Chapter 1 Industry Overview
Consumer finance refers to the provision of loans for individuals for consumption purposes, and the amount is generally less than 200,000 yuan. Early consumer finance products were mainly provided by commercial banks and auto finance companies, and with the development of the consumer financial market, licensed consumer financial institutions and Internet institutions gradually joined the competition.
At present, the participants in the mainland consumer financial market mainly include three types of institutions:
(1) Commercial banks. Bank consumer credit is still a major component of the mainland consumer finance market, including credit card loans, consumer loans, etc. According to data from Chinese Minmin Bank, as of the end of 2020, commercial banks' personal consumer loans will be about 48 trillion yuan, of which mortgage loans will be about 4 billion yuan, and consumer loans with unclear calibers (including commercial bank consumer loans, credit card loans, automobile loans, etc.) will be about 8 trillion yuan.
(2) Licensed consumer finance companies. Licensed consumer finance companies are non-bank financial institutions that hold consumer finance licenses and carry out consumer loan business, and at present, a total of 33 consumer finance companies in mainland China have been approved by the China Banking and Insurance Regulatory Commission to establish (including opening).
As of the end of 2019, the total assets of consumer finance companies were 498.807 billion yuan, an increase of 28.67% year-on-year; the balance of loans was 472.293 billion yuan, an increase of 30.5% year-on-year. Affected by the epidemic in 2020, the expansion of the scale of consumer gold companies and the release of credit have slowed down, and the growth rate of assets and loans in 2020-2021 will be around 15%-20%.
(3) Internet agencies. Including large-scale e-commerce, consumer installment e-commerce, online lending platform, P2P platform, etc. With the issuance of the "Notice on Regulating and Rectifying the "Cash Loan" Business", online small loans without specific scenarios have been compressed, and P2P has gradually been standardized, and it is expected that the Internet institutions in the consumer financial market will be dominated by large-scale e-commerce and consumer installment e-commerce in the future. At the end of 2020, the loan balances of the head Internet financing platform 360 and Lexin were 92.1 billion yuan and 76 billion yuan, respectively.
According to the data released by the National Bureau of Statistics, the consumer market has been greatly affected by the new crown epidemic, but with the gradual improvement of the new crown epidemic, the national economy will continue to maintain a recovery trend, consumer demand will gradually pick up, and the policy of promoting consumption will be further increased. From January to November 2021, the total retail sales of consumer goods totaled 39.96 trillion yuan, an increase of 13.7% year-on-year.
Figure Total retail sales and growth rate of consumer goods from 2009 to 2021
Source: Qianji Investment Bank Asset Information Network Zero One Think Tank Wind
Chapter 2 Business Models and Technological Developments
2.1 Industry chain analysis
Figure Analysis of the industrial chain of consumer financial market
Source: Qianji Investment Bank Asset Information Network Analysys Analysis
(1) The funds of the upstream consumer demand side can be divided into their own funds and loan funds
According to the different consumer financial service platforms, there are differences in the form of capital supply on the upstream consumer demand side, for banks, the upstream is mainly depositors, shareholders and investment institutions with credit asset securitization, and the form of capital supply is mainly manifested as savings, capital contribution and investment; for consumer finance companies, the upstream is mainly shareholders, and the form of capital supply is expressed as capital contribution; for P2P platforms, the upstream mainly includes asset securitization transferees, P2P online lending platform investment users, etc.; for e-commerce consumer finance platforms, Consumer goods purchased on credit on e-commerce platforms can choose to pay in installments or delay payments; for microfinance companies, their upstream source of funds is mainly small loans.
(2) The downstream consumer supplier provides offline consumption scenarios and online self-operated/third-party consumption platforms
The downstream consumer supplier provides offline consumption scenarios and online self-operated/third-party consumption platforms, and the consumer financial service platform connects the supply and demand sides. Scenarios are the foundation of consumer finance, and the online transfer of consumer scenarios makes online consumer finance platforms more penetrating. The e-commerce consumer finance platform improves the e-commerce ecology based on the consumption scenarios of e-commerce itself; in the fields of education, campus, decoration, medical care, and rental housing, some P2P companies choose to enter with consumer finance as the entry point to build a "consumer scene ecology".
(3) The core consumer finance circle includes consumer financial service platforms and regulators
Demand applies for loans to consumer financial service platforms (banks, P2P platforms, consumer finance companies, microfinance companies and e-commerce consumer finance platforms) and obtains loans after passing the review. Among them, loans obtained through banks, P2P platforms, consumer finance companies and microfinance companies can purchase goods and services offline and online, while loans obtained through e-commerce platforms can only purchase goods or services through online consumer platforms.
