Hello Group (MOMO US)

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Hello Group (MOMO US) is a Chinese software developer focusing on dating apps. The company owns two major apps:

• Momo (陌陌): Originally a Tinder clone, known as a “hookup app”. Today, Momo has expanded its offering to include live streaming and social media features.
• Tantan (探探): A pure-play dating app focused on a younger demographic and that dominates online dating in China today.

The common denominator between these two apps is that they allow users to connect to potential partners in their immediate vicinity. The fact that they’re location-based services means that it’s easy for users to meet up in real life.

Momo has 109 million monthly active users, is more used in lower-tier cities, and has a tilt towards live-streaming services. Tantan is popular in tier 1 cities among the young demographic and women looking for a relationship.

China’s online dating market is still in its infancy, with only a small portion of singles using dating apps. China has roughly 300 million singles, and Momo and Tantan only have 9 and 3 million paying subscribers, respectively.

The period since 2019 has been tough for the company:

• First, revenues dropped after a government crackdown on live-streaming activities, specifically the introduction of real-name verification and caps on spending.
• Second, COVID-19 hurt the market for casual dating. Users were afraid of catching the virus, and there was no point in looking for new potential partners in your vicinity when staying at home, in the same spot, for three years.
• Third, China’s macro environment has been weak, and top spenders within the live-streaming segment have been cautious.

All of these factors are now changing for the better. The regulatory crackdown on live-streaming companies seems to be over. China’s zero-COVID policy has ended, and herd immunity is building. And the macro environment should improve as well, with an expected catch-up in consumer spending.

Management is guiding for the online dating market to improve sometime after the Chinese New Year in late January 2023. I also see encouraging signs in Douyin search query data, which suggest a pick-up in interest for online dating apps like Tantan.

Today, the stock trades in line with other Chinese live-streaming companies at around 0.5x revenues. But I wonder whether the market appreciates that Hello Group dominates the market for online dating in China and that the assets can be monetised in other ways than live-streaming.

For example, Match Group has a 30% operating margin without using any live-streaming tipping services that regulators and investors seem to despise so much. Sex sells and online dating apps have significant pricing power. For what it’s worth, Match Group has an enterprise value roughly 15x that of Hello Group.

There are obviously many risks involved as well. The Chinese small-cap space is a hotbed for frauds, and I can’t rule out the potential recycling of cash through related parties, as seems to have taken place at competitor JOYY.

Competition from short video platforms such as Douyin (TikTok) and Shanghai dating app start-up Soul could also pose a problem in the medium-to-long term.

And while it looks like the NASDAQ delisting risks are off the table for now, it’s not something I can rule out entirely either.