | 2019 | | :--- | :--- | :--- | | | (RMB thousands) | (RMB thousands) | | **Total assets** | **25,768,045** | **52,209,483** | | Cash and cash equivalents | 6,004,231 | 3,893,538 | | Short-term deposits | 7,326,996 | 16,770,885 | | Goodwill | 11,763 | 12,947,192 | | **Total liabilities** | **3,972,241** | **13,325,646** | | **Total shareholders' equity** | **21,377,131** | **38,417,766** | - Share-based compensation expenses totaled **RMB 948.1 million** in 2019, a significant increase from previous years, with the largest allocations to Research and Development (**RMB 505.7 million**) and General and Administrative (**RMB 348.5 million**) expenses[22](index=22&type=chunk) [Risk Factors](index=8&type=section&id=D.%20Risk%20Factors) The company faces numerous risks, including heavy reliance on live streaming revenue, intense competition, PRC regulatory scrutiny of its VIE structure, data privacy laws, and PFIC classification for U.S. tax purposes - The business is heavily dependent on live streaming, which constituted **93.9% of total net revenue** in 2019. Any decline in this segment could materially affect results[39](index=39&type=chunk)[44](index=44&type=chunk) - The company faces significant competition from other social media and live streaming platforms in China (Kuaishou, Douyin, Tencent Music, Momo, Douyu) and overseas (TikTok)[71](index=71&type=chunk) - The company's VIE structure, essential for its PRC operations, faces risks from PRC regulations. If the government finds this structure non-compliant, it could face severe penalties, including the shutdown of its platforms[149](index=149&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk) - The company believes it was a Passive Foreign Investment Company (PFIC) for the 2019 tax year, which could result in significant adverse U.S. federal income tax consequences for U.S. holders of its ADSs[255](index=255&type=chunk)[257](index=257&type=chunk) - The company's dual-class share structure gives holders of Class B shares **ten votes per share**, compared to one for Class A shares. As of March 31, 2020, **Mr. David Xueling Li and his affiliates held 75.8% of the total voting power**, giving them substantial control over corporate matters[261](index=261&type=chunk)[262](index=262&type=chunk) [Information on the Company](index=60&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details JOYY's corporate history, business operations, organizational structure, and properties, highlighting the Bigo acquisition, name change, global platform portfolio, AI strategy, and VIE structure [History and Development of the Company](index=60&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) JOYY Inc., founded in 2005 and public since 2012, underwent strategic changes including the 2019 Bigo acquisition and corporate name change, with Huya's controlling stake transferred to Tencent in April 2020 - In March 2019, the company completed the acquisition of the remaining **68.3% of Bigo** for **US$343.1 million** in cash and the issuance of common shares, making Bigo a wholly-owned subsidiary[300](index=300&type=chunk) - Effective December 20, 2019, the company changed its corporate name from "YY Inc." to "JOYY Inc."[302](index=302&type=chunk) - On April 3, 2020, the company transferred a controlling stake in Huya to a Tencent subsidiary for approximately **US$262.6 million**. Consequently, JOYY will no longer consolidate Huya's operating results[297](index=297&type=chunk) [Business Overview](index=64&type=section&id=B.%20Business%20Overview) JOYY operates a global social media matrix focused on video content, monetizing primarily through virtual item sales on platforms like YY Live and Bigo Live, leveraging AI, and navigating extensive content and data privacy regulations Key Product Mobile Monthly Active Users (MAU) - Q4 2019 | Platform | Mobile MAU (Q4 2019) | YoY Growth | | :--- | :--- | :--- | | imo | 211.0 million | N/A | | Likee | 115.3 million | 208.3% | | Huya | 61.6 million | 21.5% | | YY Live | 41.2 million | 3.8% | | Hago | 33.0 million | 57.9% | | Bigo Live | 23.1 million | 18.6% | - The company's business model focuses on integrating traffic generation, user engagement, and monetization, primarily through the sale of virtual items in live streaming[313](index=313&type=chunk) - Artificial intelligence (AI) is integral to all critical aspects of the business, from content recommendation and distribution to automated product testing and corporate decision-making[312](index=312&type=chunk)[334](index=334&type=chunk) - The company is subject to extensive PRC regulations covering telecommunications, internet content, online games, virtual currency, and data security, as well as international regulations like GDPR in the EU and the CCPA in California[352](index=352&type=chunk)[469](index=469&type=chunk)[470](index=470&type=chunk)[472](index=472&type=chunk) [Organizational Structure](index=94&type=section&id=C.%20Organizational%20Structure) JOYY Inc. operates in China via Variable Interest Entities (VIEs) like Guangzhou Huaduo, essential for complying with PRC foreign ownership restrictions, providing effective control and financial consolidation - The company uses a Variable Interest Entity (VIE) structure to conduct its operations in China due to PRC restrictions on foreign ownership in the internet sector[790](index=790&type=chunk) - Key VIEs include Guangzhou Huaduo, Beijing Tuda, Bilin Online, Guangzhou Huya, and Guangzhou BaiGuoYuan. These entities are controlled through a series of contractual agreements rather than direct equity ownership[482](index=482&type=chunk)[790](index=790&type=chunk) - As of April 3, 2020, JOYY owned **43.0% of the voting power** in HUYA Inc. and no longer consolidates its financial results[483](index=483&type=chunk) [Property, Equipment and Land Use Right](index=95&type=section&id=D.