Initiation of Coverage: UBS Evidence Lab: China Internet Finance 18 July 2018Contents
OUR THESIS IN PICTURES ........ 4
Q: Will volume growth of internet lenders slow down in the near term...... 6
Q: Is the worst of regulatory uncertainty behind the sector .......... 14
Q: Will ongoing industry consolidation pose threats to leading internet
lenders ..... 23
Appendix - overview of internet lending value chain .......... 33
May Yan
Analyst
may.yan@ubs
+852-2971 7157
Jerry Liu
Analyst
jerry.liu@ubs
+852-2971 7493
Alex Ye
Analyst
alex.ye@ubs
+852-3712 3594
Alex Zhou
Analyst
alex-huanan.zhou@ubs
+852-3712 4218
Angela Xu, CFA
Analyst
angela.xu@ubs
+852-3712 4671
Noel Chan
Analyst
S1460516100001
noel-y.chan@ubssecurities
+86-213-866 8845
Initiation of Coverage: UBS Evidence Lab: China Internet Finance 18 July 2018China Internet Finance
P2
UBS Research THESIS MAP a guide to our thinking and what's where in this report
MOST FAVOURED
Lexin
LEAST FAVOURED
Yirendai
PIVOTAL QUESTIONS Q: Will volume growth of internet lenders slow down in the near term
Yes, primarily due to regulatory uncertainty. However, we are constructive on the industry's growth
outlook in the longer term (after the regulatory rectification is over). Assuming industry growth slows
down in the near term but reaccelerates after 2019, we expect the P2P lending market to reach
Rmb1.9trn by end-2022, indicating an incremental Rmb700bn in the next five years, representing
around 10% of the total consumer credit growth of Rmb7.6trn during the period. We believe this
growth outlook can be justified by still robust nominal GDP growth, Chinese households' relatively
low indebtedness, consumers’ optimistic expectations of financial conditions (as indicated by UBS
Evidence Lab), and internet lenders’ competitive edge against banks among younger generations.
More
Q: Is the worst of regulatory uncertainty behind the sector
Probably not. With the regulatory deadline delayed by one to two years, we expect regulatory
rectification of internet lending to remain tough as a way of forcing out small and non-compliant
lenders. In addition, we believe there is a further opportunity for the regulator to clamp down on
some of the P2P platforms' controversial practices. While listed P2P platforms are in good shape
overall in terms of compliance, we see downside risks to their profitability as their current credit
enhancement practices still contradict their positioning as information intermediaries. Also, the
regulator's monitoring of business scale would weigh on listed lenders' near-term volume growth
outlook, especially PPDai and Yirendai.
More
Q: Will ongoing industry consolidation pose threats to leading internet lenders
Yes in the near term. Key risks amid ongoing consolidation are the possibility of further credit
downcycles caused by the concentrated exit of lenders, and outflows of individual investors' funds
from the P2P industry amid dampened investor sentiment, both of which could impact leading
lenders. That said, we believe industry consolidation will eventually benefit the leading P2P platforms
via more cost-efficient customer acquisitions, higher operating leverage, room for lower funding
costs, as well as an improved asset quality outlook for the whole industry.
More
UBS VIEW
We expect regulatory uncertainty and industry consolidation to be ongoing themes for the internet
lending sector in the medium term, which could give rise to further industry credit downcycles. We
prefer Lexin due to its lower downside risk to growth and less sensitivity to industry credit down
cycles.
EVIDENCE Industry consolidation has accelerated since the cash loan regulation in December 2017, evidenced by
the net exit of close to 600 P2P platforms in H118. The concentrated exit and tighter credit approvals
across the industry have led to an industry credit downcycle, widely affecting leading platforms.
WHAT'S PRICED IN Internet lenders are trading at 6.2x 12-month forward PE on average, down from 12.0x in November
2017. We think the sharp de-rating since the regulatory clampdown reflects increasing market concerns
on business growth and the asset quality outlook of listed internet lenders.
Note: Sector average is market-cap weighted average of Yirendai, PPDai, Lexin and Qudian. Source: Datastream, UBS
-80%
-60%
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No
v-1De
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Relative share price performance (since 1 Nov 2017/ IPO)
YRDPPDFLXJTQD681012No
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Internet lenders sector 12-month forward P/E
12-month forward P/EMean
+ 1SD- 1SD
Initiation of Coverage: UBS Evidence Lab: China Internet Finance 18 July 2018China Internet Finance UBS Research
Sector Q1
OUR THESIS IN PICTURES return
We expect non-mortgage consumer credit to reach
Rmb18.5trn by the end of 2022, at 11% CAGR,
representing an incremental market of Rmb7.6trn
While growth in the P2P lending industry is likely to
slow significantly in the near term amid the exit of small
lenders and tighter regulation, we expect the growth to
pick up once the current rectification is over
Measured by debt-to-disposable-income ratio, Chinese
households' leverage has increased rapidly in the past
few years, but remains lower than some other
developed countries
Our earlier UBS Evidence Lab survey indicates that the
majority of Chinese households hold a rather optimistic
outlook of their future financial conditions, and
therefore show high willingness to borrow and spend.
As such, we expect Chinese households to continue
increasing their leverage on non-mortgage consumer
credit
Sources for exhibits above:CEIC, UBS Evidence Lab, UBS estimates
0%
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45%
-48121620
4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2QE
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Rmb trn Consumer credit excluding mortgages
Credit cardOther
P2P loansYoY growth (RHS)
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Rmb trn P2P lending - loan balance and growth
P2P loansYoY growth (RHS)
-40
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180
200808284868890929496980002040608
20202020Household debt-to-disposable income ratio
USChinaJapanKorea
(%)
Get much
better
29%
Get
somewhat
better
55%
Stay the
same
14%
Get worse
2%
Expectation of financial conditions in five years。