China Fintech Sector: China / Hong Kong Industry Focus

China / Hong Kong Industry Focus
China Fintech Sector

Refer to important disclosures at the end of this report
DBS Group Research . Equity 4 Jun 2018

Meeting the future
 Regulatory uncertainty is an overhang but long-term
positive for online lending consolidation
HSI : 30,469
 Economies of scale and risk control would be a key
factor for long-term sustainable growth
A N ALYST
 Insurtech is expected to disrupt P&C homogenous Cindy WANG +852 2863 8830 cindywangyy@dbs.com
segment with growing scale to drive profitability Ken SHIH +852 2820 4920 kenshih@dbs.com
 Buy Lexin (LX US), Yirendai (YRD US), and Zhong An
(6060 HK) Recommendation & valuation
F intech online lending – positive on industry consolidation.
Helped by consumption upgrade, underserved borrowing needs Closing T arget F Y 18F
by traditional banks, and a growing tech-savvy population, Bank T ick er Rat ing Price Price PB PE PS
peer-to-peer (P2P)/online micro-lending platforms grew rapidly (lc) (lc) (X ) (X ) (X )
to Rmb1tr, or a 131% CAGR in 2015-17. We expect the Yirendai YRD US BUY 23.46 30.00 2.4 8.6 1.4
addressable market for online consumer lending to be Rmb8- Lexin LX US BUY 15.62 21.00 6.0 15.5 2.2
10tr, an 8-10x growth potential. Although regulation ZhongAn 6060 HK BUY 52.20 68.00 5.6 n.a. 1.5
uncertainty is a near-term overhang, the industry ’s consolidation
Source: Thoms on Reuters, DBS Vickers , Bloomberg Finance L.P.; closing
would be positive in the long run with the help of reduced price as of May 31, 2018
competition to drive better growth prospects. We expect only
300-500 P2P platforms would survive vs 1,800 currently .
K ey winning formula: scalability + credit control. Fintech lending
platforms with the capability of securing borrowers at low
acquisition costs, abundant funding sources, and strong credit
control would stand out. We expect three groups of fintech
lending players to be the major beneficiaries, including Internet-
giant-backed players, those with an online/offline hybrid model,
and online instalment platforms. Pure P2P with small-sized loan
would be the most challenging model due to high default rates
amid weak credit risk control, and low economies of scale and
high acquisition costs make them hardly profitable.
Insurtech – Disruptor to P&C homogenous segment. Mass
computing ability, scenario-based setting and growth are
Insurtech players’ key strengths. Recent trend shows that
Insurtechs are increasingly switching away from online
ecosy stem partners, and commencing online-to-offline (O2O)
integration by tapping into P&C homogeneous-like auto
insurance and health insurance segments. With better O2O
integration, we expect the leader, Zhong An (6060 HK, BUY), to
capture 2%/1% of China’s P&C/auto insurance market share
and achieve underwriting profit by 2020F, on rising
underwriting leverage.
Posit ive view on Fintech industry The recent share price
correction has priced in the regulation headwind, loan
origination slowdown and the spike of default rates due to like
credit-cycle happened in Dec’17. The current trading valuation
of 5-6x PE for the industry is undemanding and we expect the
sector to resume growth momentum once the consolidation is
completed. We recommend investors to select quality play,
Yirendai, scenario-based instalment, Lexin, and online insurers,
ZhongAn, within China Fintech sector.
DBSV's discussion of the issuer in this report (Qudian, (QD US) & Hexindai (HX US)) will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of
this report should not expect additional reports relating to this issuer, unless so decided by DBSV.
ed-TH / sa-CS / AH
Industry Focus
Table of Contents
Fintech online lending - positive on industry consolidation 3
The push-and-pause regulations 6
An underpinned online consumer lending market 9
Key factors required to be long-term winners 12
Insurtech – Disruptor to P&C’s homogenous segment 20
Positive view on Fintech industry 29
Stock profile 35
Yirendai 35
Lexin 35
ZhongAn 35
Hexindai 35
Qudian 35
Page 2
Industry Focus
Fintech online lending - positive on industry consolidation of total loans are made up of personal unsecured credit loans.
For borrowers residing in tier 3 to tier 5 cities, banks have fewer
China Internet Finance, including online micro-lending and P2P
branches to serve them. Moreover, they do not have a credit
platform, has been growing rapidly since 2015/2016. This sector
history and are hence out of the banks’ credit radar. Even if these
has been mainly boosted by the demand from student loans to
borrowers manage to obtain credit from the banks, they will only
cash loans, which target people between the ages of 20-39 with
be offered products with a limited loan quota, such as credit
low income but high consumption desire, and underserved by
cards. This creates a great opportunity for P2P/micro-lending
banks. According to Oliver Wyman, the online consumer lending
platforms to target borrowers who either have limited loan quota
market reached Rmb1tr in 2017, and we estimate the potential
or are underserved by banks.
market size to be around Rmb8-10tr based on 300-400m
targeted borrowers and 80-100% loan-to-disposable income Fig 1: Only one-third of the population has a credit
ratio. record
(m)
Despite the near-term regulation headwind, we believe this will 1,000 926
880 899
be a long-term positive trend for industry consolidation and 900 805 820 839 857
777
dev elopment once the approval process for online lending 800
664
700 636.0
platforms are finalised. We expect three groups of fintech 600
lending players to be the major beneficiaries. Firstly, Internet- 500 412
460
350 380
giant-backed players, such as Ant Financial, J D Finance and 400
289 321
300 262
224
Webank, should benefit on large traffic and low acquisition 141.0 176
200
costs, as well as abundant funding sources. Secondly , P2P 100
platforms backed by parent companies, such as Lufas and 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Yirendai (YRD US), should have better credit risk control with a
long history of borrowers’ profiles and provide a safer transaction People in database People with credit rating
platform to investors. Thirdly, consumption scenario-based online
instalment platforms, such as Lexin (LX US), are expected to fulfil Source: Credit Reference Center; DBS Vickers
borrowers’ different stages of spending needs and increase
customers’ stickiness.
Fig 2: An underserved market
Borrowing needs are underserved by the banking industry . China
banks only serve individual customers with credit records under Total population 1.39bn
China Credit Reference Center (CCRC), which only has 460m
profiles on its system as the commercial and consumer credit
reporting system only started to serve as a basic financial credit Employment/ I nternet users o f
information database in 2013. This implies that only one-third of 776m/772m
the population would be covered by banks if they have credit
requirements. Thus, the main potential untapped market for
online consumer lending sector would be the more than 300m Cre dit record in CCRC
460m
population comprising those who hav e a stable job and internet
access but no credit data in CCRC.
On the other hand, China banks are mainly focusing on

SOE/corporate lending as it is more cost effective to offer big- Source: National Bureau of Statis tics of the People’s Republic of China,
China Internet Network Information Center (CNNIC), Credit Reference
ticket loans. In March 2018, corporate /personal loans Center, DBS Vickers
represented 65%/34% of total loans while mortgage accounted
for 54% of personal loans, which means only 15% or Rmb19bn
Page 3
Industry Focus
Fig 3: Corporate/SOE lending still account for 45% of Fig 4: China internet/mobile internet users
total loans for China banks
(m)
100% 1000 60%
13 12
13 12
13 12
13 13
13 12
13 13
13 13
13 13
13 14
14 14
14 14
15 14
14 14
14 14
14 14
15 13
16 13
14 14
17 13
18 13
15 14
17 15
18 15
18 15
15 14
18 15
90% 50%
800
80%
40%
70% 600
60% 30%
50% 400
55
56
57
57
56
20%
56
56
55
54
54
52
54
54
53
52
53
51
51
50
52
49
47
48
47
46
45
40%
200 10%
30%
20% 0 0%
10%
20
20
20
20
20
20
19
19
19
19
19
19
18
19
18
18
18
18
18
18
18
18
18
18
18
18
1H09
2H09
1H10
2H10
1H11
2H11
1H12
2H12
1H13
2H13
1H14
2H14
1H15
2H15
1H16
2H16
1H17
2H17
0%
3Q11
4Q11
1Q12
2Q12
3Q12
1Q13
2Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
3Q15
4Q15
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q12
3Q13
2Q15
1Q16
4Q17
China Internet users (m)
Mobile internet users (m)
Micro-SME Corporate & SOE Mortgage Internet penetration rate (RHS)
Mobile internet penetration rate (RHS)
Other consumer loan Other loan
Source: China Internet Network Information Center (CNNIC); DBS

Source: PBOC, DBS Vickers Vickers
A growing tech-savvy population. With the rising number of Fig 5: China internet users by age
middle-class millennials and the rapid development of e-
commerce, more Chinese people are purchasing online. The 35%
30.0%
increasing desire for premium goods, coupled with the 30%
expectation of rising income, supports the demand for big-ticket 25% 23.5%
items such as luxury products, electronics and vacations, etc. 19.6%

20%
However, the millennials’ low monthly income of around 13.2%
15%
Rmb2,000-8,000 cannot support their purchasing desire, and the
10%
banks are also unwilling to offer them credit as they do not have 5.2% 5.2%
5% 3.3%
a credit history to apply for credit cards or unsecured
consumption loans. This pushes people to borrow money from 0%
Age 10-19 20-29 30-39 40-49 50-59 age over
online consumer lending platforms which are easy to apply for under 10 60
loan quota mostly through mobile apps with the help of
2016 2017
continued increasing Internet popularity .
Source: CNNIC; DBS Vickers
China’s online population had hit 772m by the end of 2017, up
5.6% y -o-y, and a total of 753m Chinese use mobile phones to
surf the Internet, making up 97.5% of online population, Fig 6: China internet users by income
according to the China Internet Network Information Center
> RMB8K 8.5%
(CNNIC). Out of this, 53.5% of internet users are aged between
20 and 39, while 51% have an income of Rmb2,000-8,000. They RMB5K- RMB8K 11.7%
make up the 300-400m population who will be the main RMB3K- RMB5K 22.4%
borrowers on the online consumer lending platforms. RMB2K- RMB3K 16.6%
RMB1.5K- RMB2K 9.2%
RMB1K- RMB1.5K 6.0%
RMB500-RMB1K 8.0%
< RMB500 17.7%
0% 5% 10% 15% 20% 25%
2017 2016
Source: CNNIC; DBS Vickers
Page 4
Industry Focus
P2P/online lending platforms focus on near-prime borrowers. Fig 7: China borrowers by credit score
Borrowers can be segregated into four categories by their FICO
score, which is a credit score created by the Fair Isaac Corporate Super-prime Banks
to measure the risk of default. It considers various factors in five [FICO=
areas to determine credit worthiness, namely payment history, above 800]
current level of indebtedness, types of credit used, length of E-commerce affiliated
internet-finance/ offline Prime
credit history and new credit accounts. The four categories are as consumer finance
follows: companies [FICO= 670-799]
Near prime P2P/ online

- Super-prime [FICO= above 800]: These borrowers are lending
considered to have excellent credit and pose the least risk to [FICO= 580-669] platforms
lenders and are thus offered the best loans and credit cards
Sub-prime
with the lowest interest rates and most favourable terms.
This group of borrowers could also be called banks’ high net [FICO= below 579]
worth individuals (HNWIs). Based on CMB/Bain & Company ’s
Source: FICO; DBS Vickers
report, there were ~1.87m HNWIs in China in 2017.
- Prime [FICO= 670-799]: This group of borrowers are

Fig 8: Continued growth of disposable income
considered likely to make loan payments on time and fully
repay their loans, as they have credit files that show a strong (Rmb)
40,000 25%
history of using credit wisely and handling loans responsibly. 35,000
We think there are around 460m prime borrowers who have 30,000 20%
credit records under CCRC and are served by banks, e- 25,000 15%
commerce affiliated internet finance companies (such as Ant 20,000
15,000 10%
Financials), and offline consumer finance companies.
10,000
5%
5,000
- Near prime [FICO= 580-669]: Borrowers who might have a - 0%
2000
2001
2002
2005
2006
2007
2008
2009
2010
2011
2012
2013
2016
2017
2003
2004
2014
2015
short credit history, an adverse credit record, or a low
income which prevents them from accessing loans from Per capita disposable income of urban residents
Per capita disposable income of rural residents
banks. We estimate that this group of borrowers, which has Urban residents YoY (RHS)
stable monthly income but no credit record, makes up 300m Rural residents YoY (RHS)
of the population, and is the main targeted customers for

Source: WIND; DBS Vickers
P2P and online consumer lending players.
- Subprime [FICO= below 579] : Comprising borrowers who Fig 9: China online retail sales growing rapidly
may have difficulty maintaining their repayment schedules,
and whose loans are characterised by higher interest rates, 8,000 (Rmb bn) 80%
poor quality collateral, and less favourable terms to 7,000 70%
compensate for higher credit risk. This is a long-tail market 6,000 60%
made up of around 500m of the population. The highest 5,000 50%
risk of default for subprime borrowers arises from not 4,000 40%
having a sustainable income to support loan repayments. 3,000 30%
2,000 20%
To sum up, most P2P/online consumer lending platforms are 1,000 10%
- 0%
focusing on borrowers between the ages of 20 and 39, with a
2010 2011 2012 2013 2014 2015 2016 2017
monthly income of Rmb2,000-8,000 and less or no credit history, China online retail sales
and mostly classified under the near-prime group. With a YoY (RHS)
Online retail penetration rate (RHS)
potential addressable market of 300-400m people, we expect
the continued growth in disposable income/retail sales at Source: CNNIC; DBS Vickers
8%/10% CAGR and the increasing online retail penetration to
support online consumer lending growth momentum at +30%
CAGR in FY18-19F.
Page 5
Industry Focus
The push-and-pause regulations small, carry a high interest rate and have a short-term duration,
are known as cash loans or payday loans. As cash loans carry
A n initial lack of supervision. P2P, also known as marketplace
relatively high interest rates given their unsecured feature, many
lending through online platform, was first introduced in China by
borrowers pay extremely high interest without awareness due to
PPDai (PPDF US) in 2007, following the establishments of Zopa in
short borrowing period. In addition, there was no system in place
the UK in 2005, and Prosper and Lending Club (LC US) in the US
for lending platforms to disseminate borrowers’ information to
in 2006 and 2007 respectively . It is also around the same time
regulators. Thus there was no method to monitor each
that the China government began to encourage Internet
borrower’s aggregate credit, leading to uncontrolled increase in
dev elopment and poured resources into infrastructure network.
residential leveraging.
Aided by the initially relaxed regulations and the government’s
full support of internet finance, the number of P2P platforms in
On the platforms’ standpoint, with the help of charging higher
operation had sprung up from only 10 in 2010 to more than
interest rates and repeat borrowing, the cash loan business
3,000 in 2015.
helped the number of loans facilitated to grow rapidly and lower
customer acquisition costs. This resulted in turnaround to profits
However, there are two sides to every story . As the regulators did
for some industry leaders such as Qudian and PPDai in 2016.
not require P2P players to apply for licenses and did not impose
That year, the loan transactions on P2P platforms maintained
any clear rules on lending and borrowing limitations at the
their growth momentum, grow ing +110% y -o-y to reach Rmb2tr,
beginning, many disputes gradually emerged from the market,
including consumer financing, supply chain financing, and small
such as the use of force during collection, extremely high interest
and micro enterprise financing, based on WDJ Z. On the other
rates charged and violation of privacy , etc. These undesirable
hand, the number of P2P platforms in operation hit its peak of
practices were against the principal of offering inclusive finance
~3,500 in Nov ember 2015 but was trimmed down to 2,400 by
for the people with credit needs but could not be served by
the end of 2016, while the number of problem platforms, such
banks. Thus, the regulators began to introduce a series of
as those involved in fraudulent tricks, accumulated to 3,400.
regulatory requirements in 2015 and has since emphasised on
the promotion of sound development of Internet Finance.
In December 2017, regulators announced the strictest rules for
P2P industries (see figure 14) prompting the market to believe
St rict regulations have become an overhang for the industry.
that only 300-500 platforms could be approv ed, vs ~1,800 still in
Most P2P platforms started their business by providing campus
operation in March 2018. The regulators required local
loans. As students have strong purchasing desire but do not have
governments to complete the evaluation and registration of
the income to support their consumption, they resort to using
qualified P2P platforms in April 2018 and no later than J une
online consumer lending platforms to finance their purchases
2018. However, no P2P platforms obtained approval in April.
without their parents’ knowledge. As a result, this has resulted
Based on our industry check, the delay is mainly due to three
in many chaotic incidents in campuses and credit threats made to
reasons as follows:
students as they do not have repayment capability. In April 2016,
CRBC and the Ministry of Education co-announced a prohibition
1. Structural changes on the asset side still have a long way to
on such lending platforms from performing any marketing
go that currently only 47 platforms out of 1,800 meet
campaigns on campus to entice students to take loans via the
regulators’ requirement s on individual borrowing amount
platforms.
capped at Rmb1m in aggregate platforms as of March 2018,
such as Lufas and Yirendai, based on WDZJ .
Besides that, in August 2016, CRBC announced its interim
measures on online consumer lending platforms that define them
2. Depository banks for P2P platforms need to obtain the
as a complement to traditional banks to serve as an intermediary
approval of National Internet Finance Association (NIFA).
and to provide small-ticket loans. To control credit risks and
Thus, although some P2P players had previously signed
differentiate themselves from banks’ scope of business, online
contracts with banks, this does not guarantee those banks
lending platforms cap the loan amounts of individuals/companies
could obtain the necessary approvals.
at Rmb200,000/1m per platform and Rmb1m/5m in total for all
platforms. Note that before the quota limitation, platforms
3. As each local government’s standards are different, the
prov iding big-ticket loans usually required borrowers to provide
central government is likely to repudiate the local
collateral such as a house.
governments’ approval rights to make the scoring system
fair.
Thus, P2P platforms shifted their business model to provide loans
to workers aged between 20 and 39 who earn a monthly salary
These have caused difficult ies for P2P platforms’ approval process,
of Rmb2,000-8,000 with no credit history and underserved by
which is likely to be delayed again in J une 2018.
banks, mostly in tier 3 to tier 5 cities. These loans, which are
Page 6
Industry Focus
Industry consolidation to be a long-term positive. Despite Fig 12: P2P’s total transaction amount y-o-y growth
regulatory uncertainties causing an overhang and short-term started to decline in Dec 2017
disturbance, we believe the industry consolidation would be a (Rmb bn)
long-term positive. We also do not think the regulators would 300 400%
350%
shut down the P2P industry as 1) it is a complementary channel 250
300%
to banks and serves customers who have credit needs but are not 200 250%
cov ered by banks, 2) regulators could control the online 200%
150
consumer lending industry to protect borrowers from being 150%
100 100%
saddled by extremely high interest rates, and 3) P2P lending
50%
records could be shared with the central government to create a 50
0%
complete personal credit database. We believe industry leaders 0 -50%
Oct-14
Oct-15
Oct-16
Oct-17
Jul-14
Jul-15
Jul-16
Jul-17
Jan-14
Jan-15
Jan-18
Jan-16
Jan-17
Apr-14
Apr-15
Apr-16
Apr-17
such as Lufas, Yirendai and PPDai are likely to meet the
regulatory requirements and regain growth momentum after the
P2P total transaction amount YoY (RHS)
consolidation with an increasing number of borrowers and
inv estors on each platform amid less competition in the market.
Source: WIND, DBS Vickers
Fig 10: China P2P industry development

