China fintech:Poised to dominate consumer finance
China’s fintech lending sector is booming. Whilst there will inevitably be setbacksfrom tighter regulations and many players will fail, we are convinced that onlineofferings are a formidable threat to banks, in the vastly underpenetratedconsumer finance segment. We initiate coverage of the fintech lending sectorwith a positive view and recommend investors buy Yirendai and Qudian. Ourtarget price implies a one-year TSR of 43% on YRD and 32% on QD.
Consumer credit sector is under-served
Household leverage in China is low because individual savers and borrowers areunder-served by banks. This is partly due to a lack of consumer credit records.With rising adoption of mobile internet, fintech lenders are filling that gap withinnovative solutions involving short-term cash advances and instalment loans.We project fintech loans will register a 37% CAGR over the next 5years.
Borrower acquisition and retention are key success factors
Fintech lending companies make money by charging facilitation fees toborrowers over their platforms. However, despite low-cost online models,customer acquisition costs are rising and remain a significant hurdle. Soundcustomer retention and repeat business is therefore vital to profitability.
Funding structure is a critical determinant
P2P remains the predominant funding source. Whilst we consider this moreexpensive and prone to more regulation, we think strong brands like Yirendaican benefit from a stickier customer relationships. By contrast, non-P2P lenders,especially with proper licences, are tapping into cheaper funding sources frombanks, trusts and even the securitization market.
Credit risk management yet to be proven
Given limited public credit records, fintech lending platforms have utilisedunconventional data sources such as social media and online shopping recordsduring the credit approval process. Credit insurance and shared reserve poolsare also common protections for lenders. Whilst pooling unfortunately introducescredit risk for shareholders, the reserving rates (defined as reserves as aproportion of total principals), appear reasonable on our analysis and willcontinue to rise for as long as defaults remain low.
Initiate on Yirendai (YRD US) and Qudian (QD US) with OP
Yirendai
- ·市场分析:GDP数据发布 A股震荡回落 2019-10-18
- ·一周市场回:两市震荡下跌 有色、电气设备板块跌幅靠前 2019-10-18
- ·2019年4季度风险溢价预测:4季度末市场估值有下降压力 2019-10-18
- ·科创板新股申购策略之十九:宝兰德报价策略:估值区间67.56%-67.75%分位理性选择 2019-10-18
- ·市场交易主力资金系列:商业银行理财子公司投资全景手册 2019-10-18
- ·2019A股三季报业绩预告简评:创业板业绩持续向好 龙头股业绩占优 2019-10-18