IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Pintec Technology Holdings  / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/27358" target="_blank" data-smartkarma-citation="entities:27358:1">Pintec Technology Holdings L (PT US)</a> announced its IPO price range of $10.00-12.00 per ADS. At the mid-point of the IPO price range, Pintec will raise net proceeds of $30.8 million, resulting in a fully diluted market cap of $481 million. Certain existing shareholders have indicated an interest in purchasing up to $34 million worth of the ADS, which represents 83% of the offering at the mid-point of the IPO price range.In <a href="https://www.smartkarma.com/insights/pintec-ipo-preview-derailed-by-a-regulatory-quagmire" target="_blank" data-smartkarma-citation="insights:22855">Pintec IPO Preview: Derailed by a Regulatory Quagmire</a>, we recommended investors to keep a safe distance until there is more clarity on the ever-shifting regulatory landscape. Unfortunately, the latest financial disclosure in the F-1/A filing suggests that there remain material known unknowns:<ol>
<li>It is difficult to judge if Pintec’s Q3 metrics are in line with market trends as only <a href="https://www.smartkarma.com/entities/27440" target="_blank" data-smartkarma-citation="entities:27440:1">X Financial (XYF US)</a> and <a href="https://www.smartkarma.com/entities/27478" target="_blank" data-smartkarma-citation="entities:27478:1">Weidai Ltd (WEI US)</a> have disclosed July and August metrics. The month-on-month decline in Pintec’s loan facilitation volume was worse than Weidai and X Financial in July. In August, X Financial’s loan facilitation volume grew but Pintec’s volume declined. The month-on-month decline in Pintec’s loan facilitation volume was marginally better than Weidai.</li>
<li>Pintec’s 90-day delinquency rate increased from 4.6% in 1H18 to 6.1% in August 2018. Among peers, only X Financial and Weidai has reported delinquency rates for August 2018. Notably, Pintec’s 90-day delinquency rate in August has increased at a faster rate than X Financial and Weidai.</li>
<li>Pintec’s primary funding source is in the regulator’s crosshairs. Jimu Box, a related party P2P lending platform, accounted for 65% of total funding in September 2018 vs 75% in 2Q18. In June 2018, the Beijing authorities issued an informal notice which requires that all P2P platforms registered in Beijing (such as Jimu Box) not to expand their business scale.</li>
<li>Pintec is still in the process of finding an alternative means to provide credit enhancement measures which comply with recent regulations. Jimu Group, a related party, along with Pintec provide credit enhancement measures to Pintec’s financial partners, including purchasing overdue loans. However, Jimu Group and Pintec are not licensed to provide such services.</li>
</ol>We use a group of US-listed Chinese consumer finance companies for our relative valuation. Based on our estimates and at IPO mid-point, Pintec trades at a material premium to the blended median of its peer group on a 2019 P/E basis. Notably, at the IPO low end of $10 per ADS, Pintec's 2019 P/E of 7x is 30% higher than the median peer group rating of 5.5x. Consequently, from a valuation perspective, the proposed IPO price range is unattractive.<div class="content-highlight">Pintec is the latest Chinese online consumer finance company testing the IPO waters despite the cloud of uncertainty shrouding the industry. However, investors seeking exposure to a potential industry recovery are spoiled for choice due to the many listed companies or upcoming IPOs. Due to Pintec's unappealing combination of average financial metrics and premium valuation, we would not participate in the IPO. </div>