Fig 13: P2P borrower/investor trends
(k) (RMB k)
30,000 300
25,000 250
China's P2P M ore P2P/online
P2P e ntering in
growing rapidly in le nding regulations 20,000 200
China in 2007 2011-2013 issued since 2015
15,000 150
10,000 100
5,000 50
- 0
Source: DBS Vickers 2013 2014 2015 2016 2017 2018F 2019F 2020F
P2P investors P2P borrowers

Average investor amount (RHS) Average borrowing amount (RHS)
Fig 11: China P2P platforms in operation continue to
shrink Source: iResearch, DBS Vickers
7,000 Peak of 3,473 P2P 20%
platforms in operation
6,000 in Nov'15 15%
5,000
10%
4,000
5%
3,000
0%
2,000
1,000 -5%
0 -10%
Mar-14
Mar-16
Mar-17
Mar-15
Mar-18
May-15
May-16
May-14
May-17
Sep-14
Sep-16
Sep-15
Sep-17
Nov-15
Nov-17
Nov-14
Jan-15
Nov-16
Jan-17
Jan-18
Jan-14
Jul-14
Jul-15
Jan-16
Jul-16
Jul-17
Accumulated problem platforms

# of P2P platforms in operation
# of P2P platforms in operation - QoQ (RHS)
Source: WIND, DBS Vickers
Page 7
Industry Focus
Fig 14: P2P regulation details
Date Regulator Regulations Key rules

Jul-15 PBOC, MIIT, Guidelines on -Encouraging innonvation and supporting the steady development of Internet Finance
MPS, MoF, promoting the sound - Support qualified Internet Finance platforms which serve the real economy so as to meet the investment
SAIC, China development of and lending demands for small and micro enterprises and individuals, as well as to inclusive finance.
Law, CBRC, Internet Finance - Encourage banks to provide custody, payment and settlement services for third-party payment and online
CSRC, CIRC, lending platforms. Encourage insurance companies to cooperate with Internet companies to enhance risks
CAC control.
Sep-15 Supreme Guidance on private - Civil law protects lender's claims to loans with annualized interest rate within 24%
Court lending - Annualized interest rate exceeding 36% is invalid; borrowers can request lenders to return the interest
amount of exceeding 36%
Apr-15 CBRC and Notice on strengthening - Ban immoral lending platforms to do any marketing campaigns on campus and seduce students to borrow
Ministry of risk prevention on loans
Education campus loan - Enhance students' consumption, financial and Internet security knowledge
Aug-16 CBRC, MIIT, The interim measures - Individuals / Companies borrowing amount is capped at RMB200K/1m per platform and RMB1m/5m in
MPS, CAC for administration of aggregate platforms.
online lending - P2P platforms not allowed to take deposits, provide credit guarantee or raising funds for their own use.
platforms - Prohibited to sell wealth management products or issue asset backed securities
- P2P companies must use third-party banks as custodians of investor funds
- Banned asset transfer and securitization
- Platforms need to register with local financial regulators
Feb-17 CBRC Online lending custody - Commerical banks are required as custodians to handle and segregate investor funds
business guidelines - P2P companies are responsible for opening and closing accounts specific to P2P funds custody, capital
settlement, accounting verification and supervision over capital
Dec-17 CBRC Implementation plan - Re-exam the qualification of online microloan lenders including the qualification of the major shareholders
for the cleanup of - Local regulators will thorougly examine the business of all online microloan lenders by Jan'18 and will form
online microloan a long-term supervision framework.
lenders - Online microloan lenders' loan usage and purchase scene will be examined and whether lenders have taken
effective actions to prevent borrowers from borrowing from multiple lenders
Dec-17 PBOC, CBRC Internet Finance/P2P - Suspension of granting new license to any P2P platforms and platforms operating after Aug 24, 2016 are
special working group's not allowed to get the regulator's approval this time. Require local governments to finish the examine and
notice on regulating registration of qualified P2P platforms in April 2018 and no later than June 2018.
P2P industry - The stated borrowing rate should be coverted to "annualized" rate and capped at 36% including fees. No
illegal fund raising and transaction or transfer of credit assets via Internet platforms or local exchanges are
not allowed.
- More restriction is given to Internet loan purpose. Loan should not be utilized to "student-loan", "down-
payment for property" and investment speculation.
- Customers information should not be abused and traded illegally, and no debt collection is involved in
threatening violence.
- P2P platforms violate the regulation issuing on Aug'16 regarding to the cap of borrowing amount for
individual/company are unqualified for registration.
Apr-18 PBOC Notice on selling wealth - Non-financial institutions cannot sell WMPs, unless get the license from regulators.
management products - Without permission, online operators selling WMPs must immediately stop. The remaining amount of WMPs
through online shold be disposed to zero before the end of June 2018.
platforms
May-18 CBRC, PBOC, Circular on Regulating - Without approval by th related authority, any companies or individuals cannot set up or engage in any loan
SAIC, MPS Private Loan Behavior to distribution.
Protect the Economic - Private lending must strictly abide by the relevant regulations. Funding must comes from legitimate sources,
and it is forbidden to absorb other people's funds for lending.
- Crack down on the illegal absorption of public deposits and treats on collecting loans. Ban on illegal
distributing loans to students, non-designated loans, or charging high interest rate. Forbidden for
employees of financial institutions to act as member or controllers for private lending.
Source: CBRC, PBOC, DBS Vickers
Page 8
Industry Focus
An underpinned online consumer lending market Fig 16: China has the highest savings rate
High savings and low leverage ratio to support online lending 45 (%)
mark et growth momentum. The personal loan market is still at 40
its infancy stage in China given its relatively low household 35
30
debt-to-net disposable income ratio of 101% in 2016, 25
compared to most developed countries. This indicates that 20
Chinese residents’ solvency remains solid on the back of 15
continued increase in income level and high savings rate. 10
5
China’s consumer lending market (including auto loans, credit 0
cards and consumption loans) reached Rmb9.3tr in 2017, up -5
41% y -o-y, mainly driven by the strong growth in online 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Australia South Korea U.K.
consumer lending. However, total consumer lending represents Spain U.S. France
only 7.7% of total loans in China, vs the US’s 15.8%, Japan China Germany
suggesting that the consumer lending growth outlook is
sustainable given an underpinned market. Source: OECD, DBS Vickers
Based on disposable income per capita of Rmb26,000 in China

Fig 17: China consumer consumption loan market
and 300-400m targeted borrowers who between the ages of
20 and 39 and underserved by banks, we estimate the 25,000 (Rmb bn) 50%
potential online lending market to be Rmb8-10tr, assuming 80-
20,000 40%
100% loan-to-disposable income ratio. As the size of the
online consumer lending market was Rmb1tr in 2017 15,000 30%
(according to Oliver Wyman), only 10-12.5% share of the
10,000 20%
potential market, this would support the industry ’s growth
momentum once regulations are finalised and consolidation is 5,000 10%
completed. - 0%
2015 2016 2017 2018F 2019F 2020F 2021F
Personal consumption loan
Fig 15: Household debt as a % of net disposable income
Auto loan
Credit card
(%)
Total consumption loan YoY (RHS)
250
200 Source: PBOC, Oliver Wyman, DBS Vickers
150
100
Low penetration rate in online consumer lending. With the
popularity of smartphones and e-commerce, as well as
50 consumer consumption upgrade, online consumer lending had
0
been growing rapidly at 131% CAGR in 2015-17. Despite the
drastic development, online consumer lending penetration rate
South Korea
U.K.
China
Spain
Australia
Germany
U.S.
Japan
France
was only 12% of consumer loans (excluding mortgage) in

2017 (vs 7% in 2016), or 3% of total retail loans, compared to
the 4%/1% in the UK/US. Once the consolidation of P2P/online
Source: Bank of International Settlement; DBS Vickers; data as of 2016 consumer lending platforms is completed, we believe the
industry will resume its growth momentum on the back of
strong credit demand from borrowers who are underserved by
banks, and investment demand from investors who are looking
for higher returns.
Under the new regulation, loans without designated usage are

prohibited as regulators discourage funds from being used to
speculate in stocks and for property down payments. Thus,
online consumer lending players shifted from a cash loan
business model to consumption loans. In 2015-17, unsecured
Page 9
Industry Focus
personal loan posted a 114% CAGR, while POS instalment require own capital to be disbursed as loans. Revenue is
jumped at a 222% CAGR. With the focus on consumption derived from fees and commissions charged to borrowers and
scenario, we think online lending players providing instalment investors.
serv ices with the support of e-commerce channels or self-
operated e-commerce platforms, such as HuaBei (Ant Financial), Offline/online model is a hybrid model, where investors are
BaiTiao (J D Financial) and Lexin, will be the key beneficiaries sourced online but loan distribution is performed offline by
and would enjoy a higher growth rate compared to peers. partner institutions. Offline processing can either take place in-
house, such as at Renrendai/Ucredit, or offline processing
Fig 18: China consumer consumption loan market which is done with third-party partners. Another model is to
use offline partners to source borrowers, such as Y irendai,
(Rmb bn) Hexindai and Luf ax, and to conduct credit rating and loan
3,000 300%
facilitation online. The platform’s revenue mainly comes from
2,500 250%
the spread between the interest rates charged to the borrower
2,000 200% and paid to the investor.
886
1,500 711 150%
549 Origination & Distribution is a balance sheet model whose loan
406
1,000 270 100% distribution is performed online and funded internally or via
1,578
74 1,182 1,383 wholesale funding lines, such as A nt Financial, WeBank, JD
500 987 50%
26 795 F inance, Qudian and Lexin, or online consumer finance
173 369
- 0% platforms backed by banks (e.g. M erchants Union Consumer
2015 2016 2017 2018F 2019F 2020F 2021F F inance), and loan originations are subsequently sold directly to
Online POS installment Online unsecured personal loan institutional investors or securitisation (ABS), while some
Unsecured personal loan YoY (RHS) POS installment YoY (RHS) portion of the loan may be retained on the balance sheet.
Revenue is generated from interest rate spread on loans
Source: Oliver Wyman, DBS Vickers
originated using own funds, and gains on sale of loans to
institutional investors or securitisation. Currently only 22
consumer finance licences have been issued (mostly J V with
Fig 19: P2P as a % of consumer lending banks), while 219 Internet micro-loan licences were issued
before the regulator stopped issuing any in Nov ember 2017.
4.5%
4.0% 4.0%
4.0%
69% of P2P online platforms have failed. Competition in P2P
3.5%
3.0% (pure online) is the most severe due to low barriers of entry,
3.0%
2.5%
light capital and no licence requirements, and most P2P
2.0% platforms were established during 2014-16 on the back of
1.5% Internet boom and mobile popularity . The number of P2P
1.0% 0.8% platforms in operation hit the highest at 3,473 in Nov ember
0.5%
0.02% 0.003%
2015. However, with the tightening regulations, 69% of P2P
0.0% platforms had failed by April 2018 due to high default rates
Australia China United Japan Korea, Rep. United
Kingdom States from borrowers amid weak credit risk control, high
P2P as % of consumer lending
borrower/investor acquisition costs and low economies of
scale, which make it impossible to turn in a profit.
Source: WDZJ, Bloomberg; DBS Vickers
O2O and Origination & Distribution models are more
sust ainable. We like the P2P hybrid model (online/offline) as it
Pure online P2P might be the most challenging model involves platforms with a parent company or strategic partners
China online consumer lending can be segregated into three
to support customer base and carry relatively low acquisition
business models, namely P2P (pure online), offline plus online,
and origination & distribution. costs, as well as a longer history of credit data to screen out
likely defaulters and create a better risk-control model.
Peer-to-Peer (pure online) is a platform that facilitates the Platforms under the Origination & Distribution model need to
matching of consumers’ borrowing needs to investors who are apply for a consumer finance licence which creates a high
willing to finance online, such as PPDai and China Rapid barrier to entry, and most of these platforms are backed either
F inance (CRF). The business model is online-only, leveraging by banks or affiliated Internet giants to support low funding
the use of technology and machine learning algorithm to costs and better credit control.
create credit rating and facilitate loans. Low transaction costs
make micro-loans feasible and its capital-light model does not
Page 10
Industry Focus
Fig 20: Market map of consumer finance - by product type
Page 11
Industry Focus
Fig 21: Competitive landscape
100
Hexindai
90
Wedai Tuandai
Henyirong
80
70 Touna Yirendai
Ticket size (Rmb k)
Eloan
60
50
Lufax
40 Silver Valley
Souyidai
30 Renrendai
Dianrong
20 Wolaidai Jimu
Wealth365 Yooli
10 PPMoney Lexin Niwodai Iqianjin
Qudian
0 CRF PPDai
0 5 10 15 20 25 30 35 40
Tenure (month)
Source: WDZJ, Company, DBS Vickers; data as of March 2018
Key factors required to be long-term winners Enlarged loan size and borrower growth are key drivers of top
line. Driven by an increasing number of borrowers and
Sc alability + credit control = profitability. Given a fragmented transaction volume, online lending platforms’ revenue rose
market with ~1,800 P2P operators, Lufax, as a market leader, rapidly at 235%/117% y -o-y on average in 2016/2017.
account for ~7% of market share in terms of loan facilitation Qudian, Lexin, PPDai and China Rapid Finance’s ticket sizes are
amount, while top 100/300 platforms command 70%/81% of relatively small at Rmb2,000-9,000, as they target borrowers
market share. We believe platforms with the ability to secure with no credit history and low monthly salary but high
borrowers at low acquisition costs, abundant funding sources, consumption desire. Qudian and PPDai’s borrower numbers
and strong credit control could sustain in the market, and small jumped 5x/2x y -o-y in 2016/2017 respectively, showing the
platforms with lower economies of scale would gradually fade strongest growth, thanks to the high frequency of borrowing.
out followed by regulation controlled. Meanwhile, Yirendai and Hexindai are focused on borrowers
who have a credit history (such as credit cards), to provide an
There are currently six P2P/micro-finance lending platforms additional big-ticket credit product with a longer borrowing
listed in the US, namely Qudian (QD US), LexinFintech (LX US), tenure of 2-3 years to meet the unfulfilled needs from banks.
PPDai (PPDF US), Yirendai (YRD US), Hexindai (HX US) and
China Rapid Finance (XRF US). Qudian, which adopts a loan However, as regulators have banned small-ticket cash loans
origination and distribution model, provides cash loan, without a specified usage or so-called payday loans, PPDai
merchandise loan and car loan products. Lexin, with a mix of shut down its handy cash loan segment in 1Q18, which
P2P and loan origination/distribut ion model, provides accounted for around 10% of total loans in 2017. Although
instalment loans. PPDai and China Raipd Finance are pure Qudian has a micro-loan license to provide payday loans, the
online P2P platforms which specialise in small-ticket loans. company has adjusted its loan profile to offer slightly larger-
Yirendai and Hexindai, with online/offline P2P platforms ticket loans to better quality borrowers, which increased
backed by their parent companies CreditEase and Hexin Group average credit size to Rmb1,400 and credit term to 5.1 months
respectively, provide big-ticket loans. in 1Q18 from Rmb960 and 2.5 months respectively in 2017.
This suggests that the fast churn of payday loans that drove
We compare their key operating metrics, profitability, and rapid top-line growth in 2016/17 would no longer be the case
credit models to provide a deep analysis on their business onward. We believe Qudian and PPDai would take time to shift
models and identify the key features required to be long-term their business models to provide longer-tenure/bigger-ticket
winners. products given interest rate is capped at 36%. Yirendai should
suffer less from the regulatory ban on payday loans and would
continue to benefit from its first-mover advantage on providing
big-ticket and long-tenure loans.
Page 12
Industry Focus
Fig 22: Strong top-line growth across the board Cont rolling customer acquisition and funding costs would
provide room for profit upside. How do online lending
(RMB m) platforms make a profit? Borrowers pay fees including lender’s
100,000 250%
90,000 return and facilitation fees to the platform and facilitation fees
80,000 200% are mostly booked as upfront fees. Online lending companies
70,000 make profits from facilitation fees after deducting risk reserve
60,000 150% (P2P shifting the reserve to third-party insurance), customer
50,000 acquisition costs and operating expenses. The chart below (fig
40,000 100% 25) illustrates the breakdown for borrowers’ annual percentage
30,000 rate (APR) by each platform. As interest rate is capped at 36%,
20,000 50% platforms can hardly increase their APR to gain extra profits.
10,000
Therefore, increasing the number of repeat customers to save
- 0%
Qudian Lexin Yirendai Ppdai Hexindai CRF
on acquisition costs, and cutting funding costs as well as
operating leverage, has become the focus for margin
2015 2016 2017 2017 YoY (RHS) improvement.
Source: Company, DBS Vickers Fig 25: Borrowers’ APR breakdown

