Description

Summary

Momo (NASDAQ: MOMO) is a cash flush Chinese social media company which owns Momo and Tantan, two popular Chinese applications with a combined 114mm MAUs and 12.1mm paying users. Momo app (80% of revenue, 100% cash flow today) is a legacy location-based entertainment app with location-based messaging/flirting, livestreaming, and social media functionality. It was known as the original “hookup” app of China. Tantan is a pure play dating app and an exact clone of Tinder. They are the market leader in the small but growing Chinese casual dating app market. The combined company boasts LTM revenue of 15 billion RMB with an EBITDA margin of 20%. This is down from 17bn of revenue and a 23% EBITDA margin in FY19.

Recent weakness in their livestreaming business at Momo app post covid and stalling user growth has sent multiples far below their historically low values, trading at a measly 3.5x ’21 EV/FCF implying a distributable cash flow yield of over 30% at current prices. The company trades only 35% higher than TEV with net cash on the balance sheet making up $8.80 per share. We expect them to generate enough cash to cover the current stock price within 3.5 years. Sans an immediate financial deterioration, downside risks are limited to mostly systematic considerations like China risk, regulatory risk, and fraud risk – none of which should be written off when it comes to Chinese equities, but easy to stomach given the potential upside.

The market views the Momo app as a livestreaming app that has lost the battle to scaled competitors. We view it a dating/social media app that is losing a historically important yet non-core and variable cost revenue stream whose story has distracted from a quality and growing businesses in their core segment.  The core Momo app has strong/growing cash flow generation, a large user base, and improving social functionality. They have few competitors of scale in their geolocational messaging/hookup niche and provide an essential service for a highly motivated user base. Tantan provides substantial future growth prospects while running close to cash flow breakeven. We believe multifunctional social applications with competitive moats, user bases at scale and a heavy peer to peer component will have far stickier user numbers and revenue potential than investors give them credit for.  

With record low multiples on trough earnings, we see upside of 150%+ with limited downside potential over the next 12-18 months on return to the stock’s historical multiples. We see 2-3x total return potential on blue sky scenarios for Tantan or investor interest in the Chinese online dating story.

Thesis

1)  Revenue stabilization at Momo’s livestreaming segment is around the corner with growth expected in the back half. Contrary to the market, we believe their positioning and legacy brand will allow them to successfully carve out a niche for Momo’s livestreaming business and have greater staying power than is priced in. With costs at this segment almost entirely variable and with new forms of monetization proven out, the long-term future success of livestreaming is no longer necessary for a Momo bull case.

2)  Momo app’s growing social media-based usage and revenue proves the app can monetize its large user base without livestreaming.  A company with strengthening network effects and a more recurring revenue stream deserves expanded multiples. With the stock trading at historically low multiples, this offers good risk/reward. We believe this strategic shift from livestreaming platform to social media platform has gone unrecognized by the market.

3)  Online dating in the underpenetrated Chinese market is a significant trend with a long runway for growth. Tantan provides significant and direct growth upside as the current market leader in casual online dating. Momo the app also tangentially benefits from this trend, and Momo the company is the only pure play dating company in the East.

Industry/Competition

Livestreaming

Livestreaming is an online entertainment feature where an individual will broadcast live video of themselves entertaining an online audience that can number from a few dozen to hundreds of thousands. Entertainment can take the form of chatting, singing, dancing, discussion, demonstrating products, playing video games, or competing with other streamers. Platforms monetize through tips/donations where viewers donate $ to the streamer for their attention, to show thanks, or to get them to do something on stream like singing a particular song. It has been a well proven out monetization tool during the last 5 years in China with over 300 million people watching 3.5 million streamers and generating 61 billion RMB of revenue in 2019. The success of Microsoft’s Twitch platform and to some extent Youtube Live has helped prove out the livestreaming/tipping model to once skeptical US investors.

