Chinese fintech valuations under scrutiny

Bankers are preparing for a handful of US listings from Chinese fintech companies this year. But some US investors are starting to worry about valuations.

Chinese financial technology companies will line up to seek funds in the US equity market this year, but investors' questions around earnings may put pressure on their valuations.

That is the view of Crawford Jamieson, vice-chairman of global capital markets at Morgan Stanley, who was speaking at a conference organised by The Economist on Friday.

Jamieson was discussing the market ahead of a raft of expected Chinese fintech IPOs in the US, including rumoured deals from, Dianrong and Tuandaiwang. Lufax, the country's largest peer-to-peer lender valued at $18.5 billion, is preparing an IPO in Hong Kong.

“The challenge is not the multiple, the challenge is the E — the earnings — and visibility around the earnings,” said Jamieson at the conference. “And to be fair, the early ones that come out of China [will be] smaller, and perhaps their earnings visibility will change.”

When China Rapid Finance, an online lending unicorn, made its debut on the New York Stock Exchange in April, it broke a long hiatus of Chinese fintech companies from the US market. There had not been a listing since peer-to-peer lender Yirendai sold its own deal in December 2015.

Plenty more Chinese fintech companies are preparing to follow suit, but Jamieson — whose bank worked on both deals — said US investors were increasingly starting to question valuations, a concern that has been exacerbated by the recent underperformance of their US fintech peers.

Losses are quite common among Chinese peer-to-peer lenders, who are in the midst of an aggressive competition to attract new customers through aggressive campaign and direct incentives.

After reporting two consecutive years’ net losses during marketing for the IPO, Yirendai's shares more than halved in its first month of trading. The company has since gone into profit. China Rapid Finance’s shares have had a better start, edging up by 5% since its trading debut despite a net loss of $33.4 million on $55.9 million in net revenues for 2016.

International investors have taken notice of the heady valuations of Chinese fintechs, perhaps best demonstrated by Alibaba’s affiliate Ant Financial’s last round private funding, which valued the online payment giant at $60 billion.

But investors should take a broader view of the economics of smaller Chinese fintechs by looking at their credit cycles, customers, acquisition costs and sustainable margins to understand the long-term value of these companies, said Jamieson.

“At the end of the day, the question really is the model,” he added. “We're not valuing companies based on next year's earnings, we have to figure out what they're worth in five years. Once you’ve figured that out ... then we can decide what to pay today.”

Fang Yihan, chief executive of Yirendai, told FinanceAsia on the sidelines of the conference that some foreign investors were still not comfortable putting their money into the sector as there’s a lack of coverage and understanding of the model of Chinese fintech firms.

“There should be a handful of other fintech IPOs coming out of China this year, which we really look forward to,” said Fang. “We hope more investors and funds will know about us, as more investors start covering the sector… The entire industry will benefit from it, if the listings of outstanding fintech firms can boost the multiples.”

Yirendai reported a net income that of $160.8 million for 2016, leading to a surge in its share price. The company’s shares have now jumped five-fold to $23.44 since hitting a nadir in February 2016. The stock currently trades at a 7.17 price-to-earnings multiple. 

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