40%
Fig 23: Rapid growth in number of borrowers, especially 35%
for small-ticket loans 30%
25%
(k)
14,000 250%
20%
11,700
12,000 15%
200%
10,000 8,730 10%
8,000 150% 5%
6,000 0%
4,080 4,282 100% Qudian-cash Lexin Yirendai PPdai Hexindai CRF
-5% loan
4,000
50% Lender's return Risk reserve Customer acquisition cost Opex Profits
2,000
649
29
- 0%
Qudian Lexin Yirendai Ppdai Hexindai CRF Source: Company, DBS Vickers estimates; data as of 2017
2015 2016 2017 2017 YoY (RHS)
Most platforms incurred losses in 2014/2015 due to lack of

Source: Company, DBS Vickers operating scale. Yirendai was the first P2P player to post a
profit in 2H14, while Qudian/PPDai and Hexindai turned
profitable in 2016, helped by a strong borrowing base to
Fig 24: Average borrowing size can be separated into increase loan facilitation for the former and shifting from
two groups: large ticket size vs small ticket size secured to unsecured loans for the latter. CRF ’s business model
sticks to very small loans as low as Rmb500 to increase
100 (RMB k)
90
90 retention rate and to grow its ticket size as time goes on, as
80
well as to build up credit data. Thus it has yet to turn in a profit
71
70 due to no scalability .
60
50
40
30
20
9
10 1 3 1.1
0
Qudian Lexin Yirendai Ppdai Hexindai CRF
Average of borrowing size
Source: Company, DBS Vickers
Page 13
Industry Focus
Fig 26: Net margin varies depending on scale Fig 27: High cost-to-income ratio mainly due to S&M
expenses
60% 45%
40% 41% 37% 160%
34%
40% 28% 30%
21% 25% 140%
20% 4%
0% 120%
-3% -8% 100%
-20% -12%
-40% 80%
-37% -42%
-60% -53% 60%
-80% -60%
40%
-100%
-99% 20%
-120%
Qudian Ppdai Lexin Yirendai Hexindai CRF 0%
Qudian Ppdai Lexin Yirendai Hexindai CRF
2015 2016 2017
COGS Loan origination and serving Reserve S&M G&A R&D

St rengthening customer retention rate to reduce acquisition

c osts. Customer acquisition costs are the main expenses in Fig 28: Customer acquisition costs
S&M, accounting for 50-80% of total costs. We compare each
platform’s annualised acquisition costs as a percentage of loan (RMB) 4,700
5,000 6.0%
facilitation and notice that Lexin has the lowest costs, likely 4,500
helped by its e-commerce platform and high repeat borrowing 4,000 4.8%
5.0%
rate of 80%. We believe a scenario-based consumption model 3,500
4.0%
would be easy to increase customers’ stickiness. Qudian’s 3,000
customer acquisition costs are mainly paid to Ant Financial due 2,500 3.0%
2.8%
3.0%
to the strategic partnership that enables Qudian to secure new 2,000
2.1% 2.0%
borrowers through Alipay portal. However, as Ant Financial’s 1,500
1,000
borrowing rate has been capped at 24% since Nov ember 1.1% 1.0%
500 110 99 125 110
2017, Qudian needs to sacrifice 12ppts interest rate (from
- 0.0%
36% APR) when acquiring new borrowers. Thus, it improved Qudian Lexin Yirendai Ppdai CRF
its repeat borrowing rate to 82% in 2017 from 68% a year
ago. Customer acquisition cost Adjusted customer acquisition costs
As Yirendai’s loan products have a tenure of around 2-3 years

Source: Company, DBS Vickers ; adjus ted cus tomer acquisition cos ts as
and are of a large ticket size, the company has a low repeat a % of loan facilitation on annual basis; data as of 2017
customer rate of 9% in 2017 (improving to 23% in 1Q18).
Despite user acquisition cost is Rmb4,700, the annualised
acquisition cost as a percentage of loan facilitation is around Fig 29: Companies providing small-sized loans have a
2.8% for Yirendai. Currently, online/offline loan facilitation high repeat borrowing rate
account for 54%/46% and borrower acquisition cost for
90%
online/offline is ~6% of loan facilitation. As Yirendai aims to 82% 80%
source 100% of its traffic online, the improving credit profile 80%
73%
to enhance approval rate (c. 4%), as well as the increasing 70%
69%
repeat customer rate (c. 23%) would be a better way to lower
60%
acquisition costs and secure stable profit margin.
50%
40%
30%
20%
9%
10%
0%
Qudian Lexin Yirendai Ppdai CRF
Source: Company, DBS Vickers; data as of 2017
Page 14
Industry Focus
Reducing investor returns or funding costs would be another Fig 31: P2P investor return comparison
w ay to secure profits. Funding for P2P platforms are mostly
from individual investors who account for ~100% funding
sources for Hexindai, China Rapid Finance and Yirendai.
However, as some local regulators, such as Shanghai
gov ernment, requires loan facilitation size to be capped at the
J une 2017 level based on retail investors’ investment amount
until it completes its inspection process, we believe P2P
platforms need to secure additional funding sources from the
institutional side. PPDai has indicated that it expects to increase
institutional funding from 15% in 2017 to 20-30% this year.
Av erage investor returns for the P2P industry is around 8.9%,

while funding costs from trust is around 9-10%. This might
exert some pressure on the funding cost side. If online lending
platforms are to secure profits, lowering investor returns would
be an easy way to achieve this. Based on WIND, investor return Source: Company; DBS Vickers
was ~12% in J anuary 2016 but fell to 7-8% in early 2017, and
gradually returned to 9% in 2018 likely due to operators
raising yield to secure funding amid tight liquidity . Fig 32: P2P market rate and investor return
Qudian and Lexin have a micro-finance loan licence which 13 (%)
could use its own funding to distribute loans, as well as are
relatively easy to secure institutional funding from banks or 12
issue public ABS (asset-backed securities). Banks’ funding cost 11
is around 8-9% which would be cheaper than trusts’. Ant
10
F inancial and J D Finance are the key issuers of consumer credit
ABS which offer a yield of 5-6%, well below the average 9
funding cost for P2P of 9-10%. However, as regulators restrict
8
micro-finance lenders from overleveraging by issuing ABS,
which are not included in the calculation of debt-to-capital 7
May-16
May-17
May-18
Nov-17
Nov-16
Jul-16
Jul-17
Sep-17
Sep-16
Jan-16
Mar-16
Jan-18
Mar-18
Jan-17
Mar-17
ratio of 1.5x, the ABS market has shrunk in 2018 with a 0.2%
y -o-y decline and is likely to face continued pressure in the near
term. P2P market rate P2P investor return
Fig 30: Funding sources comparison Source: WIND; DBS Vickers
100%
90% Fig 33: ABS issuance- related to consumer finance
80%
70% 350 350%
(RMB bn)
60% 301.1
300 300%
50%
250%
40% 250
200%
30% 200
20% 150%
150
10% 100%
0% 100 80.2
Qudian Lexin Yirendai Ppdai Hexindai CRF 50%
50 39.1
Institutional funding Retail funding Own funding 19.0 0%
2.5 6.1
0 -50%
2013 2014 2015 2016 2017 2018YTApril
Source: Company; DBS Vickers
ABS issuance amount- related to consumer finance YoY (RHS)
Page 15
Industry Focus
A disruption from data and technology-driven credit model to often, presumably as people borrow an amount that they
assess borrowers’ profiles. As P2P/online consumer lending believe they are able to pay back in the future. Take PPDai
play ers are focused on borrowers without credit history and
as an example, it had 4m unique borrowers in 4Q17 and
underserved by banks, most of the questions asked are how do
they assess credit risk and determine pricing for these 2.27% loans overdue within 15-29 days. Assuming each
“whitelist” borrowers? The highly effective risk management borrowers’ borrowing amount was the same, this suggests
sy stem needs to cover the entire loan lifestyle, from fraud that there were 90K defaults within the quarter. Adding
detection, credit assessment, risk pricing, to post-facilitation this label data into the model, it could further refine the
monitoring and loan collection. Each platform has its own credit scoring process to predict the possibility of defaults.
credit scoring models to generate credit limit and pricing based
on each loan applicant’s unique risk profile. We identify three
- Credit score model continuously evolving through
key points for fintech lending players’ credit model that is
different from the banks. machine learning. Technology disruption always comes
from new entrants. As there are no restrictions on creating
- Attribute data is key to assess credit score. Unlike banks credit scoring models, fintech lending platforms evaluate
who are able to use a borrower’s credit history obtained borrowers’ credit profiles and likelihood of defaults based
from official sources, such as CCRC, or bank account on big data analytics and machine learning capabilities to.
history, online lending players use alternative data, With the massive data collected, millions of borrowing
including basic information such as full name, age, patterns and defaults, online lending platforms are able to
residential address, ID number, place of employment or continue to refine its algorithms to lower the default rate
bank account, and third-party data, such as e-commerce and strengthen risk management.
transactions, social media and Sesame Credit, and
proprietary data through its own platform. The more the The above illustrates that fintech lending players are able to
data collected, the more precise is the credit assessment. refine the credit scoring model to make it more accurate
through gathering relevant attribute data and label data to
- Label data refines the accuracy of credit profile. Good build machine learning models which can evolve as the
credit is easy to acquire, and defaults do not happen that business grows.
Fig 34: Fraud detection, credit scoring, and post facilitation monitoring
Page 16
Industry Focus
Dat a sourcing determines default risks. The sources of user capability of selecting better quality borrowers given higher
data that each platform acquires are quite diversified and these risks of providing large-sized and long-tenure loan.
determine the quality of borrowers. Basically , we could
separate this into two models, one is for small ticket loans of Qudian has the lowest delinquency rate. Online lending players
less than RMB10K and another is large ticket loans above
provide small-sized loans, mostly payday loans or cash loans,
RMB10K but lower than RMB200K.
and rely more on behavioral data obtained from third party
Y irendai has long credit history data supported by parent channels. As those borrowers have basically no credit history,
c ompany . For platforms lending large-sized loans, such as the default risks are relatively higher. The advantage of small
Yirendai and Hexindai, they tend to be more cautious and sized loan lenders is that they are able to quickly accumulate
require historical credit records as one of the criteria. Both of borrowers’ profiles to refine their credit model. Lexin and
them are also supported by parent companies which have PPDai’s delinquency rate within a month was around 0.8%-
offline teams to screen borrowers and transfer loan
1.5%. Charge-off rate for PPDai has been relatively stable at 4-
applications to online facilitation systems, thereby lowering the
probability of fraud. Thus, the delinquency rate within one 5% in 2015-17, while Lexin’s charge-off rate increased from
month is quite low at less than 1%. The charge-off policy is 1.7% in 2016 to 3.6% in 2017, likely impacted by the fast
stricter and applies to loans overdue for three months, growth of personal installment loans with a tenure of around
compared to six months for small-sized loan lenders. Yirendai’s nine months which had a lagged effect in that year. Qudian
charge-off rate for a lifetime loan, around 30 months, would has a low delinquency rate and charge-off rate compared to
be around 9-10%. By annualized, the default rate would be peers, as it largely relies on Zhima Credit for risk pricing which
around 3-4%, lower than small-sized loan lenders, such as
may offer the most reliable credit data apart from PBOC’s
PPDai. Yirendai had upgraded its risk grid to five grades from
four to deliver more precise and accurate credit assessment of credit bureau. However, this could also be because the fast
loan application in 2Q17 which helps its credit quality growth of value of loans outstanding may somehow have
improved in late April 2018 after the industry credit crunch in masked the default rate.
Dec 2017. With parent company, CreditEase, supported 12-
y ear historical credit data, we believe Yirendai has more
Fig 35: Credit model, delinquency rate, and charge-off comparison

Qudia n Le xin Yire nda i PPDa i He xinda i CRF
Prima ry s ource - Zhima credit - Proprietary - CreditEase - Proprietary - Hexin Group - Behavioral data
of us e r da ta - Proprietary behavioral data at database behavioral data at database from third party
behavioral data at loan application - PBOC credit loan application - PBOC credit channel partners.
loan application - Behavioral data record - Behavioral data record - Actual credit
- Actual credit from third party - Proprietary from third party - Proprietary data for repeat
data for repeat channel partners behavioral data at channel partners behavioral data at customers
customers - Actual credit loan application - Actual credit loan application
data for repeat data for repeat
customers customers
Cre dit mode l Two credit Hawkeye- 7 risk Yiren score- with Magic Mirror In-house credit CRF score, 1 to 7
assessment levels, A to F. five segments- Model- with eight scoring 97-230+ categories, rougly
models - A score Grade I to V segments to A-E grade. 25% comparable FICO
for new borrowers approval rate. score
and B score for
repeat customers
De linque ncy <0.9% (M1+) 1.55% (1-29 days) 0.8% (15-29 days) 2.27% (15- 0.09% (15- 5.8% (1-89days)
ra te 29days) 29days)
De finition of Overdue for 1-180 Overdue for 1-180 Overdue for 15-89 Overdue for 15- Overdue for 15-89 Overdue for 1-90
de linque nt days days days 179 days days days
loa ns
Cha rge -off ra te 0.3% in 2015 1.25% in 2015 9.3% in 2015 4.3% in 2015 3.09% in 2017 13.6% in 2017
0.16% in 2016 1.73% in 2016 5.9% in 2016 4.94% in 2016
0.24% in 2017 3.59% in 2017 1.1% in 2017 4.14% in 2017
Cha rge -off Loans overdue for Loans overdue for Loans overdue for Loans overdue for Loans overdue for Loans overdue for
policie s 6 months 6 months 3 months 6 months 3 months 3 months
Source: Company; DBS Vickers; Delinquency rate is defined as the past due loans divided by loan outstanding, before charge-offs ; data as of 2017
Page 17
Industry Focus
L ik e-credit cycle happened in Dec 2017 but fading out in Fig 37: Taiwan credit card NPL once peaked at 7.5% in
1Q18. In Dec 2017, the P2P market experienced a like-credit 2003
risk bubble due to some borrowers deliberately not paying
back loans instead of being unable to repay, as they believed 8.0%
they had borrowed from illegal P2P platforms and those 7.0%
platforms would be shut down based on regulation 6.0%
requirements. This trend was supported by PPDai’s delinquency 5.0%
rate within a month that jumped from 0.89% in 3Q17 to
4.0%
2.27% in 4Q17. According to our checks, some of the very
small P2P platforms saw their delinquency rate for the first day 3.0%
ov erdue loan after the regulation announcement jump to 50- 2.0%

