Sacrificing gross margin for a surge in revenue, GOFINTECH QUANT successfully turned a profit

The national wealth quantum engaged in securities brokerage and financial services saw its revenue surge over 40 times year-on-year in the first half of the fiscal year, but its gross profit margin plummeted significantly.

Key Points:

• For the six months ending in September, the company's revenue skyrocketed 46 times year-on-year, achieving a turnaround from loss to profit.
• The substantial revenue growth primarily came from newly developed supply chain brokerage services, but the profit margin of the new business is extremely thin.

Liang Wuren

Revenue growth sometimes comes at the expense of profit margins, and this not-so-ideal operational trade-off has become a textbook-level, even somewhat extreme case for GOFINTECH QUANT (0290.HK).

Last Friday, this company providing diversified financial services announced that for the first half of the fiscal year ending in September, its revenue surged 46 times year-on-year to HKD 1 billion (USD 128 million), compared to only HKD 22 million in the same period last year. While the performance is promising, the company also successfully turned a profit after recording a loss in the same period last year, laying the foundation for its first annual profit since 2017 (when it was still named China National Wealth Financial Group).

However, despite these seemingly impressive figures, many market participants are puzzled. The gross profit increase during the latest six-month period was less than 4 times, which looks decent on its own, but the gap compared to the explosive revenue growth is quite evident, and this huge discrepancy stems from the company's sharp decline in profit margins.

During the period, the company's gross profit margin plummeted to 6.6%, a dramatic drop from 75% in the same period last year. The main reason is the new supply chain service business that the company started investing in since October last year. Although this is a completely new business segment for GOFINTECH QUANT, it already accounted for over 90% of the company's total revenue in the first half of this fiscal year, indicating a rapid expansion pace.

For investors hoping for GOFINTECH QUANT to establish an operational scale that matches its market value, this development has certain positive implications. The company's stock price has surged significantly over the past year, with a current market value of approximately USD 2.7 billion. However, the problem lies in the extremely low gross profit margin of this new business. For the six months ending in September, GOFINTECH QUANT generated HKD 949 million in revenue from its supply chain business, but this segment only contributed HKD 1.4 million in profit, with a net profit margin of about 0.1%, which is nearly negligible.

The supply chain business essentially allows GOFINTECH QUANT to act as an intermediary to match supply and demand, currently focusing mainly on bulk commodities and precious metals trading. The company first collects the purchasing needs of buyers and seeks suppliers who can meet delivery requirements under optimal conditions.

The company will initially purchase the required goods with its own funds and then resell them to buyers, earning a thin profit margin. This business is currently operated by only four employees, so daily operating expenses are expected to be quite limited. Its main risk lies in the possibility of buyers defaulting or delaying payments, as GOFINTECH QUANT needs to purchase goods from suppliers with its own funds first and can only recover funds after buyers make payments, creating potential uncertainty in cash flow

Thin Profits

Overall, GOFINTECH QUANT has obtained very thin profits in the process of conducting procurement business on behalf of its clients. The company stated that its procurement clients for supply chain services mainly come from Hong Kong and the mainland, including several large state-owned enterprises in China; suppliers include trading companies in Hong Kong. To rapidly expand the scale of this new business, GOFINTECH QUANT may have sacrificed some profit margins. At this stage, investors will closely monitor whether the company can further obtain more profits from these clients as its negotiation leverage with supply chain clients gradually increases.

This year, GOFINTECH QUANT also launched an art investment business, but this business has not recorded any revenue in the first half of the fiscal year. The company has developed several development plans for this new business. First, in the first nine months of this year, GOFINTECH QUANT has signed 28 art acquisition transactions, involving a total amount of HKD 830 million, with the related acquisitions all paid using the company's internal funds. If the value of the related assets rises, the company can record investment income, but there is also a risk of asset prices falling. In the latest reporting period, the company has experienced the downside risks of such investments and recorded valuation losses.

In addition, GOFINTECH QUANT plans to use blockchain technology to launch digital lending services secured by art, aiming to quickly capture the latest trends in the financial industry. At the same time, the company intends to establish a comprehensive platform for art tokenization and convert its art assets into non-fungible tokens (NFTs) for digital transactions.

However, whether it is to generate considerable profits from the art business or significantly improve the profit margins of the supply chain service business, it may not be achievable in the short term, and there are no guarantees for either. In contrast, the immediate driving force for GOFINTECH QUANT's profits will come from its recent acquisition of a 22.5% stake in Southern Eastern Asset Management Company from Huake Intelligent Investment (1140.HK).

In December last year, GOFINTECH QUANT agreed to acquire the asset management company's stake for HKD 1.1 billion through the issuance of new shares. The related transaction was approved by the shareholders of both GOFINTECH QUANT and Huake Intelligent Investment in July this year. It is still unclear whether the transaction has been completed, or if it is still pending delivery. However, once the transaction is finalized, GOFINTECH QUANT will be able to incorporate its share of profits from Southern Eastern into its own profit and loss statement.

Southern Eastern is one of the largest ETF issuers in Hong Kong, recording revenue of HKD 677 million and net profit of HKD 253 million in the first nine months of last year.

Before the full rollout of various new business layouts, in GOFINTECH QUANT's traditional business, the securities brokerage and margin financing sector performed well in the first half of this fiscal year. The revenue of this division grew more than fourfold year-on-year, and the division's profit also surged by 326%, mainly benefiting from the recovery of the Chinese stock market this year.

After announcing its latest results, GOFINTECH QUANT's stock price rose by 6.7% within two trading days, reflecting investors' overall positive attitude towards its explosive revenue growth, despite the company simultaneously bearing the cost of significantly sacrificing gross margins. Driven by this, the stock price has nearly doubled this year, currently tracking a price-to-earnings ratio of about 78 times, far higher than traditional brokerage peers such as Futu Holdings (FUTU.US) at about 19 times and Tiger Brokers (TIGR.US) at about 13 times However, if GOFINTECH QUANT can quickly improve its profitability after entering new business areas and maintain profitability after years of losses, such high valuation multiples are still expected to decline