Blockchain e-commerce platform Future FinTech Group Inc. (FTFT) has gained 388.2% over the past year, driven by the Chinese fintech industry’s accelerated growth amid the COVID-19 pandemic.
China is currently designing its digital currency, with the potential to dethrone the U.S.-dollar as the global reserve currency. With China on track to launch the government-controlled digital currency, with real world trials currently being conducted, the future of “physical money” is questionable. Furthermore, with the widespread adoption of online payment as the global economy inches towards going cashless, the fintech industry is expected to ultimately be the backbone of the global capital markets.
These factors have allowed FTFT to gain 209% year-to-date, and 22.6% over the past month. However, while the Chinese fintech industry exhibits impressive growth prospects, a rising regulatory crackdown on tech giants and the fintech industry is a cause for concern.
Here’s what we think could drive FTFT’s performance in 2021:
Tightening Regulations in Chinese Fintech Industry
China’s prohibition last year of a highly anticipated IPO by Ant marked the onset of a heavy regulatory crackdown on the country’s burgeoning fintech industry. The China Banking and Insurance Regulatory Commission (CBIRC) announced last month that fintech companies are required to meet preset capital adequacy margins, and banks’ internet loans require a minimum capital contribution, in sync with domestic financial regulations.
These regulations are expected to foster sustainable growth in the Chinese Fintech industry. As the country prepares to roll out Yuan digital currency, a structural balance in the fintech industry is required. The short-term ramifications of the regulatory tightening include reduced profitability of fintech firms. These firms generally take high risks in their day-to-day operations. As China imposes several rules against excessive leverage and online microlending to mitigate systemic risks, FTFT might witness a steep decline in its financials in the near term.
Despite having a market capitalization of more than $353 million, FTFT has generated only $567,490 in revenues over the past year. Also, the company’s revenues have declined 2,346.2% year-over-year.
Interestingly, FTFT’s trailing-12-month net income was $93.02 million, which is higher than its annual revenues. This can be attributed to the high earnings generated from its discontinued operations. However, these windfall gains are temporary. In terms of actual financial performance, the company has yet to generate adequate operating profits and cash flows. Its trailing-12-month ebit margin stood at negative 1,816.18%, while its levered free cash flow was negative $89.81 million.
Trading at a Premium Valuation
In terms of trailing-12-month ev/sales, FTFT is currently trading at 622.55x, which is significantly higher than the industry average 1.84x. The company’s trailing-12-month price/sales ratio of 370.91 compares with the 1.50 industry average.
Also, FTFT’s trailing-12-month price/book multiple of 11.09 is 201.5% higher than the industry average 3.68.
POWR Ratings Reflect Bleak Outlook
FTFT has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an F grade for Value, Stability, and Quality. FTFT’s operational losses and premium valuation justify the Value and Quality grades. The stock has a five-year monthly beta of 2.11, indicating surging volatility. This is in sync with its Stability grade.
FTFT is ranked #76 of 77 stocks in the C-rated Technology – Services industry. In total, we rate FTFT on eight different levels. Beyond what we’ve stated above, one can get additional FTFT ratings for Momentum, Growth, and Sentiment here.
Click here to view the top-rated stocks in the Technology – Services industry.
Chinese regulatory headwinds and the company’s sub-par financials could limit FTFT’s growth prospects in the term. This, combined with the stock’s premium valuation, makes it best avoided now.
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FTFT shares were trading at $5.56 per share on Wednesday afternoon, down $0.25 (-4.30%). Year-to-date, FTFT has gained 195.74%, versus a 8.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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