60%, which caused a liquidity crunch, and the number of 1.0%
troubled P2P platforms rose to 73 in 1Q18, from 38 in 4Q17. 0.0%
But the crisis was just like a tsunami, coming fast and fading
2000
2002
2003
2004
2005
2007
2008
2009
2011
2012
2013
2014
2016
2017
2001
2006
2010
2015
quickly too. This kind of move would also hurt the borrower’s
own credit rating. PPDai’s one-month delinquency rate Taiwan credit card NPL
returned to 0.87% in 1Q18.
Source: Central Bank of Taiwan; DBS Vickers
Hist orically no consumer credit cycle has taken place. Given its
unique policy strategy and banks only serv ing the top of the
py ramid group, China hasn’t experienced any consumer credit Fig 38: US consumer loan/credit card NPL was worse at
crisis. China’s credit card non-performing loans (NPL) ratio has 4.6%/6.3% in 2009
been quite stable at the 2% range and the 6-month overdue
ratio was at 1.2-1.5%. Besides that, China banks’ competition (%)
7.0
in retail banking is not as fierce as seen in other countries that
6.0
had experienced a personal credit bubble, such as Taiwan in
2003-2005 and the USA in 2008-2009. Hence, it is hard to 5.0
predict the NPL level if China had a consumer credit bubble. 4.0
We think Taiwan and the USA could be good cases as their 3.0
consumer NPL had hit a peak of 7.5%/6.3% during the credit
2.0
bubble. A default of 10% would be the worst case in our view.
There are 1.8K P2P lenders in the market currently , but only 1.0
300-500 players may get approval by regulators and the rest 0.0
would gradually exit, and this is a key item for investors to
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2000
monitor regarding credit risks. But as the previous like-credit

cy cle happened in Dec 2017, we believe China regulators US consumer loan NPL US credit card NPL
would be more cautious on dealing with exit mechanisms
instead of causing market panic. Source: Federal Reserve; DBS Vickers
Fig 36: China credit card NPL and +6M overdue ratio
(%)
3.0
2.5
2.0
1.5
1.0
0.5
-
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
China credit card NPL ratio >6 months overdue credit card ratio
Page 18
Industry Focus
Fig 39: Listed P2P players - key comparisons

Qudian Lexin Yirendai PPDai Hexindai CRF
Code QD US LX US YRD US PPDF US HX US XRF US
Market cap (US$) 3.3B 2.7B 1.9B 2.0B 0.5B 0.3B
Model B2P B2P+P2P P2P P2P P2P P2P
Installment purchase
Standard loan
Cash loan loan Consumption loan
Product Consumption loan Consumption loan Consumption loan
Merchandise loan Personal installment Lifestyle loan
Other loan
plans
27.1% offline referred 76% borrowers were
100% online, new by CreditEase (5% referred from Hexin
Customer source customers mostly 100% online referred fee charge), 100% online Group (6% referral 100% online
referred by Alipay and others from fee paid by
online borrowers); 24%
Institution
Individual investor
Loan resources Institution, own fund Individual investor Individual investor Individual investor Individual investor
85%, trust 15%
ABS
Prime customers age
Target customers age Target borrowers age Target borrowers age Target custtomers age
at 25-35 year-old with
at 18-35 year-old with Educated young at 20-40 year-old, between 31-45, with between 23-29 year-
RMB5-8K monthly
Target borrowers salary around RMB4- adults age at 18-36 living in tier 3 to 4 credit history in tier 2- old, well educated,
income, need credit
5K per month and no year-old cities and monthly 3 cities and monthly works in private sector
card information to
credit record income of RMB5K-6K income of RMB3K-7K and price sensitive
apply for loans
Active borrowers
11,700 4,080.0 649.2 8,730.0 32.4 4,302.2
(k)
Loan origination
88,906 47,700 41,406 65,614 3,318 21,450
(RMB m)
Loan outstanding
11,186 19,300 40,616 19,129 8,273 6,695
(RMB m)
RMB1K for cash loan, RMB102K for
Avg loan size
RMB1.5K for RMB9K Standard Loan, RMB3K RMB20-200K RMB1.1K
(RMB)
merchandise loan RMB45K for FastTrack
Cash loan- 2 months;
12-36 months for
Avg loan duration merchandise loan- 8 9.53 months 30 months 7 months 3 months
credit loans
months
Cash loan- 36%;
APR 22.8% 24%-36%; avg 33% 25%-30% 28.0% 19%-27%
merchandise loan
Repeat customer
81.9% 80.0% 9% 69% N/A 73%
ratio
53% from retail Investors age 35-45,
85% retail investors, 100% retail investors; Mostly from retail
100% from investors, and 47% mostly live in tier 1
Investors type 15% institution white-collar middle high net wealth
institutional funding from institutional cities, total assets
investors (trust) class in tier 1-2 cities individuals
funding partners between RMB600K-
Investors (k) N/A 171.0 592.6 564.5 164.9 44.4
5.5%-10.4% based on 10.4% consumption
Investment return N/A investment length 1- 10%-12% 9%-10% 11% loan; 11.3% lifestyle
24 months loan
Funding cost from 8.3% from
Funding costs banks 8-9%, trust 9- institutional partners, N/A N/A N/A N/A
10% 7.8% from own app
Delinquency rate 2% (M6+); 1.14%
<0.9% (M1+) ~3% (M3+) 4.14% (M3+) 3.09% (M3+) 2% (M3+)
by vintage (M3+)
Assurance
program (transfer 8% of on-balance 4.5% of loan 9% of loan ~5% of loan 2.4% of loan
No
from P2P to 3rd sheet loan originations originations origination origination
party assurance)
Depository bank N/A China Guangfa Bank China Guangfa Bank China Merchants Jiangxi Bank Bank of Shanghai
Third-party
N/A Sino Guarantee PICC Sino Guarantee Changan Insurance No
assurance
RMB110 (calculated
Customer RMB4K from online, RMB120-130 (RMB100 RMB735 (investor
by Alipay RMB99 RMB110
acquisition cost RMB5.6K from offline in 3Q17) acqusition cost)
marketing/new
Wealth Yi Ren Wealth
N/A Juzi Licai N/A N/A N/A
management Management
Major Xiaobo An (Hexin
Ant Financial 11.6% JD 11% CreditEase 85% N/A N/A
shareholder Group) 66.68%
Source: Company; DBS Vickers; data as of 2017
Page 19
Industry Focus
Insurtech – Disruptor to P&C’s homogenous segment small base, undoubtedly the scenario-based Insurtech players
are grabbing market shares away from the traditional
China’s online insurance market can be classified into three
insurance players and third-party online platforms, and we
main segments, namely (i) Online distribution segment, (ii)
expect this trend to continue in the foreseeable future.
Technology -enabled upgrade segment, and (iii) Ecosystem-
oriented innovation segment, according to Oliver Wyman Fig 41: China’s online distribution
(figure 40). Participants in the online insurance market include
(a) traditional insurers using online platform as a distribution Rmb bn
channel, (b) third party online open platforms, and (c) online 4,000 10%
3,500 9%
scenario-based insurers. Growth in the overall online insurance 8%
market is expected to reach 31% CAGR during 2016-21F, with 3,000
7%
2,500
the strongest growth potential from the technology -enabled 6%
2,000 5%
upgrades and ecosystem-oriented innovation segments, which
1,500 4%
is expected to grow at 41% and 62% CAGR, respectiv ely, 3%
1,000
during the same period. 2%
500 1%
0 0%
Fig 40: China’s online insurance market size 2012 2013 2014 2015 2016 2017
Total online premium Total insurance premium
Rmb bn Penetration rate (%) -RHS
1500
223 Source: Insurance Association of China, DBS Vickers

1200
62% Cagr 229
900
600 41% Cagr Fig 42: China’s online/total insurance premium

20 961
300 41 Rmb m
302 2000 250%

26% Cagr 1800
0
1600 200%
2016 2021F
1400
Online distribution Technology enabled upgrade Ecosystem oriented innovation 1200 150%
1000
800 100%
Source: Oliver Wyman, DBS Vickers 600
400 50%
The growth in online distribution segment may be more 200
0 0%
v ulnerable to policy risk as “online” is purely treated as an
Aug-15
Aug-16
Aug-17
Feb-15
Feb-16
Feb-17
Feb-18
Nov-14
Nov-15
Nov-16
Nov-17
May-15
May-16
May-17
alternative channel and could be subject to tightening

measures to limit the sales of universal/investment insurance
Total pure P&C insurer monthly premium YoY (%) - RHS
products by channel players such as that which had led to a
premium growth slowdown during 2016-17 (figure 41).
Source: Insurance Association of China, DBS Vickers
Premium growth among online scenario-based insurers
(technology -enable and ecosystem-oriented segment) remains
robust with a rosy outlook. Scenario-base setting and mass computing are key strengths
We believe the key difference between Insurtech and the
Insurtech grabbing shares away from traditional players traditional insurance company lies in its core business model.
Using data from four licensed Insurtech players, namely Zhong For traditional life insurers, the key is to leverage its book to
An, TK.cn (non-listed), 1 An.com (non-listed) and Answern create balance sheet leverage by accumulating in-force policies,
(non-listed), as proxies to technology -enabled and ecosystem- and its profitability is driven by the way it manages assets and
oriented segments, in 2017, the aggregate premium of these liabilities, in-force blocks, and the duration. For traditional P&C
four players was Rmb9.2tn, and represented only 0.3% of the insurers, the key is to leverage its book to create underwriting
total insurance market, but growth was robust at 111% y -o-y leverage and its profitability is driven by its ability to manage
v ersus market’s 18% (figure 42). In 1Q18, scenario-based policy holders’ risk profile (probability to make insurance
Insurtech premium growth continued to surge, jumping 89% claims), its assets and liabilities, and operating efficiency.
y -o-y , with premiums from leading player Zhong An up 115%
y -o-y (figure 43) versus the 11% y -o-y decline in the market, For Insurtech, the core business model is fairly similar to P&C
which was impacted by weak open-year sales. Despite the still insurers i.e. leveraging its book to create underwriting
Page 20
Industry Focus
lev erage, however, the key factor driving its underwriting expansion in its customer base has provided Zhong An with a
lev erage is its ability to utilise advanced data computing great opportunity to utilise, cross-sell, and transform the vast
technology (i.e. big data, cloud, blockchain, and AI) to conduct consumer data into premium growth in the future. In addition,
mass consumer data analysis and create a “scenario-based” the more the consumer data in possession, the better it will be
setting in order to identify the trigger for insurance demand. In able to understand the profile of the consumer and this is
other words, the ability to create “scenario-based” settings important to minimise risk and offer dynamic pricing (risker
and mass data computing capability will decide how fast it can profile will be charged more). After all, in the “fintech” world,
create underwriting leverage to drive profitability. it’s all about consumer data.
Fig 44: China’s online/total insurance premium

Fig 43: China’s online/total insurance premium
(m)
Rmb m 900
1000 140% 800
700
120%
800 600
100% 500
600 80% 400
400 60% 300
40% 200
200 100
20%
0
0 0%
Health
Auto
Taobow mobile
Zhong An
consumption
Consumer
Travel
China Internet
customer
finance
Aug-15
Aug-16
Aug-17
Feb-15
Feb-16
Feb-17
Feb-18
Nov-14
Nov-15
Nov-16
Nov-17
May-15
May-16
May-17
Lifestyle
MAU
user
Zhong An insurance monthly premium YoY (%) - RHS
Source: Insurance association of China, DBS Vickers Source: Company data, DBS Vickers
L ev eraging on online ecosystems in race for consumer data

While China’s four Insurtech players may have different origins Fig 45: China’s online/total insurance premium
- Zhong An is the combination of internet giants and major Ye a r 2014 2015 2016 2017
insurer including Tencent (600 HK, BUY), Ant Financial (non- GWP per customer (Rmb) 4.0 7.3 9.9 12.6
listed) and Ping An (2318 HK, BUY), while Taikang Online is an Zhong An's customer (m)* 199 313 344 432
extension of Taikang Life Insurance (non-listed), and E-An and China internet total user (m) 649 688 731 772
Conversion rate (%) 31% 45% 47% 56%
Answern started from the combination of several internet
Taobow mobile MAU (m) 393 443 493 580
shareholders - these Insurtech players have one thing in
Conversion rate (%) 51% 71% 70% 74%
common, which is to grow its initial business footprint from
existing online ecosystems (figure 46), such as Taobow, Ctrip, Note: * Zhong An’s 2015 and 2016 cus tomer number based on DBSV
and Wechat ecosystem. forecast. MAU = monthly active us er.
Source: Company data, DBS Vickers
We believe leveraging on existing online ecosystem platforms
for Insurtech players is an efficient way to obtain mass
consumer data and increase customer solicitation, especially at
the initial phase of business development. Taking Zhong An for
example, its number of customers reached 432m in 2017.
Breaking this down into its five ecosystems, customer numbers
reached 380m/9m/40m/1m/39m for Lifestyle consumption/
Consumer finance/Health/Auto/Travel ecosystems, respectively.
If we make a simple comparison between Zhong An’s
customer base to number of Taobow’s monthly active user
(MAU) and number of internet users in China, the customer
conversion rate stood at 74% and 56%, respectively,
compared to 51% and 31% three years ago. Obviously, Zhong
An made a big leap in customer acquisition during these years.
We believe such rapid consumer solicitation speed and
Page 21
Industry Focus
Fig 46: China’s four licensed scenario-based online insurers - product features and major partners
Online ins urer Zhong An TK.cn 1an.com Answern

Majo r pro duct o ffering
E-commerce Shipping Return Policy,
Lifestyle Account Safety Policy, Phone
Shipping Return Policy n.a. Online Payment Safety Policy
consumption Accident Policy, Phone Screen Crack
and Accident Policy
Baobei Open Platform,
Consumer
Mashanghua, Quick Loan Policy, n.a. n.a. n.a.
finance
Hua Bao
Critical Illness Health Policy,
Personal Clinic Policy, Walk to
Personal Clinic Policy, Critical Illness Personal Clinic Policy, Registration
Wellness Policy, Diabetes Policy, Answern Health Insurance -
Health Policy, High-end Personal Clinic Service Policy, Huanlebao Accident
Colorectal Cancer Policy, Children Answern No.1
Reimbursement Policy, Female Policy
Comprehensive Policy
Exclusive Illness Policy
Auto Damage Policy, Third Party
Liability Policy, Car Theft Policy,
Auto insurance Baobiao Auto Insurance n.a. Answern Auto Insurance
Driver/Passenger Seat Liability
Policy, Selected Repair Poicy
Flight Accident and delay policy, Full-year Comprehensive Travel
Jijiubao, Train Accident Policy, Hotel Offshore VISA Travel Policy, Policy, Jinsuoyijia Family P&C Policy, Skiing Accident Policy, Travel
Travel
Cancellation Policy, Flight Ticket Onshore Travel Protection Policy Huanlebao Accident Policy, Accident Policy
Change Policy Compound Accident Policy
Xilinmen Family P&C Policy, Property

