China’s fast growing peer-to-peer (P2P) lending industry entered a new stage of development this Wednesday with Dianrong's acquisition of Quark Finance’s asset-origination operations.
Dianrong’s co-founder and CEO Soul Htite told FinanceAsia the M&A deal marks the first instance of a “marketplace lender acquiring assets from another lender in either China or the US.”
The deal also underlines the growing power of the industry’s biggest lenders at a time when the government is trying to encourage consolidation and effectively regulate the country’s 2,000 plus P2P companies.
Since 2009, China has witnessed explosive growth in P2P lending, which matches individual small borrowers and lenders via the internet. According to industry association Wangdaizhijia, the industry recorded transaction volumes of Rmb250 billion ($36.87 billion) in May and Rmb997 billion in outstanding loan balances.
Dianrong is already one of the industry’s larger participants and its move is about scaling up further ahead of a possible IPO, although Htite is coy about when a flotation might happen.
“We’re keeping all the options open, including an IPO for sure, but there’s no final decision as of now,” he said. “Investors are coming in to visit us and want to know what we’re doing and how we’re doing it, but we’ll press the button when we feel it’s right.
“For now, we are really well-funded,” he added.
Htite is one of the world’s best-known P2P advocates after co-founding Lending Club, the world’s first listed P2P firm. Dianrong was established in 2012 and Htite cites the Quark acquisition as evidence of the Chinese industry entering a more mature stage of development.
He argued that M&A between peers typically signals an industry’s growing maturity within the venture capital world whether that be for video streaming sites, online traveling agencies, group purchase websites and ride hailing platforms.
Deal terms
Dianrong’s new purchase gives it a far bigger footprint across China, adding 71 borrower service centres across 47 Chinese cities (these centres provide comprehensive loan underwriting data collection and servicing). Dianrong itself has 28 borrower service centres across 27 cities.
Htite said the expanded network provides an even better platform to acquire more borrowers.
“Dianrong could have kept building one branch at a time, [what] we call organic growth,” he commented. Instead, it took the M&A route to, “boost our business in a very short period of time".
Htite does not believe there will be integration issues. “I wouldn’t have done this transaction if we didn’t already have our own branches,” he explained.
The deal size remains undisclosed, but Htite says he expects the transaction to close within the third quarter. It also incorporates Quark Finance’s Credit Studio platform, which provides data analysis through automated and human interactions to deliver mass-production credit evaluations and processing.
Growth potential
Analysts believe China’s biggest P2P lenders including Dianrong, Lufax and Ppdai.com are poised to register strong growth.
In a research report, published at the end of June, CICC said: “We suggest paying close attention to investment opportunities in the internet consumer finance sector.”
It gave three main reasons. Firstly it said: “overall bad debt risks are controllable and leading players may deliver explosive earnings growth.”
Secondly, it added that: “quality companies could gain access to abundant funding resources in the primary market and some may be preparing for listing.”
Thirdly, it noted that: “regulatory tightening may boost the growth of sector leaders and lending risks.”
Htite agrees. He said Dianrong always maintains a cushion of about 25% to 30% of available funds above the borrowed amount thanks to the company’s stringent borrower selection.
The company originates borrowers (individuals and small and medium-sized enterprises) through three channels: institutional partnerships such as banks and financial leasing firms, its own branch network, and online.
“Online growth is pretty much organic, whereas for partnerships, you need to sign one at a time,” he said, leaving branch acquisition the most viable option for quick growth.
In 2016, Dianrong originated approximately Rmb16.23 billion in loans. This represented a 148% increase over 2015, according to its January statement. It now generates $500 million in assets a month and has four million retail investors, according to Htite.
Htite also said greater regulatory clarity would be, “good for investors and companies.”
In August last year, the Chinese government introduced new administrative rules. Then in November, it further specified registration requirements for P2P lending firms with the local government bureaus, which are tasked with rolling out central government legislation.
Local bylaws are also being rolled out. On July 7, Beijing joined Shanghai, Guangzhou and Shenzhen in releasing its draft rules.
The government's regulatory tightening follow a large number of failures including P2P lenders such as Ezubao, which imploded at the beginning of 2016 after taking more than Rmb50 billion from almost one million investors.
Since then fintech start-ups have found it harder to raise fresh funds and a number of potential IPO’s have been put on hold.
Dianrong itself was most recently valued around the $700 million mark in August 2015.
According to S&P Global Market Intelligence data, it raised $207 million in its Series C round of financing from investors led by Standard Chartered Private Equity. Tiger Global Management, which backed Chinese e-commerce giants Alibaba and JD.com, is also an investor with an unspecific stake.
The industry’s biggest player is Ping An affiliate Lufax, which is believed to have pushed its own IPO back to 2018. S&P Global Market Intelligence data records a post money valuation of $18.5 billion following a December 2015 funding round, which raised $1.2 billion.
However, there are signs that investor appetite is picking up. China Rapid Finance raised $60 million from an IPO on the New York Stock Exchange in April after pricing its deal at $6 per share. After reaching a low of $5.72 in late June, the shares have since re-bounded to $6.28 at Thursday’s close.
Likewise, fellow Chinese P2P lender, Yirendai is also listed on the New York Stock Exchange. Its share price has risen 42.5% year-to-date, giving the company a $1.7 billion market capitalisation and a valuation of 9.7 times 2017 earnings based on Morgan Stanley’s estimates.