Pintec Technology Holdings L (PT US) announced its IPO price range of $10.00-12.00 per ADS. At the mid-point of the IPO price range, Pintec will raise net proceeds of $30.8 million, resulting in a fully diluted market cap of $481 million. Certain existing shareholders have indicated an interest in purchasing up to $34 million worth of the ADS, which represents 83% of the offering at the mid-point of the IPO price range.In Pintec IPO Preview: Derailed by a Regulatory Quagmire, we recommended investors to keep a safe distance until there is more clarity on the ever-shifting regulatory landscape. Unfortunately, the latest financial disclosure in the F-1/A filing suggests that there remain material known unknowns:
It is difficult to judge if Pintec’s Q3 metrics are in line with market trends as only X Financial (XYF US) and Weidai Ltd (WEI US) have disclosed July and August metrics. The month-on-month decline in Pintec’s loan facilitation volume was worse than Weidai and X Financial in July. In August, X Financial’s loan facilitation volume grew but Pintec’s volume declined. The month-on-month decline in Pintec’s loan facilitation volume was marginally better than Weidai.
Pintec’s 90-day delinquency rate increased from 4.6% in 1H18 to 6.1% in August 2018. Among peers, only X Financial and Weidai has reported delinquency rates for August 2018. Notably, Pintec’s 90-day delinquency rate in August has increased at a faster rate than X Financial and Weidai.
Pintec’s primary funding source is in the regulator’s crosshairs. Jimu Box, a related party P2P lending platform, accounted for 65% of total funding in September 2018 vs 75% in 2Q18. In June 2018, the Beijing authorities issued an informal notice which requires that all P2P platforms registered in Beijing (such as Jimu Box) not to expand their business scale.
Pintec is still in the process of finding an alternative means to provide credit enhancement measures which comply with recent regulations. Jimu Group, a related party, along with Pintec provide credit enhancement measures to Pintec’s financial partners, including purchasing overdue loans. However, Jimu Group and Pintec are not licensed to provide such services.
We use a group of US-listed Chinese consumer finance companies for our relative valuation. Based on our estimates and at IPO mid-point, Pintec trades at a material premium to the blended median of its peer group on a 2019 P/E basis. Notably, at the IPO low end of $10 per ADS, Pintec's 2019 P/E of 7x is 30% higher than the median peer group rating of 5.5x. Consequently, from a valuation perspective, the proposed IPO price range is unattractive.Pintec is the latest Chinese online consumer finance company testing the IPO waters despite the cloud of uncertainty shrouding the industry. However, investors seeking exposure to a potential industry recovery are spoiled for choice due to the many listed companies or upcoming IPOs. Due to Pintec's unappealing combination of average financial metrics and premium valuation, we would not participate in the IPO. 

Pintec Technology IPO Valuation: Unattractive in Context of Known Unknowns

<a href="https://www.smartkarma.com/entities/27478" target="_blank" data-smartkarma-citation="entities:27478:1">Weidai Ltd (WEI US)</a> is the largest P2P (peer-to-peer) lending platform with a focus on facilitating auto-backed loans in China. Weidai intends to list on NYSE and raise $100 million.The Chinese online consumer finance market has been rocked due to new regulations driving a recent wave of P2P platform defaults. We believe the issuance of clear regulatory guidance in August 2018 will help to restore P2P investor sentiment gradually with a full recovery in loan growth expected at the earliest in 4Q18. Notwithstanding the uncertainty, <a href="https://www.smartkarma.com/entities/27440" target="_blank" data-smartkarma-citation="entities:27440:1">X Financial (XYF US)</a> recently floated to raise net proceeds of $91 million with the shares currently trading marginally below the IPO price. Setting aside the current industry uncertainty, on a fundamental basis, we believe that Weidai is an attractive play on the recovery (timing uncertain) of China consumer finance market due to:<ol>
<li>Regulatory changes implemented in late 2017 resulted in a well-publicised industry-wide credit downturn in the consumer credit markets. Consequently, the growth in loan origination volume ground to a halt in 4Q17, resuming tepid growth in 1H18. Weidai appears to have weathered the storm better than its peers. Apart from <a href="https://www.smartkarma.com/entities/23611" target="_blank" data-smartkarma-citation="entities:23611:1">Yirendai Ltd (YRD US)</a>, Weidai posted the smallest decline in loan facilitation volume in 1H18.</li>
<li>Weidai’s 90-day delinquency ratio of 1.6% is the lowest among listed peers in 1H18. Among listed peers, only X Financial has reported delinquency rates for August 2018. Notably, despite the increase, Weidai’s 90-day delinquency rate of 2.3% in August 2018 is still below X Financial (2.9%). Also, Weidai’s 90-day delinquency rate in August is lower than the 1H18 delinquency rate of its listed peers (apart from X Financial).</li>
<li>Weidai runs an efficient cost base. A user acquisition cost metric which is comparable with listed peers is S&amp;M expenses as a percentage of loans facilitated. Weidai has the lowest user acquisition costs as a percentage of loans facilitated vs listed peers. Also, Weidai’s operating costs as a percentage of loans facilitated are the lowest among listed peers.</li>
</ol>Apart from the uncertain timing of a market recovery, the key risk is Weidai’s ability to provide investor protection which complies with new regulations. Weidai has been voluntarily compensating its P2P investors for their default losses by purchasing their delinquent loans. Weidai also provides guarantees to some institutional funding partners. These practices could fall foul of new regulations. Weidai is in discussions with insurance, asset management and other financial companies to provide alternative means of investor protection.<div class="content-highlight">As expected, Weidai's loan origination volume and revenue have suffered in July/August due to the turbulent market conditions. For investors looking to play the eventual stabilisation and possible recovery of the market, Weidai along with X Financial are strong contenders due to solid fundamentals. Weidai is suitable for investors who have a strong stomach capable of withstanding short-term share price volatility.</div>

