Is Full Truck Alliance a Buy Under $10?

Based in Guiyang, China, Full Truck Alliance Co. Ltd. (YMM) is the world’s largest digital freight platform in terms of the gross transaction value (as of 2020). YMM is often dubbed China’s “Uber for trucks.” The company listed its shares on the New York Stock Exchange through an initial public offering on June 22, 2021. It sold 82.50 million sponsored ADRs through its IPO, raising $15.60 billion in gross proceeds. YMM’s enterprise value stood at $20.64 billion following the IPO, making it the second-largest Chinese listing in the U.S. this year.

However, shares of YMM have plunged 57.7% in price since their listing to close yesterday’s trading session at $8.89, amid rising concerns regarding regulatory headwinds and the potential delisting of the majority of the U.S.-listed Chinese companies.

According to a recent Reuters article, YMM is exploring a dual primary listing in Hong Kong next year. This comes as the U.S. has announced new laws stating stricter audit requirements for Chinese companies listed on U.S. stock exchanges. Furthermore, the Cyberspace Administration of China (CAC) is currently investigating YMM to identify potential national data security risks.

Here is what could shape YMM’s performance in the near term:

Optimistic Growth Prospects

According to a CIC report cited in YMM’s prospectus, China has the world’s largest road transportation market, valued at $951.50 billion (as of 2020). YMM, as the country’s biggest digital freight platform, is poised to benefit from the market’s immense size. Over the years, the company has introduced freight listing and brokerage services, online transaction services, and value-added services to modernize China’s fragmented road transportation industry. In addition, China’s road belt initiative should allow YMM to expand its operations overseas.

Regulatory Headwinds

On December 2, the SEC finalized rules pursuant to the Holding Foreign Companies Accountable Act (HFCAA), under which all foreign-based companies are required to meet the audit requirements set by the Public Company Accounting Oversight Board. Chinese companies have historically refused to submit their books to U.S. regulators and, thus, are at high risk of being delisted.

In a counter move, Chinese regulators are cracking down on companies that are potentially eyeing a U.S. listing. The Chinese State Council plans to update its rules for overseas listing for domestic companies and impose new restrictions on cross-border data flows and security. Consequently, many Chinese start-ups that have been listed in the U.S. in recent years, including YMM, are currently planning to shift to the Hong Kong Stock Exchange.

Chinese Government’s ‘Golden Share’ Arrangement

The Chinese government has been obtaining minority stakes, or “golden shares,” in several domestic companies that possess strategically important data and operate critical information infrastructure. In May, YMM disclosed that CAC-backed China Internet Investment Fund became a special management shareholder. The government-backed funds generally have a board seat and have veto rights for key business decisions.

Meeting the U.S. audit requirements might be considered a national threat by the Chinese government. Thus, CAC-backed YMM will likely be delisted from the U.S. exchanges over the next few years.

Stretched Valuation

In terms of forward non-GAAP P/E, YMM is currently trading at 302.02x, which is 1,309.4% higher than the 21.43x industry average. Its forward Price/Sales and EV/Sales ratios of 13.62 and 7.13, respectively, are significantly higher than the 1.66 and 2.04 industry averages.

In addition, the stock’s 109.64 trailing-12-month Price/Cash Flow multiple is 588.5% higher than the 15.93 industry average. And YMM’s EV/EBITDA ratio is negative 2.88.

POWR Ratings Reflect Uncertainty

YMM has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

YMM has a C grade for Quality and a D for Value. Its 66.94% trailing-12-month levered free cash flow margin is 1144.6% higher than the 5.38% industry average. However, the company’s net income margin and ROE are negative 125.28% and 46.53%, respectively, justifying the Quality grade. In addition, the stock’s higher-than-industry valuation is in sync with the Value grade.

Of 169 stocks in the F-rated Software – Application industry, YMM is ranked #106.

In addition to the grades I have highlighted, view YMM ratings for Growth, Momentum, Sentiment, and Stability here.

Click here to check out our Software Industry Report 

Bottom Line

Several class-action lawsuits have been filed against YMM, alleging that the company made false and misleading statements, failing to disclose that the company was required to conduct “a comprehensive self-examination of any cybersecurity risks,” and would face imminent scrutiny from the Chinese government. Furthermore, given the rising U.S.-China tensions, YMM is currently facing the risk of being delisted from the NYSE. Thus, we think investors should wait until the regulatory headwinds subside before investing in the stock.

How Does Full Truck Alliance Co. Ltd. (YMM) Stack Up Against its Peers?

While YMM has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Open Text Corporation (OTEX), Progress Software Corporation (PRGS), and National Instruments Corporation (NATI), which have an A (Strong Buy) rating.

YMM shares were trading at $8.42 per share on Wednesday morning, down $0.47 (-5.29%). Year-to-date, YMM has declined -60.84%, versus a 29.36% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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