China Regulations And Aging Trends Will Crush Profitability

Key Takeaways

• Persistent regulatory and demographic challenges in China constrain domestic growth and pressure user retention, threatening long-term profitability.
  
• Rising competition, overseas expansion inefficiencies, and shifting user trends risk further margin erosion and diminished brand relevance.
  
• Rapid overseas growth, product diversification, technological innovation, and operational efficiency position Hello Group for resilient, profitable expansion despite domestic market challenges.

Catalysts

Provides mobile-based social and entertainment services in the People’s Republic of China.

• Heightened regulatory scrutiny and tightening controls over internet content and data privacy in China present a persistent threat to Hello Group, with the potential for new operational restrictions or fines that could stifle domestic user growth and directly reduce both revenue and net margins.
  
• An aging population and shrinking base of young, mobile-first users in China create demographic headwinds that limit the future growth of Hello Group's core domestic dating and social discovery platforms, placing downward pressure on recurring revenues and user retention rates.
  
• Intensifying competition from larger, more diversified platforms such as Tencent's WeChat and ByteDance's Douyin/TikTok is likely to accelerate user churn and erode Hello Group's brand value, reducing market share and leading to slower top-line growth and lower monetization rates.
  
• The company's overseas expansion, while rapid, is driving a structurally lower gross margin due to higher payment channel fees, elevated payout ratios, and the early-stage inefficiency of new products, which management expects will further depress margins in the near to medium term and could compress net earnings if scale efficiencies fail to materialize.
  
• Industry-wide shifts in user behavior toward short-form video and live-streaming ecosystems threaten to undermine Hello Group's traditional social networking and dating business models, risking sustained declines in core user engagement and ultimately lowering both ARPU and group-level profits.

Hello Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hello Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hello Group's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.2% today to 12.2% in 3 years time.
• The bearish analysts expect earnings to reach CN¥1.2 billion (and earnings per share of CN¥7.45) by about September 2028, down from CN¥1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, up from 6.8x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 6.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.52%, as per the Simply Wall St company report.

Hello Group Future Earnings Per Share Growth

Risks

• The rapid growth of Hello Group's overseas business, particularly in the MENA region, with overseas revenue up 72% year-over-year and now accounting for 16% of total revenue, suggests a powerful new engine for group-level top line growth that may soon offset domestic declines and contribute to higher group revenues.
  
• The successful launch and scaling of new brands beyond Soulchill, each now generating meaningful revenue and demonstrating robust user retention and strong ROI on acquisition costs, point to a diversified and sustainable international revenue base, supporting long-term earnings resilience.
  
• Management highlights the effectiveness of an ROI-driven channel strategy and product localization, enabling Hello Group to quickly enter new geographies and enhance monetization, which provides structural advantages that could drive higher profitability and improve net margins over time.
  
• Technological advancements such as AI-powered personalized features implemented on both Momo and Tantan have improved user engagement and retention, which can contribute to platform stickiness, higher ARPU, and ultimately stronger recurring revenues.
  
• The stabilization seen in key domestic products, combined with narrowing year-over-year declines in China, suggest the core cash cow business is returning to a more stable footing, while margin improvements from cost efficiency measures could support healthier profits and better long-term margins even during domestic headwinds.

Valuation

• The assumed bearish price target for Hello Group is $7.05, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hello Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.07, and the most bearish reporting a price target of just $7.05.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥10.2 billion, earnings will come to CN¥1.2 billion, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 9.5%.
• Given the current share price of $8.27, the bearish analyst price target of $7.05 is 17.3% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.