The basis of the core consumer finance circle is the regulatory authority (supervision, credit reporting and bad debt processing agency), but the current regulatory system (especially the third-party independent credit reporting and rating) is missing at this stage, and the risk control cost of consumer financial service providers is relatively high.
2.2 Business Model Analysis
Source
Consumer finance companies are mainly funded by interbank inflows. The sources of funds for consumer finance companies include interbank liabilities, bonds payable, customer deposits, etc., of which interbank invoicing funds are the main source. Interbank borrowing sources include bank shareholders and other financial institutions, and the proportion of funds from the parent bank is 16.4%, 25.5% and 32.7% respectively among the funds of CML Consumption, Industrial Consumption and BOC Consumption.
Figure Issuance of consumer finance corporate bonds
Source: Qianji Investment Bank Asset Information Network CITIC Securities Wind
In addition to interbank inflow funds, consumer gold companies also expand their sources of funds through the issuance of bonds. Up to now, a total of 5 consumer finance companies have issued bonds (Home Credit Consumer Bonds and BOC Consumer Bonds have matured), with a total issuance of 23.85 billion yuan. AbS, the surviving consumer finance company, is approximately $25.7 billion, of which Home Credit Consumer Finance corporation issued approximately $16.75 billion.
Figure Continued Consumer Finance ABS (RMB100 million)
Where the money is invested
The credit business of consumer finance companies attaches importance to consumption scenarios. According to the "China Consumer Finance Company Development Report (2020)", in 2019, 4 institutions were entrusted to pay loans accounting for more than 30% of the loans, and consumer finance companies will gradually expand scene finance to 3C, home appliances, home improvement, tourism, education, medical beauty and many other scenarios.
Figure In 2019, consumer loans in the consumer finance company scenario accounted for the proportion of total consumer loans
Figure BOC Consumer Finance Company Loan Investment (2018)
The interest rate on loans to consumer finance companies is higher than that of commercial banks. Affected by the customer structure, the loan interest rate of consumer finance companies is generally higher than that of commercial banks, and the average loan interest rate of major consumer finance companies is above 15%. The interest rate of loans on products of BOC Consumer Finance is generally above 10%, and the maximum can reach 24%.
Figure Average lending rate for consumer finance companies
2.3 Technological developments
For the consumer finance industry, major cutting-edge technologies such as AI, big data, cloud computing, and blockchain have gradually penetrated into customer acquisition, risk control, credit enhancement, fund management, etc., covering the whole process of business, committed to establishing a digital credit system, creating an online "thousands of faces" intelligent marketing pattern, and comprehensively promoting the optimization and upgrading of the consumer finance industry.
- Customer acquisition: Provide accurate diversion for consumer finance business through leading institutions that master customer big data and have strong scientific and technological strength.
- Risk control: In the credit risk assessment process, the combination of big data and offline information can help verify the borrower's true information and solvency.
- Credit Enhancement: Cutting-edge technology can help borrowers with different qualifications accurately match the differentiated risk appetites of financial institutions.
- Funds: Join tools such as blockchain to efficiently solve the problem of institutions to continuously track the repayment and use of user funds.
2.4 Policy Supervision
The healthy development of the consumer finance industry is inseparable from the effective supervision of various departments and the effective constraints of various policies. From the perspective of industry supervision, the main supervision and management departments of the consumer finance industry are the Financial Commission, the Banking and Insurance Regulatory Commission and the central bank, in addition to the Internet Finance Association and the Consumer Finance Committee of the China Banking Association and other industry self-regulatory organizations, due to the high incidence of criminal crimes such as fraud and routine loans, the regulatory authorities have also introduced public security departments to increase the rectification of the order of the consumer financial market.
Combing the main policies of the industry, it can be found that before 2017, the mainland consumer finance industry policy was mainly to encourage the development of the industry, since 2017, the focus of the consumer finance industry policy is to standardize the development of consumer finance business, strengthen the protection of consumer rights and interests and maintain the order of the consumer financial market, focusing on the long-term healthy and stable development of the industry.
