Key Takeways:
- Full Truck Alliance shares are up 60% from a mid-March low, including a 32% gain since Friday, on reports that Beijing may ease its regulatory oversight of big tech companies
- Company is currently undergoing a data security review and said its business could contract in the second quarter due to Omicron-related disruptions
By Doug Young
When are mass disruptions to your business cause for celebration?
The answer to that question should probably be “never,” as disruptions like the ones caused by the Omicron variant in China these last few months are always reason for concern. But those woes, detailed in a business update last week from trucking app operator Full Truck Alliance (NYSE:YMM), don’t seem to have investors worried.
The company’s stock has surged 32% over the last two trading days, and is up 60% from its all-time low reached in mid-March. That said, we should point out that even after the rally, the stock is still down by about two-thirds from its $19 IPO price last June.
In fact, the business update, which we’ll review shortly, is probably one of the last things on investors’ minds right now. Instead, they seem to be encouraged by a series of reports late last week saying Beijing is finally starting to worry more about a sharp slowdown in China’s economy than reining in the country’s tech companies.
As a result, top government leaders were holding a symposium with officials from a wide range of major tech companies to discuss potential regulatory easing over the long Labor Day holiday, which began on Saturday and runs through Wednesday, according to one of the reports from Reuters. The report said invitees to the high-tech pow-wow included internet giants Alibaba (NYSE:BABA), Tencent (0070.HK) and Meituan (3690.HK).
While Full Truck Alliance wasn’t mentioned, investors are probably guessing its name might be on the list. And even if it isn’t, the implications are still the same. In short, Chinese leaders are finally coming to realize that wide-ranging measures to control Omicron in China are having a devastating effect on the nation’s economy. In a bid to offset that, they are signaling they could ease a tough wave of regulatory oversight dating back roughly two years.
That wave has led tech companies, which are some of the country’s biggest employers, to do the once-unthinkable and start slashing payrolls in anticipation of much slower growth than they’ve come to expect over the last two decades.
While the biggest names like Alibaba, Tencent and Meituan have been in the spotlight for anti-competitive practices, Full Truck Alliance has come under scrutiny for data security – one of a number of other areas that have also been subject to regulatory scrutiny. The company went public in New York last June, just before a larger IPO by the Uber-like DiDi Global (NYSE:DIDI), which was one of the last major U.S. listings by a Chinese company.
Both Full Truck Alliance and DiDi, as well as employment services company Kanzhun (NASDAQ:BZ) disclosed shortly after DiDi’s IPO that they were being subject to data security reviews by China’s cybersecurity regulator. Those reviews are still ongoing, and during that time, the three have been barred from registering new users, putting a damper on their growth.
DiDi has said it plans to delist from New York, though it has yet to give more specifics. The latest rally for Full Truck Alliance appears to show investors are increasingly confident the company will be allowed to maintain its U.S. listing. Kanzhun shares have also jumped by a more modest 14% over the last two trading days, perhaps showing investors are confident it will be allowed to maintain its U.S. listing as well.
China slowdown
All that said, we’ll spend the second half of this space reviewing the latest update on Full Truck Alliance’s actual business, which looks quite grim, though the bad news could be relatively short-term. Intercity travel in China began to slow sharply in March as several cities struggled to contain the highly contagious Omicron Covid-19 variant through restrictions that often included banning truckers from entering.
Such a ban has been in effect for more than a month now in Shanghai, China’s commercial hub which has locked down most of the city. Beijing is in the process of implementing similar restrictions in a bid to prevent a similar outbreak under the nation’s “zero Covid” policy.
Full Truck Alliance is quite direct in its latest update, saying the restrictions are having a major impact on its business. “Unless the Omicron outbreaks are swiftly brought under control, the company expects these outbreaks to have a material and adverse effect on the company’s business and results of operations,” it said. “For the second quarter of 2022, the company is likely to experience year-on-year declines in both (gross transaction value) and fulfilled orders.”
Such declines would continue a trend that has already seen a sharp slowdown for the company in the first quarter. In the business update, Full Truck Alliance said it facilitated 25.2 million orders in this year’s first quarter, up 13.6% year-on-year, representing a sharp slowdown from the fourth quarter’s 41.6% growth. Similarly, growth in gross transaction value slowed to just 4.2% in the first quarter from 22.1% in the fourth quarter.
The company typically gives a business update before announcing its full quarterly results more than a month later. So, we’ll have to wait until late this month or early June for a clearer picture on its situation. Its fourth-quarter results were relatively upbeat, especially considering all of its challenges, with revenue up 68% year-on-year to 1.4 billion yuan ($212 million). The company lost 1.3 billion yuan during the quarter on a GAAP basis. But on a non-GAAP adjusted basis, which excludes many non-cash items, it reported strong profit growth to 243 million yuan from a 148 million yuan profit a year earlier.
All things considered, the company looks relatively well-positioned to resume its strong growth when the latest Covid wave subsides and the cybersecurity review is finished. Analysts seem to think so too, with three of the four polled by Yahoo Finance giving the company a “buy” and the fourth even rating it a “strong buy.” In valuation terms, Full Truck Alliance actually trades quite strongly compared to more traditional trucking-based logistics companies. Its price-to-sales (P/S) ratio now stands at 5.7 times, compared with a ratio of 4.8 for ZTO (NYSE:ZTO) and a meager 0.7 for JD Logistics (2618.HK).
