Investors find safe haven in Newborn Town during global trade war

The Middle East-focused social media operator performed strongly in the first quarter, as its stock has been on a recent roll

Key Takeaways:

• Newborn Town’s social networking revenue rose 40% year-on-year in the first quarter
• Cumulative downloads of its social networking apps jumped 26% in the quarter from a year earlier

By Lau Chi Hang

The tsunami unleashed by U.S. President Donald Trump’s trade war has hammered global stock markets, including Hong Kong, whose benchmark Hang Seng Index plummeted last month as Chinese stocks took a bath. But as most tickers got pummeled, Newborn Town Inc. (9911.HK), sometimes called the “Tinder of the Middle East,’ not only avoided the bloodbath, but saw its stock surge to new highs.

Newborn Town may not be a household name to ordinary Hong Kongers, but its social media apps are all the rage in the Middle East and North Africa (MENA). Those include names like its MICO platform for livestreaming, YoHo for audio social networking, TopTop for gamers and SUGO for lonely hearts in search of companionship. Most recently it rolled out its HeeSay social media app for the LGBTQ community last year.

The company’s geographic focus makes it well positioned to withstand the raging trade war, reflected in its recently announced first-quarter update that showed a company with strong momentum. Cumulative downloads of its social networking apps totaled about 820 million by the end of the quarter, up 26% year-on-year, as it logged 32.84 million average monthly users during the period, up 15% from a year earlier.

Revenue from its social networking business reached between 1.35 billion yuan ($185 million) and 1.4 billion yuan during the quarter, up as much as 44% year-on-year. Its innovative businesses did even better, growing up to 88% year-on-year to between 155 million yuan and 175 million yuan, albeit off a much smaller base. 

Newborn Town’s stock rallied 5.1% after the quarterly update’s release. The shares have doubled since the start of the year, easily beating the broader market. They held up even after Donald Trump’s trade war began in early April, and rose 39% for the month.

Trade war safe haven

The company has a number of factors going for it during the global trade war originating in the U.S. For starters, many investors may believe its positioning in the social networking and gaming spaces makes it less vulnerable to the impact of rising tariffs. Geographically speaking, the company’s focus on the MENA region is far from other places like China, Europe and Canada that are most in Donald Trump’s crosshairs. Finally, the company has steered clear of the kinds of data security concerns plaguing TikTok and other Chinese companies with large amounts of offshore user data. All of those factors have allowed Newborn Town to stay above the fray despite its Chinese roots.

That status has lured investors, who are looking for such safe havens to park their funds as they flee more vulnerable stocks. The company’s impressive performance and rising profits over the past few years have further underscored its relative resilience in the face of all the turbulence around it.

Newborn Town has been on a winning streak for most of the time since its IPO in 2019. Its one bad year, at least in terms of its bottom line, came in 2021 when it registered a loss of 390 million yuan. But even that was unrelated to its actual business and instead was the result of equity-based compensation expenses that rose by 651 million yuan.

The company logged profits of 130 million yuan and 510 million yuan in 2022 and 2023, respectively. The figure fell 6.3% to 480 million yuan last year, but even that was due to a high base the previous year when it recorded one-off gains from asset sales. Excluding those gains, its profit would have risen 30% last year.

Stock Connect candidate

The stock may also be getting a boost from its solid chances of being included in the Stock Connect program that makes Hong Kong-listed shares available to Mainland China-based buyers in Shanghai and Shenzhen. To be eligible for inclusion in the program, Hong Kong-listed companies must be component stocks in the Hang Seng, Hang Seng Composite MidCap or Hang Seng Composite SmallCap indexes, and have a market cap of at least HK$5 billion ($688 million).

Given its current size and market cap of more than HK$10 billion, along with high trading volume in its shares, the company could quite possibly be included in the Hang Seng Composite SmallCap Index first. From there it could be admitted into the Stock Connect program, which could further boost its shares as Shanghai- and Shenzhen-based investors pile in.

Second growth curve

Newborn Town is also on the prowl for its next big growth engine, which it thinks it may have found in the development of high-quality games. It earned 460 million yuan from such games last year, up 21.3% from 2023. The company says that quality is a top priority in its gaming business, and it pursues a strategy of developing evergreen games that generate good user experience and have long life cycles. Its “Alice’s Dream: Merge Games” has made it onto Sensor Tower’s list of top 30 Chinese mobile for overseas markets several times.

Its base now established in the Middle East, the company is also eying the more competitive European and Japanese markets. Senior vice president and senior company secretary Song Mingliang has told media Newborn Town is on the hunt for M&A opportunities in those two markets to keep its revenue growing at a steady clip. He stressed that existing mobile internet operators in those markets have failed to provide users with more emotional value so far, leaving an opening for the likes of Newborn Town.

The company’s booming shares may have delighted investors, but the rally has also raised the very real risk of a correction. The stock now trades a relatively frothy price-to-earnings (P/E) ratio of 22 times, which is well ahead of global leader Match Group’s (MTCH.US) 15 times and more than double the 9.5 for the similar-sized Yalla (YALA.US), which also focuses on the MENA region. At such elevated levels, investors might want to exercise extra caution before jumping on to Newborn Town’s strong growth story.

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