Modulized technology service
All Risk Policy, Employer Liability
includes S, X, T, F, and H, 5 product Bank Card Safety Policy, Family P&C
Policy, Cargo Freight Policy, Brightful Family P&C Insurance, Rainy day
lines to serve customers in inclusive Policy (theft, fire, explosion,
Others Life Annuities Policy (Child), Long- insurance, Bank/Credit Card Safety
finance, consumer finance, thunder, water pipe), Motor Driver
term Regular Life Policy, Elderly Policy, Household Robbery Policy
insurance, information security and Accident Policy
Annuities/Pensions , Investment-link
medical/healthcare industry
policy
Techno lo gical applicat io n

Image recognition, smart learning, Distribution channels, product
AI n.a. n.a.
machine learning, anti-fraud design, operational management
Automatic claims settlement,
Block chain clearing and settlement, n.a. n.a. n.a.
identification verification, risk
Front-end (underwriting, claims
Distribution channels, product
Cloud computing settlement, credit ratings), back-end n.a. n.a.
design, operational management
(claims settlement, capital reserve,
Insurance pricing, credit analysis and Distribution channels, product
Big data n.a. n.a.
rating, precision marketing design, operational management
Speed series, smart series, block
Web 3.0 n.a. n.a. n.a.
chain infrastructure
Majo r part ners
Taobow, Chuchujie, Weidian, Bailian Insurance Platform, Qing
Xiaomi, Wechat, Fenqile, Aiyoumi, Xinyoulingxi Internet Finance, Song Chou, Jupaopen, Xiaomi,
CITIC Credit Card center, DX Clinics,
Online and offline CYDC.com, Didi, Alitrip, Ctrip, Qunar, Kalaibao, Jubaopen, Baobei, Bundwealth, Shuidihuzhu, Zhongmin
Yi Hao Pharmacy, Xinjingbao,
partners Qunar, LY.com, Ping An, Chang An Formax, Zhanggui, Wukongbao, Insurance, OK Bao Shang Cheng,
Baoduoduo, Didi, Ctrip, Tuniu
Auto, China Eastern Airline, Air Baiquanbao Shijilongteng, eLong, Suning
China Insurance
Page 22
Industry Focus
A means to an end – higher efficiency despite the cost

The flip side of relying on existing online ecosystems to grow Fig 48: China’s online/total insurance premium
premiums and increase customer solicitation is that Insutech
play ers will required to pay both handling charges and 140%
commission, and serv ice fees to their respective ecosystem 120%

partners. As an ecosystem platform usually adopts an “open-
100%
for-all” attitude, which implies the relationship with Insurtechs
is non-exclusive and has to be renewed periodically , which 80%
attracts competition especially from newcomers and the cost is 60%

usually high. 40%
20%
F or Zhong An, the handling charge/commission fees and
technology service fees which the Insurtech needs to pay its 0%
2014 2015 2016 2017
ecosystem partners reached Rmb603m and Rmb1,585m
Loss ratio Expense ratio Combined ratio
respectively in 2017 (figure 47), and accounted for 13% and
34% of net premium earned for the year. The technical service Source: Company data, DBS Vickers
fees formed 55% of its total SG&A expense. This has put
pressure on its expense ratio, which hit 74% during the same
period. This pushed its combined ratio to 133% (figure 48). Phase II – M igrating to “Online” to “Offline’ model
Recent trends suggest that Insurtechs are increasingly
migrating from a pure online “ecosystem-driven” insurance
Fig 47: China’s online/total insurance premium company, to “Online” to “Offline” (O2O) integrated business
model especially in P&C auto insurance segment and health
Item 2014 2015 2016 2017
insurance segment. We believe strategically and economically,
Handling c harge and c ommis s ion (Rmb m)
this migration makes sense:
Lifestyle consumption (1) (1) 0 0
Consumer finance 0 0 0 0
Health - 1 14 96 1. To enlarge the addressable market: China’s auto insurance
Auto - - 0 9 and health insurance market reached Rmb738bn and
Travel 18 91 240 316 Rmb439bn in 2017, respectively (assuming 75% of
Others (0) 9 33 181 China’s P&C insurance is from auto insurance, figure 49).
Sub-total 16 101 287 603 This combined is six times and twelve times the respective
Tec hnic al s ervic e fee (Rmb m) market sizes of existing online insurance and “ecosystem-
Lifestyle consumption 67 278 281 368 oriented“+”technology enable” segments.
Consumer finance - 100 66 124
Health - - 27 141
2. Homogenous and short duration product segment easier
Auto - - 5 22
to penetrate: Auto insurance products are highly
Travel 25 190 633 848
homogenous and the duration is usually 1 year (drivers
Others - 2 15 82
Sub-total 92 570 1,027 1,585
renew every year). Given the lack of differentiating factors,
Total SG&A (Rmb m) 236 1,030 1,754 2,886 it will be easier for new market entrants, especially online
Service fee % of SG&A 39% 55% 59% 55% Insurtechs, to penetrate and grab market share.
Expens e ratio (%) 35% 58% 63% 74%
3. Diversifying away from the high concentration of its
ecosystem partner: While expanding into new business
Despite the hefty expense, we believe this is the most efficient segments may also incur higher initial service fees and
albeit costly solution to acquire mass consumer data during SG&A expenses, longer-term, we believe this is moving
Zhong An’s initial phase of business development. The cost is strategically in the right direction, as risk of overly rely ing
likely to continue to rise in the near term as it expands into on certain ecosystem partners to grow scale comes with
other new ecosystem platforms and new business areas. But, high service fees and high concentration risk.
as its premium scale gets larger, and stronger underwriting
lev erage starts to kick in, we believe Zhong An will have the
benefit of economies of scale filtering in to help lower
expenses.
Page 23
Industry Focus
Fig 49: China’s online/total insurance premium Fig 50: Insurtech initiatives in auto insurance market
I nsurt e ch Z ho ng An T a ika ng 1 An Answe rn
Rmb
Date of
800 120%
license Sep-15 Dec-16 Sep-16 In progress
700 100% obtained
600 80% Nation-wide
500 Yes Yes No No
60% license
400 Auto
40%
300 premium 854 800 1,480 n.a.
200 20%
(Rmb m)
100 0% Jointly Established Self-operate
0 -20% launched flat hierarcy model.
2000
2001
2002
2003
2004
2009
2010
2011
2012
2013
2014
2015
2016
2017
2005
2006
2007
2008
Baobiao Auto structure for Established

Insurance centralized offline
Health insurance Auto insurance
with Ping An management service
P&C in July . Establish 3 centre in 35
Source: CIRC, DBS Vickers Business
2015. Zhong pilot run local provinces to n.a.
model
An is service handle
responsible centre in online
Grabbing a bite of the big homogenous auto insurance pie for Online Beijing, customers'
Among the four-licensed online Insurtechs, Zhong An was the sales & Hubei and claim
first to obtain the auto insurance licence back in 3Q15, while marketing, Shangdong requirements
Answern and Taikang Online also obtained the licence in 3Q16 while Ping An region in , and to
and 4Q16, respectively. Each Insurtech has a slightly different
Source: Insurance Association of China, DBS Vickers
auto insurance ecosystem and claim service model : (i) Zhong
An has teamed up with Ping An P&C and the former focuses Z hong An to take 2%/1% P&C/auto insurance share in 2020F
on ”Online” sales service while the latter on “Offline” claim Specifically, Zhong An has entered into an amended
serv ices, and (ii) Taikang Online and 1 An are focusing on the cooperation agreement with its auto insurance partner, Ping
self-established service chain ecosystem while establishing an An P&C, to raise the premiums and claims payment share split
offline regional service center to fulfill and accommodate claim to 50%/50% starting from J anuary 1, 2018, from 30%/70%
serv ices (figure 50). One common feature is to utilise their previously. In the amended agreement, Zhong An also
respective mass data acquisition/analytic capabilities to identify provided its revised annual forecast of auto insurance premium
car drivers’ behavior/habits in order to better understand that it targets to receive in 2018F and 2019F. By taking into
driv ers’ profile, with an aim to provide different scenario-based account its expansion from 6 to 18 regions and that each new
products, dynamic pricing, and to minimize risk. region will require 4-5 months to set up, and assuming 15%
m-o-m premium growth in 2018F, and 6% m-o-m growth in
As auto insurance products are highly homogeneous with 2019F, the estimated annual cap is estimated to reach
product duration usually of 1 year, and lack differentiating Rmb1,960m and Rmb6,000m in 2018F and 2019F, respectively
factors, P&C insurers usually compete on price and rebates to (based on 50%/50% split).
auto dealers/OEMs, while their profitability will depend very
much on their ability to manage risk. That said, we believe the While the annual cap estimate is only a guideline rather than
segment is vulnerable to new market entrants jumping in to an official guidance, we conservatively estimate Zhong An’s
grab market share, especially from Insurtech players given its auto premium to reach Rmb1.4bn and Rmb4.7bn in 2018-19F,
key strength is to create different scenario-based settings to respectively. This suggests that premium from its auto
trigger different demand, its disruption to channel boundaries ecosystem is estimated to account for 15% and 30% of total
and ability to manage risk. Zhong An, Taiking Online and premiums during the same period, serving as one of the main
Answern have started generating auto insurance premium in premium growth drivers in the coming years. Assuming China’s
2017. Despite the small scale currently , we believe the growth P&C insurance market grows at 12% CAGR in the coming two
potential is substantial. years, and 75% of the P&C market is auto insurance, our
estimate suggests Zhong An will be able to grab 2% and 1%
of the P&C and auto insurance market share respectively by
th
2020F. This will rank Zhong An as 9 or 10th among China’s
domestic P&C players in terms of market share, a few notches
th
up from 17 in 2017. Undoubtedly, we should not ignore its
astonishing premium growth potential.
Page 24
Industry Focus
Insurtech’s health insurance gaining attraction Fig 51: Zhong An’s health insurance ecosystem
In addition to auto insurance, health insurance is another
segment where Insurtechs are increasingly tapping into. By
taking advantage of Insurtech’s st rength in online channel sales, Health Prediction
direct access to target customers, favorable scenario-based Unfold the secret of genes and
customize testing insurance Genetic health tests
setting to cater to diversified demand, growth in health
insurance premium has also been phenomenal. For Zhong An,
Health Management
its health insurance premium has grown by 5-fold to reach Intelligent pricing with modern
technology
Rmb1.2bn in 2017, and accounted for 20% of total premiums Management platform of Walk to Health
sold in that year (up from 7% in 2016); this represented 0.3% chronic diseases Policy
of total health insurance market share. Health Insurance

Personal Clinic Policy products and
group insurance service Customize health insurance for different
The underlying logic of Zhong An’s health econsystem is to groups. Meet all basic needs of health
insurance with one single product
segregate the market into three segments (figure 51): (i) Health
Prediction – aiming for the high net worth population to Source: Company data, DBS Vickers
provide customised genetic tests, (ii) Health Management –
aiming at China’s rising middle class population who are more
health aware now, and (iii) Health Insurance – targeting at Exporting technology know-how is an additional long term
general public to fulfill their customised needs, via its flagship driv er
product “Personal Clinic Policy”. Zhong An established Zhong An Technology in J uly 2016, a
fully owned subsidiary (figure 52), which aims to export its
We see the main distinction between health insurance advanced technology knowhow in five areas - Insurtech (S-
products offered by Insurtechs as compared to health series), Intelligent data application (X-series), blockchain
insurance products from traditional lifers are (i) Product applications (T-series), integrated solutions for financial service
duration usually one year, (ii) Scenario-based and customised industry (F -series), and data interconnection and
insurance solutions such as providing full medical coverage intercommunicat ion for health and medical service (H-series).
with an emphasis on cover on critical illnesses such as cancer, We believe such a business model is a clever way to accelerate
and (iii) Customised products for all age groups (youth to the monetisation of its technology knowhow, to provide
elderly ), all income groups (high net worth and general public), another interface to continue to acquire consumer data in
and for all genders (e.g. customised female health insurance various fields, and to further diversify away from its reliance on
for specific cancers and critical illness). major online ecosystem partners.
Fig 52: Regulations and policies on China’s online insurance segment
Produc t line S- s eries X - s eries T- s eries F- s eries H- s eries

Technology
Insurtech Intelligent data Blockchain Financial Healthcare
/segment
Realize interconnection and
Provide technology
Aims to establish two core intercommunication of
products and solutions Risk management, model
Based on self-developed platform, i.e. Fund and industry data by connecting
Product feature for the deficiencies in all building, intelligent marketing
"Annchain". Asset Platform and Credit medical and healthcare
respects of insurance and traffic analysis
Cloud system institutions and commercial
business
insurance companies
Mainly covers e- Apply in various industry
Integrated solution for credit
commerce sales Intelligent risk control, application scenario, i.e. Analysis and consolidation
business to support
scenarios, customer intelligent marketing, anti-counterfeit traceability, on medical data to explore
Product offering business development in
service scenarios and intelligent data scenario blockchain operations, data added value and ensure data
customer finance and
channel development application security storage, health security
industry chain finance
scenarios insurance serivce
200 contracted clients, Promote digital operation of
10 contracted clients covering Internet financial Several contracted clients medical and healthcare
Approximately 16
Customer mainly insurance companies, insurance mainly consumer finance institution to improve
contracted clients
company companies, business companies and SME banks customers' medical service
consulting companies experience
Source: CIRC, State Council of PRC, DBS Vickers
Page 25
Industry Focus
In 2017, revenue from Zhong An Technology (booked under

“other income” in Zhong An’s P&L) reached Rmb41m, and we Fig 53: Zhong An and China P&Cs’ underwriting leverage
expect it to grow at least 8-fold by 2020F.
(x)
Underwriting leverage = profitability 4.0
3.5
We believe Insurtech’s business model is more similar to P&C 3.5
3.1
2.9
insurers rather than life insurers. In the case of P&C insurers, it 3.0 2.6
is more about generating underwriting leverage whereas life 2.5
insurers’ is more about generating balance sheet leverage 2.0
(lengthier product duration). For China P&Cs, the average 1.5
operating leverage is at 3x (figure 53), while for balance sheet 1.0
China P&Cs and lifers’, the average leverage is at 3.1x and 0.5 0.3
14.1x, respectively (figure 54). For Zhong An, given its business 0.0
remains at an initial developing stage, the underwriting Zhong An PICC P&C CPIC P&C Ping An P&C China Taiping
P&C
lev erage is at 0.3x as of 2017. As Zhong An has yet to achieve
sufficient underwriting leverage and economies of scale, it is Source: Company data, DBS Vickers
understandable that the insurtech will record underwriting
losses in the coming years, and its profitability will purely
depend on its investment return performance. Fig 54: Zhong An and China insurers’ leverage ratio
However, we consider the greatest potential for Insurtechs, (x) 20.0

20.0
which is similar to B2C e-commerce, is its strong ability to 18.0
15.9
rapidly grow its gross written premium (similar to GMV for e- 16.0
commerce). Upon achieving sufficient underwriting leverage, 14.0 12.8
we believe its profitability growth will then come through. For 12.0
10.0
Zhong An, as the Insurtech is still at the phase of accumulating 7.9
8.0
underwriting leverage, coupled with its strategic move to 6.0
expand into auto, health and consumer finance business (O2O 4.0 2.9 3.1 3.1 3.3
integration) where product duration is lengthier than its 2.0 0.2

0.0
prev ious focus on consumer lifestyle and travel ecosystem, it Zhong PICC CPIC Ping An China China Ping An China CPIC
would recognise higher unearned premium reserves. Hence, An P&C P&C P&C Taiping Life Life Taiping Life
P&C Life
we expect it will still suffer from underwriting losses in 2018-
19F . Nonetheless, as it continues to grow its scale, it would Source: Company data, DBS Vickers
start to generate underwriting profit by 2020F, with
underwriting leverage estimated to reach 1.4x. Once it has
achieved a scale to reap sufficient economies of
scale, its profitability is likely to accelerate going forward.
Fig 55: Zhong An underwriting profit/(loss) estimate
Year (Rmb m) 2014 2015 2016 2017 2018F 2019F 2020F

