One of China’s leading peer-to-peer lenders has just raised $60 million from its initial public offering on Nasdaq – at a price for its shares far below what the company had hoped to achieve. But the deal got completed at a time when others have been put on hold.
China Rapid Finance, a Shanghai-based P2P lender and credit scorer, priced its IPO for 10 million American depository shares on Nasdaq at $6 per share, with a total offering size of $60 million.
Yet when Rapid filed with the US Securities and Exchange Commission, its stated intention was to raise $105 million by offering shares at a price range of $9.50 to $11.50 per share.
Even if the IPO’s greenshoe of 1.5 million ADSs is filled, that would bring the total amount raised to $69 million, or 66% of the expected amount of financing from the transaction.
“It’s good that the deal was completed,” said Ryan Roberts, senior research analyst at MCM Partners in Hong Kong, “but on the other hand it looks like investors were quite skeptical and wanted a hefty discount from the original range.”
What does that imply for other Chinese fintech companies looking to do an IPO, such as Lufax, Paipaidai, and Qubian – not to mention the 800-pound gorilla, Ant Financial?
“Other companies hoping to IPO may have to re-think their approach,” Roberts told DigFin. “If their company isn’t profitable, or showing clear signs of becoming so, that could put IPO plans on hold.”
Growing customer base
China Rapid Finance is in a fast-growing industry, with experienced management and strong financial backing from investors including Broadline Capital, China United SME Guarantee Corporation, DLB Capital, Northwater Capital and QED Investors.
Rapid’s pricing may have been affected by investor unease over the company’s recent financial performance, and a lack of certainty that the company would turn profitable soon. It also came to market at a time of regulatory uncertainty for China’s P2P industry.
Rapid’s business model connects lenders with young consumers from China’s emerging middle class who are first-time borrowers. Borrowers can receive small loans of as little as Rmb100 at an interest rate as low as 1% (Rapid pays an incentive to lenders to keep them interested).
These early loans are designed to track who pays them back; these customers are then offered bigger loans with rising interest rates, so that eventually the investors no longer need incentives. Because Rapid owns the borrowers’ credit score on its system, borrowers have an incentive to remain on the platform.
Once a borrower cumulatively transacts for a little over $1,000, they generally turn profitable for China Rapid Finance, which charges transaction fees to both sides, according to MCM Partners’ research.
However, the company reported a loss of $33.4 million in 2016, on the back of revenues of $55.8 million; in its SEC filing the company cited increasing costs on information technology, data analytics and providing customer service.
The company was founded in 2001 by Zane Wang, who used to work at Sears, the U.S. department store, where he set up its credit-card business. It went into the P2P business in 2011. Since then, the management has been spending to ramp up customer acquisition, which may have dampened its profitability outlook to investors.
The proceeds are intended to aggressively grow the customer base at a time when China’s P2P industry is consolidating. There are approximately 2,500 P2P platforms in the country, many with poor governance models (including one, Ezubo, which allegedly defrauded 900,000 people of about $7.6 billion).
Fortune favors the bold
Last year the government responded by regulating the industry. P2P platforms must now get a license, hire a third-party custodian, and take other steps, although the regulation hasn’t outlined many details. The deadline is August 17; uncertainty over which companies will qualify by then may be one factor to have delayed fintech IPOs.
Rapid, with its experienced management team, may have pushed ahead with its listing in order to demarcate itself as an industry leader and win several months of time to grow the customer base with fresh capital.
To that end, Rapid’s IPO may be a success, despite the nearly 40% discount it swallowed on the share price.
The closest comparable it has is Yirendai, another consumer-oriented P2P platform. Yirendai listed on Nasdaq in 2015, raising $75 million. The main difference is that Yirendai was already profitable, whereas there is no p/e ratio applicable to Rapid, which has no earnings.
Using price-to-sales ratio instead, MCM Partners calculates that Yirendai IPO’d on a multiple of 3.7x, versus 7.6x for Rapid – on this basis, Rapid’s IPO still looks rich.
The company’s valuation also means it is no longer in the ‘unicorn’ camp of startups valued at $1 billion. According to CB Insights, there are 22 fintechs globally that have reached unicorn status, led by Lufax, and including Rapid – but that was based on its achieving an IPO price of $10 per share. Its market capitalization is now about $586 million.
The secondary market may determine whether Rapid’s IPO should be viewed as encouraging, or sobering, for other fintechs in the pipeline.
Yirendai sets a promising precedent: its stock price is up 140% since listing. China Rapid Finance (ticker XRF) has also enjoyed a surge out of the gates: on Monday, May 1, its price hit a high of $8.38. Perhaps it will yet live up to its unicorn status?
Morgan Stanley, Credit Suisse and Jeffries & Co. served as joint bookrunners for Rapid’s IPO.