Unlike in the United States, where the livestreaming is still in its infancy and predominantly takes the form of video game livestreaming, over 70% of Chinese livestreaming is in real life or IRL streamers. The Chinese livestreaming market can be loosely broken down into three segments – entertainment livestreaming, video game livestreaming, and e-commerce livestreaming. Entertainment livestreaming was the original form in China and is a mature but evolving industry. Video game livestreaming and e-commerce livestreaming are newer extensions of the feature that are still early in the growth cycle and represent expanding use case into quite different forms of content.

Entertainment Livestreaming – This was the original form of livestreaming in China and where Momo falls. Streamers broadcast video of themselves doing something engaging for the audience (talking, dancing, singing, cooking, discussing, etc.) and monetize through virtual tips. Audiences tend to lean towards the single males under the age of 35 demo and live streamers tend to be women in their early 20’s. The industry like many follows the power law or 80-20 rule with the top 20% of users generating upwards of 80% of revenue. The bottom 80% of users typically give small gifts and banter in the chat, using the live streams as an escape from the loneliness of the real world. They are colloquially referred to as “diaosi”. The top 20% of the audience are colloquially referred to as whales or “Tuhao” and give large gift donations. In exchange, they show status in front of their social circles and the other viewers and receive personalized attention from the live streamer. Tipping provides viewers a sense of connection to the streamer and allows them to show face in front of their social circles – well suited to an eastern style culture with a massive gender imbalance. In its original form, there was usually a sexual undertone to streams. The more extreme versions feel like the streamer is a fully clothed cam girl but with a subtler undertone. Elements of the above dynamic generally holds for the whole industry but more aptly applies to the right tail of entertainment livestreaming options. The industry has broadened in scope to more broad appeal, just for fun livestreams with female viewers, male streamers, and tipping motivations driven by entertainment value as opposed to personal emotional connection. We will refer to the broader version as “mainstream livestreaming” and the original form as “emotionally connective livestreaming”.

Live streaming in China exploded in popularity around 2015. Dozens of platforms popped up offering slightly differing forms of the service. Scaled user bases and first mover advantage proved key to retaining quality influencers and monetizing effectively net of CAC. Market leaders like Momo, YY Live, and Yizhibo achieved mid 30% EBITDA margins and saw sustained user growth. Subscale competitors and those with poor management teams struggled to break even and were quickly dissolved or acquired. The market today consists of 6-8 scaled legacy players (YY Live, Momo, Yizhibo, etc). Competition has remained strong - for viewers and especially for quality streamers/influencers. Take rate for the platforms peaked in ’17 at around 60% falling closer to 50% today as live streamers now must compete for quality talent with new forms of video content.

Many of the remaining legacy live streaming sites have been acquired or merged with established multifunctional tech giants in China (YY Live recently with Baidu, Yizhibo with Weibu). This has shifted the scale advantage from Momo to its competitors and provided them with better cross traffic potential from related offerings and a better value proposition to influencers. Momo offers the same with the social side of its app, but on a smaller scale. The biggest competitor has been Douyin/Tiktok which has quickly established itself as the largest social media company in China. Their foray into livestreaming in 2H ’18 as the largest platform offering the service has widened the competitive advantages of scale. They’ve cannibalized “whale” viewers who see more social benefit to tipping on a popular and fully integrated social platform as well as popular streamers who see more opportunity creating content on a larger, more monetizable platform with a young and engaged audience.

Covid marked an acceleration of trend for change in the livestreaming industry and the relative popularity of Douyin. Livestreaming user growth seemed to taper off between ’18 and ’20 among the incumbents with revenue holding steady as well. Q1 ’20 marked a period of declining users and rapidly declining revenues as a mature business model coincided with economic distress for the highest paying tier of users. Pure play platforms like YY Live (pre merger #s), Momo and Inke all reported lower users and lower revenue. While user numbers have recovered close to pre pandemic highs, revenue has not as whales and popular streamers have moved on.  

Going forward, the entertainment livestreaming and virtual donations TAM continue to grow but growth continues to move to the most scaled platforms. On the bright side for Momo, as livestreaming competitors are now often rolled into broad appeal social apps, their content focus has shifted towards broad appeal entertainment livestreaming and away from emotionally connective livestreams to avoid cheapening the umbrella brand. This provides a potential opportunity for Momo with a compatible umbrella brand to carve out an emotionally connective or camgirl-esque niche for its livestreaming business.