%20Property%2C%20Equipment%20and%20Land%20Use%20Right) The company's headquarters are in Guangzhou, China, with additional owned and leased office spaces globally, including Zhuhai and Singapore, while physical servers are hosted in third-party data centers - The company's corporate headquarters is in Guangzhou, China, comprising **37,548 square meters**. It also owns a **27,206 square meter** building in Zhuhai[484](index=484&type=chunk) - Bigo's headquarters is in Singapore, and it leases **39,793 square meters** of office space globally. Huya leases **30,402 square meters**, primarily in Guangzhou[485](index=485&type=chunk)[486](index=486&type=chunk) [Operating and Financial Review and Prospects](index=96&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes JOYY's financial condition and results, noting a 62.2% revenue surge in 2019 driven by Bigo consolidation, alongside sharp increases in costs and operating expenses due to global expansion [Operating Results](index=96&type=section&id=A.%20Operating%20Results) In 2019, net revenues increased 62.2% to RMB 25.6 billion, primarily from live streaming and Bigo consolidation, while costs and operating expenses rose significantly due to revenue sharing, bandwidth, and sales and marketing Year-over-Year Financial Performance (2018 vs. 2019) | Metric | 2018 (RMB millions) | 2019 (RMB millions) | Change (%) | | :--- | :--- | :--- | :--- | | **Net Revenues** | **15,763.6** | **25,576.2** | **+62.2%** | | Live Streaming Revenues | 14,877.7 | 24,028.3 | +61.5% | | **Cost of Revenues** | **10,017.1** | **17,148.4** | **+71.2%** | | Revenue Sharing & Content | 8,272.7 | 12,861.4 | +55.5% | | Bandwidth Costs | 967.4 | 1,723.0 | +78.1% | | **Operating Expenses** | **3,224.6** | **7,764.7** | **+140.8%** | | R&D Expenses | 1,192.1 | 2,535.5 | +112.7% | | Sales & Marketing Expenses | 1,149.3 | 3,739.7 | +225.4% | | **Net Income Attributable to Shareholders** | **1,642.0** | **3,379.3** | **+105.8%** | - The significant increase in net income for 2019 was heavily influenced by a non-cash gain of **RMB 2.7 billion** on the fair value change of the company's pre-existing investment in Bigo upon its acquisition[634](index=634&type=chunk)[1267](index=1267&type=chunk) - The company's three main segments in 2019 were YY, Huya, and Bigo. Bigo, consolidated from March 2019, contributed **RMB 5.0 billion** in revenue for the period[648](index=648&type=chunk)[652](index=652&type=chunk) [Liquidity and Capital Resources](index=118&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) The company financed operations through cash flow and a US$1 billion convertible notes offering in 2019, with cash, cash equivalents, and restricted cash totaling RMB 4.55 billion by year-end Summary of Cash Flows (2019) | Cash Flow Item | Amount (in millions RMB) | | :--- | :--- | | Net cash provided by operating activities | 4,581.7 | | Net cash used in investing activities | (15,609.9) | | Net cash provided by financing activities | 9,469.9 | | **Net decrease in cash and equivalents** | **(1,558.3)** | - In June 2019, the company issued **US$1 billion** in convertible senior notes (**US$500 million** due 2025 and **US$500 million** due 2026), receiving net proceeds of **US$982.4 million**[690](index=690&type=chunk) - As of December 31, 2019, the company held **RMB 4.55 billion** in cash, cash equivalents, and restricted cash, down from **RMB 6.00 billion** at the end of 2018[691](index=691&type=chunk) - Capital expenditures were **RMB 1.22 billion (US$175.9 million)** in 2019, a significant increase from **RMB 392.8 million** in 2018, primarily for purchasing office space, servers, and other assets[707](index=707&type=chunk) [Tabular Disclosure of Contractual Obligations](index=122&type=section&id=F.%20Tabular%20Disclosure%20of%20Contractual%20Obligations) As of December 31, 2019, JOYY's primary contractual obligations included operating lease commitments, capital commitments, and convertible senior notes, representing significant future payments Contractual Obligations as of December 31, 2019 | Obligation Type | Total | Less than 1 year | 1-2 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | | (RMB thousands) | (RMB thousands) | (RMB thousands) | (RMB thousands) | (RMB thousands) | | Operating lease commitments (RMB) | 359,971 | 159,920 | 106,987 | 93,064 | — | | Capital commitment (RMB) | 915,780 | 506,924 | 197,749 | 211,107 | — | | Convertible senior notes (US$) | 1,065,313 | 10,625 | 10,625 | 31,875 | 1,012,188 | [Directors, Senior Management and Employees](index=123&type=section&id=ITEM%206.%20DIRECTORS%2C%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section covers JOYY's leadership, compensation, board structure, and workforce, highlighting key executives, share incentive plans, board committees, and a dual-class share structure concentrating voting power [Directors and Senior Management](index=123&type=section&id=A.%20Directors%20and%20Senior%20Management) JOYY is led by co-founder David Xueling Li as Chairman and CEO, supported by a senior management team including the CFO, COO, and CTO, with a board comprising five directors, including four independent members - Mr. David Xueling Li is the co-founder, Chairman of the Board, and Chief Executive Officer[719](index=719&type=chunk) - The senior executive team includes Bing Jin (CFO), Ting Li (COO), and Pengjun Lu (CTO)[719](index=719&type=chunk) [Compensation of Directors and Executive Officers](index=124&type=section&id=B.%20Compensation%20of%20Directors%20and%20Executive%20Officers) In 2019, directors and executive officers received RMB 28.8 million in cash compensation, with equity-based incentives from three share incentive plans aligning management interests with shareholder value - For the fiscal year ended December 31, 2019, the aggregate cash compensation (salaries and bonuses) paid to directors and executive officers was **RMB 28.8 million (US$4.1 million)**[728](index=728&type=chunk) - The company has three share incentive plans: the 2009 Scheme (expired Dec 2019), the 2011 Plan, and the 2019 Arrangement (for Bigo employees)[732](index=732&type=chunk)[734](index=734&type=chunk)[744](index=744&type=chunk)[753](index=753&type=chunk) - As of March 31, 2020, there were outstanding options to purchase **10.3 million common shares**, **37.1 million restricted shares**, and **42.7 million restricted share units** under the various plans[733](index=733&type=chunk) [Board Practices](index=130&type=section&id=C.