Yixin finds a new path to profit as a car loan agent

Key Jtake away food :

  • Yixin posted an adjusted net profit of $43 million last year as its new auto loan facilitation business grew 65% and its credit impairments fell sharply.
  • The company’s asset quality has improved significantly since switching to lending facilitation from its previous business as a direct lender

By Ken Lo

It is often said that when the main road is closed, try to take a secondary path which could lead to a different but no less wonderful journey. Such a path encapsulates the store of Yinxin Group Ltd. (2858.HK), whose latest financial results show solid progress in the new path it has found as a car loan facilitator.

The substantial growth of this lending facilitation business has helped Yixin reported net profit of 28.95 million yuan and adjusted net profit of 273 million yuan ($43 million) last year, reversing losses in 2020. This reflects the success it has found in its new life as a lending intermediary helping banks provide auto loans to consumers, a strategy he adopted after regulators repressed on its former direct lending model.

Of the society annual results announced last Thursday showed that Yixin’s total revenue rose 5.1% to 3.5 billion yuan ($549 million) last year. This included a strong 72% increase in revenue from its transaction platform business, mainly due to a 65% increase in revenue from loan facilitation services to 1.95 billion yuan. With the growth of its lending facilitation business, the company’s share of total revenue increased from 35.6% in 2020 to 55.9% last year. The company’s former direct lending business moved in the opposite direction, dropping from 58.7 percent to 33.1 percent of the total, as revenue from that source fell 40 percent to 1.19 billion yuan.

Yixin’s move from direct lender to intermediary lending facilitator is part of a broader trend among Chinese fintech firms, following a government crackdown that included heavy new regulation on their direct lending business model. ‘origin. Regulation has been relatively lighter on facilitating lending that does not require such intermediaries to handle real money, which has prompted many companies like Yixin to move into this space.

Despite steady progress in its transformation, Yixin’s shares fell 8% last Friday after reporting a close at HK$0.92. The price has been steadily declining since a high of HK$2.89 last April. The shares are now trading at the bottom of their 52-week range, suggesting investors are still not happy with its transformational story.

China’s car finance market has grown rapidly in recent years and is expected to reach 2 trillion yuan this year as more people in the world’s biggest car market buy such expensive items on credit. The market has not slowed despite repeated pandemic disruptions over the past two years, which have not only forced store closures and left consumers locked in their homes, but also led to supply chain shortages that have affected car production.

Last year, the company contributed 45 billion yuan in auto loans through its loan facilitation and direct financing business, up 66% from 2020. The number of sales of autos it helped finance also jumped 49% to a much higher 530,000 for the year. than the 3.8% increase in new car sales in the industry last year. In the larger total, Yixin helped fund 293,000 new car deals, up 31% from 2020, and 237,000 used car deals, up 80%, thanks in large part to policies governments that have lowered the value added tax on the distribution of used cars and improved the ease of transactions.

Less profit for intermediaries

The company’s transition from direct lending and vehicle leasing to lending facilitation has not been smooth. The main challenge is the lower profits from the intermediary lending business compared to direct financing and leasing. To compensate, Yixin needs to find ways to boost his transactions. But a major advantage of facilitation over direct lending is a much lower risk of default for the former.

The steady improvement in the quality of its assets has been the most important factor in Yixin’s improved revenue. A notable example is its credit impairments, which fell 84% from 1.81 billion yuan in 2020 to just 286 million yuan last year. As its direct lending business ceased, its 90+ day overdue ratio fell from 2.28% to 1.95%. Loans 30 to 90 days past due also fell to an all-time low.

The company, which currently works with 23 banks and financial institutions for its lending facilitation business, attributed the improvements to better risk control measures since the second half of last year. This includes raising the bar for borrowers who use its services, with a focus on higher quality clients. The company has also used artificial intelligence and big data technologies to improve its risk control capabilities and reduce delinquent loans.

The sharp reduction in its direct financing business has not hurt Yixin’s gross margin at all, with the figure rising about 4 percentage points last year to 51% as the company benefits from cost savings. increasing scale.

Two auto finance companies with similar business portfolios to Yixin include a US-listed company Can go CANG and Autohome ATHM 2518.HK)), which is listed in the United States and Hong Kong. Unlike Yixin, Cango has reduced its auto lending business in recent years due to its increased focus on providing a wider range of auto trading services. This includes a focus on new energy cars, which accounted for a quarter of the 23,000 cars Cango helped fund last year.

Autohome, which is larger and focused on new-vehicle transactions, said its revenue fell 16.4% to 7.24 billion yuan last year, while its net profit fell by 36.9% to 2.15 billion yuan. This reflects the impact of a global chip shortage that is hurting new vehicle production and sales, as well as automakers’ declining marketing budgets due to rising costs.

Yixin’s latest price-to-sales (P/S) ratio is 1.54 times, higher than Cango’s 0.32 times but lower than Autohome’s 3.5 times, putting it in the middle of the pack. Most investment banks are cautiously optimistic about the company. Citibank believes Yixin will benefit from continued improvements in its credit checks, but it will take time for the company’s trading platform to mature and ultimately deliver stable growth. He gave the company a “neutral” rating, although its target price of HK$2.50 is well above current stock levels.

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