Government regulations
Table Consumer Finance Industry Policy
Source: Qianji Investment Bank Asset Information Network Shanghai New Century
Industry self-discipline and enterprise self-examination
Table Consumer finance industry self-regulatory regulations
Chapter III Industry Development and Market Competition
3.1 Industry financial analysis
Figure Industry comprehensive financial indicators
Source: Qianji Investment Bank Asset Information Network Wind
Figure Historical valuation of the industry
Valuation methods can choose P/E valuation method, PEG valuation method, price-to-book valuation method, price-to-price ratio, P/S price-to-sales ratio valuation method, EV/Sales price-to-sales valuation method, RNAV revaluation net asset valuation method, EV/EBITDA valuation method, DDM valuation method, DCF cash flow discounted valuation method, NAV net asset value valuation method, etc.
Figure Index market performance
Figure Index valuation analysis
Figure Major listed companies
Figure The main composition of Haiyin shares
Figure Suning Tesco main business composition
3.2 Risk Factor Analysis
Industry credit is closely related to economic cycles
The development of the consumer finance industry shows a positive correlation with the macro-economy and per capita income level, and because of its "subprime" nature, its volatility will be greater than that of general loan issuers. In the case of stable economic growth, the income level of residents continues to increase, consumer demand is strong, the scale of consumer finance business expands, and the credit risk faced is small; in the case of economic downturn, the income level and consumption willingness of residents decline, the scale of consumer finance business is reduced, and the credit risk faced increases.
Financing capacity and financing cost dependence are high
As a leveraged industry, the consumer finance industry is more dependent on external financing, credit policy and interest rate policy changes will have a greater impact on the consumer finance industry, financing capacity and financing costs are crucial to the competitiveness of consumer finance supply entities, and platforms with strong capital acquisition capabilities can provide customers with more preferential interest rates or earn higher interest rate differentials, thus having more advantages in competition.
The financing of commercial banks mainly comes from deposits, which are low and stable; the sources of liabilities of consumer finance companies include financial institution borrowing, interbank lending, asset securitization, financial bonds and syndicated loans; the main financing channels of small loan companies are currently borrowing and asset securitization of financial institutions, and the financing channels are relatively limited, and after the introduction of the new regulatory regulations in 2020, the standard bond financing scale including asset securitization shall not exceed 4 times of their capital, and its leverage is relatively low.
It is worth noting that due to the characteristics of small amounts of dispersed consumer financial credit assets, it is suitable for financing through asset securitization, and the scale of its financing through asset securitization is relatively large, and the balance sheet of the main assets of consumer finance supply entities and the holding of related inferior assets need to be paid attention to. In addition, consumer finance supply entities can also alleviate some of the capital pressure through loan assistance and joint loans, but they need to pay attention to the impact of regulatory policy changes on related businesses.
From the perspective of financing costs, banks are indebted through deposits, and the financing cost is the lowest; the small loan companies under the Internet head enterprises benefit from a good shareholder background and risk control capabilities, and their financing costs are at a relatively low level; the shareholder background of consumer finance companies is generally better, and their financing costs are moderate; the general small loan companies are small in scale, the risk control ability is general, and the financing costs are generally higher.
Risk control is complex
Risk control ability is the core of the sustainable development of the consumer finance industry, and credit risk control is the top priority, different from the risk control of traditional credit business, the consumer finance industry mostly conducts risk control through online, and its credit risk has its own unique features, that is, the diversity of the reached scene, the difference in customer group characteristics, the rapidity of risk exposure and the weakness of customer credit.
Since the target customer groups of each consumer financial supply entity are different, the non-performing loan ratio is not the only criterion for measuring their risk control capabilities, and their credit risk control capabilities refer to the ability to control the bad debt rate at a lower level under the same pricing level or the same customer risk type. In view of the characteristics of consumer finance loans, the consumer finance industry usually achieves risk control through financial technology, big data and data modeling, etc. In view of the rapidity of risk exposure, it is necessary to continuously iterate on risk control models and strategies to maintain the effectiveness of risk control.
3.3 Market Development Status
Asset size
The scale of consumer finance companies is significantly differentiated. By the end of 2020, 6 of the 13 consumer finance companies that disclosed their asset size had assets of less than 10 billion yuan. The scale of assets of Zhaolian Consumer Gold and Immediate Consumption Gold exceeds 50 billion yuan, and the newly established Sunshine Consumption Gold and Xiaomi Consumption Gold are smaller.
Figure Asset size of consumer finance companies at the end of 2020
Source: Qianji Investment Bank Asset Information Network CITIC Securities
Performance
Industry revenue and profit continued to grow. According to the data disclosed by various consumer finance companies, the total revenue of 16 consumer finance companies that disclosed comparable revenue data was 53.96 billion yuan, down 1.3% year-on-year; the total net profit of 18 consumer finance companies that disclosed comparable net profit data was 5.87 billion yuan, down 15.2% year-on-year. The epidemic has had a greater impact on residents' income and willingness to consume, and the overall performance of consumer finance companies has declined.