%20Board%20Practices) The board of directors, consisting of five members, has four key committees, with the Audit Committee comprising independent directors and the Compensation Committee chaired by the CEO under foreign private issuer exemptions - The board has four committees: Audit, Compensation, Corporate Governance and Nominating, and Investment[765](index=765&type=chunk) - The Audit Committee consists of three independent directors: Peter Andrew Schloss (Chairman), David Tang, and Richard Weidong Ji. Mr. Schloss qualifies as an "audit committee financial expert"[766](index=766&type=chunk) - The Compensation Committee is chaired by CEO David Xueling Li, who is not an independent director, a practice permitted under foreign private issuer exemptions[767](index=767&type=chunk) [Employees](index=132&type=section&id=D.%20Employees) As of December 31, 2019, JOYY's workforce more than doubled to 9,273 employees, with a strong focus on research and development and customer services, and participation in all required PRC social security plans Employee Breakdown by Function (as of Dec 31, 2019) | Function | Number of Employees | Percentage | | :--- | :--- | :--- | | Customer services and operations | 4,210 | 45% | | Research and development | 3,946 | 43% | | Sales and marketing | 446 | 5% | | General and administration | 671 | 7% | | **Total** | **9,273** | **100%** | - The total number of employees more than doubled from **4,325** at the end of 2018 to **9,273** at the end of 2019[775](index=775&type=chunk) [Share Ownership](index=132&type=section&id=E.%20Share%20Ownership) The company's dual-class share structure, with Class B shares holding ten votes per share, grants co-founder David Xueling Li substantial control, owning 75.8% of the total voting power as of March 31, 2020 - As of March 31, 2020, **David Xueling Li**, Chairman and CEO, beneficially owned shares representing **75.8% of the total voting power**[784](index=784&type=chunk) - The company has a dual-class share structure where Class A common shares have **one vote per share** and Class B common shares have **ten votes per share**[788](index=788&type=chunk) [Major Shareholders and Related Party Transactions](index=134&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details JOYY's concentrated ownership structure and related party transactions, particularly the critical contractual arrangements with its Variable Interest Entities (VIEs) for PRC operations [Related Party Transactions](index=135&type=section&id=B.%20Related%20Party%20Transactions) JOYY conducts China operations via VIE contractual arrangements to comply with foreign ownership restrictions, receiving significant service fees from entities like Guangzhou Huaduo and Guangzhou Huya, and engaging in affiliate transactions - The company relies on a VIE structure to operate in China. This involves a series of contractual arrangements with entities like Guangzhou Huaduo and Guangzhou Huya to transfer economic benefits and maintain control[790](index=790&type=chunk) - In 2019, the company received service fees of **RMB 476.5 million** from Guangzhou Huaduo and **RMB 941.0 million** from Guangzhou Huya under these VIE arrangements[798](index=798&type=chunk)[806](index=806&type=chunk) - The company paid **RMB 116.0 million (US$16.7 million)** for bandwidth services in 2019 to Guangzhou Sunhongs, a company in which principal shareholder Mr. Jun Lei holds a **19.5% interest**[832](index=832&type=chunk) [Financial Information](index=143&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section includes consolidated financial statements, discusses a notable lawsuit with NetEase resulting in a RMB 20.0 million compensation order, and confirms the company's policy of not paying dividends - The company was ordered by the Guangzhou Intellectual Property Court to compensate NetEase **RMB 20.0 million** for copyright infringement related to the game Fantasy Westward Journey. The judgment was upheld on appeal in December 2019[840](index=840&type=chunk) - The company has never paid dividends and does not have a current plan to do so, preferring to retain earnings for operational and expansion purposes[844](index=844&type=chunk) [Additional Information](index=145&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section details JOYY's corporate governance and legal framework as a Cayman Islands company, highlighting its dual-class share structure, differences in shareholder rights, and its classification as a PFIC for U.S. tax purposes - The company's common stock is divided into Class A (**1 vote per share**) and Class B (**10 votes per share**). Class B shares are convertible to Class A, but not vice-versa, concentrating voting power with Class B holders[856](index=856&type=chunk)[864](index=864&type=chunk) - The company believes it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the taxable year ended December 31, 2019[949](index=949&type=chunk) - As a Cayman Islands company, shareholder rights differ from those in the U.S. For example, shareholders have no general right to inspect corporate records or lists of shareholders, and derivative lawsuits are more difficult to bring[903](index=903&type=chunk)[912](index=912&type=chunk)[936](index=936&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=160&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risks are foreign exchange risk, impacting USD-denominated assets, and interest rate risk on deposits, with a hypothetical 10% USD depreciation decreasing asset value by RMB 1.39 billion - The company is exposed to foreign exchange risk as most revenues are in RMB while some assets are in USD. As of Dec 31, 2019, a **10% depreciation of the USD** against the RMB would result in a decrease of **RMB 1.39 billion** in the value of its USD-denominated cash, deposits, and investments[968](index=968&type=chunk)[971](index=971&type=chunk) - The company is exposed to interest rate risk on its interest-earning bank deposits. A hypothetical **1% decrease in interest rates** would have reduced interest income by **US$23.6 million** for the year ended December 31, 2019[972](index=972&type=chunk) [Controls and Procedures](index=164&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management concluded that JOYY's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with the independent auditor also issuing an unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[986](index=986&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework (2013)[988](index=988&type=chunk) - In 2019, the company completed the integration of the internal control over financial reporting of its acquisition, Bigo[990](index=990&type=chunk) [Principal Accountant Fees and Services](index=165&type=section&id=ITEM%2016C.