Executive Summary / Key Takeaways

• The Core Tension: Hello Group sits at a critical inflection point where its domestic cash cow (Momo and Tantan) is declining at low-teens rates while its overseas business grows 70% annually, creating a fundamental trade-off between margin compression and growth reacceleration that will define 2025 results.

• Financial Evidence of Strategic Pivot: Q2 2025 domestic revenue fell 11% year-over-year to RMB 2.18 billion while overseas revenue surged 73% to RMB 442 million, now representing 17% of the total mix—up from 10% a year ago. This shift drove gross margin down 2 percentage points to 38.8%, demonstrating the immediate margin cost of pursuing overseas growth.

• Valuation Disconnect: At $6.95 per share, the stock trades below estimated net cash of $8.7 per share, with management actively repurchasing shares, viewing buybacks as "a better return for shareholders compared to a fixed dividend payout." This suggests the market has priced in a far more pessimistic scenario than the company's strong balance sheet and cash generation warrant.

• Execution Risk on Two Fronts: The investment thesis hinges on whether management can simultaneously stabilize the domestic user base (paying users fell 1.5 million sequentially in Q1 2025 alone) while scaling overseas operations profitably. New tax regulations on agents/broadcasters in H2 2025 and political unrest in MENA add near-term headwinds.

• Potential Inflection Point: Management guidance suggests group-level revenue could turn positive year-over-year in H2 2025, which would mark a "major structural turning point." However, this requires overseas growth to not only continue but accelerate while domestic declines narrow—a delicate balancing act that remains unproven.

Setting the Scene: A Social Giant in Transition

Founded in 2011 and headquartered in Beijing, Hello Group (formerly Momo Inc.) built its empire on location-based social discovery, connecting users through live talent shows, short videos, and interactive experiences. For years, the Momo app served as a reliable cash cow, generating steady revenue from virtual gifting and value-added services while Tantan established itself as China's leading dating app. The business model was straightforward: attract users, convert them to paying customers through engaging social features, and monetize through discretionary entertainment spending.

This model worked until it didn't. By 2024, the domestic social entertainment market faced converging pressures: regulatory tightening, macroeconomic headwinds dampening high-income user spending, and a fundamentally changed user acquisition environment post-pandemic. Hello Group's response was decisive but painful—proactively reducing revenue-oriented competition events on Momo and cutting channel investments on Tantan, accepting near-term revenue declines to improve ecosystem health and ROI.

The company's strategic pivot, however, extends beyond cost-cutting. Over the past few years, Hello Group has methodically built an overseas growth engine centered on the MENA region, where its voice-based social product Soulchill has achieved remarkable success. This isn't a desperate diversification play but a calculated expansion into fragmented markets where the company's product development expertise and operational experience create genuine competitive advantages. The question for investors is whether this overseas growth can offset domestic decay quickly enough to justify the margin compression and execution risk inherent in the transition.

Technology, Products, and Strategic Differentiation: ROI Over Scale

Hello Group's current strategy represents a fundamental shift from user scale to profitability per user. On the domestic front, management has implemented a ruthless ROI-focused acquisition model, explicitly abandoning "ultra-low paying users who made limited contribution to the top line but whose absence improved profitability." In Q1 2025, this approach slashed Momo's paying users by 1.5 million sequentially to 4.2 million; in Q2, another 600,000 paying users disappeared, bringing the total to 3.5 million. The significance is clear: Hello Group willingly shrank its user base to eliminate unprofitable segments, betting that higher ARPPU from quality users would offset volume losses.

This strategy is working at the margin level. Momo's user acquisition ROI exceeded 100% in Q1 2025, driven by reduced unit acquisition costs and ARPPU growth. The company shifted budget from high-cost transitional channels to KOL collaborations on platforms like Douyin and Red Note, achieving a "clear advantage" in marketing costs. Meanwhile, AI-assisted features—personalized greetings and chat assistants—have driven response rates up by a high single-digit percentage and improved multi-round conversation retention. These aren't vanity metrics; they directly impact the platform's ability to convert users into paying customers and maintain engagement.

On Tantan, management has executed an even more dramatic pivot. The dating app underwent a full product upgrade in Q2 2025, simplifying the UI to emphasize core dating features and strengthening user authenticity through verification. This "significant negative impact on overall user retention" in the short term reflects management's willingness to sacrifice scale for experience quality. The payoff? Tantan's ARPPU surged 18% year-over-year in Q2 2025, and its ROI remained "far exceeding 100%" despite an 18% revenue decline. The company is cutting quarterly marketing spend from RMB 40-50 million to RMB 20-30 million, accepting a "faster decline in active users" to ensure full ROI recovery.