Gross written premium 794 2,283 3,408 5,954 9,538 15,682 24,214
Less: Premiums ceded to reinsurers (7) (10) (40) (249) (382) (627) (969)
Net written premiums 787 2,273 3,368 5,705 9,157 15,055 23,245
Less: Net change in unearned premium reserves (75) (351) (143) (1,091) (2,198) (3,312) (4,765)
Net premiums earned 712 1,921 3,225 4,614 6,959 11,743 18,480
Net claims incurred (523) (1,316) (1,355) (2,746) (3,280) (4,394) (5,897)
Handling charges and commissions (16) (101) (287) (603) (1,041) (1,716) (2,550)
General and administrative expenses (236) (1,030) (1,754) (2,886) (4,325) (6,752) (9,924)
Net c laims and expens e (775) (2,447) (3,397) (6,234) (8,646) (12,862) (18,371)
Underwriting operating profit/(los s ) (63) (525) (171) (1,620) (1,687) (1,119) 109
Page 26
Industry Focus
Fig 56: Regulations and policies on China’s online insurance segment
Co mpany name Zho ng An Taikang.cn Yi An P&C An Xin P&C PI CC P&C Ping An P&C CPI C P&C Taiping P&C
Logo
Business model Insurtech Insurtech Insurtech Insurtech Traditional P&C Traditional P&C Traditional P&C Traditional P&C
Establsihed date Oct-13 Nov-15 Feb-16 Jun-15 Jul-03 2002 2001 Dec-01
Market share
0.6%/(17) 0.2%/(33) 0.1%/(44) 0.1%/(45) 33.8%/(1) 20.9%/(2) 10.1%/(3) 2.1%/(8)
(%)/rank
Beijing Ximeng
Ant Financial
Land (15%),
(13.5%), Tecent Yinzhijie Tech
Honghai Mingzhu
(10.2%), Ping An Taikang Life (15%), Brightoil PICC Group
Sofeware (14.5%), Ping An Group China Taiping
Major shareholders Insurance insurance Petroleum (15%), (69%) CPIC (98.5%)
Tongyu Century (99.5%) (100%)
(10.2%), (100%) Yinbixin AM
Technology
Shenzhen Jia De (14%)
(14.5%)
Xin (9.5%)
Telemarketing/int
Self established ernet (27%), cross-
Taobow, CITIC credit card
Xinyoulingxi Bailian Insurance insurance agent selling (18%),
Chuchujie, center, DX
Ecosystem Internet Finance, Platform, Qing (67%), Direct auto dealer
Weidian, Xioami, Clinic, Yi Hao n.a. n.a.
partnership Qunar, Kalaibao, Song Chou, sales (28%), (23%), agency
Wechat, Didi, Pharmacy,
Jubaopen Jupaopen, Xiaomi Insurance broker (15%), direct sales
Fenqile Xingjinbao
(5%) (11%), others
(6%)
Lifestyle Liability insurance Auto (71%), Auto (79%), Auto (78%),
consumption (35%), Accident Auto (34%), Commercial guarantee Commercial
Accident (58%),
(30%), (24%), Gurantee property (4%), insurance (9%), property (5%),
Health (20%),
Consumer Guarantee insurance (25%), Accident & liability insurance Liability Auto (78%),
Auto (3%),
Premium breakdown finance (17%), insurance (19%), Accident (16%), health (9%), (3%), accidient & insurance (4%), Marine (3%), Non-
Traffic accident
Health (20%), Health (13%), Health (11%), Liability insurance health (3%), Agricultural marine (19%)
(1%), Others
Auto (1%), Family P&C Liability insurance (5%), Agricultural commerical (3%), Accident
(18%)
Travel (2%), insurnace (8%), (6%), Others (8%) (6%), Others property (2%), (2%), others
Others (7%) Others (1%) (5%) others (4%) (8%)
GWP (Rmb m) 5,957 1,656 839 794 350,314 216,090 105,739 26,099
Net profit (Rmb m) (996) (194) (283) (304) 19,807 13,372 3,845 363
Total asset (Rmb m) 21,059 3,069 1,486 1,508 524,566 336,073 146,453 31,725
Net asset (Rmb m) 17,271 721 978 622 133,114 70,144 36,021 7,405
Underwriting
0.3 2.3 0.9 1.3 2.6 3.1 2.9 3.5
leverage (x)
Leverage ratio (x) 0.2 3.3 0.5 1.4 2.9 3.1 3.1 3.3
ROE (%) -8.3% -26.9% -28.9% -48.9% 15.7% 21.7% 10.7% 4.9%
ROA (%) -6.6% -6.3% -19.0% -20.2% 4.0% 4.0% 2.6% 1.1%
Combined ratio (%) 133.1% 121.0% 100.1% 199.7% 97.3% 96.2% 98.8% 101.2%
Loss ratio (%) 59.5% 43.4% 41.4% 65.2% 62.3% 56.6% 59.9% 52.3%
Expense ratio (%) 73.6% 77.6% 58.7% 134.5% 35.1% 39.7% 38.9% 49.0%
Core solvency ratio 1178.3% 331.0% 363.0% 370.0% 229.2% 194.0% 267.0% 216.0%
Policy direction – More encouragement than restrictions consider that the policy ’s intention is to encourage rather than
F rom a regulatory standpoint, the first official document to restrict the use of technology and innovation to promote the
state using technology to accelerate the transformation, sound development of China’s online insurance sector, while
optimisation, and to strengthen supervision and risk we see limited regulatory headwinds in the near-term horizon
th
management in China’s insurance industry was China’s 12 in China’s online insurance segment.
F iv e Year plan back in September 2011 (figure 57). In J uly 2015,
Chinese officials further released guidelines to promote the
healthy development of Internet Finance, providing the major
framework for each of the respective Internet Finance
segments (including online insurance). In the same month,
CIRC also released interim measures of online insurance
supervision which officially set the definition, qualification,
business scope, information disclosure requirement, operating
guideline and supervision of “online insurance”. In general, we
Page 27
Industry Focus
Fig 57: Regulations and policies on China online insurance segment
Da te Docume nt Re gula tion de ta il

Sep-11 The 12th Five-Year Plan Emphasize of using "technology" to accelerate the transformation and optimizing the structure development of China
Outline for the development insurance industry; Emphasize of using "technology" as a mean of supervision to strengthen industry's risk
of China insurance industry management/prevention ability; Strengthen application and fully advocate Information construction
Aug-13 Notice on issues concerning 1. To establish independent information security department and regularly conduct risk assessment;
the Business-start check of 2. To establish electronic core business system in order to support underwriting, pricing, payment, claim and customer
professional Internet service related insurance business;
insurance company 3. To set up complete record keeping capacity;
4. To establish isolation mechanism between internal system and the external internet;
5. To make clear the relative electronic machine/equipment which is used to support cloud computing led business model
for regulatory purpose;
6. Electronic policy should provide simplify explanation and dynamic demonstration on internet;
7. Underwriting procedure should set up maker-checker mechanism, and make sure policyholder read through the policy
terms and condition;
8. To ensure the service quality and standard to policyholders no less than other channels
Apr-14 Notice of opinion concerning 1. When operating internet insurance business, life insurance company should meet following qualifications: a. Solvency
the operation of internet to reach Solvency type II standard, b. operating management system should include underwriting, surrender, claim,
insurance business by life information storage and customer service functions, c. obtain ICP (Internet Content Provider) operating license, d.
insurance company consultant and salesperson much obtain qualification license from CIRC
2. Life insurance company can not delegate its underwriting business to any insurance agent/institution who has not
received agency license issued by CIRC;
3. When selling participating, investment-link and universal policy through internet, must state the working "uncertainty
return" with character no less than product name;
4. Life insurance company should disclose information on official website regarding tis internet insurance business
Jul-15 Guidelines on Promoting 1. To encourage innovation and support the development of Internet Finance ( 互聯網金融), including a. to encourage
Healthy Development of using innovate new product/service to stimulate market vitality, b. to encourage cooperation between institutions for
Internet Finance complementary advantages, c. to expand finance channel and improve financing environment, d. to streamline
administration and delegate authority, e. to implement related fiscal and tax policy, and f. to promote the construction of
credit data infrastructure
2. To classify and clarify internet finance supervisory responsibility;
3. To strengthen system soundness and regulate internet finance market discipline
Jul-15 Interim measures for 1. Internet insurance business defined as using internet or mobile devises, through self-established or third-party internet
supervision of internet platform to establish insurance contract and provide insurance services (requires insurance license);
insurance business 2. Insurance company who has demonstrate sufficient internal control capability and to satisfy customer service demand,
can expand the following online P&C services nationwide: a. Accident insurance, regular life and traditional life insurance,
b. Household P&C insurance, liability insurance, credit insurance and guarantee insurance, c. Any P&C insurance product
which can independently and completely use internet to realize sell, underwrite and make claim, and d. any product
allowed by CIRC;
3. Information disclosure - restrict using "expected return" wording when underwriting traditional life products;
4. Policyholder's premium money should directly remit to insurance company's premium account. Third party internet
platforms can not help collect such premium money;
5. Insurance company should establish sound customer identification recognition system, and strengthen the monitoring
of big ticket size and suspicious transaction;
Jun-17 Strengthening the 1. Guarantee Insurance business is defined as insurance company providing guarantee insurance service to
Administration of the borrower/lenders of the online lending platform;
Gurantee Insurance Business 2. Insurance company who extend guarantee insurance business to online lending platform must comply with Solvency
on Internet Platforms requirement;
3. Insurance company should strictly select online lending platform, and can not provide credit enhancement, conduct
asset pool, and illegal fund raising;
4. Insurance company should strictly scrutinize the quality of the policyholder;
5. Insurance company should clarify the obligation of information disclosure to the online lending platform cooperated;
6. Insurance company should strengthen the management of online platform guarantee insurance;
7. Insurance company should establish strict risk management system;
8. Insurance company should strengthen the management of information system;
9. Insurance company should conduct regular risk monitoring and stress test of its online platform guarantee insurance
business;
10. Insurance company should perfectly handle any sudden event to timely dissolve risk
Source: CIRC, State Council of PRC, DBS Vickers
Page 28
Industry Focus
Positive view on Fintech industry capital requirement, and the business models are on the early
stage that most of them are unlikely to pay dividends in the
Share price priced in the regulation headwind. After PBOC and short-run and ROE might fluctuate, DDM valuation is not
CBRC announced joint-statement to regulate on online applicable to Fintech lending companies.
microfinance and P2P platforms in Dec 1st 2017, China Rapid
F inance, Qudian, Yirendai and PPDai have corrected We adopt PE multiple for online lending platforms given the
48%/40%/37%/16% as of May 31, 2018, respectively, as sector is more like an Internet company with fee charging on
market concerns on regulation uncertainties, loan origination loan facilitation and not taking any risks on the book onward,
slowdown and the spike of default rates due to like credit-cycle as well as great earnings potential amid industry consolidation.
happened in Dec 2017. We believe share prices have priced in Within P2P/online consumer lending platforms, we like
the recent headwind, and the current trading multiple for the Yirendai (YRD US, BUY), supported by its offline parent
industry of 5-6x FY19F PE is undemanding given its great company, and CreditEase, which is positioned as a
addressable market with 8-10x loan growth potential. We complement ary channel of traditional banks to provide big-
expect the industry to resume growth momentum once the tickset loans and has better credit control with a long history of
consolidation of P2P/online consumer lending platforms is credit data. Lexin (LX US, BUY) would benefit on a close-loop
completed, on the back of strong credit demand from of consumption scenario-based instalment platform to increase
borrowers who are underserved by banks, and investment customers’ stickiness and lower acquisition costs to drive
demand from investors who are looking for higher returns. earnings upside. Within Insurtech sector, we like ZhongAn
(6060 HK, BUY) given it possesses the greatest potential
Undemanding valuation and select quality play. We use among scenario-based online insurers to grab China’s brick-
div idend discount model (DDM) for China banks valuations and-mortar P&C insurance market share.
assuming sustainable dividends and ROE. However, P2P/online
microfinance companies position as loan facilitator with light-
Fig 58: Fintech companies share price vs policy map
Page 29
Industry Focus
Fig 59: Stock performance after regulation announcement

on Dec 1, 2017 Fig 60: Stock performance YTD
Source: Bloomberg, DBS Vickers; data as of May 31, 2018
Fig 59: Stock performance after IPO
Source: Bloomberg, DBS Vickers data as of May 31, 2018
Page 30
Industry Foucs
Fig 61: Fintech companies valuation

T arget PBV PEV PSV ROE EPS CA GR
price St ock Price M k t Cap F Y 17 F Y 18F F Y 19F F Y 17 F Y 18F F Y 19F F Y 17 F Y 18F F Y 19F F Y 17 F Y 18F F Y 19F 18- 19F
Cov erage T ick er (LC) rat ing (LC) (US$ m) (X ) (X ) (X ) (X ) (X ) (X ) (X ) (X ) (X ) (%) (%) (%) (%)
China F int ech
Yirendai YRD US 23.5 BUY 30.0 1,424 3.1 2.4 1.8 6.7 8.6 6.2 1.7 1.4 1.2 53.7% 31.5% 32.8% 3.8%
Lexin Fintech LX US 15.6 BUY 21.0 2,588 3.4 6.0 3.3 24.0 15.5 7.3 3.0 2.2 1.6 28.0% 48.3% 58.3% 81.0%
Qudian QD US 8.3 NR 2,713 1.8 1.5 1.2 3.1 7.2 4.9 0.6 0.2 0.1 n.a. 21.8% 25.2% -20.7%
PPDai PPDF US 7.4 NR 2,234 9.4 2.8 1.9 34.3 8.3 5.3 0.6 0.5 0.3 n.a. 28.8% 39.6% 154.1%
Hexindai HX US 11.8 NR 567 21.6 n.a. n.a. 59.1 8.8 7.1 24.7 5.2 3.8 45.7% 47.2% 39.2% 189.0%
China Rapid Finance XRF US 3.1 NR 205 3.4 3.5 2.4 -1.3 52.2 3.6 2.3 1.3 0.7 n.a. -18.7% 20.8% n.a.
ZhongAn Online P&C Insurance 6060 HK 52.2 BUY 68.0 9,761 5.3 5.6 5.5 n.a. n.a. n.a. 2.1 1.5 0.9 -8.3% -4.3% 1.0% n.a.
A v erage 6.9 3.6 2.7 21.0 16.8 5.7 5.0 1.8 1.2 29.8% 22.1% 31.0% 81.4%
Int ernet
Alibaba BABA US 198.0 BUY 232.0 507,134 11.2 8.8 7.2 72.6 50.7 39.9 20.6 13.0 8.3 17.5% 19.7% 19.9% 34.8%
Tencent 700 HK 399.2 BUY 540.0 486,977 12.1 9.5 7.4 43.0 38.1 29.3 1.7 1.2 0.9 33.2% 27.6% 28.0% 21.2%
Baidu BIDU US 242.6 NR 84,588 4.4 4.0 3.4 29.5 23.6 20.1 1.0 0.8 0.7 21.2% 16.1% 16.3% 21.2%
J D.com J D US 35.2 BUY 61.0 50,459 6.2 6.0 5.6 n.a. 200.2 82.4 0.9 0.7 0.6 -0.4% 3.0% 7.0% n.a.
Ctrip.com CTRP US 45.1 NR 24,584 1.8 1.9 1.8 71.6 37.8 27.6 0.9 0.8 0.6 3.9% 4.4% 6.4% 61.1%
Royal Flush 300033 CH 45.9 NR 3,853 7.8 6.9 6.2 34.0 24.7 22.9 2.8 2.3 2.1 23.7% 24.5% 25.1% 21.8%
Hundsun Tech 600570 CH 57.7 NR 5,559 11.3 10.4 9.0 75.9 65.0 50.0 2.1 1.6 1.3 17.3% 17.2% 20.2% 23.2%
A v erage 7.8 6.8 5.8 54.4 62.9 38.9 4.3 2.9 2.1 16.6% 16.1% 17.5% 30.6%
Pay ment /consumer f inance
Mastercard MA US 190.1 NR 198,480 34.9 25.5 16.8 51.8 30.1 25.8 15.9 13.3 11.8 76.5% 101.3% 95.2% 41.8%
V isa V US 130.7 NR 267,181 9.3 8.7 8.0 41.1 29.1 24.8 14.6 12.9 11.6 34.7% 30.7% 32.8% 28.7%
Capital One COF US 94.0 NR 45,725 1.0 0.9 0.8 26.7 9.3 8.7 1.5 1.6 1.6 5.0% 10.2% 10.0% 75.0%
American Exp AXP US 98.3 NR 84,574 4.3 4.0 3.5 33.0 13.6 12.3 2.4 2.1 2.0 14.9% 30.7% 29.6% 64.1%
Discovery Fin. DFS US 73.9 NR 25,775 2.5 2.3 2.1 13.6 9.6 8.7 2.2 2.4 2.3 20.3% 24.7% 24.9% 25.3%
Sybchrony Fin. SYF US 34.6 NR 26,137 1.8 1.8 1.6 14.3 10.1 8.1 1.6 2.0 1.8 14.5% 17.9% 20.3% 32.4%
A v erage 9.0 7.2 5.5 30.1 17.0 14.7 6.4 5.7 5.2 27.6% 35.9% 35.5% 44.6%
Source: Company data, DBS Vickers; data as of May 31, 2018
Page 31
Industry Focus
Fig 62: Yirendai fwd 12M PB bands Yirendai fwd 12M PE bands Yirendai fwd 12M PS bands
Source: Bloomberg, DBS Vickers
Fig 63: Lexin fwd 12M PB bands Lexin fwd 12M PE bands Lexin fwd 12M PS bands
Fig 64: Qudian fwd 12M PB bands Qudian fwd 12M PE bands Qudian fwd 12M PS bands
Source: Bloomberg estimates, DBS Vickers
Page 32
Industry Focus
Fig 65: Hexindai fwd 12M PB bands Hexindai fwd 12M PE bands Heixndai fwd 12M PS bands
Fig 66: PPDai fwd 12M PB bands PPDai fwd 12M PE bands PPDai fwd 12M PS bands
Fig 67: China Rapid Finance fwd 12M PB bands China Rapid Finance fwd 12M PS bands
Page 33
Industry Focus
Fig 68: ZhongAn fwd 12M PB bands ZhongAn fwd 12M PS bands
Fig 69: China Fintech sector fwd 12M PE bands
Source: Bloomberg, DBS Vickers; companies include Yirendai, Qudian,

