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China Online Lending Sector Transformation from a retail-funded model Diversified Financials | Initiation
Equity Research Asia Pacific | China
Figure 1: Covered online lenders: % institutional funding vs YTD share price return
110%
90%
70%
50%
30%
10%
-40% -20% 0% 20% 40% 60%
YTD share price change
Note: 9F represents post-IPO share price return. Closing prices as of 8 Oct, 2019. Source: Company data ■
Bracing for an intensifying P2P clean-up. We see two fundamental conflicts at the core of the P2P model: (1) risk appetite mismatch between investors and borrowers, and (2) high regulatory cost vs small systemic impact. We expect accelerated P2P platform clean-up heading into 4Q, with continued roll-out of high regulatory hurdles while the ‘triple-reductions’ (i.e., reduction in the number of platforms, outstanding balance, and number of investors) remain in force for an extended period of time—likely through 1H 2020. A majority (~98%) of the currently 708 operating platforms is likely shut down during this process. ■
Picking the best-positioned players in transforming towards institutional funding. With limited licensing options available for now, loan facilitation (or ‘assisted lending’) model is the most viable exit strategy for existing P2Ps. Despite a generally negative impact on take rate (higher funding cost and potentially lower APR) and operating margin (higher sales & marketing expense), a faster progress in transformation towards the loan facilitation model will be a key differentiation in loan origination volume growth. In this report, we identify three areas of the online lending business most valued by the licensed financial institutions: (1) customers, (2) asset quality, and (3) regulatory compliance. Lexin and Qudian rank among the best-positioned for transforming towards a 2B model. Yiren Digital ranks last. We adjust the WACC to reflect higher exposure to P2P-related regulatory uncertainty. ■
Stock Calls—prefer Lexin and Qudian. We initiate coverage on Lexin with OUTPERFORM (TP of US$17.00) and 9F with NEUTRAL (TP at US$11.62). Maintain OUTPERFORM on Qudian (TP US$11.70) and VCredit (TP HK$13.00). We assume coverage on PPDai with OUTPERFORM (TP cut to US$5.80 from US$8.80). We also assume coverage on Yiren Digital with NEUTRAL (TP cut to US$6.92 from US$20). We prefer (1) Lexin for long-term sustainability, thanks to a focused and differentiated customer base and effective risk control, and (2) Qudian for relative defensiveness of its evolving business model amid the regulatory uncertainty. ■
One key risk is the sustainability of institutional partnership. We believe the on-boarding cycle of 3-6 months reduces banks’ willingness to abruptly terminate. Online lenders with stronger risk control should enjoy better funding sustainability than peers. Research Analysts Yiran Zhong 852 2101 6125
yiran.zhong@credit-suisse.com
Charles Zhou, CFA 852 2101 6177
charles.zhou@credit-suisse.com
Richie Jiang 852 2101 6198
richie.jiang@credit-suisse.com
Ashley Dai 852 2101 6102
ashley.dai@credit-suisse.com
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their % of loan volume funded by institutions
VCredit
Qudian
Lexin
9F
PPDai
YRD
19 17 14 11 10 10 11 10
Focus charts
Figure 2: Fintech players under coverage—valuations, target price, and rating recommendations
Figure 3: Rising % of institutional funding has been the primary driver of total volume growth during ‘triple-reductions’
Ticker Name TP Currency
Current P/E Current P/B Rating New FY19E FY19E
1Q19 2Q19 QoQ % (RHS) 30 36% LX.OQ
Lexin
17.00
USD
4.7
1.6
Outperform
26
QD.N
Qudian 11.70
USD
3.3
1.0
Outperform
25
22 27% 2003.HK
VCredit 13.00 HKD 5.5 1.1 Outperform
PPDF.N
PPDai 5.80 USD 2.5 0.8 Outperform
JFU.OQ
9F 11.62 USD 8.2 1.7 Neutral
YRD.N Yiren Digital 6.92 USD 3.8 1.3 Neutral 20 18%
15 9%
10 0%
5 -9%
0 Qudian VCredit*
Lexin
9F PPDai
X Financial
Yiren Digital
-18%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 4: CS forecast—% institutional funding vs take rate
% funded by institutions via loan facilitation (LHS) Combined net take-rate (RHS)
Qudian VCredit Lexin 9F PPDai Yiren Digital 100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
25%
20%
15%
10%
5%
0%
Note: Combined net take-rate reflects on- and off-B/S net revenue divided by total loan origination volume. Source: Company data, Credit Suisse estimates
Figure 5: Qudian and Lexin 2Q19 active borrower growth was markedly stronger than peers
Figure 6: Lexin and Qudian S&M expense per new customer declined YTD, bucking industry trend
8.0 # of active borrowers (mn) YoY% (RHS)
60%
400
6.4 40% 300
4.8
3.2
1.6
0.0
PPDai 9F Qudian Lexin X Financial Yiren Digital 20%
0%
-20%
-40%
200
100
0
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Lexin PPDai Qudian Qfin
