China Finance Online Leading The Way

By Ryan C. Fuhrmann | June 08, 2010 AAA

China Finance Online (Nasdaq:JRJC) bills itself as the only financial website portal firm available for U.S. investors to invest in on domestic exchanges. It also happens to be a leading portal in China in its own right, and is one of the few ways for a burgeoning class of individual investors to track stock indexes in China and learn about individual companies.

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First-Quarter Sales and Profit Trends
Net revenues shot ahead 29.6% to $15.2 million as active, paid subscribers increased 20.3% to 129,100 and total registered user accounts grew 30.9% to 15.4 million and added more potential for paying users. Gross margins also improved to an impressive 87.5% to demonstrate the scalability of China Finance's software model where the marginal cost of an additional user is quite low.

Despite the positive gross margin trends and gross profits of $13.3 million, China Finance is still having to spend heavily to develop its products and also market them. Total operating expenses grew 28.6% to $13.5 million. Non-operating investment income and gains from a subsidy helped the company stay in the red with net income of $113 million, or one cent in diluted earnings per share. On a positive note, earnings came in positive after a penny loss last year.

Company Guidance
Management expects to end its fiscal year with more than 20 million users and full-year revenue between $56 million and $62 million. It currently projects net income between $2 million and $4 million and free cash flow of approximately $8 million. This approximately works out to earnings per diluted share between 7.5 cents and 15 cents and free cash per share of 28 cents per diluted share.

China Finance's Potential
China Finance is not a large firm by any means and sports a small market capitalization of $160 million. However, it continues to have potential if growth trends can continue. It is already proving an ability to generate plenty of capital, with an impressive estimated free cash flow to sales margin of about 14%, if it can hit the low end of its current full-year guidance. It also has more than $100 million in cash and no debt so controls its own financial fortunes and already generates enough of its own capital to grow and maintain its operations. Finally, an agreement with China Unicom (NYSE:CHU) to be the financial portal on many of its mobile devices should continue to increase the penetration of subscribers across the country.

Bottom Line
Overall sentiment on investing in China has cooled as of late, but there is obviously huge potential for China Finance Online as the country's citizens continue to learn about investing and become more active in the markets. It's reasonable to see the company turning into the equivalent of the finance portion of Yahoo (Nasdaq:YHOO) and similar to TheStreet.com (Nasdaq:TSCM) and Morningstar (Nasdaq:MORN) that use free content to persuade a small percentage if their user bases to sign up for paid content. (Historically, international investing has worked out well for investors, but this may no longer be the case. To learn more, check out Does International Investing Really Offer Diversification?)

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