TD Holdings (NASDAQ: GLG) stock is up 70% premarket off the back of their announcement of Fiscal Year 2021 results. These show a revenue increase of over 600% and a significant narrowing of the loss on activities. From the release:
For the year ended December 31, 2021, our revenue increased by 612% to $201.13 million and net loss narrowed down by 84% to $0.94 million, compared with $28.27 million and $5.95 million for the year ended December 31, 2020.
There’s a hope that this performance will continue and that they’ll move into actual profitability. Which would be good for TD Holdings stock of course and could well explain the 70% rise off the back of those results.
It’s also possible to be contrarian here and to take a more detailed look at what is happening. The main business here at TD is the brokerage of non-ferrous metals (non-ferrous usually includes things like aluminium, nickel, copper and so on). There’s nothing wrong with being a broker, it can be a very profitable occupation.
However, there are two ways to measure the revenue of a broker. One is to use – as TD Holdings does – the value of all sales. The other is to measure only the margin on those sales, the value add by the brokerage. That value add at TD seems to be very low. Possibly even negative. Commodity sales themselves rose to $197.95 million, which the cost of sales rose to $198.13 million. Those aren’t, strictly, comparable figures because there’s a certain amount of service fees and overhead included in the cost of sales figures.
But even so those numbers aren’t showing wide margins. Brokerage being a game not of the volume of sales that are possible, but what is the margin earned off those sales. It’s the margins that pay the costs of doing business and then feed through to the bottom, or profit, line.
What might also cause concern is that substantial parts of margin – rather than total revenue – were made from interest income: “Interest income was primarily generated from loans made to third parties and related parties. Interest income increased by $3.84 million, or 62%, to $10.08 million for the year ended December 31, 2021, from $6.24 million for the year ended December 31, 2020.” That’s not brokerage margin at all. It’s also not earnings from unrelated business- say, a capital surplus that is invested in the usual cash equivalent markets. That’s lending as a part of the line of business.
In fact, one unfair reading of the TD Holdings accounts would be that metal brokerage produced no gross margin at all, all contributions toward costs and the bottom line coming from lending activities. That would be an extreme and unfair reading. There is some contribution to gross margin from brokerage. But a great deal less than the 600% rise in turnover would indicate.
Whether this 70% rise in TD Holdings ADR holds or not will really be the result of people drilling down into these results and then considering what they see. That opinion could go either way.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.