Meten Holding Group Ltd. (METX - Get Rating), in Shenzhen, one of China’s top omnichannel English language training providers. It delivers English language and skills training to Chinese students and professionals.  As of December 31, 2020, the company had 105 self-operated learning facilities in 28 cities throughout 15 provinces, autonomous regions, and municipalities, and 13 franchised learning centers in 12 cities across 11 provinces and municipalities.

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The company’s shares have gained 54.5% in price over the past month to close yesterday’s trading session at $0.50, driven by METX’s partnership with AGM Group Holdings Inc., which is designed to boost its competitive position in the industry and position itself as a leading technology-driven blockchain and metaverse company.

However, METX’s shares have declined 74.9% year-to-date and 69.7% over the past six months. And the company’s underwhelming fundamentals could cause its shares to suffer a further pullback soon. In addition, the company’s inability to generate sufficient cash flows could mar its growth.

Here’s what could influence METX’s performance in the coming months:

Strategic Partnership

In September, METX entered a strategic agreement with AGM Group Holdings Inc., an integrated technology company that focuses on fintech software services and high-performance hardware, and on computing equipment manufacturing to develop its blockchain and cryptocurrency mining businesses. By using AGMH’s innovative technology, experienced staff, and better-quality miners, the partnership intends to expedite Meten’s blockchain and cryptocurrency mining business development.

Equity Financing

METX completed an underwritten public offering that generated  $60 million in gross proceeds. The offering consisted of 22,500,000 ordinary shares at $0.30 per share and 177,500,000 pre-funded warrants. The company intends to use the net proceeds from this offering for capital expenditures, general corporate and working capital requirements. However, the transaction exhibits the company’s inability to generate sufficient cash flows to fund its operational activities. Also, using equity financing as a funding source dilutes existing shareholder value and should be viewed as an alarm.

Mixed Financials

For the second quarter, ended June 30, 2021, METX’s revenue increased 8.2% year-over-year to RMB204.77 million ($31.71 million). Its gross profit grew 23.5% from its year-ago value to RMB66.17 million ($10.25 million). However, the company’s loss from operations came in at RMB77.55 million ($12.01 million) over this period. In addition, its net loss amounted to RMB78.87 million ($12.09 million) over this period.

Poor Profitability

METX’s 0.79% trailing-12-months asset turnover ratio is 24.8% lower than the 1.1% industry average. Also, its ROC, net income, and EBIT margins are negative 104.9%, 40.3%, and 36.4%, respectively. Furthermore, its trailing-12-months cash from operations stood at negative $50.96 million, compared to the $195.68 million industry average.

POWR Ratings Reflect Uncertainty

METX 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.

Our proprietary rating system also evaluates each stock based on eight distinct categories. METX has a D grade for Momentum. The stock is currently trading below its $0.56 and $1.27 respective 100-day and 200-day moving averages. This is consistent with the Momentum grade.

The stock also has a C grade for Growth and Quality. The company’s mixed financials in its last reported quarter justify the Growth grade. In addition, the company’s poor profitability is in sync with the Quality grade.

Of the 57 stocks in the D-rated China industry, METX is ranked #38.

Beyond what I have stated above, you can view METX ratings for Value, Stability, and Sentiment here.

Bottom Line

Although METX’s shares have gained significantly in price over the past month owing to its strategic partnership and rapidly growing network, the company’s poor profitability and operational inefficiency could be a cause of concern. Thus, we think investors should wait for METX’s prospects to stabilize before investing in the stock.

How Does Meten Holding Group Ltd. (METX) Stack Up Against its Peers?

While METX has an overall C rating, one might want to consider its industry peer, FinVolution Group (FINV - Get Rating), LexinFintech Holdings Ltd. (LX - Get Rating), and China Biologics Products Holdings Inc. (CBPO - Get Rating), having an overall B (Buy) rating.

METX shares fell $0.50 (-100.00%) in premarket trading Friday. Year-to-date, METX has declined -75.00%, versus a 26.10% rise in the benchmark S&P 500 index during the same period.

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