YMM - Full Truck Alliance: A Mixed View

2023-06-20 06:00:00 ET

Summary

• Full Truck Alliance's latest guidance points to a further revenue growth deceleration for the company in Q2 2023.
• YMM's shares are cheap after suffering from a meaningful valuation de-rating in recent months, but the company's actual share repurchases were below expectations in my view.
• Full Truck Alliance's ambitious long-term earnings growth target could be affected by regulatory pressures on commissions that freight platforms can charge in China.
• I have a mixed view of YMM's shares, which translates into a Hold rating for the stock.

Elevator Pitch

I have a Hold rating for Full Truck Alliance Co. Ltd.'s ( YMM ) shares. My view of YMM is mixed, considering multiple factors like short term guidance, long term financial goals, regulatory risks, valuations, and share repurchases. As such, I rate YMM's stock as a Neutral or a Hold.

Company Description

Full Truck Alliance refers to itself as "a leading digital freight platform connecting shippers with truckers to facilitate shipments" in the company's press releases .

Full Truck Alliance's Key Corporate Milestones

An Overview Of The Key Services Provided By Full Truck Alliance

In local currency or RMB terms, YMM generated 50%, 21%, 16%, and 13% of its fiscal 2022 top line from freight brokerage services, freight listing services, value-added services, and online transaction services, respectively, as per its 20-F filing .

Short Term Revenue Guidance Was Disappointing

Late last month, Full Truck Alliance reported the company's financial performance for the first quarter of 2023, and YMM also released its Q2 2023 management guidance.

YMM expects to deliver a Q2 2023 top line in the RMB1,910-2,010 million range, which translates into a +17.4% YoY revenue expansion rate based on the mid-point of its guidance. Assuming that the company's management is spot-on with its financial guidance, Q2 2023 will represent the seventh consecutive quarter of sales contraction in YoY terms for Full Truck Alliance. As a comparison, Full Truck Alliance achieved a YoY revenue growth rate (in RMB terms) of +27.7% for Q1 2023, which was already much slower than the company's top line increase of +34.5% in Q4 2022.

Separately, the sell-side analysts' consensus full-year FY 2023 revenue projection for Full Truck Alliance had been lowered by -10% from RMB9,054 million as of December 15, 2022 to RMB8,150 million (source: S&P Capital IQ ) as of June 19, 2023.

The latest management guidance and the changes to Full Truck Alliance's consensus financial forecasts suggest that YMM's near-term top line growth outlook isn't as good as what investors would have expected earlier.

In the company's 20-F filing, YMM cautioned that its financial results are "affected to a significant extent by economic, political and legal developments in" China, as this is its home market where "all of the Group’s revenue has historically been sourced from." A recent June 15, 2023 Seeking Alpha News article highlighted that China's actual May 2023 industrial output growth and retail sales growth rates turned out to be -10 basis points and -90 basis points below consensus expectations, respectively. China's below-expectations economic indicators might help to explain why both the management and sell-side analysts take a cautious view about Full Truck Alliance's top line growth prospects in the short term.

Valuations And Share Buybacks

In 2023 year-to-date, Full Truck Alliance's stock price decreased by -22% as compared to a +15% rise for the S&P 500. YMM's consensus forward next twelve months' EV/EBITDA valuation multiple de-rated from 25.1 times at the beginning of this year to 13.2 times as of June 16, 2023. During the same time frame, Full Truck Alliance's consensus forward next twelve months' normalized P/E compressed from 5.3 times to 3.1 times.

It is reasonable to assume that YMM's year-to-date valuation de-rating is largely attributable to the market's expectations of slowing revenue growth as outlined in the preceding section.

On the positive side of things, Full Truck Alliance has already initiated a one-year $500 million share buyback plan earlier on March 3 this year. This gives YMM the potential to enhance shareholder value with the repurchase of its undervalued shares (as implied by its valuation multiples highlighted above).

On the negative side of things, YMM hasn't been very aggressive when it comes to share repurchases. In the two and half months following the initiation of its share repurchase program (up to May 21, 2023), Full Truck Alliance has just utilized 7.5% of its share buyback authorization or bought back 0.5% of its shares outstanding. Given that YMM recently announced its first quarter results on May 22, the black-out period prior to that might have prevented the company from buying back more of its shares.

Nevertheless, I still think that YMM's actual share buybacks in the recent months were below expectations, considering the size of its share repurchase authorization and its undemanding valuations. But Full Truck Alliance has the potential to execute its share buybacks at a faster pace going forward.

Ambitious Financial Goals For The Long Run

Sell-side broker China Renaissance Securities organized a number of post-Q1 results investor roadshows for Full Truck Alliance; the takeaways from these investor's meetings with the company are outlined in a May 26, 2023 China Renaissance report (not publicly available) titled "Long-Term Growth Targets Reiterated."

According to China Renaissance's research report, Full Truck Alliance aims to achieve a FY 2023-2025 normalized net profit CAGR in excess of +50%. A key driver of YMM's bottom line expansion in the coming years will be "the high-margin transaction commission business" as per management's comments cited in China Renaissance's research report.

But there are potential regulatory risks which might affect YMM's future commissions and earnings growth potential. Chinese state media The Global Times reported in April this year that "major online ride-hailing and road freight transportation platforms" were "asked (by China's Ministry Of Transport) to cut their excessive commission fees or cap their membership fees by end-May." Full Truck Alliance clarified at its Q1 2023 results briefing in late May that it doesn't "expect the company's operation to be impacted by this proposal (Ministry Of Transport's request)", because it is of the view that "our commission rate is at a very low level and in fact significantly lower than other freight platforms."

In a nutshell, Full Truck Alliance has set an ambitious financial goal relating to its FY 2023-2025 bottom line CAGR. However, regulatory headwinds pose a significant risk to YMM's earnings growth prospects, particularly relating to future commission rates.

Closing Thoughts

It is hard to be too bullish or overly bearish on YMM's shares, so I have decided to award a Hold rating to Full Truck Alliance. On the bright side of things, Full Truck Alliance's valuations are undemanding, and the company has a significant $500 million buyback plan in place. On the other hand, YMM's near-term outlook is lackluster (guidance implying sales growth deceleration), and the company faces regulatory risks with its sales substantially derived from its home market, China.

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