Does China Finance Online Have a Growth Plan? (JRJC 3Q05 Conf Call Quotes)

During China Finance Online's (ticker: JRJC) Q3 2005 earnings conference call late last week an analyst pressed President and CFO Zhan Qian about his company's prospects. Management of the online financial information provider continues to point to the weak domestic Chinese stock market in explaining its weak results and diminishing subscribers. But according to the analyst the Shanghai stock market index was strong during Q3 and the company's results were still weak. So is the company planning more advertising or marketing initiatives to improve results? Here is President and CFO Zhan Qian's response:

You said the stock market improves quite a lot in the third quarter, but actually we see some capulation (ph). If you look at the average, the stock market level, the Shanghai stock exchange index, the second quarter’s average index level is pretty much in line with the third one. So, the stock market is less volatile in third quarter in my view, but by not much. And the company is aware that the subscription services is related to the stock market performance. That’s why we have devoted many of our resources into other financial service areas, such as the personal finance, which is a target that has a much broader mass market, and advertising. And we think those two new drivers will help us to deviate from the fluctuation and the volatility of the financial market in China. The company has no intention to predict and forecast the financial stock market of China, and so that’s why, even though, yes, we are aware of many of the problems in the stock market in [inaudible], but we don’t pass on the stock market.

…the company has been actively looking for new businesses that are less correlated with the stock market.

(Quotes are from the CCBN StreetEvents transcript.)

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• Articles on JRJC.
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Comments

[JerryD]

Notable events since JRJ went public:

CEO left the company
COO left the company
Declining subscriptions
Declining average selling fees

So, what does the company do with all of its cash generated from its IPO? It proclaims that it's stock is undervalued and spends $10 million on a stock buyback program. The other thing the company does is increase spending on a marketing campaign. This marketing campaign does not help reverse their declining subscriptions. However, it increases network traffic to their site, which in turn generates more advertising revenue. Management seems very excited by this phenomenon and states that they are "putting a lot of effort in this direction". They state that revenue from advertising may be a major growth factor in the future.

In other words, less than a year after their IPO, they spend cash buying back stock that helps support an artificially high market cap. During that time, their only growth strategy that works is to increase spending on marketing to generate higher website traffic that increases their advertising revenue. These two business activities are tantamount to deciding to eat one's self in order to avoid starvation.

Simply put, the company should never have gone public. Management does not have a viable business plan yet and their spending is unsustainable.