JOYY(YYINZ) - 2020 Q4 - Annual Report

Part I Key Information This section outlines primary investment risks for JOYY Inc., covering business, operational, corporate structure, and ADS-related factors, including the YY Live sale and potential delisting Risk Factors The company faces significant risks from its new business model, managing growth, the YY Live sale, COVID-19 impacts, and intense competition - The company faces risks from the sale of its YY Live business to Baidu, including potential negative impacts on operations, user relationships, and future growth in China due to non-compete agreements[39][42] - The COVID-19 pandemic had mixed effects, increasing mobile MAUs in H1 2020 but causing decreases in H2 2020 due to app blocks in India, also negatively impacting paying users on the discontinued YY Live platform[68][69][72] - The company's ADSs may be delisted from U.S. exchanges under the Holding Foreign Companies Accountable Act (HFCA Act) if the PCAOB is unable to inspect its China-based auditor for three consecutive years[204][205] - The company relies on a Variable Interest Entity (VIE) structure to operate in China due to foreign ownership restrictions, which carries risks as it depends on contractual arrangements rather than direct ownership and could be challenged by PRC authorities[224][225][230] - The company believes it was a Passive Foreign Investment Company (PFIC) for the 2020 tax year, which could result in adverse U.S. federal income tax consequences for U.S. holders of its ADSs or shares[269][270] Information on the Company This section details the company's history, business operations, organizational structure, and properties, including key acquisitions, divestitures, and global platform focus History and Development of the Company JOYY Inc., founded in 2005, has undergone significant strategic shifts including its 2012 IPO, the 2019 Bigo acquisition, Huya deconsolidation, and the 2020 sale of YY Live to Baidu - In March 2019, the company completed the acquisition of the remaining 68.3% equity interest in Bigo, making Bigo a wholly-owned subsidiary[312] - In April and August 2020, the company transferred a significant portion of its Huya shares to Tencent, resulting in Tencent becoming the controlling shareholder and the deconsolidation of Huya from JOYY's financial statements[319][497] - On November 16, 2020, the company entered into a definitive agreement to sell its PRC video-based entertainment live streaming business (YY Live) to Baidu for approximately US$3.6 billion in cash, with the sale substantially completed by February 2021[320][498] Business Overview JOYY operates a global portfolio of video and audio-based social media platforms, leveraging AI technology and facing intense competition and complex regulatory environments - The company operates several global social media platforms, including Bigo Live, Likee, imo, and Hago, focusing on live streaming, short-form video, and social gaming[323][324] Key Platform MAUs (Q4 2020) | Platform | Mobile MAUs (Q4 2020) | | :--- | :--- | | Bigo Live | 28.7 million | | Likee | 120.1 million | | Hago | 16.5 million | | imo | 186.3 million | | YY Live (Discontinued) | 42.0 million | - Artificial intelligence (AI) is central to the business, used for content recommendation, visual recognition, and optimizing user experience[327][353] - The company faces significant competition from global platforms like TikTok and regional players like Twitch, especially after divesting its primary China-based business, YY Live[351] - Operations are subject to extensive regulations across multiple jurisdictions, including the GDPR in Europe, the CCPA in California, and various PRC laws governing internet content, data privacy, and foreign investment[369][471][473] Organizational Structure The company utilizes a complex organizational structure with direct subsidiaries and Variable Interest Entities (VIEs) to comply with PRC regulations and manage global operations - The company uses a VIE structure to conduct operations in the PRC, with entities like Guangzhou Huaduo and Guangzhou BaiGuoYuan being controlled through contractual arrangements[483][491] - The acquisition of Bigo was completed in March 2019, making it a wholly-owned subsidiary and a key part of the company's global operations[491] - The sale of the YY Live business to Baidu, which was substantially completed, represents a major change in the organizational structure, shifting the company's focus to its global assets[491] Property, Equipment and Land Use Right JOYY's corporate headquarters are in Singapore, with significant office space and properties in China and other global locations, and server infrastructure hosted at third-party data centers - The company's corporate headquarters is in Singapore, comprising 1,310 square meters[486] - The PRC subsidiaries have a headquarters in Guangzhou (37,548 sq. meters) and a building in Zhuhai (27,206 sq. meters)[488] - Subsidiary Bigo leases an aggregate of 58,395 square meters of office space globally, with 33,827 square meters located in Guangzhou[487] Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting significant revenue growth from Bigo, a net loss from continuing operations, and substantial