Hello Group Soars as Investors Snap Up Stock on China Covid Easing

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Key Takeaways:

  • Hello Group’s stock jumped nearly 30% after it announced its latest results, as around 10% of its shares changed hands on a single day
  • The results were largely in line with the company’s recent trends, and the surge instead looks tied to improving investor sentiment as China finally eases its strict Covid restrictions

By Doug Young

It seems that everyone was scrambling to explain a nearly 30% surge in shares of dating app operator Hello Group Inc. MOMO after the company reported its latest quarterly earnings that looked like a very business-as-usual report.

Most fell back on the “better-than-expected” explanation, and indeed there were a few metrics that showed things might be improving faster than the company previously forecast. Most notably, Hello Group, often called the “Tinder of China,” returned to profit growth after more than a year of contraction. But even that accomplishment contained a big asterisk, since the company’s profit continued to shrink on a non-GAAP basis.

What’s more, management said on the company’s earnings call that its business isn’t likely to improve significantly anytime soon since China’s pandemic-induced gloom will take some time to dissipate before young Chinese regain their previous interest in dating.

Instead, we’re convinced that the huge jump has much less to do with the company’s latest individual results and is more related to a huge rally in offshore-listed Chinese stocks over the past month. Put simply, investors are sensing China could finally be turning a corner as the country shows signs of ending its “zero Covid” policy that has crippled the economy this year.

The iShares MSCI China ETF (MCHI.US) reflects the larger group, rising 24% over the last month. As investors sense that China’s stocks may finally be ready for a turnaround, everyone is suddenly scrambling to find the companies with the greatest potential. And Hello Group apparently is emerging as one of those.

The company currently boasts an A-list of investors like Invesco, Vanguard, Krane Funds, Blackrock and Goldman Sachs, each holding between 3% and 6% of its shares – many of those purchased this year. The company also counts Chinese e-commerce giant Alibaba BABA as a major backer with 5.3% of its shares, though that holding goes back quite a bit longer.

That A-list of existing investors, and potentially others who see the company as a good future bet, were busy trading Hello Group shares on Thursday after its latest results came out, with 20.6 million of the company’s American depositary shares (ADSs) trading hands during the session. That was many times larger than its average daily volume of 1 million to 3 million ADSs, and was equal to about 10% of the company’s total shares. It was also the second largest daily trading volume for the company this year, behind only May 31, when 22.8 million ADSs changed hands.

That brings us back to our thesis that investors are scrambling to identify which Chinese stocks are best-positioned to bounce back from the country’s ending of its zero Covid policy and return to more normal conditions. Hello Group seems to be one of those. Another is online travel agent Tuniu TOUR, whose share price has nearly doubled over the last three trading days, including a 36% jump on Thursday on its third-highest trading volume since the start of July.

That means small investors could make some quick big money if they can guess which of these smaller-cap stocks might be well positioned to rebound with China’s sudden Covid easing.

Return to profit growth

Having given our main thesis for the huge jump in Hello Group’s stock on otherwise ho-hum results, we’ll spend the second half of this space taking a closer look at the company’s actual third-quarter report.

Previously named for its main app called Momo, Hello Group has faced pressure in the pandemic era as frequent lockdowns and a bleak economic outlook severely dampened enthusiasm for dating among the young people that are the company’s main users. On its earnings call, CFO Peng Hui alluded to the tough road the company faces to recovery when she said: “I think it’s still going to take some time for the dating sentiment to fully come back.”

At the same time, Hello Group is also dealing with some internal issues, most notably the underperformance of its smaller Tantan app that it purchased for $760 million in 2018. The company once talked up Tantan as being its major new growth engine, but the app failed to realize that potential and instead is currently losing money and rapidly shrinking.

The company’s revenue continued its streak of year-on-year declines dating back to early 2020, dropping 14% in the latest quarter to 3.23 billion yuan ($463 million). It predicted more of the same in the fourth quarter, saying the figure would end 2022 with another decline of between 11.5% and 14.3% in the final three months of the year.

As we noted above, the company’s profit returned to a growth track for the first time since early 2021, rising 12% to 450.8 million yuan. But on a non-GAAP adjusted basis, which excludes share-based compensation and some non-cash items, the company’s profit fell 6% to 535.8 million yuan.   

In another major shift, Hello Group also announced in late October that founder Tang Yan would return to the company on an executive basis after a two-year absence, upgrading his role to executive chairman from his previous non-executive chairman title. It added Tang would also take over the CEO title from Wang Li, who would continue in the company as president.

From a valuation perspective, Hello Group trades at a price-to-earnings (P/E) ratio of about 15, even after the Thursday rally, based on our own calculations. While that looks modest, it’s actually ahead of the P/E of 12 for Facebook owner Meta FB. But it’s way below the valuations of more than 100 for the more similar Match Group MTCH and Bumble BMBL, implying there could be some substantial upside for Hello Group’s stock if and when dating sentiment in China improves.

We’ll have to wait and see if Tang can restore his baby to its former glory, which once saw the company valued as high as $10 billion when its stock reached an all-time high of more than $50 in 2018. It’s been all downhill since then, with the stock closing at just $6.79 on Thursday, even after the big jump.

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