9F
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates 20 20 10 10 2018A
2019E
2020E
2018A
2019E
2020E
2018A
2019E
2020E
Rmb (Rmb bn) 2018A
2019E
2020E
2018A
2019E
2020E
2018A
2019E
2020E
Transformation from a retail-funded model P2P clean-up is set to accelerate in 4Q We expect accelerated P2P clean-up heading into 4Q, with continued roll-out of high regulatory hurdles while the ‘triple-reductions’ remains in force for an extended period of time—likely through 1H 2020. In the meantime, a majority (~98%) of the currently 708 operating platforms will likely shut down during this process. We expect ‘trial regulation’ for compliant players starting 4Q19, by either registering with high regulatory hurdles or transforming into licensed online micro-lenders/consumer finance companies. We believe that at the core of the P2P model lie two fundamental conflicts: (1) an inherent mismatch between the risk-profile of borrowers and the risk-appetite of investors; (2) high regulatory cost with retail investor base of 4.5 mn at its peak vs low financial systemic impact relative to the size of overall financial sector. Impact on listed players: Shifting business models The repetitive delay of registration deadlines and policy signals sent over the past few months suggest reduced regulatory appetite for P2P registration. Without a registration scenario, the likely exit options for existing players are: (1) acquiring licenses (2) sourcing funding from licensed financial institutions, i.e., loan facilitation, and (3) orderly exiting from the industry. With limited licensing options available, loan facilitation is the most viable exit strategy for existing P2Ps. Despite a generally negative impact on take-rate (higher funding cost and potentially lower APR) and operating margin (higher sales & marketing expense), a faster progress in transformation towards the loan facilitation model will be a key differentiation in loan origination volume growth. Qudian (100% institutional funded as of 2Q19), VCredit (100%),
and Lexin (78%) are progressing well ahead of peers. We expect better business sustainability, stronger growth outlook and higher earnings visibility for the platforms that are better positioned in obtaining institutional funding. In this report, we identify three areas of the online lending business most valued by the licensed financial institutions: (1) customers, (2) asset quality, (3) regulatory compliance, and conclude that Lexin and Qudian rank among the best-positioned for transforming towards a 2B model; Yiren Digital ranks last. Investment recommendation: Prefer Lexin and Qudian We maintain OUTPERFORM for Qudian and initiate Lexin with OUTPERFORM. We assume coverage of PPDai with OUTPERFORM, and maintain OUTPERFORM on Vcredit. We assume Yiren Digital with NEUTRAL and initiate 9F with NEUTRAL. We prefer (1) Lexin for long-term sustainability, thanks to differentiated customer base and effective risk control, and (2) Qudian for relative defensiveness of its evolving business model amid the regulatory uncertainty. For Lexin, we initiate with TP of US$17.00. We believe Lexin has a sustainable business model with comparative advantage in the areas that institutional partners value the most from online lenders: (1) risk control capability, and (2) sustainable customer acquisition. We forecast robust origination volume growth of 71/44/15% YoY for FY19-21E. Our TP of US$17.00 implies FY19-20E P/E of 9.2x and 8.0x, and FY19E P/B of 3.2x. For Qudian, we maintain OUTPERFORM and TP of US$11.70. While we raise adjusted net income by 21/52/43% to Rmb4.5/5.9/6.4 bn for FY19-21E to
factor
in
revenue
contribution from QD’s open platform initiative and expect such shift in revenue structure to significantly lift QE’s ROE to 34/32/26% for
FY19E-21E vs
24%
in FY18, we lower long-
term growth to 3% from 5% to reflect lower visibility of the new business. Our TP implies 6.0x FY19E P/E and 1.7x FY19E P/B. Key risks Key risks to our thesis include: Sustainability of existing institutional partnership, regulatory uncertainty over loan facilitation, macro headwind causing asset quality deterioration.
We expect accelerated clean-up of P2Ps, due to two fundamental conflicts of the P2P model.
A faster progress in transformation towards the loan facilitation model will be a key differentiation in loan origination volume growth.
China Online Lending Sector
Figure 7: Valuation comp table
Ticker Company Price Market Cap ADT Credit Suisse Research
Last closing
Last closing 1 year Ratings
Target price PE (x) PB (x) Profit growth ROE (%)
Price curr.
USD mn
USD mn
Price curr.
2018a
2019e 2020e
2018a
2019e
2020e
2019e 2020e 2-yr CAGR
2018a 2019e 2020e Dom...
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