Figure 2020 Consumer Finance Company Revenue
The performance differentiation is obvious. In 2020, the performance growth rate of consumer finance companies was obviously differentiated, with the net profit growth rate of JinMeixin and Hangzhou Silver Consumption Exceeding 100%, while the performance of some consumer finance companies declined significantly. With the strengthening of regulatory constraints on consumer finance lending interest rates, the channel customer acquisition ability and risk control ability of consumer finance companies will determine the future competitive situation.
Figure 2020 Net profit of consumer finance companies
Profitability
ROE has declined slightly under the impact of the epidemic, but it is still at a high level. Under the influence of the epidemic, the profitability of various consumer gold companies has declined, but it still maintains a good level. In 2020, the ROE of IB Consumption, Zhonglian Consumption and Immediate Consumption reached 31.9%/16.4%/10.5% respectively, down 5.6/0.6/3.7pct from 2019. It is expected that as the impact of the epidemic subsides and asset quality recovers, the profitability of consumer gold companies is expected to continue to improve.
Figure Head gold consumption ROA situation
Figure Head gold consumption ROE situation
3.4 Competitive Landscape
Licensed consumer finance companies present a three-legged pattern of banking, industry and e-commerce. The banking system is led or participated in by banks, with large capital scale and rich experience in cost risk control, but lacks competitiveness in customer experience and scene expansion; the industry department is led by retail enterprises, and the offline scene has the advantage of scale and the cost of obtaining customers is low, usually choosing banks or other financial institutions to cooperate to achieve complementary advantages; the e-commerce department is represented by Suning Consumption, etc., relying on the big data system established by its own huge platform business, through technological upgrading, to achieve business extension from credit purchase to consumer credit (online/offline).
Figure Distribution of competitive landscape of licensed consumer finance companies
3.5 Major Chinese competitors
Societe Generale Consumer Finance
Industrial Consumer Finance Co., Ltd. enjoys the brand and financial support of the major shareholder Industrial Bank, and has achieved profitability in only two years since its establishment in 2014.12, and the advantages of low comprehensive costs such as the cost of funds have made its profit margin reach a high level of more than 20%, and the total assets have steadily increased from 4.11 billion to 34.83 billion. Compared with the whole network lending crowd, IB Consumer Finance aims at high-end users, and the customer group is dominated by "three high" men with high income, high education and high assets, concentrated in second-tier and above large cities, with a monthly income of 10K and above. Industrial Bank enjoys the good reputation of the major shareholder Industrial Bank, has a rating advantage when issuing bonds for financing, has a low coupon rate, and controllable financing costs.
Consumer Finance Now
Immediately, the background of consumer finance shareholders is diversified, with a scientific and technological background, online and offline business integration, diversified products, and injected mobile Internet genes. Its business is online, the distribution of the city level of the customer group is relatively average, and the preference of first-tier cities is slightly higher; the user group is mainly junior married men with specialists, 25-34 years old, monthly salary of 10K and below, and cars and houses. At present, with its high-tech financial technology capabilities such as big data and artificial intelligence, It has successfully squeezed into the first echelon of licensed consumer finance companies.
Suning Consumer Finance
Suning Consumer Finance relies on online Suning Tesco and other e-commerce platforms, offline 2697 self-operated stores, in-depth into various consumption scenarios, low cost of customer acquisition, its products for Suning Tesco, Suning ecosystem covered and not covered (the introduction of education, tourism, rental, home improvement and other cooperative merchants) to provide installment services. The advantage of Suning Consumer Finance is its online and offline supply chain resources, but the linkage between its retail and consumer finance business is not in place, and at present, it is more retail support for financial business, and the overall scale and profitability need to be improved. More than eight users of Suning Consumer Finance have become men, the distribution of urban grades is relatively sinking, and the education is concentrated in young people with 3-10K incomes in this specialty, most of whom have cars and no houses.
3.6 Major global competitors
Home Credit Consumer Finance
Home Credit Consumer Finance entered the Chinese market in 2004 and is one of the first institutions in China to carry out consumer finance business, behind which are mature resident consumer credit providers abroad. At present, China has become the largest market for Home Credit, with a loan balance of more than 10 billion euros, and Home Credit has a large offline service network in China, with nearly 300,000 sales points. In contrast to Societe Generale, Gitzo's user base is more sinking, mainly for married men aged 25-34, third-tier cities and below, no garages, specialists and below, and monthly incomes below 5K. Home Credit focuses on offline services, and the layout of a large number of sales points leads to high operating costs; the difficulty of risk control leads to high costs of bad debts; the lack of shareholder endorsement of high quality reputation leads to high financing costs; the overall profitability needs to be improved, and we are vigorously exploring the online market.
