Weibo Saw Bold Performance In Q3, But Kicked Off A Bad Opening On Hong Kong Debut

Summary

• Investors did not buy Weibo’s secondary listing in Hong Kong, with its stock price dropping to 223.20 Kong Kong dollars per share.
• The company’s Nasdaq-listed stock is on a downward channel for nearly half a year and recently touches a new all-time low.
• In the face of regulatory cleanup, the company still has growth potential but at first needs to be obedient.

China has introduced pieces of legislation over the past year in a bid to beef up the regulation of anti-monopoly, big data security, and personal privacy. In the internet domain, a flock of behemoths in the sector are bombarded with more such scrutiny. DiDi (DIDI. US), for instance, has been coerced to delist from the U.S exchange stock by the regulators due to existing data security risks, even though the hail-riding player just trades there for less than six months.

Weibo (WB. US) is the second-largest social media application and the fourth largest social networking platform by the number of users in China, after WeChat, Douyin, the Chinese version of TikTok, and QQ. According to Weibo's latest quarterly earnings report, it has reached 573 million monthly active users and is now a huge user traffic pool, but not a major target of the prevailing regulation because the platform does not store real important personal data about users under the anonymous registration mechanism.

The company’s secondary listing in Hong Kong seems like a confession to the watchdog that it is innocent. Previously, it also positively embraces regulation and makes overhauls to some malpractices on the platform, striving to build a healthy ecosystem. On the first day of its Hong Kong debut, the company’s CEO, Gaofei Wang said, “We are very confident in the company's development and are more concerned about long-term value."

In contrast, investors didn't buy the story. Weibo closed at 253.2 Kong Kong dollar a piece, 7% lower than the offer price, on the first day of trading in Hong Kong. In the following few days, its stock price slid further to trade at 222.3 Kong Kong dollars each share on Dec. 15.

The bad opening of Weibo’s secondary opening has signs to follow before it trades in Kong Hong. Since this year, the domestic regulatory tightening and growing uncertain factors have intimated most of the U.S-listed Chinese stocks, which sent their price to collapse, including Nasdaq-listed Weibo. A quick look at Weibo’s share price, we can find that it climbed to a moderate peak in July this year topping $60 per share in more than two years, but soon afterward, it started a downward trend and sank to touch a new all-time low of $28.80 per share.

The toughest time of the crackdown on internet enterprises by Chinese authorities has gone, but the regulation cloud still looms over these companies. This is a cause that the investors feel downbeat about Weibo’s future. Just like DiDi, it would never think of itself being forced to delist due to data security issues. Additionally, Weibo is a regular fine receiver who has been given administrative penalties as many as 44 times from January to November this year alone, with an aggregate fine of RMB 14.3 million, including the latest bill up to RMB 3 million on Dec. 14.

The naughty and disobedient Weibo has a blade hanging over its head which the sharp stuff may fall at any time when the authorities lose its patience, and DiDi is the latest precedent. Thus, Weibo’s listing in Hong Kong is to a certain extent an attempt to avoid such risk.

Huge growth potential

Weibo’s timeliness feature is a big edge that distinguishes itself over its peers in China. It always serves as the first place for users to discuss or spill the tea about the country’s major national events, mega sports meetings, or celebrity gossip; what’s more, it is the public social platform with the most famous people in its community. The two properties make Weibo naturally attractive to new users.

Weibo’s latest earnings report showed that it had 573 million monthly active users and 248 million daily active users in the third quarter of this year, adding 62 million users and 23 million users year-over-year, respectively. Given that WeChat, China's largest social networking platform, has more than 1 billion users, Weibo still has great growth potential.

In terms of revenue, Weibo reported revenue of US$607 million for the quarter, up 30% year-over-year, with 87% of that revenue, or US$537 million, coming from its advertising and marketing business. In November, it acquired an interactive entertainment company that contributed $69 million in revenue to its value-added services. Nevertheless, Weibo’s revenue mix is relatively less diverse and the advertisement sector is still the mainstay of revenue source. But heavy reliance on advertisement income to drive revenue is a common phenomenon shared by all types of social applications.

That's also true for the world-class social media outlet Twitter. Its latest financial report showed that the company generated US$1.28 billion in revenue in the third quarter, with 89% of that, or $1.14 billion, deriving from its advertisement segment. Twitter’s advertisement revenue is double more than Weibo’s, but interestingly, Twitter’s daily active users of 211 million are less than that of Weibo, suggesting Weibo has a weaker commercialization capacity and profitability.

Weibo revealed in its earnings report that the company's revenue is expected to grow 15-20 percent year-over-year in the fourth quarter of this year, which means it will achieve up to $616 million in revenue next quarter compared to $513 million in the fourth quarter of last year.

Despite Weibo's revenue might amount in the future, its net profit attributable to the shareholders has declined for years in a row. The company’s previous yearly financials demonstrated that its net profit attributable to the shareholders from 2018 to 2020 were US$572 million, US$495, and US$313 million respectively, showing a downward trend. That is also one of the reasons for the unfavorable kick-off of its Hong Kong IPO. Reversely, its net profit attributable to the shareholders for the third quarter of 2021 was US$182 million, a 437.7% jump year-on-year, with management explaining the spike was partly fueled by the Olympic Game effect.

It seems that Weibo’s revenue inflation has a direct connection with its user engagement. As a result, the company has disclosed that it would step up efforts to build a more diverse content ecosystem and hold on to the Generation Z (Gen Z) users to perk up the community. Gen Z users have 75% more shares of Weibo’s total monthly active users, and they are more expressive and engaged, as well as have a higher consumption tendency.

If Weibo’s “trends+social” operation model and the contents of the 46 vertical categories can be well improved, it will continue to be a strong magnet for new users. More importantly, the Beijing Winter Olympics Game is right around the corner, plus the Hangzhou Asia Games next year, will once again create a national buzz, as the Tokyo Olympics Games did this summer, hoping to bring more new users to Weibo.

Weibo has been primarily centered on the Chinese market that has not yet grown available as worldwide as Twitter. But its current price-to-earnings (P/E) ratio is 21.0 while Twitter and Snapchat are still in the red; it is also much cheaper than the price-to-earnings (P/E) of 33.8 for Meta (Facebook), though its market cap is far dragged behind by the American social giant.

In China, Xiaohongshu, or Little Red Book, has an estimated value of US$20 billion after a recent round of fundraising of US$ 500 million, which is nearly twofold higher than the US$ 6.8 billion of Weibo. But Xiaohongshu now is incomparable to Weibo in terms of size as its monthly active users have just reached 150 million in the third quarter. Furthermore, its valuation may shrink when it goes public due to its underdeveloped content ecosystem and still-exploring monetization channels.

By and large, no rival in the social media space is strong enough to fight against Weibo’s “trends+social" operation model in China. Its stock will rebound, but at first, it needs to be a good boy in the face of regulatory cleanup.