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) This section details fees paid to PricewaterhouseCoopers Zhong Tian LLP, totaling RMB 26.9 million in 2019, with audit fees comprising the largest portion, all pre-approved by the audit committee Accountant Fees (2018-2019) | Fee Type | 2018 (RMB thousands) | 2019 (RMB thousands) | | :--- | :--- | :--- | | Audit fees | 20,101 | 23,186 | | Audit-related fees | — | 688 | | Tax fees | 763 | 2,521 | | Others | 680 | 534 | [Purchases of Equity Securities by the Issuer and Affiliated Purchasers](index=166&type=section&id=ITEM%2016E.%20PURCHASES%20OF%20EQUITY%20SECURITIES%20BY%20THE%20ISSUER%20AND%20AFFILIATED%20PURCHASERS) In August 2019, the board approved a US$300 million share repurchase plan, under which the company repurchased approximately 0.4 million ADSs for US$23.7 million by year-end - On August 13, 2019, the board approved a 12-month share repurchase plan for up to **US$300 million**[1001](index=1001&type=chunk) Share Repurchases in 2019 | Period | Total ADSs Purchased | Average Price Paid Per ADS (US$) | Approx. Dollar Value of ADSs Purchased (US$ thousands) | Value Remaining Under Plan (US$ thousands) | | :--- | :--- | :--- | :--- | :--- | | Aug 14 - Aug 31, 2019 | 434,145 | 54.62 | 23,713 | 276,287 | PART III [Financial Statements](index=166&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents JOYY's audited consolidated financial statements, with the auditor identifying critical audit matters related to Bigo acquisition intangible asset valuation, goodwill impairment, and revenue recognition - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, identified three Critical Audit Matters for the 2019 audit: 1) Valuation of trademark and user base intangible assets from the Bigo acquisition, 2) Goodwill impairment assessment for the Bigo reporting unit, and 3) Revenue recognition for contracts with multiple performance obligations[1040](index=1040&type=chunk)[1041](index=1041&type=chunk)[1045](index=1045&type=chunk)[1048](index=1048&type=chunk) - The acquisition of Bigo in March 2019 was a transformative event, with net consideration of **RMB 16.0 billion**, resulting in the recognition of **RMB 12.4 billion** in goodwill and **RMB 3.5 billion** in identifiable intangible assets (trademark, user base, etc.)[1041](index=1041&type=chunk)[1265](index=1265&type=chunk)[1269](index=1269&type=chunk) - On April 3, 2020, the company sold a controlling stake in Huya to Tencent for **US$262.6 million**. As a result, Huya ceased to be a subsidiary and its results will be accounted for using the equity method going forward[1445](index=1445&type=chunk) [Exhibits](index=167&type=section&id=ITEM%2019.%20EXHIBITS) This section lists all exhibits filed with the annual report, including articles of association, share incentive plans, material contracts like VIE agreements, convertible notes indentures, and required CEO/CFO certifications - The exhibits include the detailed contractual arrangements that form the basis of the company's VIE structure for its key PRC operating entities, such as Guangzhou Huaduo, Beijing Tuda, and the entities related to Huya and Bigo[1013](index=1013&type=chunk)[1014](index=1014&type=chunk)[1015](index=1015&type=chunk) - Filed exhibits include the indentures for the **US$500 million** 0.75% Convertible Senior Notes due 2025 and the **US$500 million** 1.375% Convertible Senior Notes due 2026[1021](index=1021&type=chunk) - The list includes the 2009, 2011, and 2019 Share Incentive Plans, which govern the company's equity compensation for employees[1013](index=1013&type=chunk)[1021](index=1021&type=chunk)

Part I [Key Information](index=5&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section presents selected consolidated financial data for the past five years and details significant investment risks, categorized by business, corporate structure, China operations, and ADS-related factors [Selected Financial Data](index=5&type=section&id=A.%20Selected%20Financial%20Data) The company presents selected consolidated financial data for fiscal years 2014-2018, showing consistent net revenue growth to **RMB 15.76 billion** in 2018, though net income decreased to **RMB 1.64 billion** due to fair value losses, while total assets significantly increased to **RMB 25.77 billion** Selected Consolidated Statements of Operations Data (2016-2018) | Indicator | 2016 (RMB, thousands) | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | :--- | | **Total net revenues** | 8,204,050 | 11,594,792 | 15,763,557 | | - Live streaming | 7,027,227 | 10,670,954 | 14,877,667 | | - Others | 1,176,823 | 923,838 | 885,890 | | **Gross profit** | 3,100,620 | 4,568,390 | 5,746,423 | | **Operating income** | 1,771,484 | 2,699,231 | 2,639,690 | | **Net income attributable to common shareholders** | 1,523,918 | 2,493,235 | 1,641,958 | | **Diluted Net income per ADS (RMB)** | 26.40 | 41.33 | 25.38 | Selected Consolidated Balance Sheet Data (As of Year-End 2017-2018) | Indicator | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | 2,617,432 | 6,004,231 | | Short-term deposits | 6,000,104 | 7,326,996 | | **Total assets** | 14,458,719 | 25,768,045 | | Total current liabilities | 3,145,799 | 3,853,026 | | **Total shareholders' equity** | 10,712,859 | 21,377,131 | - Share-based compensation expenses totaled **RMB 648.0 million** in 2018, a significant increase from **RMB 257.7 million** in 2017, impacting overall profitability[23](index=23&type=chunk) [Risk Factors](index=7&type=section&id=D.