Bottom line: This year is likely to see at least a half dozen privately owned financial services companies make public listings in the U.S., Hong Kong and China, with Lakala and Lufax likely to be among the first.
We’re already three months into the new year, and still awaiting the first of what looks set to be a bumper crop of IPOs by a new generation of privately owned financial services firms that are far more dynamic than their state-run peers. Two more of those are in the headlines today, led by China Rapid Finance, a peer-to-peer (P2P) lender that says it’s eyeing a $100 million IPO in New York. At the same time, the popular Lakala electronic payments service has filed to make a listing on the Nasdaq-style ChiNext board in Shenzhen.
That pair are joining a few other notable names that are reportedly aiming to list in the not-too-distant future. That group includes Lufax, which bills itself as China’s largest P2P lender and is aiming to list in Hong Kong. Then there’s Qudian, a microlender that is looking to raise hundreds of millions of dollars with a New York listing. And of course, the granddaddy of them all is Ant Financial, which could raise more than $1 billion with a listing in Hong Kong or dual listing in Hong Kong and China.
So what’s happening here, and why this sudden explosion in private financial services firms? The answer is relatively straightforward. In short, China didn’t really allow such companies until about a decade ago, when a few bold ones like Alibaba (NYSE: BABA) quietly began offering electronic payment services without ever being formally allowed to do so.
The trend has rapidly gained momentum in the last 3-4 years, as Beijing more formally embraces this newer generation of companies that specialize in lending to private consumers and small businesses. That’s a critical element, since China’s traditional state-owned banks are notoriously bad at lending to the private sector, since they usually require real estate collateral that most such borrowers don’t have.
All that said, let’s look at the latest two entrants from this new generation of companies to join the financial services IPO queue, starting with China Rapid Finance. The firm, which was valued at $1 billion at the time of its latest fund-raising in November, is looking to raise at least $100 million in its New York listing, according to one report, which cites unnamed sources. (English article)
There’s not much else about the actual status of the IPO, but the report does contain some financials, which say the company has serviced 1 million borrowers and handled 8.8 million loans as of last October. The report says China Rapid Finance was actually founded in 2001, which means it obviously began its life as something else and has probably only discovered P2P lending in the last two or three years.
Lakala Likes ChiNext
Next there’s Lakala, which is emerging as one of the few private-sector rivals to juggernauts Alipay, Ant Financial’s biggest asset, and Tencent’s (HKEx: 700) payment system linked to its WeChat instant messaging service. The company has formally filed for a ChiNext IPO, saying it will issue at least 40 million shares that amount to about 10 percent of its total share count. (English article)
There’s no given target for the fund-raising, but we can probably assume that Lakala is worth around $1 billion, which would put the fund-raising target at $100 million or more — a relatively high amount for a ChiNext company. Lakala is actually earning a profit at the moment, posting a 212 million yuan ($31 million) profit on revenue of nearly 2 billion yuan in the first nine months of last year. Those numbers certainly aren’t too bad for such a young company, and I expect the IPO should be well received.
We’ll close with a final look at who might be first to market, and what kinds of valuations they might get and risks they may face. It does appear that Lakala might be first, since it’s the only one to actually make a firm filing so far. Next up should be Qudian, China Rapid Finance or Lufax, as this trio race to become China’s first publicly listed P2P lender. I would probably put my money on Lufax, as it seems the most advanced in the process and has big named backers like Ping An Insurance (HKEx: 2318; Shanghai: 601318) helping out. That could be followed by Qudian, and then China Rapid Finance, with Ant stepping up around the end of the year.
At the end of the day, all these offerings should be relatively well received, since China stock buyers currently have very few choices for financial services plays outside the state-run realm. The biggest uncertainty all will face is China’s regulatory environment, which is almost certain to restrict their activities and force them to create reserve pools to lower risk. But companies that have made it this far are likely to survive over the longer term, meaning all could be good investments over at least the next 5 years.