Online Dating

We see a long runway for growth in Chinese online dating. While traditionally shunned by conservative China, the younger generation is becoming increasingly amenable to Western style casual dating. We expect China’s online dating penetration to increase from 3.8% to 8% over the next 5 years implying industry CAGR of 15%. For comparison, US adoption has gone from 11% in 2012 to 30% today. In the long run, we expect Chinese penetration numbers to approach western type numbers as globalization continues to soften cultural differences in our ever-interconnected world. We except Tantan TAM to grow closer to 20-25% as we expect them to gain incremental market share from formal Chinese matchmaking services like Baihe and Jiayuan. Growth in online dating should be tangentially related to Momo’s growth with its focus on social and livestreaming that relates to online dating. Its growth should be linear with Tantan which is perfectly positioned for this growing segment.

The market as it stands today is still small and fragmented, but Tantan has been the clear leader. Tencent has tried launching a few dating apps with limited success. We think the biggest competitive threat comes from use case expansion from larger tech companies or another viral product like Tantan.

The Company

Momo

Momo began in 2011 as a geolocational social app that enabled users to create limited profiles and connect with other users in an X mile radius chat, play online games, flirt etc. Given the lack of online dating options in China, it gained popularity as the “hookup app” or “Tinder” of China.  MAU grew to 20mm.  In 2015 they introduced an entertainment livestreaming function to the application which was immensely popular and increased the profile of the app causing MAU to rapidly grow from 20mm to 100mm+ in a few years.

Momo has also expanded the scope of their app to include broader social functions and richer ways for people to connect with those in their area - more detailed profiles, group messaging, mini dating games, chat rooms, and even virtual karaoke. This has been met with success, increasing user engagement metrics and retention numbers. Although their “jack of all trades” super app design seems a bit cluttered from a Western perception of social media, it is well-received from Eastern users and is common amongst Chinese internet companies. We think investors unfairly categorize Momo as a simple livestreaming company given that is how they have traditionally monetized when the actual user functionality of the app is quite diverse and more heavily weighted towards social and messaging than livestreaming. Management estimates that 70% of user traffic is related to social and messaging with “over 80% of activity on the app having nothing to do with livestreaming.”

Unlike their highly competitive livestreaming segment, Momo is the market leader with a unique product in its core geolocational messaging/social functionality. The Momo brand remains ubiquitous in Chinese culture as the platform for hookups and meeting people in your area – not the sexiest of brands for growing to a 500mm broad appeal app, but perfect for dominating a niche that benefits from a dedicated brand image. None other than Tencent’s WeChat has tried to compete with Momo by adding a “nearby” function with a similar hookup tilt to its messaging app in late 2019. This has been one of their only competitive challenges. What should have been a competitive death blow to Momo – an app with unrivaled scale (1bn+ users), superior social functionality, and broader features to connect with others offering a similar service has instead seen limited success. In the same period, Momo’s social side grew revenue and engagement faster than ever. This has proven out what we’ve long thought – that hookup apps or any app really with a more deprave association requires a unique and dedicated brand. In the same way most people would not want their Tinder profile directly linked to their Facebook profile they interact with friends and family on, consumers want a unique platform that provides the illusion of separation. We think this thesis holds stronger in a conservative Chinese culture where government censorship acts as a deterrent to companies unwilling to walk the fine regulatory line that a government compliant hookup app requires.

New social features that increased user engagement and widened the competitive moat have also led to new modes of monetization for this unique social platform. Value added services revenue has grown at a 75% CAGR since 2017 and management sees that trend continuing into ’21 with good visibility on near term rollouts. VAS generally relates to monetization on the social/messaging side and includes premium subs, peer to peer gifting revenue, audio/video entertainment, and chat/audio based dating games. Most of the monetizable features for VAS involve professional moderators that receive a payout. It has a flatter revenue distribution than livestreaming with several revenue generating features, less customer concentration risk at the top, and less reliance on peer-to-peer gifting.

