Tuesday, February 05, 2008

China Finance Online Remains A One-Trick Pony

On January 30, China Finance Online Corporation (JRJC-$18.10), an online financial data and stock market analytics provider to Chinese investors, said it expected to record a non-cash impairment charge (in the fourth-quarter of 2007) against its minority interest in mobile gaming services provider, Moloon International Inc.

Excluding the impact of the investment impairment against Moloon, China Finance Online expects adjusted earnings to be in the range of US$3.0 million to US$3.4 million in the fourth quarter of 2007, on estimated net revenues in the range of US$8.7 to US$9.0 million.

The Company did not specify the amount of the write-down and "does not expect the impairment charge against its investment in Moloon, or disposal of this investment in the future if possible, to have any adverse impact on its business growth."

The 10Q Detective is not as optimistic as management. In fiscal 2006, China’s Ministry of Information Industry announced policy changes which, among others, required mobile value added service, or MVAS, providers to extend free trial periods for customers prior to subscriptions and to send reminders to customers confirming new and existing subscriptions. Consequently, following an independent valuation, the Company determined that its $15.0 million investment in Moloon was impaired and recorded an impairment loss of $1.32 million in 2006.

Buried in regulatory filings, too, management admitted that business conditions at Moloon continued to deteriorate in fiscal 2007.

Business Strategy

The Company remains highly dependent on subscription services for growth, with more than 80% of sales generated by package fees to
premium services, such as 'Value Engine' and 'Grand Reference.'

Hes a one trick pony
One trick is all that horse can do
He does one trick only
Its the principal source of his revenue.
~ Singer/songwriter Paul Simon [1941 -]

Contrary to the dismissive attitude of management, new distribution channels are needed to feed continued retail subscriber growth—its core business. In this light, the disposal of this $15.0 million investment in Moloon in the future, if possible, cannot but have an "adverse impact on its business growth."

The online financial data and information service market in China is fiercely competitive, with few substantial barriers to entry. China Financial Online competes, directly and indirectly, for users and subscribers with companies in the business of providing financial data and information services, including other financial information web pages (such as hexun.com), publishers and distributors of traditional media, internet portals providing information on business, finance and investing (such as sina.com. and sohu.com), and personal stock research software vendors (such as Shanghai Qian Long High Tech Corporation, that develop and market stock research software through stock brokerage companies).

To attract visitors to its sites, the Company offers much of its content free of charge. As of September 30, 2007, the Company had 8.1 million registered user accounts of jrj.com and stockstar.com, compared to 7.3 million in the previous quarter, an increase of 0.8 million quarter-on-quarter. Fee-based active individual subscribers grew to 45,500, an increase of 22% from the previous quarter.

Telemarketing plays an instrumental role in the conversion from free registered users to fee-based customers. Cheap labor (fixed costs) at call centers held acquisition costs per subscriber to about $103 in the 3Q:07, up slightly from $96 in the prior quarter. Revenue per subscriber in the 3Q:07 was about $620 (annualized), on average.

The Company plans to triple the size of its telemarketing team from 260 as of 3Q:07 to 760 by the middle of 2008.

Business Opportunities

Dig the well before you are thirsty. ~ Chinese Proverb

The Company is rolling out Fund Guru, a mutual fund individual tools, targeting more than 10 million mutual fund investors in China.

The Company’s recent agreement to acquire an 85% stake in Daily Growth Investment Company Limited, a Hong Kong-based securities brokerage firm with a 35-year history, coupled with the September 2007 announcement by the Chinese government that Chinese individual investors could invest their money in the Hong Kong market, opens complementary market opportunities (such as cross-selling subscription services to brokerage clients).

Offsetting this potential growth, however, is current volatility in world stock markets—including the Far East—that could dampen investor enthusiasm for stocks and subscription-based service offerings.

In January 2008, China Finance Online said it would form a
financial news channel with China Telecom on the latter's Vnet Web site. However, given the inability of management to execute on transforming its business model to a vertically integrated financial media company, investors should remain skeptical of announced developmental initiatives.

Financial Health

Net operating cash flows for the third quarter of 2007 were $6.33 million, due primarily to strength in subscription services.

The balance sheet is strong, with cash and equivalents of $64.08 million at the end of September 2007 quarter, and no long-term debt.

Valuation Analysis

The stock of China Finance Online trades at 23.5 times forward FY ’08 consensus estimates of 77 cents, on average. Investors looking to buy financial web-content stocks, however, might look at U.S.-based TheStreet.com (TSCM-$11.88), whose shares are currently changing hands at 16.9 times 2008 estimates.

In addition, TheStreet.com is growing its business independent of a subscriber-oriented business model. TSCM’s third-quarter 2007 marketing services revenue, comprised of advertising and interactive marketing services, totaled $6.9 million, or about 43% of revenue.

Be not afraid of growing slowly, be afraid only of standing still. ~ Chinese Proverb

Like other aforementioned initiatives, China Finance Online is standing still with ancillary growth from advertising revenues. In the third-quarter ended September 30, 2007, advertising-related services represented only 7% of net revenues of 3Q:07, not a sizable business for the Company.

Aside from a steadily increasing registered user base (and associated fees), China Finance Online does not expect significant growth from its service lines in 2008, nor has management structured any growth from the potential acquisitions. In our view, evidence of management success in leveraging the value chain found in new services will be the inflection point to start buying this stock.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

1 comment:

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