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Monday, August 22, 2005

China Finance Online (CHFI)

This company (website) is a financial services company in... wait for it... wait for it... China! One of their clients is China Digital Communication Group (CHID).

August 1, 2005 conference call
New CEO gave presentation, CEO doesn't speak English (has translator). Based on my assessment he seems somewhat quiet, thoughtful, and probably delegates well.
Shanghai stock market continued to deteriorate
but advertising business improvements offset that somewhat
plans to expand products to limit exposure to Chinese stock market
wealth mgmt increased 18% as an industry in China
they're claiming the current $200 billion in personal wealth mgmt industry will grow compounded 30% over the next 5 years. Way too optimistic in my view.
They believe now is the time to enter the wealth mgmt sector. a) GDP growth and middle class expansion, b) WTO says foreign banks will have full access to Chinese markets after 2006, c) at that point, competition will be greater than now.
Beta testing is done, launch during August.
3 channels: website, 30 co-branded partners websites (includes 5 of the top 10 in China), banks/insurance companies/etc.
Actively negotiating with other financial service providers.

CFO (English speaker)
$335K revenue in advertising. Not direct sales, now working with agents.
Stock market up 8% since low in June. Currency revaluation. Central bank is offering loans to key brokerages in China. Companies can repurchase shares on the open market. Stock dividend tax rate is being lowered for individual investors.
Gross margins are high partly because of locked-in rates?

Cash is down from previous quarter due to $10m stock repurchase (1.659 million ADRs, or 8.3 million shares). Without it, cash would have slightly increased. BoD authorized another $10 million stock repurchase.

Currency revaluation will obviously help US investors.

1) JP Morgan HK: SG&A increased quite a bit, signed on portals, any indication or stats that traffic to site has increased? Also, Chinese stock market, will it go up? :-)

Yes, Marketing has increased due to exclusives. Partnerships and co-branding brings in lots of new traffic. Traffic has increased 20% despite very weak market environment.

Outlook is not CFO's responsibility to forecast market. There are signs of turnaround. Up 8%, volume increased. Otherwise, no idea. Long term, it will track China economy [yes, exactly!]

Followup) Also, personal finance launch in August, any expectations?

Very successful beta testing in last 1/2 month. Launch in next few weeks. First, get into the mass market, get lots of coverage. Then collect fees later on. This means it starts at a loss.

Followup) How to collect payment?

Good question. [???] There are electronic merchants to collect fees. Online payment, phone payment, financial institutions, etc.

2) P. Jeffries US: Top line is second consecutive Q of top-line decrease. With the personal finance product going out for free, any expectations of top-line growth? Lower?

Costs are low now because online marketing campaign is pretty much finished in Q2. No significant growth in expense. Financial market is very weak in Q2, seems to be stabilizing. Maybe some bounceback in Q3. Depends on market in general. Advertising will possibly grow in Q3. Q3 will be "stable" at this level.

Followup) Operating margins: these should improve, will it be better than Q2?

Yes, those numbers should stabilize, assuming financial market doesn't get worse.

Followup) How long will the pers finance be free? What metric to use to switch?

The product may not be free. They will charge for product. End user will pay in the form of fee via the bank or whatever. They wanted to distribute as many copies to end user as possible. They will monitor and adjust accordingly. They don't have a clue right now, in my opinion.

Followup) Will cooperate with other financial partners?

Strategy didn't change. Waffling, not clear. Not a lot of top-line growth in the future.

3) Some US guy in China: Any forecasts?

No. [wise move]

4) Some guy in the US: Is the advertising revenue exchanged for other advertising revenue or cash? [haha, like the dot com era in the US]

Co-branding, Company embeds its content into the partner's financial channel. If you're in China.com security channel, you see the whole content provided by the Company. Also, logos are combined.

It's considered cost, not revenue. Company is paying some of the partners, some are free. It's one-way only, not phoney revenue.

Followup) total paying subscribers is as expected based on numbers (new and repeat)?

Yes, but due to US GAAP, must amortize over a year period. The number given was collected in this quarter, but apparently not the GAAP number.

5) Another guy in US: Any idea for the ASF (subscriptions) for the rest of the year?

Yes, it has stabilized in the past quarter, but it's very difficult to forecast.

Followup) Deferred revenue, if we multiply ASF by users (Q2 vs Q1), Q2 fee for quarter went down but deferred revenue went up.

Advertising revenue in Q2 went up a lot. Much of that is amortized over a 1 year period. So a lot of the deferred revenue is from advertising (some 1 year, some 6mo), not ASF.

Followup) What industries are advertising?

So far they've signed up 10 advertising agents. Car makers, banks, financial institutions, real estate.

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