The overseas business tells a different story—one of aggressive growth investment. Soulchill, the voice-based social product in MENA, generated nearly RMB 1 billion in 2024 revenue, up 50% year-over-year and surpassing Tantan's total earnings. In Q1 2025 alone, it produced close to RMB 300 million, representing nearly 40% growth. The product's success stems from deep localization: virtual gift designs and interactive features aligned with local preferences, plus a geographic expansion from voice-based to live streaming that resonates in Turkey, Egypt, and Gulf countries. Newer apps Yaahlan and Amar have entered monetization phases, delivering stable ROI since marketing investment increased and validating management's assessment that the MENA market "can accommodate multiple brands."

Financial Performance: Margin Compression as Strategy

Hello Group's Q2 2025 results provide clear evidence of the strategic trade-offs management is making. Total revenue declined 3% year-over-year to RMB 2.62 billion, but this headline number masks a dramatic internal shift. Domestic revenue fell 11% to RMB 2.18 billion, while overseas revenue jumped 73% to RMB 442 million, representing 17% of the total mix versus 10% a year prior.

This mix shift directly impacted profitability: non-GAAP gross margin compressed 2 percentage points to 38.8%, driven by the overseas business's higher payout ratios (especially during expansion), workforce optimization severance payments, and higher payment channel costs in international markets.

The segment dynamics reveal why management accepts this margin pressure. Momo's value-added services revenue declined 11% year-over-year to RMB 1.85 billion, primarily due to "soft spending sentiment among high-paying users amid a weak macro environment." However, the sequential 4% increase from Q1 suggests stabilization efforts are taking hold. More importantly, the paying user base has been intentionally culled—down 1.5 million sequentially in Q1 and another 600,000 in Q2—yet the company maintained revenue trajectory by focusing on higher-value users. This quality-over-quantity approach improved underlying profitability even as absolute user numbers fell.

Tantan's financials demonstrate the extreme version of this strategy. Onshore revenue declined 18% year-over-year to RMB 160 million, with paying users falling 80,000 sequentially to 740,000. Yet ARPPU increased 18% year-over-year and 8% quarter-over-quarter, which "helped to alleviate revenue pressure." The product upgrade's short-term impact on paying conversion was offset by membership package restructuring and refined operations for core user groups. The result: Tantan remains profitable at a lower platform scale, with ROI "far exceeding 100%" and significant year-over-year growth in profitability despite top-line declines.

The overseas segment's financial profile explains why management prioritizes growth over margins here. With revenue growing 73% year-over-year and full-year 2025 guidance of 70% growth to RMB 1.7-2 billion, this business is scaling rapidly enough to offset domestic declines within 12-18 months. While profitability "is not a priority for overseas expansion this year," the ROI-focused model ensures that marketing spend generates positive returns. The temporary moderation to 60% growth expected in Q3 2025 reflects a deliberate decision to "improve ARPPU and optimize acquisition costs" before reaccelerating in Q4, suggesting disciplined capital allocation rather than growth-at-all-costs.

Balance Sheet and Capital Allocation: Fortress Under Pressure

Hello Group's balance sheet remains a key strength, though it's under pressure from strategic cash deployment. As of June 30, 2025, cash and equivalents totaled RMB 12.39 billion, down from RMB 14.73 billion at year-end 2024.

This decline stems from two major cash outflows: repayment of a RMB 1.76 billion bank loan (including accrued interest) and a RMB 346 million cash dividend paid in Q2 2025. Net cash from operating activities was a healthy RMB 250.1 million in Q2, demonstrating that the core business continues to generate cash despite revenue headwinds.

The capital allocation strategy reflects management's confidence in the stock's undervaluation. The company has repurchased shares at a rate of $30-60 million per quarter, limited primarily by market liquidity, with CFO Cathy Peng indicating that "if the current buyback program is exhausted, the Board would likely authorize further repurchases." This preference for buybacks over regular dividends stems from the stock trading "a pretty significantly below cash value," making repurchases "a better return for shareholders compared to a fixed dividend payout."

However, a significant one-time charge in Q2 2025 complicates the profitability picture. The company accrued an additional RMB 547.9 million in withholding income tax for prior periods after Chinese tax authorities required a 10% withholding rate (versus the previously applied 5% preferential rate) on dividends paid by its Beijing WOFE to its Hong Kong parent. While management "continues to believe our initial assessment was reasonable," they complied with the authorities' "most recent interpretation." This RMB 547.9 million charge turned a non-GAAP net income of RMB 451.9 million into a reported net loss of RMB 96.0 million. The impact is substantial: this tax issue is likely industry-wide, not company-specific, and will result in a permanent 10% tax rate on Beijing WOFE profits going forward, structurally reducing net margins by approximately 5% of domestic profits.