Financials

Going forward, we expect VAS revenue to make up at least 40% of the mix from a historical 10-15% with segments moving in different directions. Most costs are variable in nature with R&D and G&A making up only 12% of revenue in ’20. Cost of revenue is entirely variable and represents payouts to streamers/moderators. While they do not breakout costs by segment, VAS has a slightly higher cost of revenue (perhaps 3-4% higher) with higher payouts for moderators. Shifts in the livestreaming/VAS ratio and a slight increase in payouts have driven the cost of revenue increase from ’18-’20. We expect a permanent 2-3% increase in cost of revenue ’21 onwards from newly inked contracts followed by some step down on an improving mix at VAS. S&M may run a little hot the next two years on attempts to revive livestreaming, but we have generally been impressed with managements discipline on the marketing side. Its interesting to note that a massive disruption to the business only lead to an 800bp decline in operating margin ’19-’20 with 340bp of that driven by increased payouts rather than diseconomies of scale or system shock.

Livestreaming Weakness Post Covid

Momo app’s livestreaming business has looked horrible post covid, dropping from 3.4bn RMB of revenue in Q4 ’19 to 1.9bn in Q4 ’20 and an expected bottom of 1.6bn RMB in Q1 ’21. Half of the decline can be attributed to a mix of COVID and built-up competitive erosion expressing itself through major contract roll offs and the other half to short term effects from strategic changes to the product.

Mgmt blamed the first two quarters of revenue decline (2.4bn in Q2 ’20) on COVID. Covid marked an acceleration of trend for the livestreaming industry in China with competitive erosion from short form video as well as more versatile forms of livestreaming like gaming. Momo saw an outsized decline compared to other live stream platforms with its geolocational messaging and dating functionality becoming obsolete. Momo had contracts with their key streamers roll off during 1H ’20 and the comparative advantage to streaming on Douyin with tailwinds or Momo with headwinds had never been higher. The buildup of competitive forces exploded upon contract renewals with top streamers leaving for other platforms and taking whale users with them. Momo re-signed their top streamers who chose to remain at the end of Q2 to 3 year contracts at a 3% lower take rate. We think large competition related losses are over for the time being.

Q3 ’20 losses through Q1 ’21 are mostly due to a strategy shift at livestreaming. Realizing they were losing the competitive battle for mainstream content and widely famous streamers, management initiated a strategy shift for the segment in Q3 to set the stage for future growth in a less competitive and more sustainable niche. Their traffic allocation strategy over the last few years has increasingly been to push monetization by directing traffic to the most popular streamers who generated the most revenue and running concentrated streams. This worked well for increasing tips in the short term, but hurt the quality and number of streamers outside of the top tier. It also gave too much market power to the top streamers, who gained enough fame and personal brand to succeed without Momo. From their experience with Tantan and moderated group chats, Momo has seen medium to smaller sized streams with a more focused and intimate connection as an area with less competition and more in line with their overall brand.. To enact that vision, in Q3 they changed their traffic routing algorithm to favor smaller and medium sized streams. They also changed their approach to quarterly events and tweaked their KPI system with streamers to incentivize content quality over pure revenue. The strategic shift is designed to move Momo’s livestreaming to a middle tail focused offering with smaller streams and an emphasis on emotionally connective livestreaming. 

Tips are driven by familiarity with the streamer, an engaged audience in the chat, and quality of the streamer. Revenue naturally fell as viewers were directed more viewers got directed from top earners to unproven commodities. Management and sell side analysts indicate Q1 ’21 should mark the trough from these strategic changes.

Momo Outlook

In the short run we think a lot of the lost revenue from the traffic allocation shift will be recoverable over the next 2-3 quarters as users become more familiar with new streamers, streamers gain rapport with their audiences and improve their craft, and the content ecosystem begins to recover. We believe many investors failed to differentiate COVID weakness and the short term weakness from a strategy shift as well as the near term visibility of key streamers signed for the next 3 years.  With the stock at this valuation, signs of stabilization at livestreaming and some growth from the bottom would be a huge catalyst. Management Q4 commentary on engagement numbers after the Chinese New Year are complimentary to this view, as well as improvement in user numbers from 1H ’20 to 2H ’20.

