Analysis

Is Yirendai stock overvalued ?

Since the IPO Yirendai stock which initially started at $10 went as low as $3.35 and as high as $14.87. Until March 8th, the YRD stock was similar to the Lending Club (LC) and On Deck (ONDK) stocks, or maybe even fared a little worse. The March 8th 2016 un-audited financial data, however, made the YRD stock diverge from LC and ONDK. Since the YRD stock has been completely uncorrelated to the overall Marketplace Lending sector. In our analysis, we will show why we believe that the fundamentals behind the YRD stock are suspiciously over optimistic and why we believe that the YRD stock is overvalued and should be trading around at best in line with LC and ONDL in the $4-$6 price range instead of $11.90 (as of the time of writing this article).

Is Yirendai stock overvalued 0

 

A little background

Yirendai, the Chinese P2P lender, listed on NYSE in December 2015, becoming the third major online personal unsecured lender to IPO. The company had raised during the IPO $86mil at $10 per share. Since then, the stock has been on a roller coaster ride with the price falling to 9.1 dollars on the opening day itself. The stock fell to $3.35 dollars by February 2016, highlighting the expectations of a “hard landing” for the Chinese economy mixed with the unproven p2p lending space. The company has been on an upward spree since, not only reaching the IPO price of 10 dollars but giving an almost 50% return to investors who held on, as it touched a price of $14.87 per share in April 2016. The company has pared back it gains since, settling in the $11.0 to $12.0 range. Its listed peers, Lending Club and OnDeck, have not been so fortunate, with Lending Club falling from its IPO price of $15 to $7.93  and OnDeck falling from its IPO launch price of $20 to $8.28. Investors are cumulatively sitting at an approximately 50% loss in comparable American companies. So why these different stock valuations and are these differences justified ?

Growing volume by 3.26x increased revenue by 9.75x ?

Yirendai released its fourth quarter and full year financial results on March 9th, 2016. Both earnings and revenue beat analyst’s estimates; it originated $509.7 million in loans in Q4 2015 and $1,494 million in loans in all of 2015. The annual origination volume grew by a whopping 326% as compared to the previous 2014 year. During that time, the total fees billed increased by 975% (on an annual basis) to $343 million dollars. As a result, the company achieved an EBITDA of $64.1 million and a Net Income of $43.8 million versus a Net Loss of $4.5 million dollars the previous year. The p2p lender also created a reserve fund, putting aside an amount of 7% of loans facilitated through the year. The company had a balance of $70 million in the reserve fund at the end of the year and paid out $11.3 million to investors to cover the outstanding principal and interest on loan defaults. How did Yirendai increase the fees per loan by a factor 3x within 1 year ?

Launching grade D improved default rate by a factor 6 ?

In a shift to expand its reach, Yirendai launched grade D loans in 2014. Now going down the credit ladder for scale has burned down many a lender, but Yirendai seems to have miraculously improved its delinquency and charge-off figures. To understand the shift, let’s understand the shift from Grade A loans to Grade D in the image below:

Is Yirendai stock overvalued 1

So though Yirendai was only facilitating loans to Grade A category in 2013, it had a 9% net charge-off. Whereas in 2015, over 80% of loans are in Category D, the default is now only 1.5%.

The origination fee is 3.5x larger than marketing costs ?

Prosper and Lending Club’s origination fee structure has remained stable over the years and their origination fee is in fact pressured by competition from companies like Avant. Whereas the origination fee has increased substantially at Yirendai due to the introduction of Grade D financing. The company is charging a usurious 18% as a minimum transaction fee for such riskier loans. On breaking down the business model and financial figures to its constituent parts, we can conclude that the business is focussing on loans with an APR of 35 to 40%. On an average, they have a 25% origination fee, which is net off the 12.5% average return they pay the investor on the platform. They have a 7.25% marketing cost, a 2.5% G & A + Origination & Servicing cost and a 7% Reserve fund. This has translated to a massive 21% net margin for the company in 2015. From the image below, it is clear that its American cousins have not been faring as well as the Chinese giant.

More information on Yirendai’s accounting approach:

Is Yirendai stock overvalued 2

Unaudited results ?

Both LC and OnDeck have a Net Loss for the year, though they are EBITDA positive. How can Yirendai charge such high fees? How can Yirendai maintain such low default rates while charging such high fees? The answer lies in the facts that the results declared are unaudited and the new Grade D scheme has been launched just a year back.  So it is unfeasible to model how these loans would work out for the lender in the future.

Parent company CreditEase

Another red flag is the company’s relationship with its parent, CreditEase. It is a Chinese financial conglomerate with major physical presence in both rural and urban China. Around 50% of Yirendai’s borrowers are sourced from CreditEase’s retail locations. The parent charges 5% from its spinoff for each referral and this will increase to 6% for three years from 2016. All the management, admin, debt collection, legal and other services are provided through CreditEase, thus giving it a vice-like grip over Yirendai. The p2p lender has been criticized roundly over the internet and by experts for lack of transparency. The below table represents how it is perceived and what information is it providing to its lenders and investors.

Is Yirendai stock overvalued 3

Chinese firms form the lower quartile in terms of transparency. But even then Yirendai is squarely at the bottom. Considering it’s a listed company, this has started changing but it still highlights the management attitude towards the investors and the lenders.

In addition, the company is launching a securitization which will be listed on the Shenzen stock exchange. Why wouldn’t the company attempt to securitize in the US where the capital costs are much lower than in China at this time? Could it be due to a concern that the American capital markets being more sophisticated will not be willing to participate in such a securitization ?

Conclusion

Yirendai in association with its parent, CreditEase has created an apparently successful Offline-Online model and has been aggressively able to tap the demand for credit in unbanked China. It’s Net Margins and a 7% Reserve Fund create a compelling moat and a dual protection for investors and lenders on the p2p platform. But high origination fees with such low default rates have never been historically possible and are very far from what their competition able to achieve. And even if this could be possible in the short term it is unclear if this is even sustainable for the long-term in the financial markets. Beyond regulatory risks in China, such exorbitant pricing in origination would also typically attract a self-selected negative bias in the borrower population. These problems are exacerbated because the company is moving down the credit quality to cater almost exclusively to Grade D borrowers.

Beyond all these doubts, if 2008 crisis was any indicator, it’s safe to say that Sub-prime is not a friend of any lender. Any borrower willing to pay such huge fees is suspicious and there is a chance that the company will collapse like a house of cards with the impending weight of frauds and defaults.

Full disclosure: The author has no financial interest in Yirendai or in any of the Lending Club or On Deck stocks.

Author: George Popescu and Heena Dhir

George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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