Based in Shanghai, China, The9 Limited (NCTY - Get Rating) is engaged primarily in cryptocurrency mining. The company also operates in licensed mobile games and TV games. Its shares have gained 77.7% over the past year because of important cryptocurrency mining deals it has made. However, NCTY’s stock price has tumbled 69.9% over the past three months, following the rapid price decline of the most popular cryptocurrency Bitcoin (BTC).

As Beijing intensifies its clampdown on virtual currency mining and trading, crypto stocks are getting hammered. With China launching its digital yuan, which will not accommodate user anonymity, and positions it for international use, it could be challenging for crypto miners like NCTY to regain their momentum in the near term.

NCTY is currently trading at $13.15, 85.3% below its 52-week high of $89.20. And since the regulatory clampdown on cryptocurrencies is expected to continue building in the coming months, the company’s growth prospects look bleak.

Here is what we think could influence NCTY’s performance in the near term:

China’s Ban on Cryptocurrency Trading

To curb the growth of the burgeoning virtual currency trading market and reduce financial risks, China’s State Council committee led by Vice Premier Liu He has  announced a crackdown on the operations of cryptocurrency miners. The country has banned financial institutions—including banks and online payments channels—from offering services related to digital currency to curb speculative crypto trading. As a result, NCTY and  several other popular Chinese crypto stocks have taken  a beating. China’s desire to prohibit  the use of cryptocurrencies as a mode of payment is based on its view that these currencies cray the risk of significant losses to users and investors.

Weak Financials

NCTY’s revenue and total assets have declined at CAGRs of 79.6% and 46.9%, respectively, over the past three years. Its o.01% asset turnover ratio is 98.8% lower than the 0.4% industry average. Also,  its trailing-12-month gross profit margin is negative 30.2%.

Sky-High Valuation

In terms of trailing-12-month EV/Sales, NCTY is currently trading at 2171.06x, which is  significantly higher than the 3.07x industry average. Also, the company’s 748.41x trailing-12-month Price/Sales ratio  is significantly higher than the 1.97x industry average.

POWR Ratings Reflect Bleak Prospects

NCTY has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. NCTY has a D grade for Value, and a C for Momentum. The stock’s premium valuation and negative price returns over the past three months are reflected in these grades.

Also, it has a D grade for Quality, which is consistent with the weak profitability of the company.

In addition to the grades we’ve highlighted, one can check out additional NCTY ratings for Sentiment, Stability and Growth here.

NCTY is ranked #71 of 74 stocks in the D-rated China group.

Click here to view the top-rated stocks in the China group.

Bottom Line

China’s latest regulatory barrage against cryptocurrency has led to a brutal sell-off in the crypto market. As such, the dramatic fall in NCTY’s stock could continue to concern investors. So, we think NCTY is best avoided now.

NCTY shares rose $0.12 (+0.91%) in premarket trading Monday. Year-to-date, NCTY has gained 271.47%, versus a 13.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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