Bottom line: Momo’s shares could take a hit as Beijing pressures it to clean up its reputation as a “one night stand” app, while a group trying to buy out Jiayuan could raise its bid slightly in response to investor pressure.
A pair of stories involving online matchmaking services are in the headlines as we begin the new week, with Jiayuan (Nasdaq: DATE) and Momo (Nasdaq: MOMO) facing resistance on 2 very different fronts. The first story has a Jiayuan investor crying foul over a recent buy-out offer that it says vastly undervalues the online service that engages in traditional match-making. The second story has Momo coming under fire from puritanical Beijing regulators for its more casual form of dating, which encourages short-term, one-night-stand relationships, similar to the popular US service called Tinder.
Both of these stories brought a smile to my face as we begin the new work week, as they show at once how the dating business can be both profitable but also dangerous for app makers in puritanical China. That very real danger is probably a factor behind a sharp decline in Momo’s stock since it made an IPO last December. Jiayuan’s stock has also languished since its much earlier IPO in 2011, though in that case investors were probably put off by its limited growth prospects.
Let’s start with Momo, as that’s the more amusing of the 2 stories to an observer like myself, even as more serious investors worry about the company’s future prospects. Momo’s IPO late last year was marked by controversy, after its founder’s former employer NetEase (Nasdaq: NTES) accused him of stealing company property and other resources to start Momo.
The IPO was slightly delayed due to the controversy but did eventually happen, and even did quite well by rising 26 percent on its first trading day last December. But since then the stock has sagged and mostly traded around 30 percent below its IPO price of $13.50. The stock fell nearly 4 percent in the latest trading session, amid growing concerns that the company could become the next victim of a national Internet clean-up campaign that has already netted the likes of Baidu (Nasdaq: BIDU) and NetEase.
A local friend recently commented to me that Momo was fast gaining a reputation as a “hook up” service for people looking for one-night stands, and media are now reporting the Ministry of Culture has warned the company to clean up its act. (Chinese article) Failure to take action could result in fines for Momo, or could even result in limitations or a suspension of some services. Such an overhang could put further pressure on Momo’s stock, and force it to change its business model to find less controversial uses for its location-based services.
Meantime, a group that made an offer to buy Jiayuan is being called cheapskates and opportunists by Heng Ren Investments, one of the company’s current shareholders. Heng Run published a letter outlining its position 3 weeks after Jiayuan first announced it had received a buy-out offer at $5.37 per American Depositary Share (ADS). (previous post)
Heng Ren said it has done its own research and believes Jiayuan is worth about twice the buyout offer price, or around $11.74 per ADS. (Heng Ren letter) This kind of protest is quite common in cases like Jiayuan’s, where the company’s stock has languished due to lack of investor interest and become undervalued. In this case Heng Ren is trying to pressure the buy-out group, Vast Profit Holdings, to make a higher offer.
Jiayuan’s shares were unchanged at $5.28 in the latest trading session, which is still slightly below the original offer price. I don’t have my own view on this particular offer, but I do expect that Jiayuan’s shares are probably quite undervalued. This is one of the few cases in a recent privatization wave where I’ve seen an investor complain loudly about the low offer price, and thus I wouldn’t be surprised to see Vast Profit come back with a slightly raised proposal, perhaps as high as $6 per ADS.