net income from discontinued operations Operating Results In 2020, net revenues increased significantly due to Bigo's growth, but continuing operations posted an operating loss, while discontinued operations generated substantial net income from asset disposals Consolidated Results of Operations (Continuing Operations) | For the Year Ended December 31, | 2019 (RMB thousands) | 2020 (RMB thousands) | 2020 (US$ thousands) | | :--- | :--- | :--- | :--- | | Total net revenues | 6,239,309 | 13,230,945 | 2,027,731 | | Live streaming | 5,330,790 | 12,524,825 | 1,919,513 | | Others | 908,519 | 706,120 | 108,218 | | Gross profit | 1,686,651 | 3,721,356 | 570,323 | | Operating loss | (3,557,955) | (2,820,687) | (432,289) | | Net loss from continuing operations | (543,478) | (126,378) | (19,367) | | Net income from discontinued operations | 4,243,507 | 9,849,538 | 1,509,507 | - Net revenues increased by 112.1% in 2020, driven by a 135.0% increase in live streaming revenues, primarily from the consolidation and growth of the Bigo segment[624][626] - Cost of revenues increased by 108.9% in 2020, mainly due to a 164.4% rise in revenue sharing fees and content costs, in line with the growth of Bigo's live streaming business[628] - The company adopted new accounting standards for revenue recognition (ASC 606) and credit losses (ASU 2016-13), with the latter resulting in a cumulative-effect adjustment to shareholders' equity of RMB 12.1 million[535][567] Liquidity and Capital Resources The company maintains strong liquidity, primarily from operations and financing activities, holding RMB 11.67 billion in cash and equivalents as of December 31, 2020 Cash and Liquidity Position (Continuing Operations) | As of December 31, | 2019 (RMB thousands) | 2020 (RMB thousands) | 2020 (US$ thousands) | | :--- | :--- | :--- | :--- | | Cash, cash equivalents, restricted cash, and restricted short-term deposits | 3,367,157 | 11,666,329 | 1,787,942 | - Net cash used in continuing operating activities was RMB 18.8 million (US$2.9 million) in 2020, a significant improvement from a use of RMB 1.23 billion in 2019[689][691] - Net cash provided by continuing investing activities was RMB 4.77 billion (US$731.2 million) in 2020, mainly from maturities of short-term investments and proceeds from the disposal of investments[696][697] - Capital expenditures were RMB 1.06 billion (US$162.0 million) in 2020, primarily for purchasing office space, computers, and servers[703] Contractual Obligations As of December 31, 2020, the company had significant contractual obligations including operating lease commitments, capital commitments, short-term loans, and convertible senior notes Contractual Obligations as of December 31, 2020 | Obligation | Total | Less than 1 year | 1-2 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease commitments (RMB thousands) | 177,383 | 111,639 | 50,686 | 15,058 | — | | Capital commitment (RMB thousands) | 932,898 | 643,945 | 103,015 | 185,938 | — | | Short-term loans (RMB thousands) | 738,808 | 738,808 | — | — | — | | Convertible senior notes (US$ thousands) | 1,054,688 | 10,625 | 10,625 | 530,000 | 503,438 | Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, employee base, and share ownership, highlighting the dual-class share structure and concentrated voting power Directors and Senior Management The company is led by co-founder, Chairman, and CEO David Xueling Li, with a board comprising five directors, including three independent members - David Xueling Li is the co-founder, Chairman of the Board, and Chief Executive Officer[715] - The board includes four independent directors: Qin Liu, Peter Andrew Schloss, Richard Weidong Ji, and David Tang[716][717][719][720] Compensation of Directors and Executive Officers For fiscal year 2020, aggregate cash compensation for directors and executive officers was RMB 15.5 million, supplemented by three share incentive plans with significant outstanding awards - Aggregate cash compensation for directors and executive officers in FY2020 was RMB 15.5 million (US$2.4 million)[723] - The company has three share incentive plans: the 2009 Scheme (expired), the 2011 Plan, and the 2019 Arrangement (for Bigo employees)[727] - As of March 31, 2021, outstanding awards included options for 9.7 million shares, 24.7 million restricted shares, and 74.2 million restricted share units[728] Board Practices The board of directors, consisting of five members, operates through four committees, with directors serving without fixed terms under Cayman Islands law - The board has four committees: Audit, Compensation, Corporate Governance & Nominating, and Investment[758] - The Audit Committee consists of three independent directors: Peter Andrew Schloss (Chairman), David Tang, and Richard Weidong Ji[759] - Directors are not subject to a term of office and serve until removed by a special resolution of shareholders[764] Employees As of December 31, 2020, JOYY had 7,931 employees, primarily in customer services/operations and research and development, a decrease from 2019 due to the Huya deconsolidation Employees by Function as of Dec 31, 2020 | Function | Number of Employees | Percentage | | :--- | :--- | :--- | | Customer services and operations | 3,657 | 46% | | Research and development | 3,451 | 44% | | Sales and marketing | 329 | 4% | | General and administration | 494 | 6% | | Total | 7,931 | 100% | Share Ownership The company's dual-class share structure grants Chairman and CEO David Xueling Li 76.0% of the total voting power, giving him substantial influence over corporate matters - As of March 31, 2021, Chairman and CEO David Xueling Li beneficially owned shares representing 76.0% of the total voting power[774][231] - The company has a dual-class share structure: Class A shares have one vote per share, while Class B shares have ten votes per share and are convertible to Class A shares[778][273] - Principal shareholder Jun Lei (via Top Brand Holdings Limited) has delegated the voting rights of his 122.7 million Class B shares to David Xueling Li[776] Major Shareholders and Related Party Transactions This section details the company's major shareholders and extensive related party transactions, emphasizing the enhancement of its Variable Interest Entity (VIE) structure for stability and control Related Party Transactions The company's China operations rely on complex contractual arrangements with VIEs, which are being enhanced for stability, alongside significant transactions with related parties for services - The company is enhancing its VIE structure to reduce key-man risk and improve stability by having VIEs held by PRC limited liability companies, which are in turn owned by partnerships of management individuals[780][781][782] - A series of contractual arrangements (Exclusive Business Cooperation, Exclusive Option, Equity Pledge, and Powers of Attorney) are in place to provide JOYY with effective control over its VIEs and to transfer economic benefits[787][789][791][793][794] - In 2020, the company received service fees of RMB 222.2 million from Guangzhou Huaduo and RMB 784.5 million from Guangzhou BaiGuoYuan under these arrangements[795][812] - The company purchased bandwidth services from Guangzhou Sunhongs and Kingsoft Cloud, both related to major shareholder Jun Lei, for RMB 98.4 million and RMB 14.7 million, respectively, in 2020[830][832] Financial Information This section covers consolidated financial statements, ongoing legal proceedings, and the company's dividend policy, including potential restrictions on dividend payments from PRC subsidiaries - The company is defending a putative securities class action lawsuit filed in November 2020, alleging material misrepresentations regarding revenue and the Bigo acquisition, with potential loss not yet estimable[839] - The board approved quarterly dividend policies in August and November 2020 for the next three years, with total expected payouts of approximately US$500 million, and US$67 million had been paid as of March 31, 2021[841] - Dividends from PRC subsidiaries are subject to PRC regulations and withholding taxes, which may restrict the ability to pay dividends to ADS holders[842] Additional Information This section details the company's corporate governance under Cayman Islands law, its dual-class share structure, material contracts, exchange controls, and significant U.S. and PRC tax implications, including its PFIC status Memorandum and Articles of Association JOYY Inc., a Cayman Islands exempted company, operates with a dual-class share structure and anti-takeover provisions, with Cayman Islands law offering fewer shareholder rights compared to U.S. law - The company's common stock is divided into Class A (one vote per share) and Class B (ten votes per share)[853][862] - Class B shares automatically convert to Class A shares upon transfer to a non-affiliate, and the entire class converts if the founding group's ownership of Class B shares falls below 5%[866] - The articles contain anti-takeover provisions, allowing the board to issue preferred shares without shareholder approval, which could delay or prevent a change in control[276][917] - Cayman Islands law provides fewer shareholder rights compared to U.S. law, particularly regarding inspection of corporate records and initiating derivative lawsuits[277][903][911] Taxation This subsection details tax considerations across key jurisdictions, including Cayman Islands tax exemption, PRC enterprise income tax and withholding tax, and the company's Passive Foreign Investment Company (PFIC) status for U.S. tax purposes - The company is a Cayman Islands entity and is not subject to profits, income, or capital gains tax there[939] - PRC subsidiaries are subject to a 25% EIT, with some qualifying for preferential rates, and dividends paid from PRC subsidiaries to the offshore holding company are subject to a 10% withholding tax[941] - The company believes it was a Passive Foreign Investment Company (PFIC) for the U.S. federal income tax purposes for the taxable year ended December 31, 2020[949] - If classified as a PFIC, U.S. holders face special, often punitive, tax rules on 'excess distributions' and gains from selling ADSs/shares; a mark-to-market election may be available for ADSs, but a QEF election is not[957][960][962] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks, primarily foreign exchange risk (USD vs. RMB) and interest rate risk on cash holdings, with sensitivity analyses