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Actionable news in YRD: Yirendai Ltd,

Despite The Amazing Return, Yirendai May Still Be Worth Holding


This article evaluates whether the risk-reward in YRD at current prices is sensible.

It can often be tempting to take chips off the table when a stock returns as much as YRD, but it might not always be sensible.

At less than 30X TTM EPS, with very high levels of growth still to come, YRD doesn't even look that expensive.

A long-term earnings model shows that the company can still generate substantial returns going forward.

Yirendai, Ltd. (NYSE: YRD) is a leading P2P lender in China that launched its IPO late last year, in which 15% of the company was floated to the public. Immediately following the IPO, priced at $10/share (below expectations), the stock tanked. YRD was caught in a perfect storm of a declining stock market, an unsuccessful IPO, a particularly difficult environment for financial firms and those with China exposure (Yirendai fulfills both of those criteria), and general lack of liquidity due to only 15% of the float being public.

From $10, it was trading at a low $3 handle. Now, however, the stock is in the high 20s, low 30s range. Needless to say, anyone who purchased anywhere near those lows has done tremendously well in a fairly short amount of time. The purpose of this article is to explore the prospects for YRD going forward, and whether the risk-reward at current prices remains sensible.


For those unfamiliar, YRD was launched in 2012 as a subsidiary of CreditEase (which remains the owner of 85% of the company). Established in 2006, CreditEase is a large financial services firm focusing on providing inclusive finance and wealth management products and services in China. CreditEase also focuses on microloan origination and servicing, microfinance investment and wealth management in China.

While Yirendai is still in the process of developing its online capacities, CreditEase could serve as a marketing channel, key borrower sourcing channel, and early-stage fraud detection mechanism. As of the latest quarter, less than 60% of loan volume is derived from offline channels referred by CreditEase, which helps provide some earnings visibility while giving YRD some time to develop more independent online capacities.

Over time, it is expected that the company will rely on purely automated online capabilities to source borrowers. Yirendai has also been leveraging its parent's credit database to improve its own online credit underwriting capability, which should be seen as a key competitive advantage for the company going forward.

YRD is poised to benefit from the growth of the Chinese consumer. For those who might be worried of exposure to Chinese credit at this stage of the cycle (one of the reasons why the stock was decimated January-February of this year), it is important to realize that the company is solely leveraged to consumer credit. By every indication, Chinese consumer wealth is growing, with growth in spending well above GDP-growth rates.

As consumption spending becomes a greater percentage of GDP, China also benefits from a secular shift towards larger consumption loan volumes. Seen below, China's consumption loans-to-GDP, at 23%, is well below that of other developed economies. Although China's credit card loan balance has experienced rapid growth in recent years, which is a good indicator of consumer credit demand, the average credit line remains low for many credit cardholders, and it remains difficult for many credit cardholders to get a credit line increase.

Going forward, Yirendai could expand to target short-term consumption loans, those needed for substantial family-level expenditures, such as weddings or an automobile.

Source: Morgan Stanley

China's underdeveloped consumer credit risk control infrastructure and the segment's historically lower profitability versus that of corporate lending, has led the country's banks to be very conservative in the consumer loan...