Yiren Digital: The Storm Has Passed

Yiren Digital: The Storm Has Passed


Yiren Digital is trading at a P/E ratio of 2.25 and a P/B ratio of 0.4.

After a slow transition out of the B2B business, operations now finally seem to be growing and are profitable again.

The resulting low valuation is still hidden from the mainstream due to restructuring costs in Q4 2020.

Therefore, after Q4 2021, the company’s low valuation multiples will show up on many stock screeners, possibly triggering a big outperformance of the stock.

simon2579/E+ via Getty Images In an already very undervalued industry, Yiren Digital (NYSE: YRD ) is trading even cheaper than its peers. The operational turnaround seems to have been a big success and both the company’s consumer credit business and its wealth management segment were able to quickly grow their user base.

I have written an article on the Chinese consumer finance industry, which you can find here . In that article, I have identified FinVolution (NYSE: FINV ) as the best stock to pick and 360 DigiTech (NASDAQ: QFIN ) as the close second. Upon reviewing YRD and the recent underperformance of the stock, I believe that currently, an investment in YRD is almost on par with an investment with FINV. Understanding YRD’s business

At first glance, YRD seems like a smaller business in the consumer finance space, as revenues and the facilitated loans are comparable to Qudian (NYSE: QD ), and therefore there is a big gap to peers like FINV, QFIN, and Lexin (NASDAQ: LX ).

However, the majority shareholder of YRD, CreditEase (in Chinese: 宜信), is quite well known and was really big during the years 2017-2019 when YRD earned billions of RMB with its P2P business. YRD CEO Ning Tang is also the CEO and owner of CreditEase. He is actually one of only a few Chinese Fintech CEOs who can speak English fluently and also seems quite competent, as he studied in the US and worked in investment banking in the US during the Internet bubble – see for yourself in this 18-minute interview .

Mr. Ning Tang was pretty much the first CEO to complete an IPO with a Chinese Fintech company was also one of the very first who offered online investing and lending, which is why the company’s name is now well recognized. However, be aware, that most people in China will have a bad image of pretty much every consumer finance or P2P company, as there were many scams and big trouble with loan sharks.

What differentiates YRD from its competitors is a more diversified business (25% of revenues from growing and more stable wealth management business), the brand of CreditEase, and, from an investment point of view, its low valuation. Consumer Finance: 75% of YRD’s business

Consumer finance is still the heart of the company and generates three-fourths of the company’s revenues. It offers small consumer credits (RMB 5K-20K) and loans/financial leasing for cars (RMB 50K-100K). It is now also following in the footsteps of FinVolution and entering the market of business loans for small business owners. The Chinese consumer credit market as a whole is growing with a CAGR of around 15% .

YRD was much slower to transition its business from P2P to a bank-backed consumer lending business. Therefore it suffered much longer from declining revenues, until Q4 2020 when it finally completely cut off its P2P business. Therefore the revenue development until 2020 looks ugly: However, that transition seems to have now finally worked perfectly, and business is picking up again. From a low during the COVID outbreak in Q1 2020, the company was able to constantly increase revenues and profits and currently has around RMB 12.5B loans outstanding (which are not on their books). Wealth Management: the other 25%

One-fourth of the company’s revenues come from its wealth management division. Same as for the consumer credit business, the company acts as the middleman between its clients and financial partners. It offers 4,000 financial products from 60 institutions and 150 insurance companies (life insurance and property insurance). The products include stocks, insurance, fixed income, and mutual funds. Every time a user buys one of these financial products, YRD receives a commission from the issuer of the product. This business compared to the credit business is very safe as for the company there are almost no risks attached and there seems to be a stable user base.

Due to the company’s successful past with its B2B-lending business, it also had many users on the borrower side who were just looking for ways to generate […]

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