ANALYSIS: Jiayin Pursues Transition Away From P2P Model

Jiayin is in the midst of a transition from being a P2P marketplace toward funding from institutional lenders and potentially proprietary lending to consumer borrowers.

Donovan Jones
    Apr 26, 2020 9:00 AM  PT
ANALYSIS: Jiayin Pursues Transition Away From P2P Model
author: Donovan Jones   

Quick Take

Jiayin Group (JFIN) went public in May 2019, selling $37 million of ADSs representing Class A shares in an IPO.

The firm has created an online marketplace that enables borrowers to find the best financial service offerings from lenders.

JFIN is undergoing a transition away from being a P2P marketplace to an institutional and possibly proprietary funding system for consumer borrowers.

Company

Shanghai, China-based Jiayin was founded in 2011 to connect lenders and borrowers in China through an online lending marketplace, empowered by the company's proprietary risk assessment system.

Management is headed by Founder, Director, and CEO Dinggui Yan, who was previously CEO at Niwodai Internet.

Jiayin's strategy is focused on "facilitating mid-to-long-term consumer loans with an average term of 12 months or more," as the company believes similar products are best-suited to profit its investors as well as capture the financial needs of borrowers.

The company's risk management system is based on its generated user and transaction data, "as well as multiple layers of background and behavioral data from more than ten third-party sources."

As stated in the filing, according to iResearch, the company ranked third amongst individual finance marketplaces in China in terms of transaction volume in H1 2018 for mid-to-long-term loans.

Below is a chart showing the firm's loan statistics from Q1 2016 to Q3 2018,

Market

According to a 2017 Oliver Wyman report on Chinese FinTech firms, outstanding loan balances for online peer-to-peer lending platforms have exploded in recent years, from RMB 31 billion ($467 million) in January 2014 to RMB 856 billion ($129 billion) by January 2017.

This spectacular rise represents a 27.6 times growth multiple in just a three-year period.

Furthermore, "China has overtaken the United States as the global leader in FinTech venture capital activities [in 2016] and represents 47% of global FinTech investments," as the chart below shows:

Source: Oliver Wyman

China is also home to a growing number of "unicorns," tech companies that have a private valuation of at least $1 billion. Ant Financial, valued at $60 billion, is far and away the largest FinTech unicorn followed by Lufax's valuation of $18.5 billion:Source: Oliver Wyman

Until the recent government crackdown, the growth of the Chinese FinTech market has been nothing short of dramatic.

In the four categories of Financing, Investing, Insurance, and Transaction, the chart below indicates the recent indexed growth history, with 2014 being a major inflection point.

Source: Oliver Wyman

During this tremendous growth period, the PBC (People's Bank of China) cut the benchmark interest rate five times and lowered the required reserve rate six times.

Also, during the past few years, the application of sophisticated machine learning and data mining technologies by these new financial services startups promises to improve their credit risk analysis of credit consumers for a given risk pool.

So, it isn't surprising in hindsight that the market for financial products in China grew rapidly as a result of a more liberalized interest rate and regulatory environment.

That liberalized regulatory environment has shifted to a more constrained environment since the government's regulatory actions have impacted non-traditional consumer credit firms such as JFIN.

Recent Performance

JFIN's topline revenue by quarter has dropped markedly in the past five quarters, as the chart shows below:

Gross profit by quarter has similarly fallen significantly:

Operating income by quarter has contracted to its most recent negative ($4.1 million) result in Q4 2019:

Earnings per share (diluted) have dwindled to only 6 cents, as the chart shows here:

Source for chart data: Seeking Alpha

Since its IPO in May 2019, JFIN's stock price has dropped 77.6% vs. the U.S. Consumer Finance index' drop of 30.5% and the overall U.S. market's fall of 6.1%, as the chart below indicates:

Source: Simply Wall Street

Commentary

In its last earnings call, management highlighted the growth in funding from institutions, with 45% of loans funded in March (2020?) along with another 20 institutions in process of being onboarded.

This is no surprise given the Chinese government's crackdown on peer-to-peer platforms due to significant bad behavior or consumer incompetence with these P2P platforms in recent years.

Unfortunately, the firm experienced a sharp decrease in loan demand presumably due to the effects of the coronavirus outbreak and continued macroeconomic headwinds on consumer sentiment and demand.

In response, management said it has "taken all necessary actions to reduce expenses." Luckily, most of the firm's existing client base is located outside the outbreak center of Wuhan.

As a result, the firm expects demand to ‘rebound quickly once the virus is fully contained.' It also expects to focus its efforts on repeat lenders and borrowers, which is the most cost-effective and low risk.

Notably, management intends to continue to expand into India, the Philippines, Indonesia, and Mexico, but this roadmap will likely be delayed as a result of the virus pandemic.

As to its financial results, while loan demand and the number of borrowers have dropped, average investment amount and average borrowing amount were both up considerably, a potentially positive sign about the confidence of both parties in the company's system.

The firm ended 2019 with cash of nearly $18 million after positive operating cash flow in 2019. With the impact of Covid19 on operations in 2020, cash may become an issue depending on the length and breadth of the pandemic.

Jiayin is in the midst of shifting from a P2P marketplace to an institutional marketplace, and perhaps even to making loans on its own books if it can acquire a lending license which is currently under consideration.

If those initiatives continue to bear fruit, Jiayin could look very different a year from now as an institutional and proprietary provider of consumer loans.

(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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