ANALYSIS: 9F Readies Plans for U.S. IPO; Set to Lift Off Thursday

9F is one of the larger players in the Chinese online peer-to-peer lending industry and is transitioning to focus more on wealth management, insurance and related financial services.

Author: Donovan Jones   

Short Take

9F (JFU) has filed to raise $76 million from the sale of ADSs in a U.S. IPO, according to an amended F-1/A registration statement.

The company operates an online peer-to-peer lending and financial services marketplace for Chinese consumers.

9F is in the midst of transitioning toward a more balanced business and revenue model by providing a variety of financial services for loans, wealth management, and insurance.

Company

Beijing, China-based 9F was founded in 2006 to develop a P2P digital lending platform in China.

Management is headed by founder and CEO Lei Sun, who was previously a senior manager at the head office of China Minsheng Bank (HKEX:1988).

The firm's offerings are delivered through One Card, around which JFU has built an ecosystem that connects borrowers, investors, financial institution partners, and merchant partners as shown below:

Once users get their credit limits approved, they can use the money for purchasing products of the company's strategic partners, including China UnionPay that has connected more than three million merchants, and from the firm's One Card Mall, an online shopping platform.

Management states that, according to Oliver Wyman, 9F is the largest online consumer finance platform among the independent marketplace lending platforms in China in terms of outstanding loan balances as of Dec. 31, 2018.

The firm also markets non-revolving loan products, including home improvement, education, elective medical care services, and consumer electronics.

9F additionally complements its loan products with various online wealth management products, including a suite of solutions to meet the evolving needs of investors as they grow, including fixed income, stock, insurance as well as mutual fund products.

Fixed income products account for a significant portion of the firm's online wealth management operations and is delivered through offshore and onshore platforms ‘Wukong Licai', ‘9F Wallet' and ‘9F Benben', as well as various other platforms such as ‘CSJ Golden Bull', a leading fund rating and distribution platform in China in which 9F is a major shareholder.

Market

According to a 2018 market report by China Daily, the consumer finance market in China is projected to reach $1.6 trillion by the end of 2020, which represents at a CAGR of 18 percent between 2018 and 2020.

Despite the demand, only 28 percent of consumers in China possess credit ratings of any kind, as compared to 86 percent of the U.S.

According to another market research report by the Boston Consulting Group and Lufax, China had around $2 trillion in online wealth management (OWM) in 2017 while the Chinese OWM market had reached $6 trillion with an online sales penetration rate of 34.6 percent, as of the end of Q1 2018.

The major factor driving market growth is the use of technology by FinTech companies in OWM services.

The independent third-party internet wealth management segment has a penetration rate of only 10 percent, as compared to 35 percent in the U.S.

Financials & IPO Details

9F's recent financial results can be summarized as follows:

  • Uneven topline revenue growth

  • Growing operating profit and operating margin

  • Increased net income

  • Decreasing cash flow from operations

As of March 31, 2019, the company had $961.4 million in cash and $239 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended March 31, 2019, was $351.2 million.

9F intends to sell 6.75 million shares of ADSs and selling shareholders will sell 2.15 million ADSs at a midpoint price of $8.50 per share for gross proceeds of approximately $75.65 million, not including the sale of customary underwriter options.

Class B shareholders will be entitled to five votes per share versus one vote for Class A shareholders.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company's enterprise value at IPO would approximate $893 million.

Commentary

9F is attempting to raise U.S. public capital as a bridge to transition its business model away from peer-to-peer lending toward wealth management and insurance services.

In the ‘Recent Developments' section of the current IPO registration, management has detailed a drop in net revenues in the first five months of 2019 of 36.9 percent as a result of a contraction of its loan facilitation services. The number of active borrowers decreased from 1.5 million to 900,000, a 40 percent decrease.

Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of a negative 1.2 percent since their IPO. This is a lower-tier performance for all major underwriters during the period.

Other peer-to-peer financial services marketplaces have floated their shares on U.S. markets in recent years and they have struggled under the weight of Chinese regulator pressure on the industry.

Management has done well to contend with the negative effects of the Chinese regulatory crackdown on the peer-to-peer lending industry in general.

9F is one of the larger players in the market, so will likely have the ability to make the necessary adjustments to its operations given the new regulatory environment.

But those adjustments will take some time to put into place, so prospective investors should be judicious about their choice of stocks to own in the uncertain financial marketplace industry in China over the near-term.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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