Summary
In recent quarters, Hello Group has been fighting to cling on to its dominant market-leading position.
Revenues were declining, but the downward trend has come to a stop in Q3; going forward, there are four drivers of moderate growth.
With a P/E ratio of 6.5 and an EV/EBIT multiple of 1.8, the company is rather cheaply valued.
Also, the company looks safe with a huge negative net-debt position.
With a $300M share repurchase program and a $0.64 dividend in April, the management has proven that it is much more shareholder-friendly than the average Chinese company.
itsskin/E+ via Getty Images I’m going to start this off by sharing a private detail about myself: Hello Group’s (NASDAQ: MOMO ) Tantan actually played an important part in my life as my wife and I met via Tantan here in Shanghai. Besides my positive experience with the app, I also believe that the MOMO stock offers a good combination of value, safety (great balance sheet and stable business model), and a shareholder-friendly management. Below I will take a look at MOMO’s business, analyze its financials and also discuss the two main risks: intensifying competition as well as the widely known but often misunderstood regulatory/political factors.
Please note that if not stated differently, all numbers that I use are in RMB and not in USD, as the exchange rate makes historical comparisons inaccurate. Business overview
The apps: Momo & Tantan
Over the last decade, two apps have dominated the Chinese online dating market: Momo and Tantan. Similar to Tinder ( MTCH ) in the west, almost anybody below the age of 40 knows both of these apps. What these two apps have in common is their parent company The Hello Group. This gives the company a very strong market position that is almost unrivaled.
While online competitors are far smaller than MOMO, the biggest “competitor” worth mentioning is offline matchmakers. Interestingly, in China, these offline matchmakers are very popular. Again, telling from personal experience, just a few months ago my sister-in-law met her now-fiancé via a matchmaker. Offline solutions are much more trusted than these apps and don’t have any “hookup vibes” associated with them, and therefore customers are willing to spend thousands of dollars on them. Nevertheless, the online market clearly belongs to MOMO, and this example also shows how much young people are willing to spend on finding a partner.
Previously the company was called Momo until it acquired Tantan for $600M in 2018 . Back then Momo had much higher revenues and, contrary to Tantan, was actually profitable. Until today, nothing has changed. Momo is still the company’s cash cow and is responsible for about 80% of the revenue, while Tantan is losing money every single quarter.
The CEO has put in place a new management for Tantan just this October. The opportunity is clear: emulating the success of Momo and having two profitable businesses instead of one that is keeping the other one financially afloat.
To me, the strategy of the company sounds very convincing. In the beginning, the company will focus on Tantan’s user growth, by reducing their paywalls (and also getting rid of the image of having too many paywalls). In the short term, this will lead to lower revenues and lower profitability. However once Tantan also achieves a larger scale, it will generate a bigger share from similar revenues sources as Momo. Instead of charging for VIP memberships, Tantan will generate the majority of its revenues from live streaming and selected value-added services (below you will find more information on the monetization of the apps).
The reason why I find the strategy very convincing is because the Momo App already has proven that this approach works. Also, while Tantan’s user growth was below the management’s target, the number of monthly active users still increased by 8% from Q2 to Q3. With the new management finally, in place, more user growth can be expected to come over the next quarters.
Furthermore, the growth is of high quality. Generally, dating apps are suffering from a lack of female users (two-thirds to three-fourths of users on dating apps are male), which makes female users much more strategically valuable to these apps. Therefore MOMO’s management was happy to share that 50% of the 8% user growth was female . Also, the number of fake accounts declined. Monetization
The monetization of Momo and Tantan can be split up into two revenues streams: Streaming and Dating.
Over the years, streaming has become the core of the company and is now […]
source Hello Group: China’s Tinder Has A Shareholder-Friendly Management
Protected by Patchstack