JF Wealth Suffers Reversal Of Fortune Just Months After IPO

Key Takeaways:

• The loss warning came after JF Wealth’s earnings were hit by share-based compensation expenses, falling revenue and rising operating costs
• The company is struggling to maintain its paying user base and is facing rising refund requests

By Emily Chan

As a company in the business of financial education, JF Wealth Holdings Ltd. (9636.HK) is certainly providing investors with an object lesson in earnings volatility.

The company, which offers online financial literacy training and share-trading guidance, went public on the Hong Kong Stock Exchange in March this year, boasting a gross margin of more than 87%. The IPO was part of a fintech listing rush from the start of the year that generated a lot of market buzz.

But barely four months later, JF Wealthhas raised a red flag about its expected half-year earnings, predicting a tumble from profit to loss.

The investment education platform said on Tuesday that it expected to post a net loss for the six-month period to end-June of between 32 million yuan ($4.47 million) and 42 million yuan, against a profit of 220 million yuan in the same period a year earlier. The setback was blamed on a triple whammy of share-based compensation expenses, falling revenue and rising operating expenses.

Share-based expenses were swelled by a pre-listing grant of 28.43 million shares for some of its staff, which added 57 million yuan to general and administrative costs. The company said that without those expenses it would have stayed in the black with a half-year profit ranging from 15 million yuan to 25 million yuan.

Operating expenses were bloated by 59.4 million yuan in social insurance contributions, 15 million yuan in listing expenses, about 80 million yuan in staffing costs arising from a business expansion and about 20 million yuan in rental costs. All in all, the extra costs drove operating expenses about 26% higher in the period.

Despite the looming loss, the company’s shares barely moved in the three trading days after the announcement, closing at HK$16 last Friday, slightly below the HK$16.02 before the profit warning.

The earnings warning also put a spotlight on the company’s business model and billing structure. JF Wealthsaid its balance of contract liabilities at the beginning of the year was about 577 million yuan, a fall of 88 million yuan year on year. Gross billing in the first half was about 21% higher than the same period in 2022, but revenue was about 48 million yuan lower. To grasp the reasons, we need to understand how the business charges for its services.

The company’s main revenue sources are “SmartInvest Pro”, its flagship investor education offering, and the more affordable financial information software product “SmartInvest Info”. The products offer varying levels of service, from basic stock performance toolkits and online tutorials to livestreamed courses and tailored advisory services. The standard information package costs 5,800 yuan a year while the high-end suite aimed at more active investors is priced at up to 139,600 yuan for six months of use. Customers must pay in advance for software or services, but they have the right to request refunds of unused services during the contract period.

Upfront fees are booked as revenue during the subscription period based on services used, while the rest is registered as contract liabilities. The rise or fall in contract liabilities reflects changes in recognized revenue and prepaid subscription fees during the year.

At the start of the year, contract liabilities were 88 million yuan lower than a year earlier, as the sum recognized as revenue last year exceeded the amount of newly received prepaid subscription fees. This implies that the prior-year revenue to be booked this year will be less than the equivalent amount in the previous year. A prospectus uploaded in September last year put the total order value at the end of June 2022 at about 1.038 billion yuan, which is expected to increase 21% this year to about 1.256 billion yuan. Meanwhile, revenue is predicted to fall around 48 million yuan to an estimated 861 million yuan in the first half of this year, from 909 million yuan in the same period of 2022.

The company’s revenue had been climbing over the past four years, rising 27.4% to 1.85 billion yuan last year.

With improved earnings power, the company went from a loss of 57.84 million yuan in 2019 to a net profit of 460 million yuan last year. In 2021, the launch of “SmartInvest Info” had helped to bolster earnings with an influx of new users. The financial information product added 62,832 paying users and pushed the total subscriber base over 110,000, while the total order value rose above 2 billion yuan.

Rising Refund Rates

However, the company’s business is closely linked to the general investing climate, which has darkened. The U.S. started to raise interest rates in March 2022 and China’s economy was hit by a Covid-19 resurgence at the end of the year. The Chinese recovery has since been losing pace, hitting confidence in shares traded on mainland Chinese exchanges, which have been underperforming other markets. The warning signs were visible in JW Wealth’s 2022 results, which were released shortly after the share listing.

The earnings report showed that the total order value of “SmartInvest Info” rose 34% year on year to 818 million yuan, but the number of paying users of the tool fell by more than 52% to 30,026. The average gross billing per paying user jumped from 9,700 yuan to 27,200 yuan, as purchases of value-added services helped to offset a drop in users.

The premium product “SmartInvest Pro” has also been under pressure since 2021. Despite promotions and discount offers, the number of paying users still fell 1.91% to 38,159 in 2022, while the average gross billing per paying user sank from 35,300 yuan to 30,800 yuan, and the total gross billing dropped nearly 15% to 1.174 billion yuan.

A fall in paying customers has been compounded by rising requests for refunds, affecting the income that can be booked as revenue. Refund rates for “SmartInvest Pro” and “SmartInvest Info” last year were 22.7% and 24.3%, equivalent to one refund for every four to five users, much higher than the 16.3% and 15.8% in 2021. At the end of October last year, the refund amount had exceeded 508 million yuan, equal to nearly 90% of the total for the previous three years, according to the company’s IPO prospectus.

The company has also been forced to splash out on promotions to draw new traffic from various social media platforms. The average cost of luring each new paying user rocketed from 5,219 yuan in 2019 to 14,003 yuan at the end of October last year. Total spending on acquiring online traffic exceeded 768 million yuan last year, accounting for almost 79% of the sales and marketing expenditure during the period.

As a Chinese platform for investment information, JF Wealth can be compared with U.S.-listed online brokerage Futu Holdings FUTU. Futu is a one-stop shop for trading stocks on Hong Kong, U.S. and mainland Chinese exchanges, with a price-to-earnings (P/E) ratio of about 14.5 times. Since JF Wealth listed in March, its shares have mostly traded below its listing price of HK$17, or at about 15 times earnings based on a closing price of HK$16 on July 21.

Futu’s non-GAAP net profit more than doubled in the first quarter, and its second-quarter performance is also likely to impress. By contrast, JF Wealth has slipped into the red. Investors should look out for any room for a revised valuation.