Nanhua Futures: Revenue vs. Net Profit Gap Explored

In the first half of 2023, the financial performance of Nanhua Futures has sparked significant interest within the market, as reflected in their recently released interim report. This report contains intriguing data that reveals a substantial contrast between the company’s operating revenue and net profit. This discrepancy raises several questions, particularly regarding the methodologies employed in assessing the company’s financial outcomes.

Nanhua Futures is one of the four publicly traded futures companies listed on China's A-share market, alongside Ruida Futures, Hongye Futures, and Yong'an Futures. Nanhua Futures was the first among this group to make its interim report available to investors, attracting considerable attention.

As per the report, during the first half of 2023, Nanhua Futures recorded an operating revenue of approximately 3.145 billion yuan, which represents a year-on-year decrease of 7.8%. However, the net profit attributable to the parent company’s shareholders surged by an impressive 123.62% to around 168 million yuan. Moreover, the basic earnings per share increased by 133.33% to 0.28 yuan.

The stark contrast between the revenue and net profit has led to speculation among industry analysts. The question at the forefront is why such a difference exists. During a conversation with a representative from Nanhua Futures, it was explained that this variation could largely be attributed to the nuances associated with the basis trading business unique to futures companies. They noted, "It's essential to not merely view the revenue from an aggregate perspective but rather analyze it through the lens of net revenue, which excludes trading costs. From this net revenue perspective, both our revenue and net profit have always aligned.”

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As it stands, there are only four futures companies listed on A-shares, and among these, Nanhua Futures is currently the only one to have released its semi-annual report. The complexity and variability of the international political and economic landscape continue to affect the company, leading to increased uncertainty in the external operating environment.

The report indicates that factors such as significant fluctuations in commodity prices and exchange rates have led to substantial operational risks for real economy enterprises. This has consequently heightened the demand for effective risk management solutions.

From the financial performance perspective, it is noteworthy that Nanhua Futures reported an operating revenue of approximately 3.145 billion yuan for the first half of 2023, which was a 7.8% decline compared to the previous year. Nonetheless, the net profit attributable to the parent company’s shareholders soared to about 168 million yuan, an increase of 123.62% year-on-year. Basic earnings per share also went up by 133.33% to 0.28 yuan.

The information derived from the half-yearly report once again indicates a significant dissonance between the revenue and net profit figures. Given the circumstances, what could possibly explain this anomaly? In response, the company's representative reiterated, “It’s critical to adopt a viewpoint that emphasizes the net revenue after excluding trading costs to accurately reflect our operating performance.”

Various financial research institutions have analyzed the recent report and noted that while the total operating revenue and net profit experienced changes of -7.8% and +123.6% respectively, the net revenue method, which considers only the revenue after deducting other business costs, showed a commendable growth of 35.3% to a total of 579 million yuan. Notably, the weighted Return on Equity (ROE) increased by 2.49 percentage points year-on-year to reach 4.93%.

Another alarming observation from the financial statements revealed that both the net exposure hedging income and fair value change gains had diminished dramatically by over 100% compared to the previous year’s figures. Specifically, the net exposure hedging income plummeted by 495.4% while fair value change income dropped by 150.03% year-on-year.

In responding to this downturn, Nanhua Futures explained in their report that the fluctuations in net exposure hedging income stemmed primarily from diminished profit and loss in hedged projects associated with risk management activities, whereas the observed changes in fair value gains were largely due to increases in profits and losses from futures holdings related to their risk management business.

In contrast to the domestic operations struggling under these pressures, the company’s offshore businesses have demonstrated remarkable performance. Data collected from Dongfang Caifu Choice indicates that Nanhua Futures has consistently maintained a positive trajectory concerning overall business performance over the past five years.

The annual report for 2022 highlighted that Nanhua Futures' total assets reached approximately 34.189 billion yuan, up by 13.72% year-on-year. The net assets attributable to shareholders of the listed company grew by 9.18% to 3.317 billion yuan. However, the total operating revenue experienced a sharp decline of 35.11%, and while the net profit attributable to the shareholders managed to see a slight increase of 1.01% to around 246 million yuan, the net profit after deducting non-recurring items fell by 2.57% to 240 million yuan.

Despite the downturn prevalent across the futures industry in 2022, Nanhua Futures achieved a slight increase in net profit attributable to the parent company, which they attribute largely to the outstanding performance of their offshore business segments.

In an interview, a company representative reported, "Our various business segments have experienced steady growth in recent years, with the offshore operations standing out in performance. The customer equity in our offshore businesses increased from 4.998 billion Hong Kong dollars at the end of 2020 to 14.094 billion Hong Kong dollars by the end of June 2023."

According to the half-yearly report released by Nanhua Futures, as of June 30, 2023, the total customer equities in their offshore financial services, which cover brokerages for securities, futures, and foreign exchange, reached approximately 14.094 billion Hong Kong dollars, a year-on-year increase of 33.24%. Furthermore, their offshore asset management business scale was at 2.522 billion Hong Kong dollars, reflecting a remarkable growth of 73.93% over the same period.

Research reports from Citic Securities suggest that Nanhua Futures is likely to benefit from the global clearing system, enhancing competitiveness in their offshore business while also capitalizing on the domestic futures market expansion. Notably, the returning hedge funds from Chinese enterprises combined with the company’s unique clearing advantages are expected to continue driving customer equity growth. In domestic sectors, new business releases along with a growing influx of industry clients and the rapid introduction of new varieties are positioned to further propel the industry expansion.