%20Risk%20Factors) This section details numerous risks, including heavy dependence on live streaming revenue, intense competition, challenges in managing growth, risks associated with the VIE structure, evolving PRC and international regulations, and ADS-related price volatility and share structure dilution - The company's business is heavily dependent on live streaming services, which constituted **94.4%** of total net revenue in 2018, and any decline in this segment could materially harm results[41](index=41&type=chunk)[44](index=44&type=chunk) - The company faces significant competition from other live streaming platforms like Momo, Tencent Music, Kuaishou, and Douyin in China, and TikTok and Live.me overseas[70](index=70&type=chunk)[71](index=71&type=chunk) - The use of a Variable Interest Entity (VIE) structure to comply with PRC foreign ownership restrictions is a key risk, as non-compliance could lead to severe penalties, including platform shutdown[141](index=141&type=chunk)[143](index=143&type=chunk)[144](index=144&type=chunk) - The dual-class share structure gives holders of Class B shares ten votes per share, while Class A shares get one vote, resulting in Mr. David Xueling Li and his affiliates holding **75.4%** of the total voting power as of April 15, 2019, granting them substantial control over corporate matters[245](index=245&type=chunk)[247](index=247&type=chunk) - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. holders of its ADSs or common shares[242](index=242&type=chunk)[243](index=243&type=chunk)[244](index=244&type=chunk) [Information on the Company](index=55&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section provides a comprehensive overview of the company's history, business operations, organizational structure, and properties, detailing its evolution, key platforms, revenue model, technology, and the competitive and regulatory landscape, including its use of VIEs [History and Development of the Company](index=55&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) Founded in 2005 and listed on Nasdaq in 2012, the company expanded through organic growth and strategic acquisitions, including the spin-off and IPO of HUYA Inc. and the significant global expansion achieved through the acquisition of Bigo Inc. in March 2019 - The company commenced operations in April 2005 with the establishment of Guangzhou Huaduo[264](index=264&type=chunk) - The company's ADSs were listed on The Nasdaq Stock Market under the symbol "YY" on November 21, 2012[287](index=287&type=chunk) - In March 2019, the company completed the acquisition of the remaining **68.3%** equity interest in Bigo Inc., making it a wholly-owned subsidiary and significantly expanding its international presence[285](index=285&type=chunk) - Its majority-controlled subsidiary, HUYA Inc., completed its initial public offering in May 2018, and Tencent holds a right to purchase shares to reach **50.1%** of HUYA's voting power between March 2020 and March 2021[282](index=282&type=chunk) [Business Overview](index=58&type=section&id=B.%20Business%20Overview) The company operates as a global social media platform focused on live streaming through YY Live, Huya, and Bigo, generating revenue primarily from virtual item sales, while expanding its user base to **90.4 million** mobile MAUs for YY Live and Huya, and **59.4 million** for Bigo in Q4 2018, with a focus on AI-driven innovation and global expansion - The company's main platforms are YY Live (comprehensive live streaming), Huya (game-focused live streaming), and Bigo (global live streaming and short-form video)[300](index=300&type=chunk)[302](index=302&type=chunk)[303](index=303&type=chunk)[304](index=304&type=chunk) - In Q4 2018, YY Live and Huya combined had **90.4 million** mobile average monthly active users (MAUs), an **18.1%** increase YoY, while Bigo had **59.4 million** mobile MAUs for its services in the same period[291](index=291&type=chunk)[300](index=300&type=chunk) - The primary revenue model is the sale of virtual gifts and items on its live streaming platforms, with additional revenue from online games, memberships, and advertising[297](index=297&type=chunk)[298](index=298&type=chunk) - The company is expanding globally with Hago, a casual-game social platform with **20.9 million** MAUs in Q4 2018, and Bigo, which has a strong presence in Southeast Asia, South Asia, the Middle East, and America[292](index=292&type=chunk)[294](index=294&type=chunk) - The business is subject to extensive PRC regulations covering telecommunications, internet content, online games, data privacy, and foreign ownership, as well as international regulations like GDPR in the EU[341](index=341&type=chunk)[343](index=343&type=chunk)[461](index=461&type=chunk) [Organizational Structure](index=90&type=section&id=C.%20Organizational%20Structure) The company, a Cayman Islands holding entity, operates through a complex structure of subsidiaries and Variable Interest Entities (VIEs) to comply with PRC foreign ownership restrictions, with key VIEs like Guangzhou Huaduo and Guangzhou Huya holding necessary operating licenses - The company is a Cayman Islands holding company[469](index=469&type=chunk) - It controls its PRC operating entities, such as Guangzhou Huaduo and Guangzhou Huya, through a series of contractual arrangements (VIE structure) rather than direct ownership to comply with Chinese law[469](index=469&type=chunk) - HUYA Inc. is a majority-controlled, publicly-listed subsidiary whose financial results are consolidated with the company[469](index=469&type=chunk) [Property, Plant, and Equipment](index=92&type=section&id=D.