Outlook and Guidance: The Path to Inflection

Management's guidance for 2025 reveals a company expecting to reach an inflection point while acknowledging significant execution risks. For the full year, they anticipate domestic revenue will decline "roughly in line with the first half," translating to a "10% plus minus year over year decrease." However, they also suggest "it's possible that we are going to see group level top line turn to positive growth in the second half of the year," which would represent a "major structural turning point."

The overseas business is expected to drive this inflection, with revenue growing from approximately RMB 1 billion in 2024 to between RMB 1.7 billion and RMB 2 billion in 2025—around 70% year-over-year growth. Q3 2025 may show temporary moderation to "around 60%" growth as the company focuses on "improving ARPPU and optimizing acquisition costs," but Q4 is expected to reaccelerate as "ROI optimization takes effect and with contributions from newer brands."

Margin guidance reflects the ongoing mix shift. Non-GAAP gross margin is expected to "land closer to the lower end" of the 36% to 37% guided range, down from 39% in 2024. Non-GAAP operating margin is projected in the "low teens" range of 12% to 13% for the full group, down from 16.3% in 2024. This compression is explicitly attributed to the overseas business's higher payout ratios and the new 10% withholding tax rate.

For Tantan, management expects a 20% to 30% year-over-year revenue decline in 2025 but anticipates the app "to remain profitable for the coming couple of years, albeit at a lower platform scale." This represents a strategic acceptance of smaller scale in exchange for sustainable profitability—a marked departure from the growth-at-all-costs mentality that previously defined China's social app landscape.

Competitive Context: Defending Moats While Building New Ones

Hello Group's competitive positioning varies dramatically by segment. In domestic dating, Momo and Tantan maintain leadership positions with the highest combined monthly active users in China. However, they face indirect competition from integrated platforms like WeChat and Douyin, which offer social discovery features that reduce the need for standalone dating apps. In live streaming, Hello Group competes with JOYY (YY), HUYA (HUYA), and Bilibili (BILI), each with different strengths: JOYY's global footprint, HUYA's gaming focus, and Bilibili's youth-driven community.

The company's moat in domestic social entertainment has historically been its location-based discovery algorithm and integrated ecosystem combining dating, live streaming, and short videos. This created network effects where more users attracted more content creators, driving higher engagement and monetization. However, this moat is eroding as regulatory pressures and macro headwinds reduce high-value user spending, while competitors with larger scale can offer more attractive terms to broadcasters and content creators.

The overseas business faces a different competitive landscape. In MENA, management notes that "although the Middle East hosts a rich variety of social entertainment products, the market remains highly fragmented," and they "haven't experienced significant competitive pressure." This fragmentation creates an opportunity for Hello Group's "playbook for 'zero to one' development of social entertainment" to be replicated across multiple brands. The success of Soulchill, Yaahlan, and Amar demonstrates that the company's product development expertise and operational experience translate effectively to new markets.

However, the overseas business's competitive advantages are less durable than the domestic moat. While Hello Group benefits from being an early mover with strong localization, the barriers to entry in social entertainment are lower than in dating. New competitors could emerge quickly, and the company's reliance on voice-based social features may face disruption as video and other formats gain traction. The impact is that overseas growth, while impressive, may face margin pressure not just from expansion costs but also from future competitive dynamics.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis faces material risks on three fronts: domestic execution, overseas scaling, and regulatory/tax pressures. Each risk directly threatens the central narrative of successful pivot and reacceleration.

Domestic User Base Erosion: While management's ROI-focused strategy improves near-term profitability, it risks accelerating user decline beyond the point of no return. Tantan's product upgrade had a "significant negative impact on overall user retention," and the user base "has not yet stabilized due to a long-term downward trend in organic new users." If the quality-over-quantity strategy fails to stem the bleeding, Hello Group could be left with a shrinking, aging user base that's increasingly expensive to maintain, destroying the domestic cash cow's long-term value.

Overseas Margin Compression: The overseas business's gross margin profile is structurally lower than domestic, and management expects this pressure to persist as "relatively low-margin businesses (Turkish market, new live streaming) are growing faster." While the company is "partially mitigating GP margin pressure by optimizing top-up channel costs," the fundamental math is clear: every dollar of overseas revenue replacing domestic revenue reduces overall profitability. If overseas growth requires even higher marketing spend than currently projected, the path to group-level margin stabilization lengthens considerably.