Short term stability in livestreaming should drive recovery in the stock, but we remain cautiously optimistic in the long term that the Momo app will be able to carve out a profitable but smaller niche in the livestreaming industry. As a smaller social app, they will likely slowly continue to lose widely known streamers and more mainstream content to platforms that offer better monetization potential. That should be a slow shift with top broadcasters that chose to remain under contract for the next 3 years. However, we think their brand positioning offers them of a competitive moat around the remaining business. The original form of the livestreaming market (camgirl-esque, streams driven by emotional loneliness) paired well with Momo’s core user experience. As the product became more mainstream, industry leaders including Momo began offering mainstream streams as well- a highly lucrative expansion, but ultimately revenue driven by their scale rather than relation to their unique social experience. Without any unique data insights given by mgmt, we reason that a lot of what they’ve lost has been universally popular streams Momo delved into as a scaled player, and a lot of what remains is core users who find value in overlap with a unique social side.

As competitors become institutionalized under large broad appeal umbrella brands and move away from original form livestreaming, Momo has a great opportunity to become the premier platform in that niche with a livestreaming segment that compliments its social/hookup functionality. A focus on mid-sized streams while less profitable on a per user basis inherently doesn’t require scale, makes it easier to retain talent, and offers a more personalized streaming experience better aligned with the demands of the core user base. In terms of demand, given the gender imbalances there will essentially always be a large group of single men who struggle with connection in China. This demo typically has a high propensity to pay (hence momo’s historically high margins).

In any event, VAS revenue will make up a much larger component of revenue going forward. As Momo becomes more like a social media company with network effects, a stickier user base, and revenue that is more recurring in nature, multiples should inflect. If livestreaming peters out over the next 5 year, its variable cost nature should still add to Momo’s growing cash pile in the interim and investors will be forced to reevaluate how the remaining business is valued. If it continues as a smaller niche, they’ve exceeded expectations.

While China has been somewhat “reopened” for almost a year, we see the global reopening transcending borders and acting as a catalyst for increased demand for geolocation applications that promote local socialization. Increased online dating trend should also tangentially benefit the Momo app.

Tantan

Tantan is a dating app acquired by Momo in 2018. It is an almost exact knockoff of proven market leader Tinder with a similar visual design, freemium model, and swiping/matching as the primary feature. It is the most popular casual dating app in China with 3.8mm paying users primarily in the early 20s demographic. Revenue is broken down by value added services (premium subs; 70%) and livestreaming (30%). Livestreaming is supplementary to the primary swiping experience and mgmt. intends to keep it less than 40% of the mix to avoid cheapening the core experience. It’s typically smaller streams of 8-12 viewers with a wider range of hosts and done in a constrained way is a great strategy for capturing willingness to pay from the top cohort of users. They continue to add complementary features around the primary swiping experience. Monetization has increased significantly since their $800mm cash and stock acquisition, growing revenue from 200mm RMB quarterly revenue at acquisition to 740mm RMB in Q4 ’20 and paying users from 3.1mm to 3.8mm.

Pandemic sub and revenue growth were initially good, but sub growth stalled out in the fourth quarter which we think is mostly transitory. They introduced new paid membership tiers which resulted in overall higher prices. A short-term headwind to user growth but necessary for them to roll out a la carte purchases options in 2H ’21 which will boost ARPU long term. They also pointed to a challenging marketing environment in China through Chinese New Year leading to lower ad spend in Q4/Q1. Growth should return in Q2. With an improving ad environment post new year and a new marketing plan with encouraging early numbers, they are ramping ad spend through Q2 and specifically targeting female users. Short term focus is on user growth.

We expect sub growth Q2 onwards with a faster ramp year end as increased female advertising (typically not paying users) pulls through to male sub growth. Encouraging short term trends include the global reopening spurning increased Western style dating, Chinese government support for dating amid census data showing record slow population increase, and a strengthening ad environment in China. Q4 ’20 marked cash flow breakeven for Tantan net of share based comp. Mgmt expects a 200-250mm operating loss in ’21 but slightly positive net of share based comp. Longer term, the online dating market in China is still small and significant future growth lies ahead. Its also still in the early innings on monetization and see significant per user improvement as user acquisition occurs under the new tiering system and as they implement a la carte purchase options (a significant portion of Tinder’s revenue).