provided for both - The company's primary market risks are foreign exchange risk (especially USD vs. RMB) and interest rate risk on its cash holdings[970][975] - As of Dec 31, 2020, the company held significant U.S. dollar-denominated assets; a hypothetical 10% depreciation of the USD against the RMB would result in a decrease of RMB 1.34 billion in the value of its cash, deposits, and short-term investments[973] - A hypothetical one percentage point decrease in interest rates would have reduced the company's interest income by US$19.4 million for the year ended December 31, 2020[975] Description of Securities Other Than Equity Securities This section details the fees and charges applicable to holders of the company's American Depositary Shares (ADSs), including service fees charged by the depositary bank and reimbursements to the company 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 | | Cash distribution | Up to US$5.00 per 100 ADSs | | Stock distribution | Up to US$5.00 per 100 ADSs | | Other securities distribution | Up to US$5.00 per 100 ADSs | | ADS Services (annual fee) | Up to US$5.00 per 100 ADSs | - For the year ended December 31, 2020, the depositary, Citibank, N.A., reimbursed the company US$0.07 million for expenses related to the ADS program[983] Part II Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2020, as concluded by management and attested by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[988] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[990] - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, audited and confirmed the effectiveness of the company's internal control over financial reporting as of December 31, 2020[991] Purchases of Equity Securities by the Issuer and Affiliated Purchasers This section details the company's share repurchase activities under its US$300 million plan, with approximately 2.1 million ADSs repurchased as of December 31, 2020 2020 Share Repurchases | Period | Total ADSs Purchased | Average Price Paid Per ADS (US$) | | :--- | :--- | :--- | | March 2020 | 499,165 | 43.44 | | November 2020 | 56,218 | 84.67 | | December 2020 | 1,102,908 | 81.03 | - As of December 31, 2020, the company had repurchased a total of 2,092,436 ADSs under its US$300 million plan, with approximately US$160.5 million remaining authorized for repurchase[1003][1004] Corporate Governance As a foreign private issuer, JOYY utilizes exemptions from certain Nasdaq listing rules, particularly regarding compensation committee independence and shareholder approval for equity issuances - The company, as a foreign private issuer, follows certain Cayman Islands governance practices, exempting it from some Nasdaq rules[1006] - An exemption is used for the compensation committee, which is chaired by non-independent director David Xueling Li[1007] - The company relies on an exemption from requiring shareholder approval for certain equity issuances, including for its 2019 Share Incentive Awards Arrangement[1008] Part III Financial Statements This section presents JOYY Inc.'s complete audited consolidated financial statements for 2018-2020, prepared under U.S. GAAP, with the auditor highlighting goodwill impairment and revenue recognition as critical audit matters Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers Zhong Tian LLP issued an unqualified opinion on JOYY Inc.'s financial statements and internal controls, identifying goodwill impairment and revenue recognition as critical audit matters - The auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal controls over financial reporting[1034] - A critical audit matter was the goodwill impairment assessment for the Bigo reporting unit, which had a goodwill balance of RMB 12.1 billion, requiring significant management judgment regarding cash flow projections, growth rates, and discount rates[1042][1043] - Another critical audit matter was revenue recognition for live streaming, specifically the judgment involved in identifying distinct performance obligations in complex contracts and estimating their standalone selling prices[1046][1047] Consolidated Financial Statements The consolidated financial statements show total assets of RMB 52.8 billion as of December 31, 2020, a net loss from continuing operations of RMB 126.4 million, but an overall net income of RMB 9.7 billion driven by discontinued operations Consolidated Balance Sheet Highlights (As of Dec 31, 2020) | Item | Amount (RMB thousands) | | :--- | :--- | | Total Assets | 52,818,794 | | Cash and cash equivalents | 11,371,264 | | Goodwill | 12,215,156 | | Total Liabilities | 11,623,668 | | Convertible bonds | 5,084,362 | | Total Shareholders' Equity | 40,721,310 | Consolidated Income Statement Highlights (Year Ended Dec 31, 2020) | Item | Amount (RMB thousands) | | :--- | :--- | | Total net revenues | 13,230,945 | | Gross profit | 3,721,356 | | Operating loss | (2,820,687) | | Net loss from continuing operations | (126,378) | | Net income from discontinued operations | 9,849,538 | | Net income | 9,723,160 | - The acquisition of Bigo in March 2019 added RMB 12.4 billion to goodwill[1275][1316] - The disposal of Huya in 2020 resulted in a gain of RMB 6.4 billion, which is included in income from discontinued operations[1245]