Citron Looks at China Finance Online (NASDAQ: JRJC)


As JRJC heads toward a billion dollar market cap, Citron Research encourages all investors to look at the company’s website :

Folks, the company sells a group of newsletters to Chinese stock speculators with names like “Quick Profits” and  “Storm” and “Stock Radar”.  They sell by telemarketing, and they have plans to increase their telemarketing staff again next year.

If you hit the “Purchase” or “Free Trial” buttons, you can’t even order online.  The form sends an email to a telemarketer who will presumably respond to your request and try to upsell you something.

The reality is there are hundreds of competing stock commentary publications in China.   This has gone from silliness to nonsense.  The chatrooms calling this the “Bloomberg of China” are well……out to lunch.

Now Breen Murray has raised its target from 25 to 35 while cautioning about the need for a “market correction” due to volatility.  What has changed since Breen put out its 25 target, which was a raise from 17 just the week before, except the momentum in the stock?  Did Breen’s analyst fail to understand this company as the “Bloomberg of China” until the stock price told him?

The JP Morgan analyst put a 29 target on this company as of Dec 08, with a very detailed revenue projection based on the company’s plans.  Will he have the integrity to call a “sell on valuation” now, or will he raise his target because of the stock price?

After breaking its IPO price of $13.00 right out of the gate in late 2004, and languishing in low single digits for well over 2 years, this tiny company which publishes investment guides for Chinese stocks, has this year rocketed to a 1000% gain on the mania surrounding the China Stock market. Most recently, shares rocketed higher on the purchase of a Hong Kong brokerage firm for about $3 million. Recent momentum trading has now driven this company with revenues about $5 or $6m per quarter from newsletter subscriptions above an $800 million dollar market cap.

Citron observes that management has not been able to execute over the past 3 years during the biggest boom in the China market while positioning themselves in a space with low barrier to entry.  We acknowledge they have now gotten their revenues up to $5m per qtr.  But we doubt Bloomberg is jealous.

Now we are not issuing a wholesale critique of China  stocks — a lot of them have some impressive growth rates to show for their skyrocketing valuations.  It is just important to decipher what is a bubble and what is value. Think of JRJC as for China, yet even in the tremendous market boom the company was only able to generate $7.4 million in revenue in all of 2006, and projects about $20m for the current year.

 Comparatively speaking TSCM generated $57 million in revenue and has a market cap of about 1/3rd this name.

This has become a quintessential example of the uncritical cheerleading that Wall Street has become so famous for – and that has burned investors. So, don’t be surprised if Chinese stocks catch a cold and JRJC gets the flu.