Regulatory and Tax Headwinds: The new 10% withholding tax rate on Beijing WOFE profits is a permanent structural headwind that reduces net margins by approximately 5% on domestic earnings. Additionally, new tax regulations affecting agents and broadcasters in H2 2025 "may put some pressure on the platform's revenue and gross margin." While management views "tax compliance across the entire industry is also a good thing for the long-term stability of the social entertainment platform," the immediate financial impact is negative. These changes could accelerate the domestic business's profit decline just as overseas investments peak.

Macro Sensitivity: Momo's revenue is "heavily influenced by discretionary entertainment spending of higher-income users, which is closely linked to macroeconomic indicators and equity market performance." With consumer sentiment "relatively fragile overall" and macroeconomic uncertainties resurfacing in Q2 2025, the domestic recovery could stall. Political unrest in MENA at the end of 2024 "dampened user consumption sentiment, a trend that continued into Q1 2025," creating a headwind for the overseas growth engine.

The asymmetry lies in the valuation. Trading below net cash per share with a P/E of 10.37 and EV/Revenue of 0.41, the stock appears to price in a far more pessimistic scenario than management's guidance suggests. If overseas growth reaccelerates in Q4 2025 as projected and domestic declines narrow, the stock could re-rate significantly. Conversely, if execution falters, the strong balance sheet provides downside protection that many Chinese tech peers lack.

Valuation Context: Discounted for Deserved Reasons?

At $6.95 per share, Hello Group trades at a significant discount to its liquid assets. With net cash estimated at $8.7 per share, the market is essentially valuing the operating business at a negative enterprise value. The P/E ratio of 10.37 and price-to-book of 0.71 reflect deep skepticism about the company's future earnings power, while the EV/Revenue multiple of 0.41 suggests investors expect revenue to decline indefinitely.

These multiples compare favorably to direct competitors. JOYY trades at a price-to-sales ratio of 1.56 with negative operating margins, while Weibo (WB) commands 1.46 times sales with stronger margins but slower growth. Bilibili, growing faster at 20% but still unprofitable on a net basis, trades at 2.47 times sales. HUYA, with similar live streaming exposure, trades at 0.70 times sales but has negative operating margins. Hello Group's valuation suggests it's being priced as a declining asset despite generating positive free cash flow and maintaining a strong balance sheet.

The key valuation question is whether the market is correctly pricing the structural headwinds or overly discounting the potential inflection. Management's guidance implies 2025 revenue of approximately RMB 10.3-10.8 billion (assuming H2 positive growth), which at current exchange rates translates to roughly $1.5 billion. With an enterprise value of approximately $613 million, the stock trades at less than 0.5 times forward sales—a valuation typically reserved for businesses in terminal decline.

However, this discount may be warranted if domestic margins continue to compress and overseas growth proves more expensive than projected. The permanent 10% withholding tax rate reduces net earnings by approximately RMB 100-150 million annually based on historical domestic profit levels. Combined with gross margin pressure from the overseas mix shift, sustainable earnings power may be lower than historical levels suggest. The impact for investors is that the stock's cheapness reflects real fundamental challenges, not just market pessimism.

Conclusion: A Show-Me Story at a Show-Me Price

Hello Group's investment thesis boils down to a simple but unproven proposition: that overseas growth can offset domestic decline quickly enough to stabilize group-level revenue and margins before the balance sheet deteriorates. The company has made clear strategic choices—prioritizing ROI over user scale, accepting margin compression for growth diversification, and returning capital through buybacks rather than dividends—that reflect management's confidence in the underlying business value.

The financial evidence supports both the bull and bear case. On the positive side, overseas revenue growth of 73% year-over-year, strong cash generation (RMB 250 million in Q2 operating cash flow), and a fortress balance sheet provide resources and momentum for the pivot. AI features are showing measurable improvements in user engagement, and the regulatory environment has stabilized since late 2024. The valuation discount to net cash creates asymmetric upside if execution improves.

On the negative side, domestic paying users have collapsed by over 2 million in six months, gross margins have compressed 2-3 percentage points due to mix shift, and permanent tax changes will reduce net earnings by 5% or more. The overseas business, while growing rapidly, is structurally lower-margin and faces uncertain competitive dynamics. Management's guidance for a potential H2 2025 revenue inflection is contingent on macro stabilization and successful ROI optimization that has not yet been proven at scale.

For investors, the critical variables to monitor are: (1) the trajectory of domestic user decline and whether ARPPU growth can continue offsetting volume losses; (2) the sustainability of overseas growth rates and the path to margin improvement in that segment; and (3) the impact of new tax regulations on both domestic profitability and management's capital allocation priorities. The stock's valuation provides downside protection, but the upside depends entirely on execution. Hello Group is a show-me story at a show-me price—attractive for value investors comfortable with execution risk, but requiring patience and close monitoring of quarterly progress toward the promised inflection point.