JF SmartInvest Makes Roaring, Yet Vulnerable Comeback On China Stock Rally

The investment educator's net profit grew sharply last year, despite a large loss in the first half, amid strong demand for its products fueled by a bull run for Chinese stocks

Key Takeaways:

• JF SmartInvest expects to report its net profit for 2024 rose 36% to 47% despite posting a large loss in the first half of the year
• The impressive turnaround comes amid strong interest in trading Chinese stocks, which are rallying on a series of policy measures to stimulate the country's economy

By Warren Yang

Talk about a turnaround.

Stock-trading educator JF SmartInvest Holdings Ltd. (9636.HK) made a roaring comeback in the second half of last year, as demand for its products soared on the back of a big rally for Chinese stocks. That's the main takeaway from the company's positive profit alert, issued last Monday. But the strong rebound, in a way, only highlights JF SmartInvest's fundamental vulnerability that stems from its heavy reliance on ups-and-downs in Chinese stocks, which is made worse by its revenue-generation model.

This kind of reliance, and resulting gyrations in a company's results, is common throughout the entire sector linked to stock trading. When the market rallies, investor interest in stock trading usually picks up sharply, leading to bumper revenue and profits for brokers, information providers and educators like JF SmartInvest. The opposite is true during weak markets, which plagued much of the sector for the last four years.

In its filing, JF SmartInvest said it expects to post a net profit of between 260 million yuan ($36 million) and 280 million yuan last year, up 36% to 47% from 191 million yuan for 2023. That's nice enough earnings growth, but what makes it even more impressive is that JF SmartInvest made a hefty loss of 174 million yuan in the first half of 2024, more than four times its loss a year earlier.

Some basic math based on those data points suggests that JF SmartInvest turned a net profit of up to 454 million yuan in the second half of last year, nearly double the 228 million yuan profit it reported for the six-month period a year earlier.

JF SmartInvest partly attributed its sharp reversal of fortunes to a "steady increase in securities market trading activity and the continuous strengthening of investor confidence following the introduction and implementation of a series of domestic policies in September 2024."

The company operates a platform that provides investors with training materials on financial literacy and stock trading, so demand for its services ebbs and flows with changes in market conditions. And as JF SmartInvest said, Chinese stocks, which had been shunned by investors for quite some time because of concerns about China's economic slowdown, have been on a bull run since last September.

The Hang Seng China Enterprises Index, composed of Chinese stocks listed in Hong Kong, has jumped some 36% in the past six months, while the SSE Composite Index, which tracks Mainland-listed companies, has risen 18%. Such gains mark a clear shift in investor sentiment towards Chinese stocks, which had languished for more than three years before that.

JF SmartInvest's stock has been on an even more spectacular bull run, more than quadrupling in the past six months, including a 33% rise since the profit alert. It's not clear what powered the market-beating surge before the latest earnings guidance, but it's not hard to see why investors stormed into JF SmartInvest shares, speculating the company would be a prime beneficiary of the Chinese stock rally.

Any investors making such bets were certainly right. The company's gross billings for all last year totaled 3.5 billion yuan, up nearly 50% from 2023. According to its interim report, total gross billings for the first half of last year stood at just 930 million yuan, down 26% from a year earlier. That means JF SmartInvest brought in more than 70% of its gross billings for 2024 in the second half of the year, much of that probably in the final four months after the September rally began.

Hard times

Before the second half of last year, JF SmartInvest was facing difficulties as its financials deteriorated with prolonged weakness in Chinese stocks. Its revenue growth slowed to an underwhelming 6% in 2023 from 27% the prior year, with its profitability worsening even more. As a result, its net profit dropped by more than half in 2023. The company remained profitable that year by turning a profit in the second half to more than erase the loss for the prior six months. But then it plunged massively back into the red in the first six months of last year.

In addition to JF SmartInvest's vulnerability to an overall stock market downturn, its business model has made some investors skeptical. The company's main revenue sources are "SmartInvest Pro," its flagship investor education offering, and the more affordable financial information software product "SmartInvest Info."

These products offer varying levels of services, from basic stock performance toolkits and online tutorials to livestreamed courses and tailored advisory services. Customers must pay in advance for software or services, but they have the right to request refunds for unused services during their contract periods.

JF SmartInvest initially only books the upfront fee from a user as revenue during the subscription period based on services used, while treating the rest as a contract liability. Then, it gradually recognizes the outstanding bill as revenue over time — if the subscriber sticks around. If the subscriber decides not to continue, the company refunds money for unused services and loses what otherwise would have been revenue. 

This means that not all product sales necessarily translate to revenue. And when times are rough for investors due to market weakness, JF SmartInvest can be hit with an increase in refund requests. Reflecting that, the refund rate for its SmartInvest Pro package more than doubled to 30% in the first half of last year from the first half of 2023.

The company has tried to boost its revenue with new offerings, including a device dubbed the Enjoy-Stock Pad, essentially a tablet computer equipped with its software to give users easier access to its services. But it's questionable whether such an incremental addition will provide any significant revenue boost.

So JF SmartInvest's fortunes will remain inevitably tied to sentiment surrounding Chinese stocks. That can be a good thing in times like the present, especially as hype around Chinese artificial intelligence startups further buoys the overall market mood.

Following their recent rally, JF SmartInvest shares are now more than double the value from their 2023 IPO price and trade at a relatively high price-to-earnings (P/E) ratio of 57, based on the company's latest profit forecast, and a decent price-to-sales (P/S) ratio of 7. Those compare with a lower P/E ratio of 27 for Futu Holdings (FUTU.US), though the online stock broker's P/S ratio is higher at 10.

But when all this euphoria fades, which inevitably happens with all stock rallies, JF SmartInvest is likely to take a hit that's as dramatic as its comeback, which could ultimately bring its stock back to earth.