2023-04-30 09:00:16 ET
Summary
- TOP Financial Group, a Hong Kong-based online brokerage platform, has skyrocketed on recent unusual trading. The company does not comment.
- TOP's share price is 22 times the IPO stock price which now requires business growth. The stock went public on the NASDAQ through a $25 million IPO on June 1, 2022.
- The capital structure now allows for interesting observations. In order to pursue the growth target, TOP needs to invest heavily in marketing campaigns.
- Conditions for massive capital growth now appear favorable.
TOP Financial Group has Skyrocketed on Recent Unusual Trading Activity
In the past two trading days "meme investors piled into the trade" says Yahoo Finance Live disrupting about half a year of flat trading on the NASDAQ exchange for TOP Financial Group (TOP).
Shares of the Hong Kong-based online broker soared more than 1,150% at one point intraday on April 28.
A meme stock is a viral stock capable of monopolizing people's attention online, and the social sentiment surrounding the stock that reigns supreme in such an event is critical to its reproducibility. Intense online activity with discussions and analysis of meme stocks on social media and blogs creates and fosters social moods as these technologies have the amazing ability to evoke cybernauts' emotions.
Therefore, many investors, convinced by the information on these platforms, choose to trade these stocks. The stock price suddenly shoots up, increasing the risk that the stock's market value is largely decoupled from the company's fundamentals.
TOP Financial Group shares closed at $108.21 on April 28, up 441.05% from the previous close, bringing the market cap to around $3.8 billion. A volume of around 6.7 million shares was exchanged on the market.
The swap was impressive considering the company has a float of around 5 million shares freely tradable on the NASDAQ, while the total number of issued and outstanding shares of TOP Financial Group is 30 million.
Of the total shares issued and outstanding, most shares are privately held by corporations, while a much smaller 14.24% is held publicly for a market value of approximately $540.12 million.
About the TOP Financial Group and their "No Comment" on the Share Price Movements
The stock went public through a $25 million initial public offering on Wednesday, June 1, 2022, under Zhong Yang Financial Group ( TOP ) and thereafter changed its name to TOP Financial Group Limited in July 2022.
Zhong Yang - the founder of TOP - offered a total of 5 million common shares and asked for a price of $5 per share.
TOP specializes in trading local and foreign stocks in addition to futures and options products, but the bulk of its revenue comes from commissions on futures contracts.
In response to the wild swings that took place on Friday, the Hong Kong-based online brokerage firm issued the following statement during regular business hours, adding that it would not comment further on the matter:
"While it is the Company's practice not to comment on any stock movement, we believe it is important to note that we caution investors and all other persons to rely solely on statements and filings with the United States Securities and Exchange Commission issued by the Company itself or its authorized representatives."
The trading activities of the previous day do not go unnoticed either.
Yahoo Finance puts the volume of shares traded on Thursday, April 27 at 34,109,600 - look at the dense array of thin bars below the TOP price curve for April 27 - while the share price is up significantly, but didn't shoot up as much as on Friday.
The share price closed at $20 on April 27, up 179% from $7.17 at the close on April 26 and reached $24 intraday, but excessive volatility forced TOP stock to be halted several times on Thursday.
Apparently, TOP Financial Group was not alone as a handful of other low-float stocks from China's financial services sector were raved about by meme investors.
TOP Stock Price at 22x IPO Stock Price Now Requires Business Growth
Total trading volume on Thursday was about 6 times the free float of 5 million shares that TOP was indicated to have, and that discrepancy may have contributed to the social sentiment to have shares of TOP in a portfolio at all costs.
One thing is certain: when low-float stocks experience high trading volume, stock prices tend to skyrocket on outsized swings.
As a result, TOP has a stock price nearly 22 times higher today than on June 1, 2022 [IPO], certainly implying that if the business does not progress as intended by the company, this market valuation will fail in relation to the intrinsic value of the stock.
The intrinsic value depends on the performance of ongoing operations and on the company's growth prospects. Given an intrinsic value based on what the company can generate going forward from such a portfolio of operations, the stock would most likely be significantly overvalued at these prices now.
However, the perspective changes a lot if this intrinsic value could be based on what the company could become in the future, namely an established trading platform also for Asian traders and not only for Hong Kong traders as TOP wishes.
How TOP Financial Group has Performed Recently
The company reports financial results for the entire fiscal year ending on March 30, and for the first six months of operations ending on Sept. 30.
