TOP Financial Group: Little Chance Of Growth From Here (NASDAQ:TOP)

This Analysis Reiterates a Hold Rating TOP Financial Group Limited

This article reiterates a Hold rating for shares of TOP Financial Group Limited (NASDAQ:TOP) – a Hong Kong-based online brokerage company – which was already given in the previous article.

TOP Financial specializes in trading local and foreign stocks as well as futures and options products, but the majority of its revenue (up 24.4% year-over-year to $9.7 million for the fiscal year ended March 31, 2023) comes from commissions on futures contracts.

In the previous article, the retail investor was warned to treat this stock with extreme caution as it carries significant investment risk if purchased as a “meme stock.” The stance on this stock has not changed since then. According to previous analysis, the prospects for steady growth are currently poor, and the same holds true for this analysis.

TOP Financial Group Limited: A “meme” Stock

This stock earned the “meme stock” designation in late April 2023 when its share price skyrocketed due to unusual trading flows without any comment from the company. TOP’s stock price increased more than twenty times the share price in its $25 million initial public offering, which listed the stock on NASDAQ on June 1, 2022, under Zhong Yang Financial Group, and then changed its name to TOP Financial Group Limited in July 2022. Zhong Yang – the founder of TOP Financial Group – offered a total of 5 million shares of common stock and asked a price of $5 for each of them.

This stock behaves like a “meme stock” — see the previous two articles here and here for a definition – but in a nutshell it means the market is suddenly overly enthusiastic about the stock, potentially leading to a whopping run-up in the share price. This usually happens when the company releases financial results and social media covers the topic with discussions, graphics, and analysis. By leveraging their ability to make stories go viral, these platforms create intense interest in the topic in a very short time.

If the share price rises dramatically as a result, there is a risk that the purchase of shares will result in a transaction with very little chance of a successful investment. The sharp and inexplicable rise in the share price means that the financial cost of the trading decision to buy the shares is disproportionate to their true value based on certain fundamental characteristics of the company.

The Outlook for TOP Financial Group

The stock is about to continue trending in the wake of what showed us so far from its “meme” in early May 2023, due to the following factors:

Due to a lack of bite in the company’s financial situation, exacerbated as highlighted in the previous article by declining profits and net income margins, as well as reduced cash balances and significant cash flows in the core business.

Due to, despite all goodwill, the difficult times to try to attribute rosy prospects to the activities of this company, amid a very contradictory economic context in China, which currently does not give much reason to push forward for expansion projects.

No Sign of a Growth Plan Amid a Challenging Environment in China

The price increase caused by the “meme” in early May 2023 was given a chance as an ignition of business growth for TOP Financial Group. In line with what initially seemed to be TOP Financial Group’s idea to expand the business, the opportunity to inject fresh capital into advertising campaigns to reach potential customers for the company’s brokerage platform and product services was glimpsed: That is, from a client base consisting primarily of a few wealthy individuals to a broader client base that will also include smaller individual clients who will be charged higher commission rates. An increase in spending on communication activities was expected as a sign of a growth plan underway at TOP Financial Group, but when the company published its financial results for the 2023 fiscal year, all expectations were shattered. Rather than being the result of the implementation of a business growth project, the sharp increase in spending on communications activities and technologies, as the company stated in the report, was anything but the result of “a one-time incidental expense based on a special request from a customer”.

Assuming that TOP Financial Group has a growth plan in place at this point (another chance is given with the next publication in January 2024) this would currently face a particularly challenging Chinese economic context at the moment.

According to the latest data, Chinese retail sales (up 7.6% in October) and industrial production (up 4.6% in October) appear to be recovering, but the real estate crisis triggered by China Evergrande Group (OTC: EGRNQ) and Country Garden Holdings Company Limited (OTCPK: CTRYF) (OTCPK: CTRYY) defaults in meeting offshore obligations is weighing on investments.

Although Beijing has announced plans to stabilize the real estate sector and other measures to support debt-ridden local governments, the housing crisis is likely to be a long-term drag as the sector is a mainstay of China’s domestic economy. The International Monetary Fund has warned of downward pressure on the real estate sector, which accounts for around a quarter of China’s GDP.

To stimulate the flagging economy, China’s top monetary authorities must take a special position vis-à-vis the other central banks in the world and therefore keep deposit rates low. By widening the gap with foreign returns and devaluing the local currency, the monetary policy factor will certainly not encourage trading activity: Clients are attracted by higher returns abroad, but there is the cost disadvantage of a stronger U.S. dollar and other robust currencies. Plus, securities traded on the US stock exchange are still the ones that attract by far the most interest compared to China and other markets around the world.

