West Bull Securities: "Strong Buy" Rating and HKD8.39/Share Target Price for Newborn Town Inc.

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

On August 23, West Bull Securities issued a research report, which initiated the first coverage on Newborn Town Inc. (09911.HK) with a "Strong Buy" rating (an absolute upside of more than 50% over the next 12 months) and an HKD8.39/share target price. Aside from the rapid penetration and strong performance of its social networking apps in the global markets, the game business may become the next growth driver for Newborn Town Inc., the research report said. 

Convincing Performance from Social Networking Apps 

As indicated in the report, such convincing performance mainly results from the company’s social networking business, which is operated based on three investment theses:

1. Comprehensive Portfolio of Social Networking Apps

According to the research report, the Group currently has a comprehensive portfolio of social networking apps, including MICO, YoHo, etc., covering emerging social forms like video and audio. On the one hand, by providing different features, Newborn Town Inc. successfully attracted users of different ages; and on the other, users in similar age groups typically look for similar features and conglomerate in particular apps, thus contributing to in-depth communication and naturally incremental user base in products.

2. Rapid Penetration Across the World 

The research report indicates that as of the end of June 2021, Newborn Town Inc. has tapped into several developed regions, including North America, Europe, Japan and South Korea. According to the prediction of Statista, among the global dating services market in 2020, North America and Europe were the largest markets which accounted for 23% and 22% of the market respectively. And in terms of the number of users, North America and Europe accounted for only 14% and 18% respectively, indicating the high value of users.

West Bull Securities considers that MICO is the most successful app in the product portfolio of Newborn Town Inc. On the basis of the operation in the Middle East, Southeast Asia and South Asia, MICO expanded its footprint to America in 2019, and Japan, South Korea and Europe in 2020. The research report believes that leveraging on the successful track record of MICO, Newborn Town Inc. is capable to replicate the business model to other social networking apps and expand its business to more countries. 

3. Growing Monetization Means 

Global players are enhancing the social networking apps by providing more features for monetization and retaining existing users, said the research report. For instance, Tinder from Match Group (MTCH.US) has introduced new features like video profile, Passion and VIBES recently. 

Unlike Tinder, Newborn Town Inc. focuses on the audience user experience and the interaction between users, mini-games are, thus, added, allowing the users to play while watching the live stream. These video and audio features not only build up all sorts of social networking scenes for users, but also expand monetization means. 

Game Business May be the Next Growth Driver 

As suggested in the research report, the growth of traffic monetization of Newborn Town Inc. may have peaked in the short term, and the company has enlarged its investment in the mid-core games in 2020. The development of mid-core games which depend mainly on value-added services maybe a new driver bringing the Group growth momentum. 

According to the research report, its additional inputs in mid-core games are mainly focused on R&D and external investment. As for R&D, the Group has launched two mid-core games in 2021, namely Solitaire Chapters and Merge Island; and as for external investment, it invested in Afun to enhance the R&D ability and strengthen its game reserve. 

West Bull Securities believes, developing mid-core games that attract more loyal players, instead of generating advertising revenue from casual games, marks a strategic shift in the game business of Newborn Town Inc., and value-added services are likely to be a new growth driver for the Group in the future. 

"Strong Buy" Rating and HKD8.39 Target Price for Newborn Town Inc. 

West Bull Securities uses the DCF valuation methodology for valuation and take the P/S valuation methodology as a reference to derive the fair value. It initiates the first coverage on Newborn Town Inc. with a "Strong Buy" rating and a HKD 8.39/share target price, implying 3.3x/2.3x/1.8x forward P/S of 2021/2022/2023. 

According to the research report, it's believed that the Group may benefit from the expansion of social networking business, development of mid-core games, and an increment of the number of paying users and Average Revenue Per User (ARPU). It is forecasted that the Group will realize RMB 2,287.7 million top-line in 2021, implying a YoY 93.6% increment when compared to 2020. It will bring the Group a YoY 1.9x increment in the bottom-line to RMB 335.6 million in 2021. 

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.