We think Tantan’s first mover advantage will be a significant competitive advantage for them as the Chinese market continues to expand. Its still early days in the Chinese online dating market and early incumbency far from assures eventual market success – but we think it significantly helps in online dating. If the US adoption curve of dating apps is any indication, Match data shows that new users of online dating are initially skeptical of using more than one dating app at a time. Its only after the industry has matured and become more socially ingrained that they expand their openness to try competing products simultaneously.

Chinese tech giants seem like the obvious entrant into the lucrative Chinese online dating market as they have expanded use cases in most other directions, but like with the core Momo experience we think they will be constrained with their ability to expand into online dating. Dating apps as a taboo part of Chinese society limits the potential of competition from big tech use case expansion. As with other Chinese companies that have copycatted the business models of successful US companies with competitive environments 2-3 years ahead, we think Tantan has a good chance to win the online dating market in China copying Tinder’s strategic and design advances. Like in the US, we think this will end state in a fragmented market so even if Tantan falls short of market leader, second or third is still a bull case scenario if the market grows as we expect. With government strife and vastly different social norms, we do not think Hinge or Bumble stand much of a chance of becoming big players in the Eastern market or vise versa.

Valuation

With distinct business segments moving in different directions, we use a sum of the parts valuation. There are few good comps to Momo given its unique structure. A common critique of SOTP valuations is that it’s hard to unlock the value of separate segments for unique companies that probably won’t divest. We try to take that into account by valuing segments according to how we see the narrative around Momo evolving in bull/base/bear scenarios, keeping conservative multiples, and making sure scenarios reflect an overall company multiple in line with historical average and growth. Momo in aggregate has typically traded between a 14x and 22x one year forward P/E multiple or 11x to 17x net of cash and has historically traded below livestreaming peers. Below offers some different valuation ranges for Chinese tech and livestreaming names.

Many livestreaming competitors are now rolled into larger companies that don’t break out attributions. YY Live is one of Momo’s biggest livestreaming competitors and had its Chinese livestreaming segment separate from its other business units. YY Live (JOYY) sold their livestreaming segment in Q3 ’20 for 2x revenue or 15x LTM P/E which gives a potential upper bound on mature livestreaming valuations. Huya with 12% growth expectations in video game livestreaming and expanding margin trades at 23x forward P/E.          

Social media sites in China tend to trade higher. Weibo is a more mainstream Chinese social media site (Chinese twitter) which owns livestreaming service Yizhibo – they trade at 18x forward PE with flat growth. This is probably the best comp for an integrated livestreaming/social media website albeit with a better business moat and larger TAM. Baidu which purchased YY Live last year trades at 19.5x forward P/E but is more of a search engine than a social media platform. And Douyin has recently valued itself in private rounds at 26x forward earnings, up from 15x two years ago. Tantan has no public comps at all and we rely on a growth based multiple. Chinese growth stocks have recently traded at a conservative 2.5x - 4x forward revenue. Match group for comparison trades at 12x revenue.

Bear case – Livestreaming at Momo continues to rapidly decline and its attempts to carve out a niche fail. It lives on as a small segment with traffic fueled by the social side of Momo. Diseconomies of scale push down livestreaming margin along with mgmt. throwing unproductive marketing $ at the problem and investors value the segment at almost nothing.  Overall Momo users are flat to declining, VAS revenue grows very little over the time period, and VAS margin compresses from negative growth and knock-on effects from livestreaming. Tantan either loses popularity, competitors win the race, or Chinese online dating growth fails to materialize. In any event, its revenue and user growth is flat. It is a dead stock with little upside and the entire company gets valued at the same anemic multiples as it does today. Most of the company value is cash.