Weidai Ltd (WEI US) is the largest P2P (peer-to-peer) lending platform with a focus on facilitating auto-backed loans in China. Weidai intends to list on NYSE and raise $100 million.The Chinese online consumer finance market has been rocked due to new regulations driving a recent wave of P2P platform defaults. We believe the issuance of clear regulatory guidance in August 2018 will help to restore P2P investor sentiment gradually with a full recovery in loan growth expected at the earliest in 4Q18. Notwithstanding the uncertainty, X Financial (XYF US) recently floated to raise net proceeds of $91 million with the shares currently trading marginally below the IPO price. Setting aside the current industry uncertainty, on a fundamental basis, we believe that Weidai is an attractive play on the recovery (timing uncertain) of China consumer finance market due to:
Regulatory changes implemented in late 2017 resulted in a well-publicised industry-wide credit downturn in the consumer credit markets. Consequently, the growth in loan origination volume ground to a halt in 4Q17, resuming tepid growth in 1H18. Weidai appears to have weathered the storm better than its peers. Apart from Yirendai Ltd (YRD US), Weidai posted the smallest decline in loan facilitation volume in 1H18.
Weidai’s 90-day delinquency ratio of 1.6% is the lowest among listed peers in 1H18. Among listed peers, only X Financial has reported delinquency rates for August 2018. Notably, despite the increase, Weidai’s 90-day delinquency rate of 2.3% in August 2018 is still below X Financial (2.9%). Also, Weidai’s 90-day delinquency rate in August is lower than the 1H18 delinquency rate of its listed peers (apart from X Financial).
Weidai runs an efficient cost base. A user acquisition cost metric which is comparable with listed peers is S&amp;M expenses as a percentage of loans facilitated. Weidai has the lowest user acquisition costs as a percentage of loans facilitated vs listed peers. Also, Weidai’s operating costs as a percentage of loans facilitated are the lowest among listed peers.
Apart from the uncertain timing of a market recovery, the key risk is Weidai’s ability to provide investor protection which complies with new regulations. Weidai has been voluntarily compensating its P2P investors for their default losses by purchasing their delinquent loans. Weidai also provides guarantees to some institutional funding partners. These practices could fall foul of new regulations. Weidai is in discussions with insurance, asset management and other financial companies to provide alternative means of investor protection.As expected, Weidai's loan origination volume and revenue have suffered in July/August due to the turbulent market conditions. For investors looking to play the eventual stabilisation and possible recovery of the market, Weidai along with X Financial are strong contenders due to solid fundamentals. Weidai is suitable for investors who have a strong stomach capable of withstanding short-term share price volatility.

Weidai IPO Preview: Robust Foundations in Turbulent Times

China

Weidai Ltd. provides auto-backed financing solution in China. The Company's platform connects borrowers, the majority of which are small and micro enterprise owners, with both online investors and institutional funding partners. Weidai maintains a risk management system spanning from borrower acquisition to loan collection.

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Weidai Ltd (WEI US)

Pintec Technology IPO Valuation: Unattractive in Context of Known Unknowns

Pintec Technology Holdings L (PT US) announced its IPO price range of $10.00-12.00 per ADS. At the mid-point of the IPO price range, Pintec will...

Arun George

Weidai IPO Preview: Robust Foundations in Turbulent Times

Weidai Ltd (WEI US) is the largest P2P (peer-to-peer) lending platform with a focus on facilitating auto-backed loans in China. Weidai intends to...

Arun George

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