"The Company Should Never Have Gone Public" (JRJC)

Chinese online financial information provider China Finance Online (ticker: JRJC) reported Q3 2005 results late last week. The following is a comment from a reader of The China Stock Blog:

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

Comments

[Ian1:]

While I think we are all fairly under-whelmed with the earnings results, I don't understand the comment above - increasing traffic by advertising the site and then selling advertising is a standard business plan for most, if not all, websites. They are not eating themselves, as a result of this very legitimate business strategy, as they are still making money even with increased advertising expenses.

Although I do tend to agree why go public if you <b>just</b>... use the money for a buy back - but they are not just using the money for this - see increases in advertising and product development expenses. Also, I note that the share buy-back was decided by the previous management team.

However, I am concerned by the size of the contribution to the results of the currency fluctuation, although if anything the Yuan should continue to go up against the dolar and JRJC should continue to benefit as its earnings are in Yuan. I also have some basic concerns about the image of the website as it does seem to use just about every possible aspect of bad website design, such as pop-ups and other "mouse catching" tricks that don't seem to befit serious financial website, and which must annoy regular subscribers.

2005 Nov 09 11:05 AM

[JerryD:]

Ian,
You need to break things down analytically. Marketing works when you have a product or service that people want. But marketing a website for the purpose of generating advertising revenue is a losing proposition. It does not generate shareholder value. It is not a legitimate growth plan. This is precisely management's strategy. The company generated $449k in advertising in the quarter, while sales and marketing expenses increased to $539k. It's difficult to imagine that the company is actually profiting from this venture. The company's profits are coming from their existing subscriber base, which is declining. All they are achieving now is offsetting their decline subscription revenue with advertising revenue. Growth in advertising revenue is <strong>WORTHLES... unless you have growth in user base. They are experiencing a decline in user base.

This company should never have gone public because they simple do not know what to do with all of the cash that generated from their IPO.

2005 Nov 11 12:02 PM

[Ian1:]

I agree that "Marketing works when you have a product or service that people want." But you don't have to make your money from selling that product or service (in this case, financial information). That's why advertisers look at the web site hit stats, not the number of subscribers. There are too many examples to list of sites with no paying subscribers that are worth millions becasue of their hit stats. Therefore I don't agree that "Growth in advertising revenue is WORTHLESS unless you have growth in user base". Of course, you do have to have a good product or service that people want to have good hit stats and the declining subscriber base may give an indication or the quality of the site, or maybe a lack of demand for financial information, given the state of the Chinese stock market. Or maybe its still got the best free content, but charges too much for the subcriber services. I presume that Seeking Alpha, and chinastockblog makes money but has no subscribers....

2005 Nov 12 05:28 PM

[JerryD:]

I agree with you on a number of points. Just to be clear, I see the declining subscriber base as a major indicator of the value the company is providing. Once their surging market expenses slows down, we'll see how much their web hits and advertising revenue will be impacted.

You mentioned "too many examples" of no paying subscriber sites worth millions. So, I'm curious, can you name one or two examples of such sites that are similar to JRJ and are worth $100 million (JRJ's current market cap)?

2005 Nov 14 06:38 AM

[timezero:]

JRJ is just a joke like China's own stock market. Without having any idea about corporate governance and fiduciary responsibility to public investors, lack of integrity has led to the crash of the whole system. It was quite like what happend in the US before 1933. Insider trading and cooked books are everywhere. Once you put down your money into Chinese stock market, you are entering a trap or another and get burned sooner or later. What most Chinese investors count on now is technical analysis. After all, what can they believe? The only thing left is the chart. Sadly, it is just a toy of manipulators.

With this backdrop, will a online financial advisory firm prosper? An idiot can tell. What can they offer? They basially act as accomplice of those manipulating masterminds, giving value-destroying advice one by one. In fact, the only thing they can do to create value for the investors is to tell them keep away from the casino-in-nature market.

2005 Nov 10 11:19 AM