9F Seeks U.S. IPO Investment

9F (JFG) has filed to raise gross proceeds of up to $150 million from a U.S. IPO, according to an F-1 registration statement.

The firm operates an online peer-to-peer [P2P] lending platform in China and abroad.

JFG is seeking U.S. investment in a difficult period for Chinese firms in general and P2P firms specifically.

I’ll provide an update when we learn more IPO details.

Company & Technology

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 JFG 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 December 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.

Customer Acquisition

9F utilizes website, social media, online video, and TV advertising, partner referrals as well as loyalty programs, under which the borrower pays an annual fee to gain access to an enhanced suite of products that include premier loan and online wealth management products, as well as non-financial benefits such as an express check-in at the airport for one year.

Sales and marketing expenses as a percentage of revenue have been dropping as operations have scaled up, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

To March 31, 2019

29.0%

2018

31.4%

2017

33.3%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, has swung positive and was 0.4 in the most recent year, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

To March 31, 2019

0.4

2018

-0.6

Sources Company registration statement

Market & Competition

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% between 2018 and 2020.

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

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%, 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%, as compared to 35% in the US.

Financial Performance

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

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To March 31, 2019

$ 179,402,000

11.7%

2018

$ 827,942,000

-16.5%

2017

$ 991,438,235

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To March 31, 2019

$ 72,751,000

40.6%

2018

$ 329,027,000

39.7%

2017

$ 135,375,147

13.7%

Net Income (Loss)

Period

Net Income (Loss)

To March 31, 2019

$ 78,582,000

2018

$ 294,311,000

2017

$ 106,434,265

Cash Flow From Operations

Period

Cash Flow From Operations

To March 31, 2019

$ 73,210,000

2018

$ 349,549,000

2017

$ 421,410,294

Source: Company registration statement

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.

IPO Details

9F intends to raise $150 million in gross proceeds from an IPO of its Class A shares.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

for strengthening our ecosystem, including our efforts to grow the community in our ecosystem and to improve the quality of interactions on our ecosystem;

for broadening our product offerings, including executing our plan to broaden our offered consumption scenarios loan products, to develop enhanced online wealth management products and to nurture our emerging loyalty program;

for investing in research and development, in particularly on artificial intelligence and big data technologies;

for international expansion, including our plan to expand investment in Hong Kong and Southeast Asia, as well as our plan to applying additional licenses that are critical for executing our international business strategies; and

the balance for general corporate purposes, including funding potential acquisitions and strategic investments of the targets with advanced technology capabilities or consumption scenarios.

Management’s presentation of the company roadshow isn’t available yet.

Listed underwriters of the IPO are Credit Suisse, Haitong International, and 9F Primasia Securities.

Commentary

9F is attempting to secure U.S. public investment after a period of generally poor performance by Chinese firms and their stocks as a result of a slowing domestic economy and U.S. China trade tensions.

9F’s challenges have been magnified by the crackdown of Chinese regulators on peer-to-peer lenders in China.

Regulators have succeeded in shrinking the industry from many smaller players to far fewer larger players and are clamping down through regulatory oversight and licensing requirements.

9F is one of the larger players and will likely survive but its operations will be hampered until regulators give the green light to further growth of the sector.

The company’s financials have shown the effects of this regulatory environment, with revenue topline contraction in recent periods.

Sales and marketing expenses as a percentage of total revenue have continued dropping and the firm’s sales & marketing efficiency ratio is positive, so management appears to be continuing to create efficiencies in its operations.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Valuation assumptions will be important and when we learn more details about the IPO, I’ll provide an opinion.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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