%20Property,%20Equipment%20and%20Land%20Use%20Right) The company's principal executive offices are in an owned property in Guangzhou, with additional owned and leased facilities in China, and it acquired land use rights in Guangzhou for future development, while servers are hosted in leased third-party data centers - Principal executive offices are located in a **37,548 square meter** owned property in Panyu District, Guangzhou[471](index=471&type=chunk) - The company acquired land use rights for a parcel in Pazhou, Guangzhou, designated as a new e-commerce center, to support future development[472](index=472&type=chunk) - Servers are hosted in leased internet data centers owned by major domestic providers throughout China[473](index=473&type=chunk) [Operating and Financial Review and Prospects](index=92&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section provides management's discussion and analysis of the company's financial condition and operating results, detailing revenue streams, cost structures, and expenses, highlighting live streaming growth, and covering liquidity, capital resources, expenditures, and contractual obligations [Operating Results](index=93&type=section&id=A.%20Operating%20Results) In 2018, total net revenues grew **36.0%** to **RMB 15.76 billion**, driven by a **39.4%** increase in live streaming revenue, though net income attributable to common shareholders decreased to **RMB 1.64 billion** from **RMB 2.49 billion** in 2017, primarily due to a **RMB 2.29 billion** fair value loss on derivative liabilities Revenue Breakdown (2016-2018) | Revenue Stream | 2016 (RMB, thousands) | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Live streaming | 7,027,227 | 10,670,954 | 14,877,667 | | Others | 1,176,823 | 923,838 | 885,890 | | **Total net revenues** | **8,204,050** | **11,594,792** | **15,763,557** | - **2018 vs. 2017 Performance:** - **Net Revenues:** Increased **36.0%** to **RMB 15,763.6 million**[615](index=615&type=chunk) - **Live Streaming Revenues:** Increased **39.4%** to **RMB 14,877.7 million**, driven by growth in paying users (16.6M to 19.8M) and ARPU (**RMB 643.2** to **RMB 751.2**)[616](index=616&type=chunk) - **Cost of Revenues:** Increased **42.6%** to **RMB 10,017.1 million**, mainly due to a **44.4%** rise in revenue sharing fees and content costs[618](index=618&type=chunk) - **Operating Expenses:** Increased **59.6%** to **RMB 3,224.6 million**, driven by higher R&D and Sales & Marketing expenses[619](index=619&type=chunk) - **Net Income:** Decreased to **RMB 1,642.0 million** from **RMB 2,493.2 million**, primarily due to a **RMB 2.29 billion** fair value loss on derivative liabilities[619](index=619&type=chunk) - **2017 vs. 2016 Performance:** - **Net Revenues:** Increased **41.3%** to **RMB 11,594.8 million**[628](index=628&type=chunk) - **Live Streaming Revenues:** Increased **51.9%** to **RMB 10,671.0 million**, driven by a significant increase in paying users from **11.0 million** to **16.6 million**[629](index=629&type=chunk) - **Cost of Revenues:** Increased **37.7%**, primarily due to a **51.1%** rise in revenue sharing fees and content costs[632](index=632&type=chunk) - **Net Income:** Increased to **RMB 2,493.2 million** from **RMB 1,523.9 million**[639](index=639&type=chunk) [Liquidity and Capital Resources](index=114&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) The company's operations are financed by cash from operations, IPOs, and offerings, holding **RMB 6.0 billion** in cash and equivalents as of December 31, 2018, with strong net cash from operating activities at **RMB 4.46 billion** in 2018, and believes its current liquidity is sufficient for the next 12 months Summary of Cash Flows (2016-2018) | Cash Flow Activity | 2016 (RMB, thousands) | 2017 (RMB, thousands) | 2018 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 2,421,135 | 3,718,452 | 4,464,814 | | Net cash used in investing activities | (2,172,359) | (3,037,516) | (6,295,386) | | Net cash provided by financing activities | 10,651 | 1,392,525 | 4,167,270 | - As of December 31, 2018, the company had **RMB 6.00 billion** in cash and cash equivalents, up from **RMB 3.62 billion** at year-end 2017[652](index=652&type=chunk) - Significant financing events in 2018 included receiving **US$461.6 million** from Tencent for Huya's Series B-2 shares and net proceeds of **US$190.1 million** from Huya's IPO[649](index=649&type=chunk)[650](index=650&type=chunk) - Capital expenditures were **RMB 392.8 million** (**US$57.1 million**) in 2018, primarily for purchasing servers, office space, and other assets[668](index=668&type=chunk) [Contractual Obligations](index=117&type=section&id=F.%20Tabular%20Disclosure%20of%20Contractual%20Obligations) As of December 31, 2018, total contractual obligations amounted to **RMB 415.3 million**, comprising **RMB 221.9 million** in operating lease commitments and **RMB 193.4 million** in capital commitments, with most obligations due within one to five years Contractual Obligations as of December 31, 2018 (in RMB thousands) | Obligation Type | Total | Less than 1 year | 1-2 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease commitments | 221,895 | 84,689 | 53,609 | 83,597 | - | | Capital commitment | 193,412 | 154,427 | 27,383 | 11,599 | 3 | | Convertible senior notes (in US$) | 1,006 | 1,006 | - | - | - | [Directors, Senior Management and Employees](index=118&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section details the company's leadership, board practices, and employee base, including directors and executive officers, 2018 compensation of **RMB 19.6 million**, board committee structures, **4,325** employees as of December 31, 2018, and the significant voting control held by the chairman due to the dual-class share system [Directors and Senior Management](index=118&type=section&id=A.%20Directors%20and%20Senior%20Management) The company is led by co-founder, Chairman, and CEO David Xueling Li, with a senior management team including CFO Bing Jin, COO Ting Li, and CTO Pengjun Lu, and a five-member board of directors including three independent directors - Mr. David Xueling Li is the co-founder, Chairman of the Board, and Chief Executive Officer[679](index=679&type=chunk) - Other key executives include Bing Jin (CFO), Ting Li (COO), and Pengjun Lu (CTO)[685](index=685&type=chunk)[686](index=686&type=chunk)[688](index=688&type=chunk) [Compensation](index=120&type=section&id=B.