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blue-chip

Long-Term Upside Potential on these Chinese Businesses – LI, MOMO

Jun 15, 2021 | Team Kalkine
Long-Term Upside Potential on these Chinese Businesses – LI, MOMO

Li Auto Inc.

LI Details

Li Auto Inc. (NASDAQ: LI) designs, develops, manufactures, and sells premium smart electric vehicles in China. The company concentrates its in-house development efforts on its proprietary range extension system, next-generation electric vehicle technology, and smart vehicle solutions. Its key model is Li ONE, a six-seat, large premium electric SUV equipped with a range extension system and cutting-edge smart vehicle solutions. LI was listed on the NASDAQ on November 18, 2020. As of June 14, 2021, the company’s market capitalization stood at USD 25.43 billion, with 904.64 million American Depository Shares (ADS) listed and outstanding (each ADS representing two Class A ordinary shares).

Robust Increase in Li ONE Deliveries: On June 02, 2021, the company announced that it delivered 4,323 Li ONEs in May 2021, representing a 101.3% increase from the deliveries reported in May 2020. The deliveries are expected to keep rising going forward, even as the ongoing industry-wide semiconductor shortage continuing to generate uncertainties.

Convertible Senior Notes Offering: On April 12, 2021, LI completed the offering of USD 862.5 million aggregate principal amount of 0.25% convertible senior notes due 2028, including the full exercise by the initial purchasers of their option to purchase an additional USD 112.5 million of notes. Proceeds from the offering will be used for R&D of new vehicle models and leading technologies, and working capital purposes.

Q1FY21 Results: The company reported a sharp uptick of 319.78% in total revenue to RMB 3.58 billion in Q1FY21 (ending March 31, 2021) compared to RMB 851.68 million in Q1FY20. However, the net loss for Q1FY21 was RMB 359.97 million vs RMB 77.11 million in Q1FY20. LI’s ongoing efforts to enhance investment in R&D and direct sales and servicing network resulted in higher operating and R&D expenses.

Key Risks: The company uses over 1,900 parts for Li ONE, some of which are sourced from single-source suppliers. Hence, any defects/quality issues with these components could cause delays in product deliveries, compromising LI’s brand image and business. Further, prolonged frictions between the US and China, and the recent passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years) expose the stock to significant political and regulatory risks. Though a solution to the standoff could be negotiated in the medium term (before the earliest possible delistings begin in 2024), the companies that might not be able to fulfill the revised standards are at risk.

Outlook: In Q2FY21, LI expects vehicle deliveries to be between 14,500 and 15,500. Total revenue is estimated to range between RMB 3.99 billion and RMB 4.27 billion.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

LI Daily Technical Chart

Stock Recommendation: LI has increased by 9.03% in the past 3 months, decreased by 9.86% in the past 6 months, and is currently leaning towards the lower end of the 52-week range of USD 14.31 to USD 47.70. The stock is currently trading above its 100 DMA level. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 33.01. Considering the attractive valuation of the newly listed company, excellent balance sheet, exponential increase in revenue, and potential for long-term growth, we recommend a “Buy” rating on the stock at the closing price of USD 28.24, up by 0.46% as of June 14, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

Momo Inc.

MOMO Details

Momo Inc. (NASDAQ: MOMO) is a holding company and offers its users various platforms to discover new relationships, expand their social connections and build meaningful interactions. The company’s key products include 1) Momo, a mobile application that connects people and facilitates social interactions based on location, interests, and a variety of online recreational activities; and 2) Tantan, a social and dating app designed to help users find and establish romantic connections and meet interesting people. The mobile apps are available on android, iPhone operating system (iOS), and Windows platforms. As of June 14, 2021, MOMO’s market capitalization stood at USD 3.25 billion, with 206.13 million American Depository Shares (ADS) listed and outstanding (each ADS representing two Class A ordinary shares).

Q1FY21 Results: The company reported a 3.44% decrease in net revenue to RMB 3.47 billion in Q1FY21 (ending March 31, 2021) compared to RMB 3.59 billion in Q1FY20, with revenue from the Momo app representing 83.61% of the total revenue. Net income for Q1FY21 was RMB 460.92 million, 14.28% lower than RMB 537.71 million reported in Q1FY20. Monthly Active Users (MAU) on the Momo app increased to 115.3 million in March 2021 from 108.0 million in March 2020.

Key Risks: MOMO operates in a market characterized by rapidly changing technologies, new generations of product enhancements, and changing user expectations. Hence, the company’s ability to monetize its services depends on its ability to maintain/attract users and to adapt to the changing technologies and industry standards. Further, prolonged frictions between the US and China, and the recent passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years) expose the stock to significant political and regulatory risks. Though a solution to the standoff could be negotiated in the medium term (before the earliest possible delistings begin in 2024), the companies that might not be able to fulfill the revised standards are at risk.

Outlook: For Q2FY21, the company stated that it expects the net revenue to be between RMB 3.6 billion and RMB 3.7 billion, representing a slight decrease of 6.9% to 4.3% from Q2FY20. In addition, it also stated that its Momo app is on a steadily improving trend and expects it to evolve into a cash cow business.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

MOMO Daily Technical Chart

Stock Recommendation: MOMO’s share price has decreased by 16.84% in the past 12 months. The stock is currently at the lower band of the 52-week range of USD 12.01 to USD 21.15 and trading close to its 200 DMA level. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 18.48. Considering the weakness in the stock price over the past 12 months, the increasing demand for social and dating mobile apps, and a turnaround in the business outlook, we recommend a “Buy” rating on the stock at the closing price of USD 15.75, down by 0.19% as of June 14, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.