Tickers in this Article: JRJC, SCHW, RJF, CHU, LFC
Leading online Chinese financial portal provider China Finance Online (Nasdaq:JRJC) reported yet another difficult quarter of financial results. Near-term stock market weakness in China is pressuring sales, while the company appears to need more scale and customers to report consistent profits. As perhaps the leading online resource for Chinese investors and diversification into related businesses, its potential remains virtually unlimited, but few signs have emerged as to when this potential starts being realized. TUTORIAL: The Industry Handbook: The Internet Industry

First Quarter Recap
Sales fell 1.8% to $15 million on lower subscription revenue from individual investors in China. The company blamed this on the fact that domestic investor confidence remains low. In its words, concerns about the sluggish Shanghai index and "a slowdown in Chinese economic growth" have caused investors to scale back their stock market exposure. Additionally, it cited increased industry regulation from the Chinese government and suggested this could slow industry growth, though the company believes that as the largest player, it would be able to handle a more stringent regulatory environment.

Product costs jumped 18% and sent gross profits down 4.7% to $12.7 million. To battle the lower gross margin, management was able to lower operating expenses significantly, or 14.4% to $11.5 million. This and an investment gain helped push net income up to $1.4 million, or 6 cents diluted EPS and up sharply from 1 cent reported in last year's first quarter. However, operating cash flow fell further into negative territory to a negative $13.4 million. (For related reading, see The Essentials Of Corporate Cash Flow.)

Given the more uncertain trading environment in China, management lowered full-year revenue guidance to $55 million, or almost 8% below 2010 levels. It expects to report a loss of $1 million, or about 4 cents per American Depositary Share (ADS).

China Finance Online's potential remains far from realized, and it appears to have taken a step in the wrong direction over concerns about domestic trading activity in the stock market and heightened industry regulations. An agreement with China Unicom (NYSE:CHU), which makes China Finance the exclusive financial content provider, should place it in front of many potential individual users. Additionally, the company has ambitions to reach out to institutional clients, including firms such as China Life Insurance (NYSE:LFC), and to move into more traditional brokerage services such as those provided by Raymond James Financial (NYSE:RJF) or Charles Schwab Corp. (NYSE:SCHW) in the U.S.

Bottom Line
But with struggling sales, slightly negative earnings and a deterioration in cash flow generation, there appears to be little reason to consider investing in the stock right now. Upside potential exists on a rebound in near-term trends, while the long-term outlook is certainly compelling given many Chinese have yet to become investors. But it has been some time since the company reported positive news from its operations. (For related reading, see Investing In China.)

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