%20Compensation%20of%20Directors%20and%20Executive%20Officers) In fiscal year 2018, the company paid **RMB 19.6 million** in cash compensation to directors and executive officers, in addition to awarding **367,870** HUYA Inc. ordinary shares, utilizing multiple share incentive plans to attract and retain talent - Aggregate cash compensation (salaries and bonuses) for directors and executive officers in FY2018 was **RMB 19.6 million** (**US$2.8 million**)[689](index=689&type=chunk) - The company utilizes multiple share incentive plans (2009 Scheme, 2011 Plan, HUYA 2017 Plan) to grant equity awards, with a significant number of options, restricted shares, and restricted share units outstanding as of April 15, 2019[692](index=692&type=chunk) [Board Practices](index=126&type=section&id=C.%20Board%20Practices) The five-member board of directors has established Audit, Compensation, and Corporate Governance & Nominating Committees, with the Audit Committee comprising independent directors, and the company utilizing foreign private issuer exemptions allowing a non-independent director to chair the Compensation Committee - The board has three committees: Audit, Compensation, and Corporate Governance and Nominating[734](index=734&type=chunk) - The Audit Committee consists of three independent directors: Peter Andrew Schloss (Chairman), David Tang, and Richard Weidong Ji, with Mr. Schloss qualifying as the 'audit committee financial expert'[735](index=735&type=chunk) - The company relies on foreign private issuer exemptions, allowing Chairman David Xueling Li, a non-independent director, to chair the Compensation Committee[736](index=736&type=chunk)[931](index=931&type=chunk) [Employees](index=128&type=section&id=D.%20Employees) As of December 31, 2018, the company had **4,325** employees, with the largest segment being Research and Development at **2,197** employees, underscoring its focus on technology and innovation Employee Breakdown by Function (as of Dec 31, 2018) | Function | Number of Employees | | :--- | :--- | | Research and development | 2,197 | | Customer services and operations | 1,303 | | General and administration | 404 | | Sales and marketing | 231 | | Engineering and maintenance | 175 | | Management | 15 | | **Total** | **4,325** | [Share Ownership](index=128&type=section&id=E.%20Share%20Ownership) The company operates with a dual-class share structure, where Chairman David Xueling Li beneficially owned **21.9%** of common shares but controlled **75.4%** of total voting power as of April 15, 2019, granting him substantial influence over corporate matters - The company has a dual-class share structure: Class A common shares (1 vote per share) and Class B common shares (10 votes per share)[753](index=753&type=chunk) Beneficial Ownership of Key Shareholders (as of April 15, 2019) | Shareholder | Total Common Shares Beneficially Owned (%) | Total Voting Power (%) | | :--- | :--- | :--- | | David Xueling Li | 21.9% | 75.4% | | All directors and executive officers as a group | 22.1% | 75.4% | - Mr. David Xueling Li's voting power includes shares held by entities he controls and voting rights over shares held by Mr. Jun Lei, which were delegated to him in August 2016[751](index=751&type=chunk) [Major Shareholders and Related Party Transactions](index=130&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details major shareholders and related party transactions, emphasizing critical contractual arrangements with Variable Interest Entities (VIEs) like Guangzhou Huaduo and Guangzhou Huya, which ensure compliance with PRC regulations and transfer economic benefits and control to the company - The company conducts its operations in China through a series of contractual arrangements with its VIEs (e.g., Guangzhou Huaduo, Guangzhou Huya) and their shareholders to comply with PRC restrictions on foreign ownership[755](index=755&type=chunk) - These VIE agreements include Exclusive Business Cooperation, Exclusive Option, Equity Pledge, and Powers of Attorney, which collectively transfer economic benefits and provide effective control to YY Inc[757](index=757&type=chunk)[759](index=759&type=chunk)[761](index=761&type=chunk)[762](index=762&type=chunk) - In 2018, the company received service fees of **RMB 313.1 million** from Guangzhou Huaduo and **RMB 420.2 million** from Guangzhou Huya under these arrangements[763](index=763&type=chunk)[771](index=771&type=chunk) - Prior to its full acquisition in March 2019, Bigo Inc. was a significant related party, and as of Dec 31, 2018, the amount due from Bigo was **RMB 191.8 million** for operating expenses paid and loans provided by the company[793](index=793&type=chunk) [Financial Information](index=138&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section includes the company's consolidated financial statements, discloses ongoing legal proceedings including a copyright infringement lawsuit with Guangzhou NetEase involving **RMB 20.0 million** in damages under appeal, and states the company's policy of retaining earnings for business expansion without current dividend plans - The company is involved in a lawsuit with Guangzhou NetEase Computer System Co., Ltd. over alleged copyright infringement, where a court ordered the company to pay **RMB 20.0 million**, but this judgment is not final and is under appeal[799](index=799&type=chunk) - The company has no current dividend policy and does not plan to pay dividends in the foreseeable future, retaining earnings for business operations and expansion[802](index=802&type=chunk) - The ability to pay dividends is also restricted by PRC regulations on the distribution of profits from PRC subsidiaries to the offshore holding company[803](index=803&type=chunk) [The Offer and Listing](index=139&type=section&id=ITEM%209.