alpha_zeta's  Instablog

AEG (and ING): very nice that you say the company plans to increase its ROE a little, but "How?" is not stated.

In a low interest rate environment, the absolute yields are low and expenses cannot continue to be reduced, therefore shrinking investment margins are the norm.

So, sell more volume you say?

Now look at the risk based capital that must be posted :
a) US regulatory - NAIC
b) rating agency- S&P, Moody's, Fitch, etc
c) European regulatory -- uh oh, whammmmo - look how much higher this cost is for some product lines sold by AEG (and ING )

Solvency II is analogous to a "180 degree regulatory arbitrage", likely causing more strategic reviews of their businesses.

Could the Europeans eventually divest some of their USA insurance operations? (in addition to the banking and reinsurance) AEG (and ING): very nice that you say the company plans to increase its ROE a little, but "How?" is not stated.

In a low interest rate environment, the absolute yields are low and expenses cannot continue to be reduced, therefore shrinking investment margins are the norm.

So, sell more volume you say?

Now look at the risk based capital that must be posted :
a) US regulatory - NAIC
b) rating agency- S&P, Moody's, Fitch, etc
c) European regulatory -- uh oh, whammmmo - look how much higher this cost is for some product lines sold by AEG (and ING )

Solvency II is analogous to a "180 degree regulatory arbitrage", likely causing more strategic reviews of their businesses.

Could the Europeans eventually divest some of their USA insurance operations? (in addition to the banking and reinsurance) 

JRJC needs to provide some explanation and some detail about the assumptions underlying its business projections.  Perhaps an Excel spreadsheet could be made available - some companies do provide such infomation.


Reasons no buyback:

1. Mgmt re-iterated on its conference call June 16 that buybacks are short term and the company is focused on longer term. I've read and heard this.  This item has arisen on numerous occasions over some years and the company's answer has been the same.

2. Post dot.com bubble look at their share price, products/competitors, profits,cash.  What longer term trend do you see?

3. Cash and Cash Depletion.

JRJC has generated revenue and had losses.
JRJC projects 2011/12 $55m revenue and a loss.

So, there are expenses(operations, taxes, etc) which are more than $55m.  Cash is needed for working capital especially if expenses are incurred first and revenues come later. 


4. Expenses.

(a) regular expenses - have resulted in losses previously, and will be higher going forward because of item (b)

(b) Get compliant with China regulations.
This affects sales,marketing,administration, etc many parts of the business.

Smaller companies, such as JRJC, incur higher % of costs compared to larger companies.  

Did they give an estimate of this cost run-rate for 2011, 2012, 2013 ?

(c)  workers and wage rate. 
--> 1,600 workers seems like a lot, and possibly more are needed to get into Compliance with Regulations.
--> what is trend next few years in wages rate?  lots on inflation, 1 or 2 years from now wages increase?
--> Is management able to make some difficult decisions like reducing staff as paying customers decline?


5. Revenues

(a) paying customers declined 5,000 last quarter (annual run-rate 20k)

(b) reasons that customers will decline more (and i think more than JRJC projects):

i.    people are getting out of the stock market - JRJC said so
[imo, some people spending more on daily living as food/transport,etc costs have increased far more than wetern developed nations realize - many westerners have savings far above the average person in China ;  some wealthy Chinese persons putting money into asset classes other than stocks and some are taking money out of China, some of which is buying real esate abroad]

ii.  new regulations - longer processes - JRJC said so

iii. more competition of "financial information" today vs 5 or 10 years ago (JRJC was a leader 10 years ago).

iv. many websites provide information for free - why pay at JRJC?

v.  not enough scale -- costs JRJC more if it were to offer complete / comprehensive range of products.

vi. trading costs -- low cost and international providers such as Interactive Brokers are available - why pay higher costs at JRJC?
 

(c) subscriptions and statistics.   What is a "paying subscriber" statistic (are they all annual paying)?  how do the subscription services work?  paid annually or monthly?  are there refunds if cancel prior to expiry of contract?

(d)  Demographics of JRJC's customers.  How long have they been a customer?  Age groups?   Wealth/assets grouping?  

(e)  Investment Banking type services.  This is much smaller item for JRJC.  But, if you are a larger or medium size China company, will you go to JRJC to advise you on a deal?  How many press releases/announcements do we see with JRJC's involvement in M&A type transactions?

Foreign investment banks have been setting up shop in the past year or so.  More competition to one of JRJC's product lines that it has not done much in anyways.

6.  Profit Margins.   JRJC may need to reduce the prices it charges for its services to keep up with competition and reatin customers.  Also, it may need to offer more services for free.

7. Next 12 months, net effect.  Suppose paid subscription users drop 20%  and __% of services are given away for free, expenses are $5-10m more, well let's say $15m-20m cash gets wiped off the balance sheet. That could be on the low end.  If customers realize they can get better value elsewhere, maybe no reductions will keep them at JRJC.


Disclosure:  no position.  I need to see better / mre disclosure from management on some major items.  Also need to see management buying stock, and a small token amount of company buyback.  But, the company seems adamantly against it and they may well have good reason not to use  cash for buybacks due to several risks/reasons outlined above.