Newborn Town Reports Blowout Business, But Investors Fail To Move In

Key Takeaways:

• Newborn Town’s revenue grew between 60.7% and 62.7% to more than 3.2 billion yuan in the first nine months of this year
• The social media platform operator’s cumulative app downloads passed the 700 million mark during that time

By Lau Chi Hang

China’s economic slowdown and weak consumption are prompting many companies to look elsewhere for growth, often through overseas expansion. But the race to go global isn’t quite so straightforward, and where a company pivots can often be critical for its success. Once considered the most lucrative markets, the U.S. and Europe are becoming increasingly hostile to Chinese companies, erecting trade barriers to solar panels, semiconductors, e-commerce platforms and most recently electric vehicles.

By comparison, the Middle East offers a relatively trouble-free glide for Chinese companies with the right stuff, including Newborn Town Inc. (9911.HK), which some have nicknamed the “Tinder of the Middle East.” Newborn Town’s own results have been on fire lately, as reflected in its latest financial estimates released last month, underscoring the big potential of a larger Arabic-speaking region known as the Middle East and North Africa (MENA).

The latest results show a continuation of the company’s positive trends into 2024, with its revenue up between 60.7% and 62.7% year-on-year to an estimated 3.24 billion ($454 million) to 3.28 billion yuan in the first nine months of the year.

Cumulative downloads of all its social media apps reached 740 million by the end of September, up 6.5% from three months earlier. And its latest monthly active user base totaled 28.98 million, up around 1.5% over that period.

The company develops and operates audiovisual networking and gaming products and is most known for social networking apps, including its popular MICO livestreaming platform, its audio-based YoHo social media platform, its TopTop gaming network, and companionship platform SUGO. The company expanded its offerings last year by acquiring Blued and Heesay, networking platforms for homosexual and transgender users.

Staying True To Your Heart

Newborn Town founder Liu Chunhe decided to start his own company as a graduate student in 2009, hoping to harness the power of technology to change the world. As he set about his task, he couldn’t stop thinking of a line from Mencius, an early Confucius disciple, that says: “The best people are those who retain the heart they were born with.” With that in mind, he named his company Newborn Town with a vision of always remembering where it got its start and working tirelessly towards its original goal of maintaining its original heart and always striving to do better.

Liu started out as a coding instructor, which is where he met Li Ping, originally a student who would later join him as partner in starting the business. They started to develop products for overseas markets in 2013, and the company’s Solo Launcher won honors from Google as one of the app store operator’s best apps worldwide. Around that time the company shifted its focus to social networking with its platforms gradually expanding into the MENA region and to Asian markets. Its social networking platforms are currently leaders in the MENA market.

Early on it obtained the first social networking business license from Egypt and this year it gained a regional headquarter license from Saudi Arabia, becoming the first global social entertainment business to be based in the kingdom. Such achievements speak to the popularity it enjoys in those markets.

The company has performed strongly since going public in Hong Kong in 2019. It logged a 390 million yuan in loss in 2021, though that was mainly due to share-based compensation expenses. Excluding that, its core business continued to turn a nice profit that year. Last year its profit quadrupled to 510 million yuan. The growth continued this year, though at a sharply slower rate, as its profit rose 21.3% to 225 million yuan in the first half of 2024.

Volatile Stock

While its performance over the years looks strong, the company’s stock has been less reliable. The shares spiked a bit after the nine-month results announcement came out as investors welcomed the strong revenue growth. But the closing price that day was still less than half the company’s all-time closing high of HK$9.42 back in 2021.

In fact, investors have been quite fickle on the stock since its IPO.

The company was a smash when it listed in 2019, pricing its shares at HK$1.68 in an IPO that was oversubscribed 1,441 times, making it the most oversubscribed stock of the year. It nearly doubled on its first trading day, closing up 93.5%. The stock surged for a while, climbing as high as more than HK$11 at one point in 2021, before things went south and it tanked to just HK$1 in 2022.

Things started to look up again early last year when the stock went over HK$4 again, only to lose momentum and dip back to HK$3. Its latest levels are more than double its IPO price, but still a far cry from their all-time highs.

Costs are also an issue for the company. While its revenue has surged, its spending has grown even faster. Its revenue jumped 65% in the first half of the year, trailing a 69.4% rise in cost of revenue, which doesn’t even factor in promotional, R&D and administrative spending. Such elevated costs may be another reason behind investor reservations about the stock.

Low Valuation

The company won some heavyweight investors before the IPO, but those have gradually cashed out since then. In the absence of that vote of confidence, the company also lacks big-bank analyst coverage that adds credibility, perhaps due to its relatively low market value. Its inability to maintain a market cap above HK$5 billion over the past three years has also drawn criticism, making it ineligible for trading in the Hong Kong Stock Connect program that would make its shares available to Mainland China-based investors.

The company now trades at a trailing price-to-earnings (P/E) ratio of 6.7 times, close to the 6 for Yalla YALA, but well below the 17 for Match Group MTCH, parent of Tinder. Some investors may worry about problems not included in the company’s financial statements, and thus are staying away.

Alternately, investors may simply need more time to see if the company can continue its rapid growth and may vote with their wallets if it can. In the end, founder Liu might be sticking to his philosophy of staying true to his original heart and founding vision. But he may have to tweak that formula to win the heart of investors and create some excitement around his company’s stock.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.