Chinese online financial data and information provider China Finance Online (Nasdaq:JRJC) isn't widely followed on Wall Street, with only a couple of analysts actively providing sales and profit projections. This under following could spell opportunity as cash flow multiples minuscule when subtracting out reported excess cash on the balance sheet. The business also has compelling growth prospects as the firm aims to become the Chinese equivalent of Bloomberg to investing institutions and the Yahoo! (Nasdaq:YHOO) Finance portal for consumers.
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Third Quarter Results
Revenues fell 4% to $14.6 million, as subscription service fees paid by individual customers, which accounted for the majority of the top line at 78% of revenue, fell 6.4% to $11.4 million. The remaining revenue segments expanded from last year's third quarter as China Finance Online garnered higher fees from institutional clients, advertising, and "mobile value added services" for customers that utilize the company's services on mobile telephone and related devices. No current insight on the strategic alliance with China Telecom (NYSE:CHA), which brought exposure to millions of broadband and fixed line Internet users, were detailed but there is significant growth potential over the longer term from this relationship.
Gross profits were 84% of sales on higher website maintenance costs while operating expenses increased significantly as the firm boosted its sales, marketing and product development spending, as it positions itself for future growth. As a result, operating income fell into negative territory, as compared to a profit in last year's quarter. This boiled down to a 5 cent loss per diluted American Depository Share (ADS), with each ADS representing five ordinary shares that trade in Hong Kong.
The Bottom Line
Despite the earnings loss, cash flow from operations was a positive $2.6 million and free cash flow was also positive after subtracting $1.7 million in capex during the quarter. Analysts expect a full-year earnings loss of 24 cents per ADS and project a revenue decline of 10.2% to $50.5 million. U.S. rival TheStreet.com (Nasdaq:TSCM) is projected to see a 22.4% top-line decline to $55.8 million as its prospects in a more mature U.S. market look bleak for the near term.
China Finance's free cash flow will also likely fall from 2008, which came in at about $22 million, but should expand significantly over the long haul. On a trailing price-to-free-cash-flow basis, China Finance trades at a multiple of under eight. This figure is calculated using a current market capitalization of $172.5 million. Subtracting out the $104.4 million in cash on the balance sheet as of quarter end, and the multiple drops to about three. (Learn more about components of the balance sheet in Reading The Balance Sheet.)
Management's outlook is "that the Chinese economy continues on a gradual rebound mode, and the path to a full recovery will be uneven, as such, the volatile domestic equity market will continue to influence the Company's operating results in the coming quarters." In other words, the path to increased sales and profits as more Chinese consumers and institutions become investors will be volatile, but the potential for China Finance Online's products and services remains compelling, especially at a low multiple that discounts very little growth going forward.
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