%20THE%20OFFER%20AND%20LISTING) This section details the trading of the company's securities, noting that its American Depositary Shares (ADSs) are listed on the Nasdaq Global Select Market under the symbol "YY", with each ADS representing **twenty** Class A common shares - The company's ADSs are listed on the Nasdaq Global Select Market under the symbol "YY"[808](index=808&type=chunk) - Each ADS represents **twenty** Class A common shares[808](index=808&type=chunk) [Additional Information](index=139&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section provides additional details on the company's corporate governance and legal framework, summarizing key provisions of its Memorandum and Articles of Association, covering material contracts, exchange controls, and comprehensive taxation considerations for the Cayman Islands, PRC, and U.S., including the risk of PFIC classification - The company is incorporated in the Cayman Islands and its affairs are governed by its Memorandum and Articles of Association and Cayman Islands law[812](index=812&type=chunk) - Voting Rights: Class A common shares have one vote per share, while Class B common shares have ten votes per share, and Class B shares are convertible into Class A shares on a one-for-one basis, but not vice-versa[814](index=814&type=chunk)[823](index=823&type=chunk)[827](index=827&type=chunk) - PRC Taxation: Dividends from PRC subsidiaries to the overseas parent are generally subject to a **10%** withholding tax, and the company could be classified as a PRC "resident enterprise," which would subject its worldwide income to a **25%** PRC tax rate[863](index=863&type=chunk)[864](index=864&type=chunk) - U.S. Taxation: There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would lead to adverse U.S. federal income tax consequences for U.S. holders of its ADSs or shares[870](index=870&type=chunk)[880](index=880&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=152&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risks are foreign exchange risk from RMB-USD fluctuations and interest rate risk on cash deposits, where a hypothetical **1%** decrease would have reduced 2018 interest income by **US$12.8 million**, with no current hedging instruments in place - The company is exposed to foreign exchange risk as its revenues are primarily in RMB, while its ADSs are traded in USD, and the RMB is not freely convertible and its value fluctuates[894](index=894&type=chunk)[897](index=897&type=chunk) - Interest rate risk primarily affects interest income from cash and deposits, where a hypothetical **1 percentage point** decrease in interest rates would have lowered 2018 interest income by **US$12.8 million**[899](index=899&type=chunk) - The company has not entered into any hedging transactions to mitigate these risks[895](index=895&type=chunk) [Description of Securities Other than Equity Securities](index=153&type=section&id=ITEM%2012.%20DESCRIPTION%20OF%20SECURITIES%20OTHER%20THAN%20EQUITY%20SECU RITIES) This section details fees and charges for American Depositary Shares (ADSs) holders, including issuance, cancellation, and distribution fees, noting that the depositary reimbursed the company **US$0.36 million** in 2018 for ADS program expenses ADS Holder Service Fees | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to US$5.00 per 100 ADSs | | Cancellation of ADSs | Up to US$5.00 per 100 ADSs | | Distribution of cash dividends | Up to US$5.00 per 100 ADSs | | Distribution of ADSs (stock dividends, etc.) | Up to US$5.00 per 100 ADSs | | ADS Services Fee | Up to US$5.00 per 100 ADSs held on record date | - In 2018, the company received **US$0.36 million** from the depositary as reimbursement for expenses related to the ADS program[909](index=909&type=chunk) Part II [Controls and Procedures](index=155&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, a conclusion affirmed by PricewaterhouseCoopers Zhong Tian LLP's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[914](index=914&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[917](index=917&type=chunk) - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[918](index=918&type=chunk) [Principal Accountant Fees and Services](index=156&type=section&id=ITEM%2016C.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) This section discloses fees paid to PricewaterhouseCoopers Zhong Tian LLP, totaling **RMB 21.5 million** in fiscal year 2018, primarily for audit services, all of which were pre-approved by the audit committee Accountant Fees (in RMB thousands) | Fee Type | 2017 | 2018 | | :--- | :--- | :--- | | Audit fees | 10,317 | 20,101 | | Audit-related fees | 4,029 | - | | Tax fees | - | 763 | | Others | - | 680 | - Audit fees for 2018 include services for the annual audit, internal controls audit, and services related to Huya's initial public offering[923](index=923&type=chunk) [Corporate Governance](index=157&type=section&id=ITEM%2016G.%20CORPORATE%20GOVERNANCE) As a foreign private issuer, the company adheres to Cayman Islands corporate governance practices, relying on exemptions from certain Nasdaq requirements, notably allowing a non-independent director to chair its compensation committee and for certain securities issuances without shareholder approval - The company follows home country (Cayman Islands) practices for certain governance matters, as permitted for foreign private issuers[930](index=930&type=chunk) - The company relies on an exemption allowing its compensation committee to be chaired by a non-independent director, Mr. David Xueling Li[931](index=931&type=chunk) Part III [Financial Statements](index=158&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents the company's audited consolidated financial statements for fiscal years 2016-2018, prepared under U.S. GAAP, including the Independent Auditor's Report, Balance Sheets, Statements of Comprehensive Income, Statements of Changes in Shareholders' Equity, Statements of Cash Flows, and detailed notes [Report of Independent Registered Public Accounting Firm](index=166&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers Zhong Tian LLP issued an unqualified opinion on the company's consolidated financial statements for the three years ended December 31, 2018, and also on the effectiveness of its internal control over financial reporting as of December 31, 2018 - The auditor's opinion states that the consolidated financial statements present fairly, in all material respects, the financial position of YY Inc. in conformity with U.S. GAAP[949](index=949&type=chunk) - The auditor also opined that the company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018[949](index=949&type=chunk)