The most recent reporting period refers to April 1, 2022 - Sept. 30, 2022, that TOP Financial reported on Jan. 6, 2023.
Regarding this reporting period, TOP said that revenue was $5.2 million, up 62.5% year-on-year, mainly due to the increase in futures contract volume by 0.5 million year-on-year on the TOP platform to a volume of 1.9 million in H1 2022.
A revenue breakdown indicates that commissions from the brokerage of futures was the primary source of income as it accounted for 51.2% of total sales in H1 2022, while fees received from the provision of trading solutions to 9 customers accounted for nearly 46%. The remaining 3-4% was from trading gains plus interest income and other minor items.
Total expenses were $3.32 million, and most of which -- say, nearly 38% -- related to fees the company paid to brokerage partners because TOP needs to use these partners to place orders for its clients. Total expenses were 44.3% higher on a year-over-year basis.
TOP net income was $1.8 million, or 100% more than last year. So, TOP had an operating margin of 35.6% for H1 2022 versus an operating margin of 28.3% for H1 2021.
The Financial Condition of TOP
As of September 30, 2022, TOP's balance sheet showed $25.7 million in cash, cash equivalents and restricted cash.
Approximately 57% of this amount was exposed to the market volatility of the US Dollar to Hong Kong Dollar exchange rate.
That cash came primarily from the $25 million in net proceeds from the IPO.
Payables to customers of $3.7 million stood out among total liabilities of $4.11 million as of September 30, 2022.
Essentially payables to customers item include the cash deposits received by TOP from its clients needed to cover the position taken by the clients for the trading activities, as the third-party brokers/dealers require to do so. The item also includes liabilities from pending transactions and overnight clearing houses as well as bank balances that TOP holds for customers.
Total debt consisted of total operating lease liabilities of $201,774 (or $201k).
The Capital Structure Now Allows for Interesting Observations
Following the share price surge on the NASDAQ, TOP Financial Group's capital structure is now as follows, with a market capitalization of $3.79 billion exceeding net cash by 149.8 times.
Source: Seeking Alpha
In the first half of 2022, TOP reported negative cash flow from operations of $4.72 million, but the company expects this item to turn positive going forward.
TOP therefore assumes that the operating cash flow and the overall available liquidity will allow the business to continue for a further 12 months.
TOP Financial Group indicates that its clients are primarily high-net-worth individuals acquired through its shareholders' social and professional networks.
However, TOP Financial Group appears to be aiming to grow its business and the strategy the company is pursuing is to diversify its customer base to include smaller retail customers and charge them higher commission rates.
Significant spending on marketing activities would indicate that the company is pursuing the growth target, but the balance sheet situation shows that TOP has not yet made significant allocations across media and channels to increase sales.
TOP needs to increase the number of clients who will be using its brokerage services on a regular basis, and to do so it needs to run an effective promotional campaign that will drive demand on its trading platform, and this requires significant capital growth.
The company anticipates spending on promotional activities, but if the purpose of this is business expansion, then the proceeds from the IPO will be insufficient, meaning TOP may decide to improve its cash position by issuing additional equity or raising debt.
Both forms of financing have disadvantages, as issuing equity means diluting shareholders, while a capital loan involves paying financial costs.
The financial cost will not be exorbitant as China's central bank keeps interest rates low to boost the economy's recovery from the zero-tolerance policy towards the Covid-19 virus. In addition, the Chinese central bank does not have the problem of fighting against high inflation as in Western economies.
In terms of issuing new outstanding shares, this avenue could now make it much easier to raise larger sums of money for investing activities, assuming the share price stays around this level after Friday's surge.
The dilution problem for shareholders will certainly be reduced and less funds will have to be expended to take shares off the market in the future and instead invest them in growth projects.
Assuming the possible scenario outlined above, this stock deserves a Hold. There is a risk that the stock price will plummet from these sky-high levels unless the company intends to expand its business seriously.
Conclusion
TOP Financial Group reported unusual trading activity over the past two days as meme investors traded the stock, causing huge stock market volume on Thursday and a spike in the share price on Friday.
The share price is now 22 times its post-IPO level in early June 2022.
The stock price is overvalued and requires business growth, and in order to pursue the growth target, TOP needs to invest heavily in marketing campaigns. Funding is required, which can be obtained through the issuance of new shares and/or capital loans.
Conditions now appear favorable for massive capital growth.
For further details see:
TOP Financial Boomed On Meme Trading, Now What