Hexindai, PPDai and Lexin
Page 34
China / Hong Kong Company Guide
Yirendai Ltd
Version1 |Bloomberg: YRD US Equity | Reuters: U:YRD
BUY(Initiate coverage) Good P2P play, despite regulatory

L ast Traded Price( 31 May 2018):US$23.46(NA SDAQ : 7,554) headwinds
Pric e Target 12-mth:US$30.00 (28% upside)
A nalyst
Gaining market share in P2P industry. Yirendai positions itself as a
Cindy WANG+852 28638830 cindywangyy@dbs.com complement to banks by providing large sized and long-tenure loans of
Ken SHIH+852 2820 4920 kenshih@dbs.com no more than RMB200k to prime borrowers with credit history in China.
What’s New Despite recent regulatory headwinds, Yirendai increased market share to
2.1% in 1Q18 from 1%/1.5% in 2016/17, among >1,800 platforms.
 Despite regulatory headwinds, Yirendai’s market
share improved to 2% in 1Q18 We expect Yirendai’s revenue CAGR at 20% in FY18-19F supported by
a 22% CAGR in loan origination and 12.8-13.1% take-up rate.
 100% online borrowers would accelerate loan
facilitation
T argeting 100% online borrowers. After its spin-off from parent
 Recent share price correction has factored in the company CreditEase, Yirendai plans to have 100% online borrowers by
delay in compliance processes, near-term credit 2019. We believe the move suggests that; 1) Yirendai has confidence in
cost spike, and FY18 earnings expectation reset controlling online acquisition cost which has trimmed down to ~6% in
 Initiate with BUY and TP of US$30 2017 from 8% in 2016, the same as CreditEase’s 6% referral fee, and;
2) Credit scoring and fraud detecting models have matured. Yirendai
Price Relative could cut off applicant scrutiny by CreditEase and cap lifetime loan
US$ Relative Index charge-off rate at 9-10%. We expect Yirendai to accelerate loan
53.2
388 facilitation through online channels, especially with loan tenure one-year
43.2 338
shorter than offline channels.
288
33.2
238
23.2 188
T he worst already priced in; Initiate coverage with BUY. We believe the
138
13.2
88 recent share price correction of 49% YTD has factored in regulatory
3.2
Dec-15 Jun-16 Dec-16 Jun-17 Dec-17
38
challenges and near-term credit cost spike which raised contribution to
Yirendai Ltd (LHS) Relative NASDAQ (RHS)
quality assurance funds (QAF) to 11% in 1Q18 from 8.5% previously , as
well as the expectation reset for FY18 estimates. Impacted by
Forecasts and Valuation
accounting changes (ASC 606), offline rev enue is recognized from
FY Dec (RMBm) 2016A 2017A 2018F 2019F
Turnover 3,238 5,543 6,456 8,037 upfront fee to monthly collection and increasing S&M expenses, FY18
EBITDA 1,076 1,662 1,246 1,744 net income is expected to decline 21% y -o-y to RMB1bn. However, we
Pre -tax Profit 1,102 1,753 1,329 1,835 expect Yirendai to resume earnings growth of 38% y -o-y in FY19F once
Net Profit 1,116 1,372 1,078 1,488
Net Profit Gth (Pre-ex) (%) 305.5 22.9 (21.4) 38.1 industry consolidation is completed. We initiate coverage with a BUY
EPS (RMB) 18.88 22.78 17.76 24.53 rating and target price of US$30. Yirendai is the only Peer-to-Peer (P2P)
EPS (US$) 2.94 3.55 2.77 3.82 platform providing half-year div idend payout ratio of 15%, implying
EPS Gth (%) 243.1 20.6 (22.0) 38.1 2.4% yield.
Diluted EPS (US$) 2.92 3.50 2.71 3.75
DPS (US$) 0.00 0.29 0.41 0.57 Valuation:
BV Per Share (US$) 5.64 7.68 9.95 13.37 Our target price is based on 8x FY19F PER, which is in line with Yirendai
PE (X) 8.0 6.6 8.5 6.1 and industry three-year avg PER. The stock is currently trading at 6.6x
P/Cas h Flow (X) 9.9 9.9 nm 78.6 FY19F PE, which we believe is an undemanding valuation.
P/Free CF (X) 10.3 10.8 nm 136.6
EV/EBITDA (X) 4.7 2.2 5.0 3.6 Key Risks to Our View:
Net Div Yield (%) 0.0 1.2 1.8 2.4 Substantial slowdown in loan facilitation, consumer credit bubble, China
P/Book Value (X) 4.2 3.0 2.4 1.8 economic slowdown and rising competition among P2P/online lending
Net Debt/Equity (X) CASH CASH CASH CASH players.
ROAE(%) 71.6 53.7 31.5 32.8 A t A Glance
Cons ensus EPS (RMB) 25.22 34.43 Is s ued Capital (m shrs) 60
Other Broker Recs: B: 7 S: 1 H: 3 Mkt Cap (US$m) 1,448
Source of all data on this page: Company, DBSV, Thomson Reuters, Major Shareholders (%)
HKEX CreditEase 82.4
Free Float (%) 17.6
3m Avg. Daily Val. (US$m) 2.2
ICB Industry: Financials / General Financial
ed-KK/ sa- CS /AH

Company Guide
Yirendai Ltd
Yirendai P2P borrowing interface
Source: DBS Vickers
Yirendai P2P investment interface
Source: DBS Vickers
Page 36
Company Guide
Yirendai Ltd
CRITICAL FACTORS TO WATCH Amount of loan origination (RMBm)

Critical Factors 61241
L oan origination 53,017 50381

Total loan origination surged to 108% CAGR in 2015-17, 44,181 41406
driv en by online channel growth at 167% CAGR and offline
35,345
channel growth at 72% CAGR. Due to regulatory
26,509
uncertainties, we expect loan growth to slow down to a 22% 20486
17,672
CAGR in FY18-19F , with main contribution from online 9558
8,836
channels. The company plans to discontinue offline referrals
0
from parent company CreditEase by 2019. 2015A 2016A 2017A 2018F 2019F
Annual active borrowers (m)

A c tive borrowers 0.9
0.96
The number of active borrowers on Yirendai grew 110% in
0.8
2015-17 as borrowers shifted from offline to online. In FY17, 0.77
0.6
online borrowers accounted for c.73% of total borrowings,
0.58
compared with 51% in FY15. The average growth rate of
annual active borrowers is estimated to be 20% in FY18-19F . 0.38 0.3
The company is expecting 100% online borrowers by 2019.
0.19 0.1
Number of investors 0.00

2015A 2016A 2017A 2018F 2019F
The number of investors has ascended with a CAGR of 35% in
Number of investors (m)
2015-17 despite a 1% slip in FY17 due to the strategic shift to
high quality investors (larger investment size and higher repeat 0.81 0.8
rate). With long-term industry consolidation, more investments 0.7

0.65 0.6 0.6
are expected to flow into Yirendai and this will be helped by
better risk control. We forecast the number of investors to rise 0.49
at a CAGR of 16% in FY18-19F. Yirendai only sources for 0.32

0.3
inv estors online.

0.16
Net revenue to loans facilitated 0.00

The net revenue to loans facilitated ratio declined to 13% in 2015A 2016A 2017A 2018F 2019F
F Y17 from 16% in FY16, with increasing revenue offset by Net revenue to loans facilitated (%)
rising reserves. We expect regulatory headwinds to continue 16.0
16
and will underpin the company ’s conservative approach in the 14 13

13 13
near-term, maintaining a take-up rate of 13%. 12.8
9.6
User acquisition cost
6.4
Yirendai’s user acquisition cost declined 0.5ppt y -o-y to 7% in
F Y17, including both borrower and investor acquisition costs. 3.2
Due to low online approval rates on potentially high default

0.0
rates, the company will find it hard to get further sav ings on 2015A 2016A 2017A 2018F 2019F
user acquisition costs in FY18.
User acquisition cost to loans facilitated (%)
9
8 7.64 7.83
7.52
6.97 7
7
6
5
4
3
2
1
0
2015A 2016A 2017A 2018F 2019F
Page 37
Company Guide
Yirendai Ltd
Price vs. Quarterly loan origination y-o-y growth (3-month lag)
60 140
50 120
100
40
80
30
60
20
40
10 20
- -
Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18
Price (RHS) (US$) Loan origination growth (LHS) (%)
Starting from mid-17, share price movement was largely driven by loan origination growth. The correlation between share price
and quarterly loan origination y -o-y growth (at 3-month lag) is 0.62. As loan origination in 1Q18 slowed down, recent share price
has corrected as well.
Price vs. Quarterly reserve ratio (3-month lag)
60 12
50 10
40 8
30 6
20 4
10 2
- -
Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18
Price (RHS) (US$) Reserve ratio (LHS) (%)
Share price also reversed in relation to quarterly reserve ratio (at 3-month lag) from mid-17 onwards. The correlation between
share price and quarterly reserve ratio is -0.6. The declining share price reflected investors’ concerns of potential credit risk since
the reverse-ratio jumped to 11% in 1Q18 from 9% in 4Q17.
Page 38
Company Guide
Yirendai Ltd
Balance Sheet:
A sset quality Charge-off Rate
Charge-off as a percentage of average loan rose from 5% in
F Y16 to 6% in FY17 driven by the increasing delinquency rates
amid the lifetime loan cycle. The 1Q18 charge-off rate was
9.3%. However, Yirendai saw some initial improvements in
late-April to May . Due to current regulatory uncertainties, we
estimate that the charge-off rate will rise to 9.9% in FY18F but
improve to 9.2% in FY19.
Share Price Drivers:

Rec overing loan origination growth
Loan origination growth has been decelerating due to lower
approval rates. However, we believe in the long-run it would
accelerate again as the industry consolidates. ROE
70.0%
St abilising reserve ratio 60.0%
In 4Q17, the large scale of default cases in the industry caused 50.0%
delinquency rates in P2P platforms to jump. Subsequently, 40.0%

Yirendai raised its reserve ratio in 1Q18. We expect the reserve 30.0%
ratio to increase to 9% in FY18 but return to 8.6% in FY19
20.0%
after the credit risk eases off and regulation has been fine-
10.0%
tuned.
0.0%
2015A 2016A 2017A 2018F 2019F
Ret reat of charge-off ratio
Similar to the reserve ratio, the charge-off ratio climbed in Forward PE Band
1Q18 due to defaults amid tight regulations. With regulatory 20.3
(x)
improvement and industry consolidation, the charge-off ratio is 18.3

+2sd: 17.3x
expected to decline in FY19. 16.3
14.3
+1sd: 13x
12.3
Key Risks: 10.3
Avg: 8.8x
Substantial slowdown in loan facilitation, consumer credit 8.3
6.3
bubble, China economic slowdown and rising competition 4.3 -1sd: 4.6x
among P2P/online lending players. 2.3
0.3 -2sd: 0.4x
Company Background
Yirendai was created in 2012 by CreditEase and is a leading PB Band
Peer-to-Peer (P2P) platform in China connecting investors and (x)
8.9
individual borrowers. The company provides solutions for
7.9
underserved credit demand through an online platform. +2sd: 7.12x
6.9
Yirendai has facilitated RMB84bn of accumulated loans for
5.9 +1sd: 5.81x
around 1m borrowers and 305K investors as of March 2018.
4.9
The stock was listed on NYSE in Dec 2015 with an IPO price of 3.9
Avg: 4.49x
US$10. Its major shareholder is CreditEase with a 82.4% 2.9

-1sd: 3.18x
stake. 1.9 -2sd: 1.87x

0.9
Page 39
Company Guide
Yirendai Ltd
Key Assumptions
F Y D ec 2015A 2016A 2017A 2018F 2019F
Amount of loan
9,557.6 20,486.1 41,406.1 50,380.6 61,241.1
origination (R M B m)
Annual active borrowers
0.1 0.3 0.6 0.8 0.9
(m)
Number of investors (m) 0.3 0.6 0.6 0.7 0.8
Net revenue to loans
13.7 15.8 13.4 12.8 13.1
f acilitated (%)
User acquisition cost to
7.0 7.5 7.0 7.6 7.8
loans f acilitated (%)
Source: Company, DB S Vickers
Income Statement (RMB m)

F Y D ec 2015A 2016A 2017A 2018F 2019F
R evenue 1,314 3,238 5,543 6,456 8,037
Cost of Goods Sold 0 0 0 0 0
Gr o ss Profit 1 , 3 14 3 , 2 38 5 , 5 43 6 , 4 56 8 , 0 37
Other Opng (Exp)/I nc (903) (2,153) (3,866) (5,248) (6,328)
O p e rating Profit 410 1 , 0 85 1 , 6 77 1 , 2 08 1 , 7 09
Other Non Opg (Exp)/I nc (11) (19) (39) 4 0
Associates & JV I nc 0 0 0 0 0
Net I nterest (Exp)/I nc 5 37 115 117 126
Dividend I ncome 0 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 0
Pr e - tax Profi t 404 1 , 1 02 1 , 7 53 1 , 3 29 1 , 8 35
Tax (129) 14 (381) (251) (347)
M inority I nterest 0 0 0 0 0
Pref erence Dividend 0 0 0 0 0
N e t Pr ofit 275 1 , 1 16 1 , 3 72 1 , 0 78 1 , 4 88
Net Prof it bef ore Except. 275 1,116 1,372 1,078 1,488
EB I TDA 403 1,076 1,662 1,246 1,744
Gr o w t h
R evenue Gth (%) N/A 146.5 71.2 16.5 24.5
EB I TDA Gth (%) N/A 167.3 54.4 (25.0) 40.0
Opg Prof it Gth (%) N/A 164.3 54.6 (28.0) 41.5
Net Prof it Gth (%) N/A 305.5 22.9 (21.4) 38.1
M a rgins & Ratio
Gross M argins (%) 100.0 100.0 100.0 100.0 100.0
Opg Prof it M argin (%) 31.2 33.5 30.3 18.7 21.3
Net Prof it M argin (%) 21.0 34.5 24.7 16.7 18.5
R OAE (%) 56.4 71.6 53.7 31.5 32.8
R OA (%) 25.1 32.0 22.3 13.8 17.2
R OCE (%) 57.3 69.6 51.3 28.5 30.4
Div Payout R atio (%) 0.0 0.0 8.2 15.0 15.0
Net I nterest Cover (x) NM NM NM NM NM
Page 40
Company Guide
Yirendai Ltd
Balance Sheet (RMB m)

