Momo:Taking off on short video

Accelerating user growth and impressive profitability; upgrading to Buy

    Quick 1Q review Momo delivered impressive 1Q adj net income of US$90.7m (36%/39% higher than DBe/street); revenue of US$265m is 7%/8% ahead of DBe/street. We note accelerating user growth (+5.1% QoQ to 85.2m) even in a low season. Short video (launched in mid-2016) has emerged as an effective way to drive user growth. Short video viewers rose dramatically to 46% of Momo’s overall daily users in mid-May, even higher than the 24% for live video. We expect the aggressive marketing campaigns and product innovation to continue to drive solid user growth. The upgrade of Hani Star Contest should further drive ARPU and incubate celebrities; upgrading to Buy with TP of US$52.

    Quick 1Q review

    Momo reported 1Q live video revenue of US$212.6m (4% ahead of DBe); live video paying users increased to 4.1m, in line with DBe. Overall MAU further grew to 85.2m (2% better than DBe) and live video user penetration rate was 24%, in line with DBe. Membership revenue reaccelerated to US$17.9m (+54% YoY) driven by the new virtual gifting services launched in 4Q. Total membership of 3.6m is in line with DBe. 2Q revenue guidance was 3-5% higher than consensus. Momo will step up on marketing throughout 2017. We think, however, the strong operating leverage can still lead to a solid adj net income growth of 118% YoY for FY17.

    Lifting PEG from 0.8x to 1.0x; upgrading to Buy with new TP of US$52

    We lift FY17/18/19E revenue forecasts by 6%/9%/10% to reflect a stronger user growth and better monetization outlook. We increase non-GAAP net income by 24%/29%/30% to reflect better operating leverage despite the step-up of marketing expense. Our TP is based on 1.0x PEG (vs. prior 0.8x) against FY17E EPS and 28% FY17-19E EPS CAGR (vs prior 24%). Risks: regulation changes, paying user growth slowdown, failure at product innovation, lower operating efficiency.