GoFintech returns to the black, but sacrifices margins for big revenue jump

The provider of stock brokerage and other financial services’ revenue surged more than 40-fold in the first half of its fiscal year, but its gross profit margin plummeted

Key Takeaways:

• GoFintech’s revenue soared 47 times year-on-year in the six months to September, as it returned to profitability
• The big revenue gain largely owed to new supply chain brokerage services, but margins for the new business are razor-thin

By Warren Yang

Revenue growth sometimes comes at the expense of profit margins. A textbook – and somewhat extreme – case of this not-so-desirable dynamic comes from GoFintech Quantum Innovation Ltd. (0290.HK).

Last Friday, the provider of a range of financial services reported that its revenue soared by a factor of 46 to HK$1 billion ($128 million) in the six months to September, the first half of its fiscal year, from just HK$22 million a year earlier. Adding to the good news, the company also returned to the black after losing money a year earlier, putting it on course to record its first annual profit since 2017, when it was known as China Fortune Financial Group.

As impressive as they seem at first glance, the results might leave many scratching their heads initially. GoFintech’s gross profit grew less than fivefold in the latest six-month period, which on its own looks big, but pales in comparison with the huge revenue jump. The big gap owes to a sharp erosion of its margins.

GoFintech’s gross profit margin crashed to 6.6% during the first half of its fiscal year from 75% a year earlier. The main culprit was the company’s recent foray into supply chain services dating from October last year. Although it’s a brand new area for GoFintech, it accounted for more than 90% of the company’s revenue in the first half this fiscal year, showing the young business has ramped up rapidly.

That’s promising for anyone waiting for GoFintech to build up the kind of scale needed to justify its market value, which currently stands at about $2.7 billion after a major rally over the last year. But the problem is that margins for its new supply chain business are extremely low. GoFintech earned HK$949 million in revenue from that business in the six months to September, but only derived HK$1.4 million in profits from the segment, translating to a miniscule net margin of 0.1%.

The supply chain business essentially sees GoFintech act as a middleman that matches suppliers and buyers, currently focusing on bulk commodities and precious metals. The company first gathers information on buyers’ procurement requirements and seeks suppliers that can meet their needs on the best terms.

It purchases the required commodities with its own funds, and then sells them to buyers, pocketing a small profit in the process. A staff of four runs the operation, so its operating expenses for the business are likely minimal. The major risk lies in the potential for buyers to default on their payments, since GoFintech uses its own funds to procure goods from sellers before recouping its money when buyers pay.

Tiny margins

The bottom line is that GoFintech collects tiny profits for the procurement work it performs on behalf of its customers. The company says buying customers for its supply chain services are in Hong Kong and China, including large state-owned enterprises in China. Suppliers include trading firms in Hong Kong. GoFintech may have sacrificed margins to scale up this new business quickly. Now, investors will be keen to see if the company can squeeze a bit more profits from its supply chain customers as it gains more leverage over them.

This year, GoFintech also started an artwork investment business, although it didn’t generate any revenue from that in the first half of its fiscal year. The company has a lot of plans for this new venture. For starters, in the first nine months of this year, GoFintech signed 28 deals to buy HK$830 million worth of artwork, using its internal financial resources for the purchases. If the values of those assets rise, the company can book gains, although the opposite can happen as well. The company learned the downside of such investment in its latest reporting period, when it recorded a valuation loss.

In addition, GoFintech is also looking to offer artwork-collateralized digital lending services using blockchain technology, rushing to capitalize on some of the latest trends in the financial industry. Furthermore, it wants to build a comprehensive platform for artwork tokenization, while converting its art assets into non-fungible tokens (NFTs) so they can be traded digitally.

Yet it will probably be a while before the art business generates meaningful profits, or for margins to improve significantly for the supply chain services business, neither of which is guaranteed. Instead, a more immediate boost to GoFintech’s profit will come from its recent acquisition of CSOP Asset Management from Wealthink AI-Innovation Capital Ltd. (1140.HK).

Last December, GoFintech agreed to buy 22.5% of the asset manager for HK$1.1 billion by issuing new stock. Shareholders of both GoFintech and Wealthink approved the deal in July. It’s not clear if the transaction has already closed, or if it’s still pending. But if and when the deal closes, GoFintech will include its share of CSOP Asset Management’s profit in its own income statement.

CSOP Asset Management is one of the largest issuers of exchange-traded funds (ETFs) in Hong Kong, reporting revenue of HK$677 million in the first nine months of last year and a net profit of HK$253 million.

Among GoFintech’s older businesses before all of its new initiatives, securities brokerage and margin financing performed nicely in the first half of its fiscal year. That segment’s revenue jumped more than fivefold year-on-year and its profit rose 326%, likely the result of a renaissance for Chinese stocks this year.

GoFintech shares gained 6.7% in two days after the release of its latest results, showing investors broadly liked the big revenue jump despite the huge margin sacrifice. With those gains, the stock has nearly tripled this year to trade at a trailing price-to-earnings of 78, dwarfing the 19 for more traditional stock brokerages Futu Holdings (FUTU.US) and 13 for UP Fintech (TIGR.US). But that high multiple could come down if GoFintech can quickly boost its profits following its move into new areas and remain in the black after years of losses.

Investors do appear to appreciate GoFintech’s efforts to spread its wings to new niche areas, as reflected by its big stock gains. But if the company fails to sustain its new-found profitability, the recent investor euphoria around its quick revenue growth may evaporate just as fast.

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