The provider of stock brokerage and other financial services' revenue surged more than 40-fold in the first half of its fiscal year, but its gross profit margin plummeted

Key Takeaways:

• GoFintech's revenue soared 47 times year-on-year in the six months to September, as it returned to profitability
• The big revenue gain largely owed to new supply chain brokerage services, but margins for the new business are razor-thin

Revenue growth sometimes comes at the expense of profit margins. A textbook – and somewhat extreme – case of this not-so-desirable dynamic comes from GoFintech Quantum Innovation Ltd. (0290.HK).

As impressive as they seem at first glance, the results might leave many scratching their heads initially. GoFintech's gross profit grew less than fivefold in the latest six-month period, which on its own looks big, but pales in comparison with the huge revenue jump. The big gap owes to a sharp erosion of its margins.

GoFintech's gross profit margin crashed to 6.6% during the first half of its fiscal year from 75% a year earlier. The main culprit was the company's recent foray into supply chain services dating from October last year. Although it's a brand new area for GoFintech, it accounted for more than 90% of the company's revenue in the first half this fiscal year, showing the young business has ramped up rapidly.

The supply chain business essentially sees GoFintech act as a middleman that matches suppliers and buyers, currently focusing on bulk commodities and precious metals. The company first gathers information on buyers' procurement requirements and seeks suppliers that can meet their needs on the best terms.

It purchases the required commodities with its own funds, and then sells them to buyers, pocketing a small profit in the process. A staff of four runs the operation, so its operating expenses for the business are likely minimal. The major risk lies in the potential for buyers to default on their payments, since GoFintech uses its own funds to procure goods from sellers before recouping its money when buyers pay.

Tiny margins

In addition, GoFintech is also looking to offer artwork-collateralized digital lending services using blockchain technology, rushing to capitalize on some of the latest trends in the financial industry. Furthermore, it wants to build a comprehensive platform for artwork tokenization, while converting its art assets into non-fungible tokens (NFTs) so they can be traded digitally.

Yet it will probably be a while before the art business generates meaningful profits, or for margins to improve significantly for the supply chain services business, neither of which is guaranteed. Instead, a more immediate boost to GoFintech's profit will come from its recent acquisition of CSOP Asset Management from Wealthink AI-Innovation Capital Ltd. (1140.HK).

Last December, GoFintech agreed to buy 22.5% of the asset manager for HK$1.1 billion by issuing new stock. Shareholders of both GoFintech and Wealthink approved the deal in July. It's not clear if the transaction has already closed, or if it's still pending. But if and when the deal closes, GoFintech will include its share of CSOP Asset Management's profit in its own income statement.

CSOP Asset Management is one of the largest issuers of exchange-traded funds (ETFs) in Hong Kong, reporting revenue of HK$677 million in the first nine months of last year and a net profit of HK$253 million.

Among GoFintech's older businesses before all of its new initiatives, securities brokerage and margin financing performed nicely in the first half of its fiscal year. That segment's revenue jumped more than fivefold year-on-year and its profit rose 326%, likely the result of a renaissance for Chinese stocks this year.

Investors do appear to appreciate GoFintech's efforts to spread its wings to new niche areas, as reflected by its big stock gains. But if the company fails to sustain its new-found profitability, the recent investor euphoria around its quick revenue growth may evaporate just as fast.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.