TOP Financial Group Limited seeks to go through this difficult Chinese economic context with the financial situation that as of March 31, 2023 (the company’s latest available data), it had $17.85 million in “cash, cash equivalents, and restricted cash” against $3.5 million in “Payable to Customers” and against $150,139 in total operating lease liabilities.

Essentially “payables to customers” item includes the cash deposits received by TOP from its clients needed to cover the position taken by the clients for the trading activities since the third-party brokers/dealers demanded 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.

Shares Look Overvalued: Other “Memes” Cannot Be Ruled Out. Risk of Holding TOP Financial Group

This analysis certainly doesn’t recommend buying TOP Financial Group Limited stock, but those with TOP stock in their portfolio might want to consider giving the stock a chance for another “meme stock” to show up let’s say on the next earnings release. Then Hold until the next earnings release because if there is another “meme stock”, that would be an opportunity to make a good profit margin.

The following financial data relates to the first half (from April 1-2023 to September 30-2023) of the 2024 fiscal year, which ends for TOP Financial Group at the end of March 2024. Publication is expected in January 2024. Full-year data will then be available in June/July 2024.

The risk of holding TOP Financial Group Limited shares in the portfolio is not so much a significant decline in the market value of the stock, as the share price now appears to have stabilized between $4 and $6, but rather a non-event or who knows when “meme” again for this stock.

As of this writing, shares are trading at $4.48 apiece (approximately 10.4% below the IPO price of $5 on June 1, 2022), for a market cap of $126.35 million. Shares are trading at a 28% premium to the floor and 57.2 times the upper limit of the 52-week range. The upper limit was the price jump in the TOP shares achieved at the end of April 2023 due to the “meme”. The stock has a P/E GAAP (TTM) ratio of 42.33x about 339.72% above the sector median, a Price / Sales (TTM) ratio of 14.84x about 534.05% above the sector median, and a Price / Book (TTM) ratio of 4.10x about 283.61% above the sector median.

The Risk: While the capital remains tied up unproductively with the investment in the TOP financial group, retail investors lose the chance to invest the money in high-yielding US treasuries amid the Fed’s hawkish stance, or in certain markets, such as safe haven investments which currently appear well-positioned ahead of the expected economic recession in the US.

However, this analysis still sees an opportunity to maintain the Hold rating until the next earnings release without incurring disproportionate opportunity costs of not being positioned in US bonds, money markets, or precious metals-backed securities. Indeed, the season of high US Treasury yields is far from over, and the growth catalyst for safe-haven assets like gold and its myriad securities is unlikely to occur before 2024.

In addition to the fact that the Federal Reserve will not cut rates until the second half of 2024 and the total cut in 2024 will not exceed 0.50% according to the Fed’s latest updated economic projections, another rate hike could indeed take place in January 2023.

The expectation of further monetary policy tightening stems from the following consideration: Christmas shopping, starting with Black Friday on November 24, 2023, will provide some relief to consumption from the dampening effect of increased borrowing costs and elevated core interest rates. A recovery in consumption will slow the ongoing process of getting core inflation back towards the 2% target, especially as the labor market proves resilient. The US Federal Reserve will therefore have to raise interest rates again to revive the disinflationary process.

So, if the retail investor holds on until at least early 2024 to see if there is another “meme” for the TOP stock, there shouldn’t be much risk of missing out on high US bond yields or gold bull market securities relative to the expected recession headwind.

Conclusion

TOP Financial Group earned the “meme stock” designation in late April 2023 when its stock price rose out of proportion to the company’s fundamentals and growth prospects, reaching levels well over twenty times its June 1, 2022 stock market price.

When the financial data for the 2023 fiscal year was published at the end of June 2023, it was assumed that the share price could rise sharply again. Instead, the increase was significantly smaller, and thereafter the share price down trended. It now seems to have stabilized around the IPO price and is trending sideways.

Another “meme” for TOP stock cannot be ruled out, perhaps in January 2024 when the company is scheduled to report results for the first half of fiscal 2024. From a business perspective, this stock currently offers no appeal other than that of a potential bounce if its name goes viral again on social media platforms.

The retail investor who still has this stock in his portfolio may want to wait for the next financial data. There is a risk that shares will trade below current levels. However, when it comes to missing out on other opportunities in the financial markets, the risk should be bearable from this point on as the other US stocks are not expected, anyway, to recover anytime soon given the looming economic recession. Moreover, the prospect of increased interest rates will persist for months to come and continue to provide the opportunity to invest in the money market or US government bonds.