Description

MOMO is an interesting net-net trading at 70% of net cash and 5x EPS/FCF. Companies typically trade below net cash because 1) the operating business consistently burns cash, and/or 2) management is poor steward of capital so shareholders will not see much of the cash. I believe that MOMO fits in neither bucket – the core business is probably in a secular decline, exacerbated by macro and regulation, but throws off nice chunk of FCF. Mgmt has generally proven to be good operators with cost discipline and conservative/pre-emptive measures to fend off regulation risk. In the last five years, company has returned over $900m of capital to shareholders, and should return another $200m per annum going forward, vs. current market cap just around $1B. I think the story is fairly straight forward, and can be boiled down mostly in a few tables below. It is a micro-cap Chinese ADR, so I doubt there is much interest and will not elaborate on the core businesses, which were discussed in fairly extensive details in two previous write-ups. This is a classic cigar butt, and I hope to get a 50% puff out of it, much like my HUYA write-up.  

First, cash. Note I am counting restricted cash as cash, as the restricted cash and largely offsetting borrowings are new entries on balance sheet this year. My understanding is that the company bought some structured financial products to enhanced yields (probably not a great idea) and/or gain off-shore liquidity for dividends/buyback. I suppose I could be more conservative and apply some haircut.

On Capital allocation, the track record speaks for itself. CEO/Founder owns 23% of shares and has 73% voting control. I believe a significant portion of his wealth is still in MOMO stock, so continued dividend certainly seems to make sense. 

Stock was weak after the recent earnings for two reasons. First, many investors were hoping for a dividend of $150m+ but was disappointed as actual dividend declined to $103m from $122m last year. Buyback was also a bit underwhelming, although mgmt. explained that they hope to put more cash to buyback at this price level ($200m in next 2 years). $100m dividend and $100m buyback equate to almost 20% shareholder yield at current price.

Secondly, mgmt. did an admirable job managing the business in 2023 – cost discipline led to a healthy profit increase despite modest revenue decline. But 2024 revenue guidance was below expectation and EBIT will also decline, fanning the fear of melting ice cube. My view is that the core MOMO business has a real niche (evidenced by the stabilizing MAU), and recent decline has more to do with the ongoing recession (even rich guys have less to spend on tipping pretty girls online) and may actually see a bit of bounce in out years if/when China recovers. I have a more dim view of Tantan (Tinder equivalent), but that is a small part of the value, and could be offset by growing international apps. In any event, I am only applying a lowly 3x EPS in my valuation, so hopefully I am conservative enough.

Valuation:

Lastly, there might be some technical selling pressure which should abate soon. BABA is the 3^rd largest shareholder with just under 5% ownership. With its own set of issues, BABA has been liquidating many of its non-core assets this year (partially to fund its dividend and buyback), and I suspect this has contributed to MOMO’s recent weakness.

Catalyst

buyback. Improved sentiment.