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Bringing Online Investing To China's Masses

Posted: Dec 04, 2008 14:33 PM by Ryan C. Fuhrmann

Tickers in this Article: YHOO, CHA, TSCM, JRJC

A few months ago China officially passed the U.S. in terms of total internet users, giving it title to the largest online market in the world with more than 250 million users according to the China Internet Network Information Centre. It is also one of the fastest growing markets; the number of users had increased more than 20% over the first half of 2008, and although the credit crisis will surely temper domestic growth trends, the potential for additional users is still substantial.

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Huge Growth in Online Investing
Increased internet penetration has also created the first generation of individual online investors in China, with firms tripping over themselves to reach critical mass in offering online brokerage and research platforms and subsequent trading commissions and subscription revenues.

China Finance Online (Nasdaq:JRJC) was one of the first firms to arrive to the party and has built a community of 10.9 million registered users, with 115,000 paid individual subscribers as of its third quarter ended September 30. During a recent company presentation in Las Vegas at a Roth Capital conference showcasing small-cap companies operating in China, management boasted of being the largest player in the space, with the closest competitor less than half its size. It sees itself as a mix between Bloomberg and Yahoo Finance, with market share of 20%-25%.

Third Quarter Highlights
Total third quarter revenue jumped 109% to $15.2 million, which indicates that China Finance is a small yet fast-growing company. Yearly revenue is up more than tenfold to $25.9 million in 2007 from $2.3 in 2003. It is also quite young, having first incorporated in 1998 and releasing products commercially in April 2001. Profitability trends have been admittedly mixed - it last reported a full-year profit in 2005. (To get started on your own analysis, read our Financial Statements Tutorial.)

Analysts are calling for 77 cents in positive earnings per American Depositary Share for all of 2008, but recent events call this level of profit achievement into question. China Finance's quarterly earnings announcement last week cited "a meaningful change in customers' order patterns since September" on historically-high global stock market volatility and slowing economic growth throughout the globe. Management still projects a more than 60% increase in revenue for its fourth quarter, but stopped short of offering specific earnings guidance as it expects a "challenging business environment" in the coming quarters.

Despite the near-term uncertainty, China Finance had $82.4 million in cash on the balance sheet as of quarter end, which works out to $3.61 per diluted depositary share. It also recently partnered with China Telecom (NYSE:CHA) to develop a finance portal and further expand its reach to increase paid subscribers.

Bottom Line
Sure, China Finance Online is a small, speculative play on growing investing popularity in China, but at under 10 times earnings, it represents an interesting play in the financial services industry. The barriers to entry may be low, but the business model lends itself to lucrative profits given the low levels of capital expenditure and scalability of the internet. Plus, the firm has an arguable first-mover advantage, following in the footsteps of TheStreet.com (Nasdaq:TSCM) and similar firms born when online investing first came stateside.

For background reading, see The Internet Industry and Investing In China.

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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