'Stock Advisor' JF Wealth Defies Market Basics with Ill-Timed IPO Bid

'Stock Advisor' JF Wealth Defies Market Basics with Ill-Timed IPO Bid

Key Takeaways:

  • Online investment advisor JF Wealth has filed for a Hong Kong IPO, deriving most of its revenue from high-end education and content services
  • The company faces mounting headwinds from rapidly growing sales and marketing costs and increasing refund requests

By Emily Chan

Basic investment courses advise stock buyers to avoid weak markets like the ones 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 councilor JF Wealth Holdings seems to be ignoring that kind of basic principle it usually provides to its customers.

The company that dubs itself as China’s leading online investor content provider defied the current market malaise by filing for a Hong Kong IPO last Wednesday, its third such try after failed attempts in August last year and March this year. It seems nobody told the company that market sentiment has cooled considerably since those last two tries.

JF Wealth is the largest online investor content provider in China, with orders totaling 1.39 billion yuan ($193 million) and 11.2% market share for high-end online investment and financial education services in 2021, according to third-party data cited in its preliminary prospectus. Its business is booming, with revenue surging more than fourfold from 274 million yuan in 2019 to last year’s 1.45 billion yuan. The figure grew by another 75% to 910 million yuan in the first half of this year from the same period of 2021.

Pricey classes

Of JF Wealth’s three main businesses, online high-end investor education services is the most lucrative, offering pre-recorded online courses, livestreaming, and one-on-one advisory services. Packages include the sharing of two to three case studies with subscribers each week, with clear buy and sell instruction, position tips and daily tracking services. The high-end courses aren’t cheap, with packages starting from 29,800 yuan and going as high as 139,600 yuan per six-month period.

Such high-end courses have become the company’s biggest cash cow, churning out revenue that jumped 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, raking in 564 million yuan despite weak global stock markets.

For more cost-conscious investors, the company’s online financial literacy education services provide financial knowledge and asset 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 last year for more experienced investors, providing professional, timely and comprehensive financial market information, data analysis and investment decision support starting at 5,800 yuan per year to as much as 68,800 yuan per six months. That service recorded more than 288 million yuan in revenue in its first year, contributing 19.8% of the total during that period. Reflecting the business’ big potential, revenue from financial information software services totaled 344 million yuan in the first half of this year, accounting for 37.8% of the company’s total.

JF Wealth’s rapid revenue growth was being driven by its fast-growing pool of paid subscribers, which totaled 110,450 at the end of 2021 – up more than 7 times from 2019. But weak markets caused that base to suddenly contract this year, with the number plummeting by 65.5% to 38,086 at the end of June. Management attributed the plunge to the company’s decision to shift its focus away from its lower-end financial literacy education services, and also to fewer promotions and discounts for its financial information software service.

As it de-emphasized lower-spending customers, the company’s average order value per paid 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-end clients, JF Wealth’s gross margin has exceeded 80% in the past three financial years, rising to 89.3% in the first half of this year. Its profit performance has also improved during that time, rising from a loss of 57.84 million yuan in 2019, to a profit of 86.68 million the following year, and an even bigger profit of 232 million yuan last year. Its profit for the first half of this year reached 220 million yuan, nearly equal to its entire profit for all of last year.

Big promotional spending

Despite the rosy profits, a closer look at its financial statements shows the company is being subsumed by huge sales and marketing expenses. With last year’s additional spending to promote its new financial information software services on top of other regular promotions and discounts, the company’s related spending jumped 130% year-on-year to 856 million yuan, accounting for nearly 60% of overall revenue.

Much of the increased spending has come through JF Wealth’s internet traffic procurement expenses, which have ballooned nearly 10 times from 67.7 million yuan in 2019 to 640 million yuan last year. That figure looks set to grow further still this year after the company spent another 415 million yuan in the first half of this year on such online procurement, accounting for 84% of total sales and marketing spending.

Meanwhile, user complaints and refund requests are likely to rise as markets sag. Last year saw the company receive 19,623 requests for refunds totaling up to 383 million yuan. In a sign that the weakening market could bring more trouble for the company in that regard, it reported its number of refund requests doubled to 12,060 in the first half of this year from 6,141 a year earlier.

With no similar listed companies for reference, we can only refer to online stock brokers Futu Holdings FUTU and UP Fintech TIGR to estimate JF Wealth’s potential valuation. That pair also focus on individual investors, with price-to-earnings (P/E) ratio of 19.4 times and 29.8 times, respectively. Using their average of 24.6 times could value JF Wealth at around 10.8 billion yuan based on its first-half profit extrapolated to the full year. But given the current weak sentiment in Hong Kong, investors may only settle for relatively conservative pricing even if the company makes it to market this time.

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