Clear
Klarna was founded in Sweden in 2005, and public data shows that its latest valuation is 300 billion yuan, with multiple rounds of financing, and has been favored by many capitals, including Sequoia Capital, SoftBank Vision Fund, Commonwealth Bank of Australia, etc. According to the newly released "2021 Global Unicorn List", as of November 30 this year, it is currently the fifth largest unicorn in the world, ranking behind ByteDance, Ant Group, SpaceX, and Stripe.
More familiar than its name, it's the first payment model, BNPL (Buy New Pay Later), which buys first and pays later. Unlike traditional financial loan services such as credit cards, BNPL does not have too high entry barriers and approval processes, and is not linked to personal credit scores. Klarna mainly provides small loans in daily life, which can be installed for individual items, but the biggest highlight is that it usually has no interest, mainly charging merchants transaction fees and late fees for consumers to pay late payments.
With the growth of the scale, Klarna is not willing to only do payment, but also try to extend the business, on the one hand, its focus on the group from B-end merchants to C-end users, while launching its own shopping App, co-brand merchants began to create a new ecology, users can plant grass, enjoy discounts, add to the shopping cart, manage orders, logistics tracking and return and exchange services. According to public data, Klarna currently accounts for 55% of the global BNPL market share, ranking first, with 90 million active users worldwide and 250,000 retail cooperative merchants. Recently, it has also entered into a strategic partnership with U.S. mobile payment technology giant Stripe, which will provide its merchant customers with installment payment services from Klarna, which is expected to further expand its influence.
Affirm
Affirm, known as the American version of "Huabei", has been listed on the NASDAQ, mainly for the UNITED States and Canada markets, providing consumers with virtual credit cards, installment payments, payment services, and payment solutions for merchant customers, etc., with a latest total market capitalization of $28.4 billion. According to the latest financial report, for the first quarter of fiscal 2022 as of September 30, 2021, the company achieved revenue of $269 million, an increase of 55% year-on-year, with market expectations of $248 million, and a net loss of $307 million, compared with $3.946 million in the same period last year, and a market-expected loss of $77 million. However, total merchandise transactions for the quarter were $2.7 billion, up 84% year-over-year, and Affirm's active users reached 8.7 million, up 124% year-over-year.
Chapter Four: Future Trends
Internet background shareholders increased
The previous supervision has successively introduced standardized policies for the Internet loan business, which will promote Internet institutions to change the business model of credit business, and the capital needs to be replenished under the increase of leverage constraints. Compared with Internet institutions, the leverage constraint of licensed consumer funds is low, and the establishment of licensed consumer funds helps Internet institutions to carry out credit business. At the same time, the supervision of Internet financial institutions will gradually move closer to traditional financial institutions, and the establishment of licensed gold consumption will also help Internet institutions to isolate financial business and entity business to meet the regulatory requirements for financial holding companies. It is expected that the application for licensed consumption by Internet institutions will be accelerated in the future.
The scarcity value of license plates is highlighted
At present, the domestic consumer financial market is dominated by commercial banks, and the licensed consumer finance supplement can meet the needs of differentiated credit customers. At present, the regulator is more cautious about the approval of consumer finance companies, and under the background of strengthening Internet supervision, the scarcity of consumer finance company licenses has further increased.
Expand the source of funds and actively replenish capital
The rapid expansion of licensed consumer gold consumption companies puts forward higher requirements for capital acquisition and capital replenishment. At present, the source of licensed consumption liabilities is mainly interbank funds, and the proportion of bond financing can be appropriately increased in the future, such as improving the efficiency of fund use through the issuance of ABS. In terms of capital replenishment, at present, the listing process has been started, and the higher ROE level of consumer finance companies is also conducive to endogenous capital growth.
Risk control capabilities are improved
In the early stage, some consumer finance companies had problems such as irregular credit processes, lax customer access, and imperfect risk control, and asset quality pressures. We believe that in the future, with the promotion of supervision and the increase in industry concentration, the construction of the risk control system of consumer gold companies is expected to accelerate significantly, strengthen risk identification and risk disposal before, during and after lending, and ensure a reasonable risk-return ratio.
Cover Photo by Scott Graham on Unsplash