9F, a Beijing-based peer-to-peer lender that is trying to become a wealth-management company, is set to list on the New York Stock Exchange on Wednesday, August 14. Independent analysts say investors should pass on the deal.
“We will avoid the company at all costs,” said Ke Yan, analyst at Aequitas Research, publishing on SmartKarma.
Some of these concerns relate to Chinese regulators’ negative attitude toward electronic consumer marketplaces. Since 2017, authorities have clamped down on the sector. Many companies, including market leader Lufax, have tried to exit the business and reinvent themselves in wealth management or other services.
9F’s strategy has been to create an ecosystem built around several portals, notably an app called OneCard, which connects consumers (borrowers) with investors as well as partner financial institutions, such as China UnionPay, and partner merchants like e-commerce player JD.com. UnionPay provides the payment rails.
While borrowers can use the platform to access consumer loans, like any other P2P, they can also borrow specifically to spend with OneCard’s merchant network. The company is building artificial-intelligence capabilities to personalize these offerings.
9F’s formal name is Beijing Jiufu Era Investment Consultant Company. Launched in 2006, it is known in China informally as Jiufu.
The company is backed by the investment arm of China Cinda Asset Management (a merchant bank originally conceived as a ‘bad’ bank for China Construction Bank’s non-performing loans) and Japan’s SBI Holdings.
It was founded by Sun Lei, previously a senior manager at China Minsheng Bank, a leading lender for small businesses. Sun owns 39.1% of 9F. In 2016, Sun led 9F’s acquisition of Primasia Securities Asia in Hong Kong as a stepping stone to international expansion, as well as to convert Primasia from a traditional to an online stock broker, collecting orders through a mobile app. In 2017, 9F also acquired Yue Tung Wealth Management, a Hong Kong insurance broker. 9F has begun operations in Indonesia, and made an unsuccessful bid to obtain a virtual-banking license in Hong Kong.
The proceeds of the IPO are slated for developing big-data capabilities, adding partners its ecosystem, marketing, and international expansion into other Southeast Asian markets.
Analysts are wary of the IPO, however.
Ke Yan notes 9F is one of the bigger digital-consumer finance shops in China, with Rmb55 billion ($7.8 billion) of outstanding loans. But loan origination fell in 2018, more than in other P2P businesses, and continued to drop in the first quarter of 2019, whereas comparable platforms saw loans business begin to grow again this year.
Although 9F is diversifying its business, fees to borrowers on these loans account for 85% of its revenues.
“The financial results are concerning,” said Donovan Jones, analyst at IPO Edge, on Seeking Alpha.
Another worry is that Sun Lei is combining the IPO with a secondary offering of 2.2 million American depository receipts to sell down 3% of his stake, “which is unusual for directors in Chinese ADRs,” said Arun George, analyst at Global Equity Research, on SmartKarma.
This raises the question of why the company is raising money at all. It is already sitting on a cash pile of $961 million.
And there are question marks over another principle, Ren Yifan, who owns 23.3% stake in 9F but a 48% stake in Jiufu Shuke, the onshore company that legally owns the business. Analysts say Ren isn’t involved in daily operations and don’t understand how he got his stake. They’re unsure of the company’s governance.
Another analyst at an investment bank in Hong Kong says the entire P2P industry still remains in a gray area in terms of regulation and the attitude of authorities. This analyst, who requested to remain anonymous because it’s deemed sensitive to talk about China’s P2P sector, added that it’s difficult to verify the true health of balances on their platforms: “We avoid the sector.”
What’s it worth?
Finally there is the valuation. In some respects, 9F looks attractive compared to other major P2P firms, such as Yirendai, Lexin Fintech, Qupital and PPDai.
The company will offer 8.9 million ADRs targeting a price range of $7.50 to $9.50 per share. At midpoint, it would raise $76 million to achieve a market value of $1.7 billion.
The size of its loan book allowed it to book $805 million in revenues for the 12 months ending March 31, 2019, which is average for the industry. Its operating expenses are also in line with peers. The company has successfully shifted its funding from P2P investors to financial institutions. It also boasts the industry’s lowest delinquency rates.
But its recent profitability is attributed to ending spend on marketing and client acquisition; in the past year it has relied on repeat business and allowed growth to fall. Analysts worry that 9F’s earnings will not be sustainable if it returns to spending on marketing.
The implied multiples of its IPO are cheap, but not cheap enough, say analysts. “9F’s fundamentals are at best a mixed bag,” said George. He calculates 9F would trade at a 5% discount to peers on a 2019 p/e basis, but at a 4% premium on a 2020 p/e basis. The company should offer at least a 10% discount, given its lack of a track record as a public company and ongoing declines in its core business.
The joint bookrunners for the IPO are Credit Suisse, Haitong International, CITIC CLSA, China Investment Securities International, and 9F Primasia Securities.