Key Takeaways:

JF SmartInvest has rolled out Enjoy-Stock Pad, a device that gives users easy access to its content and tools

The financial educator took on its current name just a day before the new product rollout, suggesting it may be trying to create a new business identity

By Warren Yang

The latest lesson from stock-trading educator JF SmartInvest Holdings Ltd. (9636.HK) seems to be that desperate times call for desperate measures.

Last Friday, the company, which operates a platform that provides investors with training on financial literacy and stock trading, announced its launch of a device dubbed Enjoy-Stock Pad. The product sounds like a tablet computer equipped with JF SmartInvest's software to give users easy access to everything the company offers, from online classes to investment and research tools using AI and big data analysis.

Enjoy-Stock Pad "can accurately match the learning needs of investors, realize personalized learning path planning, facilitate investors to learn stock investment in a more comprehensive, systematic and efficient manner, and enhance their financial knowledge and investment ability," JF SmartInvest said.

The device, which JF SmartInvest described as its "its first stock learning hardware product" wasn't the only thing new at the company, whose growth has been less-than-impressive lately as China's sputtering stock markets fail to excite investors. Just a day before the new product announcement, the company changed its name to the current one from JF Wealth. The back-to-back moves seem to reflect a desire -- perhaps desperate -- to create a new business identity and expand its offerings as its revenue growth loses steam.

Last year, JF SmarInvest's revenue rose by an underwhelming 6% to 2.3 billion yuan ($317 million) year-on-year, a sharp slowdown from the 27% growth for 2022. Its profitability deteriorated even more, with its gross profit increasing just 1.8% and its net profit falling by more than half to just about 190 million yuan.

Like many companies serving the stock-trading community, JF SmartInvest's fortunes are often closely tied to the ups and downs of equity markets. That's bad news for such companies in China lately, as a prolonged property slump and a slowing economy weigh on stock markets. After rallying in late February on hopes for an economic revival, the Shanghai Composite Index has given back all its gains and is now down 3% on the year - sharply contrasting with the 14% year-to-date gain for the S&P 500.

Against this gloomy backdrop, it's understandable why JF SmartInvest may be doing anything it can to try to breathe some life back into its business. The creation of Enjoy-Stock Pad may be an interesting addition to its main services, providing an important new revenue source because such hardware carries higher price tags than software.

But just how much of a sales boost the new offering will provide remains to be seen. JF SmartInvest presumably will charge more for Enjoy-Stock Pad than its core software services, since a tablet computer that is likely the basis for the product typically costs $200 to $400. The biggest question mark is whether potential customers would want to pay more for such gadgets when they can simply purchase JF SmartInvest's content for use on their own devices.

Eroding margins

Even if the new device brings in more revenue, that money will also come at a far higher cost than JF SmartInvest's core software and data product offerings. That could pressure the company's margins if sales of the product are strong, since hardware typically carries lower profit margins than software.

This can be a headache for JF SmartInvest as it's already grappling with swelling costs. Last year, its cost of revenue jumped by more than a third, far outpacing its revenue growth, as new hirings for content development and production led to a large increase in personnel expenses. As is often the case with tech companies in a constant race to deliver new services, the company boosted its spending on R&D and more than doubled its general and administrative expenses.

That said, JF SmartInvest has been operating on sky-high margins, thanks to its focus on content, which is relatively cheap to produce. That means it can afford to take a hit to its margins to some extent. And in fact, the company's gross profit margin for last year stood at well above 80% even after some deterioration, even though it fell by nearly 4 percentage points to 83.6% from 87.3% in 2022.

Another key metric for the company is its refund ratio, and growing customer requests to cancel their contracts were a cause for concern in 2022. But signs on that front were more encouraging last year. The ratio of refunds to total payments for SmartInvest Pro, one of the company's two flagship products, fell to 18.5% last year from 22.7% a year earlier. The figure for SmartInvest Info, the other main offering that is more affordable, also slipped to 22% from 24.3% over the same period.

JF SmartInvest asks its customers to pay in advance for its services, but it lets them request refunds for unused services during the contract periods. The company books fees as revenue during subscription periods based on services used, while treating the rest as contract liabilities. So, an increase or a decrease in contract liabilities during a year reflects changes in recognized revenue and prepaid subscription fees during the period.

JF SmartInvest went public in March last year as part of a wave of IPOs by fintech companies that generated a lot of buzz. But since then, the company's shares have lost more than 40% of their value. They still command a respectable price-to-earnings (P/E) ratio of more than 19, but that's more due to the company's relatively low profit, rather than investor optimism about its prospects. The stock's price-to-sales (P/S) ratio is more modest, at less than 2, lower than 2.6 for online stock broker Futu Holdings ( FUTU ) .

JF SmartInvest shares fell Monday, the first trading day after the announcement of its latest product, while the Hang Seng Index advanced. This at least suggests that investors aren't so stoked about its new foray.

The company's efforts to diversify its revenue stream with a move into hardware are laudable, and almost inevitable, as it now essentially relies on only two products to generate revenue. But simply putting a new product into the market is one thing, while giving people a compelling reason to buy it is another. The company could also get a boost if China's stock markets show new signs of life. But after two false starts this year and last on hopes of an economic recovery, the likelihood of a fast fix in that regard seems unlikely anytime soon.