Hello Group Inc.

MOMO Details

Hello Group Inc. (NASDAQ: MOMO) is a significant online social and entertainment company in China. Consumers can use Momo, Tantan, and other MOMO platform products to build new relationships, social ties, and meaningful conversations. Live streaming, value-added, mobile marketing, online gaming, and other services are the company's key revenue streams. MOMO had 196.95 million American Depository Shares (ADS) listed and outstanding (each ADS representing two Class A ordinary shares).

Q3FY21 Results:

• Slight Decline in Topline: Total net revenue fell 0.20% YoY to RMB 3.76 billion in Q3FY21 (ended September 30, 2021) from RMB 3.77 billion in Q3FY20, owing to structural reforms in the company's core live video business and a fall in Tantan's live streaming income due to a strategic shift.
• Drop-in Profitability: MOMO's net income (attributable to common shareholders) for Q3FY21 was RMB 403.19 million, down 11.72% from RMB 456.73 million in Q3FY20.
• Healthy Balance Sheet: The company's cash balance was RMB 9.29 billion as of September 30, 2021, with a total debt of RMB 4.61 billion.
• Increase in MAUs: Monthly Active Users (MAU) on the Momo platforms increased to 115.5 million in September 2021, up from 113.6 million in September 2020.

Key Risk:

• Political and Regulatory Risk: The Chinese authorities' crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent the company's operations. This is after the passage of a bill in the US, which could lead to the delisting of some Chinese companies from the country's exchanges (in case the US authorities cannot satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.
• Customer Concentration Risk: In FY20 and FY19, one of the third-party application shops accounted for 26% of the company's total accounts receivable. As a result of its increased reliance on such third-party sources, its operations and cash flow may suffer.

Outlook:

• FY21 Guidance: According to the Q3FY21 press release, MOMO estimates RMB 3.60 - 3.75 billion sales, a drop of 5.1 to 1.2% YoY. The company's current and preliminary opinions on the market and operating conditions are included in this prediction, which is subject to change.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

MOMO's share price has fallen 51.42% in the past nine months and currently leaning towards the lower-band of the 52-week range of USD 7.10 to USD 16.64. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 9.35.

Considering the significant correction in the stock price in the past nine months, healthy balance sheet, high profitability margins, growth in MAUs, current valuation, and associated risks, we recommend a "Speculative Buy" rating on the stock at the current price of USD 7.50, down 5.90% as of March 10, 2022, at 1:16 PM ET.

Three-Year Technical Price Chart (as of March 10, 2022, at 1:16 PM ET). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.