Base Case - Momo livestreaming eventually stabilizes sometime in 2021. Revenues and margin treks along at its current rate for the next few years and while they lose most of their general entertainment type streamers to competitors over time, they retain a lot of their camgirl-esqe and emotionally connected livestreaming. They carve out only a somewhat defensible niche and future growth looks limited. Livestreaming multiples return to their below market averages. Their VAS and social side continues to grow over the next year but starts to reach steady state ARPPU. With stabilization and VAS revenue making up a larger portion of the pie, total Momo multiples trade back to their average but they fall short of repositioning themselves in investor minds as a full fledge social media company. With growth looking slightly less promising than the past, they get no multiple expansion. Momo app ends up having longer staying power than current prices give it credit for and looks like a legacy app that still produces solid cash flow. Tantan grows in pace with the dating app market and competitors begin to establish themselves. The dating app market in China starts to get more attention from investors.

Bull Case – Momo app proves itself out as a social app and increased usage and retention numbers continue pulling through to increased VAS revenue. Momo livestreaming recovers early in ’21 and they carve out a dating related livestreaming niche that large competitors are hesitant to compete with. Momo livestreaming revenues grows after stabilizing but remains below its highs given eventual loss of general focused entertainment livestreaming business. Margins still remain strong in their niche. Momo app is viewed as an improving niche social media site with a high margin livestreaming business. Momo app trades at the high end of its historic multiples as investors realize the shifting business model. Tantan grows with a robust Chinese online dating market and maintains their lead over new competitors with increased investor interest in the sector.

Blue skys – essentially the same as the bull case except the growth of online dating in china starts getting serious investor attention and the trend becomes indisputable. On the heels of Tantan hype, Momo the company begins to look like a growth-based stock with a legacy business producing good cash flow and a growth machine in Tantan – similar to the Match/Tinder story. Tantan dominates the story and Momo app cash flows trade at higher multiples in sympathy with the overall narrative.

Potential Concerns

-   Taken private or sold cheap before value can be realized

A distinct possibility with cheap Chinese stocks where the founder controls the voting shares. At this valuation its less of a downside risk but could limit upside. With current stock price only 30% higher than its enterprise value, it would take some combination of a sustained fall close to EV and a cheap takeout premium to impair investors from this level. This is by far the largest risk we see to the thesis.

-   Regulatory risk

Always an issue with Chinese companies and especially those that play on the lines of what the government allows. Momo and Tantan were issued a 1 month ban in 2019 for risqué content along with 30 other Chinese companies. They’ve recovered and are in good standing with the government. We would be more concerned if they singled out Momo, but it seemed to be a as a first warning to keep a broad category of companies in check and there haven’t been any talk of further action in recent years. There is some risk if you believe the Chinese government is becoming more conservative rather than liberal with personal freedoms. But even if that’s the case and China moves the “line” of what’s acceptable, we think they would force Momo to reign in its content rather than ban the app. And then they would still be the platform closest to what is allowed. Customers who want to play close to the line will still want to play close to the line.

Tantan was banned in India over dispute with China. We don’t see them reversing this anytime soon with the political tensions. This obviously decreases the TAM of an app that aspires to eventually expand throughout Asia. But we think it is mostly already baked into the Tantan narrative.

Other factors

-   Strong insider ownership (40+%)

-   Management has historically been tight lipped with investors and haven’t fully promoted the stock or the story. The IR side has been lacking, but we think they’ve performed well in terms of finding unique ways to build out monetizable streams for a unique asset. It was founder led until the most recent quarter by Yan Tang. He stepped down in Q2 ’20 for the COO Yan Tang to move up to CEO. We’ve been impressed by his commentary so far and his more open approach with investors.

-   Cash continues to be returned to shareholders. They’ve declared a $.64 special cash dividend the last two years. We expect that to continue going forward barring any financial deterioration. They had $250mm/300mm USD left on their share repurchase program at the end of Q4.

Catalyst

SS

-    Stabalization in Momo's livestreaming segment

-  Global reopening increases demand for geolocational social/hookup apps in Q2/Q3

-  Demonstrated growth in Chinese online dating

-  Tantan competitor Soul potential IPO in 2H ’21 increases investor interest in the online dating story