‘Stock Advisor’ JF Wealth Defying Market Fundamentals With Untimely IPO Offer – Futu Holdings (NASDAQ:FUTU), UP Fintech Holding (NASDAQ:TIGR)

The central theses:

• Online investment advisor JF Wealth has filed for an IPO in Hong Kong and derives most of its revenue from quality education and content services
• The company faces increasing headwinds from rapidly growing sales and marketing expenses and mounting refund requests

By Emily Chan

Fundamental asset prices are advising stockbuyers to avoid weak markets like much of the world is seeing right now, including a Hong Kong stock market now trading at lows not seen since 2011. But online investment advisors JF Wealth Holdings seems to ignore that kind of rationale that it usually offers its customers.

The company, which bills itself as China’s leading provider of online content for investors, defied the current market weakness by filing for an IPO in Hong Kong last Wednesday, its third such attempt after failed attempts in August last year and March this year . It appears that no one has told the company that market sentiment has cooled significantly since these last two attempts.

JF Wealth is the largest online investor content provider in China with total orders of 1.39 billion yuan (US$193 million) and a market share of 11.2% for high-quality online investment and financial education services in 2021 , according to the third-party data cited therein preliminary prospectus. Business is booming, with sales more than quadrupling from 274 million yuan in 2019 to 1.45 billion yuan last year. The figure rose another 75% to 910 million yuan in the first half of this year from the same period in 2021.

expensive classes

Of JF Wealth’s three main businesses, the most lucrative are high-end online investor education services, offering online pre-recorded courses, live streams and one-to-one advisory services. The packages include sharing two to three case studies with subscribers per week, with clear buying and selling guides, position tips, and daily tracking services. The high-end courses don’t come cheap, with packages starting at 29,800 yuan and going up to 139,600 yuan per semester.

Such high-end courses have become the company’s biggest cash cow, generating revenue that has skyrocketed from 274 million yuan in 2019 to 1.15 billion yuan in 2021. The business continued to grow in the first half of this year, yet brought in 564 million yuan despite weak global stock markets.

For more cost-conscious investors, the company’s online educational services offer financial literacy and wealth management skills through mini-lectures and live modules at a standard price of 6,980 yuan per three months.

The company also launched a financial information software service for more sophisticated investors last year, providing professional, timely and comprehensive financial market information, data analysis and investment decision support from 5,800 yuan per year to 68,800 yuan per half year. This service recorded revenue of more than 288 million yuan in the first year, accounting for 19.8% of the total revenue during the period. Reflecting the company’s great potential, revenue from financial information software services in the first half of this year was 344 million yuan, accounting for 37.8% of the company’s total revenue.

JF Wealth’s rapid revenue growth was driven by its rapidly growing pool of paying subscribers, which totaled 110,450 at the end of 2021 — more than sevenfold from 2019. But weak markets meant that base suddenly shrank with the number slump this year up 65.5% to 38,086 at the end of June. Management attributed the slump to the company’s decision to shift its focus away from its lower-end financial literacy education services, and also to fewer promotions and rebates for its financial information software service.

With less emphasis on customers with smaller spenders, the company’s average order value per paying subscriber rose to 27,300 yuan in the first half of the year, well above the 18,100 yuan for all of 2021.

As it focuses on higher-value clients, JF Wealth’s gross margin has surpassed 80% over the past three fiscal years and has risen to 89.3% in the first half of this year. Earnings performance has also improved during this period, rising from a loss of 57.84 million yuan in 2019 to a profit of 86.68 million yuan the following year and an even bigger profit of 232 million yuan last year. The profit for the first half of this year reached 220 million yuan, almost equal to the entire profit for the whole of last year.

Big ad spend

Despite the rosy profits, a closer look at the financial statements reveals that the company is weighed down by huge sales and marketing expenses. With last year’s additional spending to promote its new financial information software services in addition to other regular promotions and discounts, the company’s related spending rose 130% year-on-year to 856 million yuan, accounting for nearly 60% of total revenue.

Much of the increased spending is attributed to JF Wealth’s Internet traffic procurement costs, which have risen nearly 10-fold from 67.7 million yuan in 2019 to 640 million yuan last year. That figure is expected to grow even more this year after the company spent an additional 415 million yuan on such online procurements in the first half of this year, accounting for 84% of total sales and marketing spending.

Meanwhile, user complaints and refund requests are likely to increase as markets dip. Last year, the company received 19,623 refund requests totaling up to 383 million yuan. In a sign that the flagging market could pose further problems for the company in this regard, it reported that the number of reimbursement claims had doubled to 12,060 in the first half of this year, from 6,141 a year earlier.

Since there are no similar listed companies for reference, we can only refer to online stock brokers futu stocks FOOT and UP Fintech TIGER to estimate the potential valuation of JF Wealth. This pair is also focused on retail investors with price-to-earnings (P/E) ratios of 19.4 and 29.8, respectively. Using their average of 24.6, JF Wealth could be valued at around 10.8 billion yuan based on its first-half profit extrapolated to the full year. But given the currently weak mood in Hong Kong, even if the company does make it to the market this time, investors may just have to settle for relatively conservative pricing.