Misfortune for DouYu as CEO faces gambling charges

The company that was once China’s biggest livestream gaming platform has been accused of hosting gambling activities and allowing pornography

Key Takeaways:

• Founder Chen Shaojie has been arrested on charges of running a gambling business that could be linked to livestreamers’ lottery schemes
• The fallout from the arrest is likely to affect the company’s strategy of focusing on its hardcore gamers

By Fai Pui

In August, we reported on moves by the Chinese gaming company DouYu International Holdings Ltd. (DOYU.US) to slash spending and focus on its most active players.

The story, headlined “Shrinking DouYu emerges as leaner and meaner fighting fish”, explained how the targeted gamers spend more time online, buy virtual game accessories and reward their favored players or streamers.

The strategy shift by DouYu, whose name means “fighting fish” in Chinese, helped propel the company to a winning streak of three straight profitable quarters, but the policy may prove to have been a fateful roll of the dice.

Just when business appeared to be on the right track, the founder and CEO of DouYu, Chen Shaojie, suddenly vanished from public view, last appearing at a financial conference in August. The company looked to be left rudderless.

Finally on the evening of Nov. 21, DouYu issued a statement saying that Chen had been detained by Chengdu police on Nov. 16. “The company has not received any formal notification regarding the investigation of Chen or the reason for his apparent arrest,” DouYu said. “The continued detention of Chen and any subsequent related legal proceedings and enforcement actions against relevant parties could have a material adverse effect on the company’s reputation, business and performance.”

On the day of the announcement, DouYu’s share price tumbled about 10% in the U.S. pre-market and sank nearly 8.5% soon after trading opened. The stock ended the day with a 6% loss and failed to muster a meaningful rebound in the next two sessions.

Shortly afterwards, the company announced it had set up an interim committee to manage operations until further notice.

The reason for Chen’s arrest eventually came to light on Nov. 22. A notice issued by Chengdu police said he was suspected of operating a gambling business. A report on China’s official Xinhua News Agency cited the police notice and referenced a regulatory probe into questionable content on the gaming platform. The Cyberspace Administration of China (CAC) was quoted as saying its investigation launched in May was focused on identifying “pornography, vulgarity and other unsavory content” on the platform, as well as any online gambling.

Even before Chen’s arrest, DouYu had abruptly announced on Nov. 13 that it would crack down on streamer violations and illicit actions such as offering consumers private financial inducements to make in-streaming purchases. The company said that all individuals suspected of links with money laundering, fraud, gambling and other crimes would be reported to the authorities. DouYu may have acted to preempt any official inquiry into dubious dealings but was unable in the end to avoid a clampdown.

The market suspects that the charges against Chen could be related to a practice whereby platform users who buy virtual props or gifts on the platform open an account to participate in lottery schemes and gain rewards from streamers in private.

Last December, a livestream group calling itself “Shanshanjiu Outdoor” with more than 3.13 million followers was convicted of gambling on the DouYu platform. The group was alleged to have promised clandestine benefits to encourage accounts to be opened. Some streamers even offered 50,000 yuan ($7,040) for a new account. Followers were able to buy virtual gifts through DouYu or WeChat and participate in lottery schemes. The group brought in nearly 120 million yuan.

It would not be the first group to test the boundaries on DouYu. In January 2021, a group ranking among the top 10 streamers on the platform conducted lucrative lottery schemes at 10 p.m. every night. Such activities were highly profitable, earning the group 177 million yuan in 2020.

According to corporate information on China’s Tianyancha database, DouYu has invested in companies that backed the two streamer groups mentioned above. This link could explain Chen’s arrest for suspected involvement in gambling.

This time, the penalty may be heavier than a fine. Ivan Chow, an independent analyst, said a conviction would probably land Chen in jail and could prompt a comprehensive overhaul of the platform. “The ‘Changsha Countryside Death Squadron’ was at its peak during the Covid pandemic when many more people were not working and were instead spending a lot of time gambling,” he said. “But online gambling is the last thing Chinese authorities want to see, hence their draconian crackdown efforts in recent years.”

Risky bet on building traffic

Chen, born in 1984, began online gaming when he was in the fifth grade and dropped out of college as a freshman to set up the gaming platform “ZMR”, which was bought by Shanda Games for 4 million yuan. He made his first fortune at the age of just 25.

In 2010 Chen bought AcFun, the first Chinese website specializing in so-called ACGN content, related to anime, comics, games and novels. Four years later he spotted the live-streaming trend, hiving off the site’s live-streaming arm as “DouYu TV”, and gained an investment from Tencent (0700.HK).

The company went public on the Nasdaq in 2019, raising about $890 million. At that point Chen was still only 35 years old, with a net worth of 2.5 billion yuan, landing him on the 2019 Hurun Rich List. The following year he ranked 34th on a rich list for self-made men and women born after 1980, becoming a role model for many young people with his wealth of 5.5 billion yuan.

However, under pressure from up-and-coming rivals such as Huya (HUYA.US), Kuaishou (1024.HK), Bilibili (BILI.US; 9626.HK) and TikTok, Chen’s company went all out to boost traffic. In the process, it ended up being named and shamed by the authorities, who ordered DouYu to clean up pornographic and other unsavory content on its platform.

With competition intensifying, DouYu’s revenues have declined, falling from 9.6 billion yuan in 2020 to 9.1 billion yuan a year later, and shrinking further to 7.1 billion yuan in 2022. The platform was mired in the red until drastic cost cuts helped it to achieve profits for three consecutive quarters. In the second quarter to the end of June, DouYu’s non-GAAP net profit more than doubled to 61.4 million yuan, according to earnings figures released in August.

In 2020, Huya and DouYu had considered joining forces under a Tencent-brokered deal to better compete with platforms such as TikTok. Huya would have acquired DouYu via a share exchange, but all the efforts fizzled out in the face of anti-trust concerns.

The U.S. listing created a stock market star, but DouYu fell back to earth with a bump. As of Nov. 25, its market value was only about $285 million, with around 92% of its initial $3.7 billion valuation wiped out. Events took a darker turn for investors on Oct. 25 when the company issued a statement noting that its stock price had been below $1 for 30 consecutive trading days. If the share price fails to break back above $1 before April 22 next year the company could face the risk of delisting. The arrest of DouYu’s founder will make a recovery even more difficult.

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