Key points to remember:
- Money-losing Qutoutiao announced a reverse 10-to-1 split of its shares to bring its stock above the $ 1 level required by the Nasdaq
- The move sparked a massive sell off in its shares as investors worried about a big loan coming next April
By Doug Young
To give up ?
It’s probably too early to say this about China’s No.2 news aggregator which is rapidly fading Qutoutiao Inc.(NASDAQ: QTT). But investors increasingly seem to think that a shutdown or a discount of the company may well be in the pipeline, based on their reaction to Qutoutiao’s move. announcement at the end of last week of a reverse stock split.
This move was quite routine, aimed at bringing Qutoutiao’s US Depository Shares (ADS) above the $ 1 level to bring them into compliance with Nasdaq rules. Although the market value of the company has steadily declined this year, its current market capitalization of over $ 100 million is still quite large and should be sufficient for continued listing.
The reverse split will see the company’s ADS ratio change from the current four ADS for each Class A common share to a new ratio of two ADS for five Class A shares. This results in a reverse share split of 10 to 1. So, based on the last ADS close at $ 0.3864, the new stock price would rise tenfold to $ 3.864 when the change goes into effect on Friday.
While it all sounds pretty routine, investors didn’t see it that way. The stock was trading at $ 0.60 before the announcement, which means it has lost around 35% of its value in the last three trading days. This isn’t exactly an encouraging sign from investors, which has led to our opening remark that some may be starting to expect an end soon for the company.
In fact, such an end doesn’t necessarily have to result in the complete shutdown of Qutoutiao, but could instead involve a sale of the business – something we’ll discuss in more detail shortly.
Founded in 2016 and listed since 2018, Qutoutiao was once a rising star in China’s news apps scene, securing its solid second place but far behind ByteDance-owned industry giant Jinri Toutiao in focusing on consumers in small towns in China. But the company’s business model of spending heavily to acquire users has proven unsustainable, leaving Qutoutiao, whose name means ‘fun headlines,’ to focus this year on customer retention rather than strong growth. the number of users.
Added to the company’s problems are recent signals from Beijing that the government may be preparing to crack down on independent news companies. Such a decision would have far greater consequences for Jinri Toutiao and the main operators of information portals such as Sina, Sohu (NASDAQ: SOHU), NetEase (NASDAQ: NTES; 9999.HK) and Tencent(0700.HK). But it could also put smaller names like Qutoutiao in a difficult position.
The most immediate problem for Qutoutiao is a 1.2 billion yuan ($ 188 million) convertible loan maturing next April that the company mentioned in its last two quarterly reports as posing a challenge. This loan is likely to be a topic of discussion again in its next report for the third quarter, which is expected to be released in the next week or two.
“Given the size of the loan, there is uncertainty as to the ability of the company to repay the convertible loan at maturity, which raises substantial doubt about the ability of the company to continue operating,” said he declared in his second quarter report back in September. This wording is fairly standard when there is a possibility that a company thinks it needs to go out of business.
Friend at Alibaba?
The loan behind Qutoutiao’s existential dilemma was provided by Ali Baba (NYSE: BABA; 9988.HK) during a better time for the business in March 2019. At the time, Alibaba viewed the loan as a strategic decision due to its option to convert the amount to around $ 11.4 million. ‘ADS Qutoutiao at $ 15 a piece, or the equivalent of about 4% of the business.
Of course, converting the loan into Qutoutiao shares is now out of the question. But there is still the possibility that Alibaba will negotiate an agreement to cancel the loan in exchange for most or all of Qutoutiao. This could explain the current market value of Qutoutiao, which, at $ 111 million, is close, although still a little lower, to the loan amount.
One snag on such a deal could be the recent pressure on Alibaba to divest itself of some or all of its media assets, which comes from officials in Beijing worried about the company’s great influence. This pressure is said to have prompted Alibaba to sell the Hong Kong-based South China Morning Post, one of Asia’s leading English-language newspapers, which Alibaba bought in 2015.
In such a context, an acquisition of Qutoutiao by Alibaba seems unlikely. Other buyers may also be reluctant to make such an acquisition due to the current uncertainty surrounding private information providers in China.
From a purely financial standpoint, Qutoutiao’s situation actually looks relatively stable after moving to a more conservative spending strategy this year. The company had 400 million yuan in cash and cash equivalents and an additional 39 million yuan in restricted cash at the end of June, along with 600 million short-term investments – which collectively is close to the amount she would need to repay the loan. .
In terms of financial performance, most of the company’s key metrics are currently contracting due to reduced spending on acquiring new users. Qutoutiao’s revenue began to contract in the third quarter of last year, and its most recent report showed the figure fell 16.6% year-on-year in the second quarter of this year to 1.2. billion yuan.
Its combined monthly average users (MAU) fell 3.1% year-on-year in the quarter to 132.3 million, while its daily average users fell 32.3% to 29.1 million. Due to more cautious spending, the company’s net loss for the second quarter actually narrowed slightly to 209.5 million yuan, from a loss of 222.1 million yuan a year earlier.
At this point, only one analyst surveyed by Yahoo Finance is following the company. But this person currently predicts that the company should finally make a profit next year. In this case, it really looks like time is running out to reach that important milestone before the convertible loan matures in April.
If it can do so, it is still quite possible that Qutoutiao will get new funding to repay the loan in order to continue as a stand-alone business. But a more preferred option would be a sale of the business, as it really does appear that Qutoutiao is too small and operates in too uncertain an environment to survive on its own for the long term.