F Y D ec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 16 36 82 83 97

I nvts in Associates & JVs 0 0 0 0 0
Other LT Assets 509 905 1,981 1,847 1,795
Cash & ST I nvts 1,581 3,814 5,434 2,899 2,800
I nventory 0 0 0 0 0
Debtors 83 29 21 3,298 4,464
Other Current Assets 0 0 0 0 0
T o t al Assets 2 , 1 90 4 , 7 83 7 , 5 19 8 , 1 27 9 , 1 56
ST Debt 0 0 0 0 0
Creditors 257 432 147 279 330
Other Current Liab 956 2,211 4,390 3,959 3,605
LT Debt 0 0 0 0 0
Other LT Liabilities 0 0 11 11 11
Shareholder’s Equity 977 2,140 2,970 3,878 5,210
M inority I nterests 0 0 0 0 0
T o t al Cap. & Liab. 2 , 1 90 4 , 7 83 7 , 5 19 8 , 1 27 9 , 1 56
Non-Cash Wkg. Capital (1,130) (2,615) (4,516) (939) 529

Net Cash/(Debt) 1,581 3,814 5,434 2,899 2,800
Debtors Turn (avg days) 11.5 6.3 1.6 93.8 176.3
Asset Turnover (x) 1.2 0.9 0.9 0.8 0.9
Current R atio (x) 1.4 1.5 1.2 1.5 1.8
Quick R atio (x) 1.4 1.5 1.2 1.5 1.8
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex M I (X) CASH CASH CASH CASH CASH
Cash Flow Statement (RMB m)

F Y D ec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Prof it 404 1,102 1,753 1,329 1,835

Dep. & Amort. 4 11 24 34 35
Tax Paid (129) 14 (381) (251) (347)
Assoc. & JV I nc/(loss) 0 0 0 0 0
(Pf t)/ Loss on disposal of FAs 0 0 0 0 0
Chg in Wkg.Cap. 623 1,159 1,483 (519) (460)
Other Operating CF (41) (173) (162) (2,899) (948)
N e t Operatin g CF 377 895 911 ( 3 ,0 61) 116
Capital Exp.(net) (16) (30) (71) (35) (49)
Other I nvts.(net) (266) (1,392) (204) (83) (83)
I nvts in Assoc. & JV 0 0 0 0 0
Div f rom Assoc & JV 0 0 0 0 0
Other I nvesting CF 0 0 (100) 0 0
N e t Investing CF ( 2 8 3) ( 1 ,4 22) ( 3 7 5) ( 1 1 8) ( 1 3 3)
Div Paid 0 0 (605) (195) (166)
Chg in Gross Debt 250 157 (294) 0 0
Capital I ssues 500 (22) 50 0 0
Other Financing CF 0 0 0 0 0
N e t Financin g C F 750 135 ( 8 4 9) ( 1 9 5) ( 1 6 6)
Currency Adjustments 0 29 (16) 0 0
Chg in Cash 845 (362) (329) (3,374) (183)
Opg CFPS (R M B ) (4.91) (4.47) (9.50) (41.89) 9.49
Free CFPS (R M B ) 7.21 14.63 13.95 (51.02) 1.10
Page 41
LexinFintech Holdings Ltd
Version1 | Bloomberg: LX US Equity | Reuters: @LX
BUY (Initiate coverage) Shopping to financing

L ast Traded Price ( 31 May 2018):US$15.62(NA SDAQ : 7,442) A close-loop platform to enhance customers’ stickiness. Lexin, a mix of
Pric e Target 12-mth:US$21.00 (34% upside) P2P and a micro-loan lender, provides installment loans on its e-commerce
platform leveraging on J D.com and SF Express to expand rapidly. The e-
A nalyst
Cindy WANG+852 28638830, cindywangyy@dbs.com commerce scenario-based concept is well-played by Lexin to serve young
Ken SHIH+852 2820 4920, kenshih@dbs.com adults whose current income is unable to support their purchasing desire
What’s New but willing to use installment plans instead. Lexin’s loan facilitation jumped
 Well executed strategy in combining e-commerce by 179% CAGR in 2016-17 with the help of 66% CAGR in active
and financing services borrowers and 68% CAGR in loan sizes, while repeat customer rate hit
80% in 2017, from 63%/74% in 2015/16, showing customers’ strong
 Low acquisition and funding costs to drive stickiness with increasing loan tickets. Despite regulatory tightening, Lexin
earnings growth at 209% CAGR in FY18-19F expects loan origination to grow 68% y -o-y to RMB80bn in FY18F .
L ow acquisition costs and funding costs to drive earnings upside. With the
 Stable asset quality helped by selecting better
borrower profiles help of its own e-commerce platform and increasing repeat customers,
Lexin’s annualised acquisition cost only accounted for 1.1% of loan
 Initiating coverage with BUY and TP of US$21 facilitation, much lower than peers’ 2-5%. On the other hand, Lexin has a
micro-finance licence that gives it the benefit of obtaining low funding
Price Relative costs from banks at ~8% or issuing ABS at 5-8.5% (vs peers’ 9-10%), in
return to provide a low APR of 23%, much lower than the 36% regulatory
cap. With the strong loan facilitation outlook and low borrower acquisition
and funding costs, we expect Lexin’s earnings to grow at 209% CAGR in
FY18-19F.
A sset quality remained stable. Lexin conservatively increased its credit costs
to 9.1% in 1Q18 from 6.2% in 2017 amid the like credit-cycle that took
place in the industry. However, its 90-day delinquency rate was relatively
stable at 1.44% in 1Q18, vs 1.14%/1.42% in 4Q17/1Q17, likely helped by
Forecasts and Valuation its strategy of providing 92% of loans to the top four out of seven ranks
FY Dec (RMBm) 2016A 2017A 2018F 2019F of credit profiles, in our view. With a prudent provisioning policy and
Turnover 4,339 5,582 7,653 10,729
EBITDA 27 499 1,342 2,852 selecting better quality borrowers, we expect Lexin to maintain a relatively
Pre -tax Profit (60) 475 1,332 2,818 stable charge-off rate of 3-4%. We are initiating coverage with a BUY
Net Profit (118) 240 1,084 2,294 rating and target price at US$21, which implies 34% potential upside.
Net Pft (Pre Ex) (core profit) (118) 240 1,084 2,294
Net Profit Gth (Pre-ex) (%) 62.0 N/A 351.0 111.6 Valuation:
EPS (RMB) (2.13) 4.23 6.55 13.85 Our TP is based on 10x FY19F PER, which is in line with industry’s +0.5
EPS (US$) (0.33) 0.66 1.02 2.16 std above 3Y average. As Lexin’s IPO was on Dec 21, 2017, the valuation
Core EPS (US$) (0.33) 0.66 1.02 2.16 history is too short, and we impute a discount on its average mean as it
Core EPS (RMB) (2.13) 4.23 6.55 13.85 bears the risk of on-balance sheet loans. Lexin is current trading at 7x
EPS Gth (%) 62.0 N/A 54.7 111.6
Core EPS Gth (%) 62.0 N/A 54.7 111.6 FY19F PE which we believe is undervalued, given that we expect strong
Diluted EPS (US$) (0.33) 0.53 0.94 1.98 earnings CAGR of 209% in FY18-19F amid a low base in FY17.
DPS (US$) 0.00 0.00 0.00 0.00 Key Risks to Our View:
BV Per Share (US$) 0.04 4.67 2.62 4.79 China economic growth slowdown, weak consumer consumption,
PE (X) nm 23.7 15.3 7.2
CorePE (X) nm 23.7 15.3 7.2 consumer credit bubble, and slowing loan facilitation.
P/Cas h Flow (X) 14.6 3.4 14.9 7.0 A t A Glance
P/Free CF (X) 15.9 3.5 16.4 7.8 Is s ued Capital (m shrs) 110
EV/EBITDA (X) 232.7 10.0 11.7 5.1 Mkt Cap (HK$m/US$m) 24,352 / 3,105
Net Div Yield (%) 0.0 0.0 0.0 0.0 Major Shareholders (%)
P/Book Value (X) 398.0 3.3 6.0 3.3 Jay Xiao 34.0
Net Debt/Equity (X) 45.1 CASH CASH CASH
JD.com 14.2
ROAE(%) (113.5) 28.0 48.3 58.3
K2 Partners Entities 11.2
Cons ensus EPS (RMB) 7.63 14.20 19.86 Matrix Partners China 11.0
Other Broker Recs: B: S: H: Magic Peak Investments 6.0
Apoletto As ia 5.9
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
Free Float (%) 18.1
ICB Industry: Financials / Financial Services
ed- JS / sa- CS /AH

Company Guide
Lexin mobile app interface
Source: DBS Vickers
Lexin mobile app interface
Source: DBS Vickers
Page 43
Company Guide
CRITICAL FACTORS TO WATCH Amount of loan origination (RMBm)
Critical Factors
L oan origination
Ov erall loan origination increased by nearly 8 times in 2015-17
with a CAGR of 180%, boosted mainly by 252% CAGR in
personal installment loans. As a comparison, its installment
purchase loan rose by only 8% CAGR during the same period.
Driv en by increasing number of active borrowers, expanding
borrowing size and enhanced user stickiness, we expect loan
origination value to grow at a CAGR of 59% in FY18-19F . Annual active borrowers (m)
A c tive borrowers
Lexin’s active borrowers rose by 66% CAGR in 2015-17 to
reach 4.1m. In FY17, a total of 23.9m people had registered on
Lexin’s platform but only 7.6m were granted credit lines. With
the current conversion rate stable and improvement in activity
from active users, we anticipated that the annual number of
active borrowers would rise at 32% CAGR in FY18-19.
A v erage loan size

Average loan size per active borrower (RMB)
The average loan size per active borrower surged by 68%
CAGR from FY15 to FY17. The regulatory headwinds may slow
the growth in the near-term. In the long-run, we expect more
credits to be drawn down to borrowers bolstered by enhanced
repeat user rate, which would further boost the ticket size. We
expect the average loan size to grow at 20% CAGR in FY18-
19.
F inancial services income to loans facilitated

Since the revenue generated in the e-commerce platform was
largely offset by costs of sourcing products, the profit growth Financial service income to loans facilitated (%)
was primarily contributed by the financial service income. The
financial services income to loan facilitated ratio went down
slightly from 7% in 2016 to 6.3% in 2017, due to the strong
growth in off-balance sheet loans facilitated. We expect the
financial services income to loan facilitated ratio to stay at
around 6-7% in FY18-19.
F unding cost
The micro-finance license granted Lexin the ability to acquire
low funding costs from banks at ~8%. Lexin is shifting its focus
Funding cost as % of loan facilitation (%)
towards institutional investors, away from individual investors,
which helps to strengthen the cost control. We expect funding
cost to loan facilitation to be sustained at 8% in FY18-19.
Page 44
Company Guide
LX share price vs. JD share price
F rom IPO to March 2018, the share price of Lexin was highly correlated to J D.com with a positive correlation of 0.61. Since J D.com
is one of Lexin’s biggest shareholders and it provides a good reflection of consumers’ willingness to shop online in China, Lexin’s
share price is somehow corelated to J D.com.
Share price vs. Quarterly reserve ratio (3-month lag)
25 10
9
20 8
7
15 6
5
10 4
3
5 2
1
- -
Mar-18 Apr-18 May-18
Price (RHS) (US$) Reserve ratio (LHS) (%)
Starting from March 2018, Lexin’s share price has mov ed in the opposite direction to the quarterly reserve ratio (3-month lag). The
fall in share price recently reflects investors’ concerns of potential credit risk since the annualised reserve ratio jumped from 7% in
4Q17 to 9% in 1Q18.
Page 45
Company Guide
Balance Sheet:
Charge-off as a percentage of average loan outstanding Charge-off Rate
increased from 1.7% in FY16 to 3% in FY17, likely impacted
by the fast growth of personal installment loans with a tenure
of around nine months which had a lagged effect in that year.
We expect the charge-off rate will peak at 3.8% in FY18 due
to the regulatory uncertainties and slightly lower to 3.7% in
F Y19.
Share Price Drivers:

Bac k ed by JD
As a B2C giant, J D.com represents the consumption upgrade
trend in China. Lexin is a strategic partnership with J D.com,
from sourcing products to utilising the warehouse and logistic
infrastructure. We believe the share price movement of Lexin
will be partially boosted by J D’s promising future.
ROE
Reserve ratio down after temporary peak
The large scale of default cases in 4Q17 triggered soaring
delinquency rates in the industry. Subsequently, Lexin raised its
reserve ratio in 1Q18. We believe after the risk bubble eases off
and regulation is fine-tuned, the reserve ratio would ebb to 8%
in F Y19.
Ret reat of charge-off ratio

Charge off ratio went up in 1Q18 due to tightened regulatory
env ironment and higher defaults in 4Q17. With regulatory Forward PE Band
improvement and industry consolidation, the charge-off rate is
expected to decline.
Key Risks:
China economic growth slowdown, weak consumer
consumption, consumer credit bubble, and slowing loan
facilitation.
Company Background
Lexin is an online consumer finance platform for educated
PB Band
y oung adults in China. The company integrates its e-
commerce driven installment finance platform, Fenqile, with
adv anced risk management technologies, Dingsheng asset
distribution platform, and J uzi Licai online investment platform
for individual investors, to create a comprehensive finance
ecosystem. Lexin has total outstanding loans of RMB47.7bn
and 7.6m of registered users with credit line in 2017. The
stock was listed in the US in Dec 2017 at an IPO price of
US$9.
Page 46
Company Guide
Key Assumptions
F Y D ec 2015A 2016A 2017A 2018F 2019F
Amount of loan
6,110.0 22,197.0 47,704.0 80,071.6 120,606.7
origination (R M B m)
Annual active borrowers
1.5 3.0 4.1 6.3 7.1
(m)
Average loan size per
4,125.6 7,386.7 11,692.2 12,707.9 16,961.1
active borrower (R M B )
Financial service income to
5.9 7.0 6.3 6.6 6.7
loans f acilitated (%)
Funding cost as % of loan
0.0 9.0 8.0 8.2 8.1
f acilitation (%)

F Y D ec 2015A 2016A 2017A 2018F 2019F
R evenue 2,525 4,339 5,582 7,653 10,729
Cost of Goods Sold (2,597) (3,737) (4,262) (5,031) (6,045)
Gr o ss Profit ( 72) 602 1 , 3 20 2 , 6 21 4 , 6 84
Other Opng (Exp)/I nc (325) (591) (844) (1,307) (1,895)
O p e rating Profit ( 3 9 7) 11 476 1 , 3 14 2 , 7 89
Other Non Opg (Exp)/I nc 0 (22) 74 22 30
Associates & JV I nc 0 0 0 0 0
Net I nterest (Exp)/I nc (2) (48) (76) (4) 0
Dividend I ncome 0 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 0
Pr e - tax Profi t ( 3 9 9) ( 60) 475 1 , 3 32 2 , 8 18
Tax 89 (58) (234) (248) (524)
M inority I nterest 0 0 0 0 0
Pref erence Dividend 0 0 0 0 0
N e t Pr ofit ( 3 1 0) ( 1 1 8) 240 1 , 0 84 2 , 2 94
Net Prof it bef ore Except. (310) (118) 240 1,084 2,294
EB I TDA (396) 27 499 1,342 2,852
Gr o w t h
R evenue Gth (%) N/A 71.8 28.7 37.1 40.2
EB I TDA Gth (%) N/A N/A 1,783.2 169.0 112.4
Opg Prof it Gth (%) N/A (102.8) 4,209.3 176.2 112.3
Net Prof it Gth (%) N/A 62.0 N/A 351.0 111.6
M a rgins & Ratio
Gross M argins (%) (2.9) 13.9 23.6 34.3 43.7
Opg Prof it M argin (%) (15.7) 0.3 8.5 17.2 26.0
Net Prof it M argin (%) (12.3) (2.7) 4.3 14.2 21.4
R OAE (%) (320.0) (113.5) 28.0 48.3 58.3
R OA (%) (16.3) (1.9) 2.0 5.7 8.0
R OCE (%) (23.5) 0.2 2.4 6.4 8.5
Div Payout R atio (%) N/A N/A 0.0 0.0 0.0
Net I nterest Cover (x) (205.9) 0.2 6.3 361.1 NM
Page 47
Company Guide
Balance Sheet (RMB m)

F Y D ec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 12 42 63 139 298

I nvts in Associates & JVs 321 1,066 1,785 2,643 3,631
Other LT Assets 101 67 142 145 147
Cash & ST I nvts 3,059 7,132 11,553 18,955 29,186
I nventory 44 108 102 102 102
Debtors 26 73 130 130 130
Other Current Assets 254 232 955 955 955
T o t al Assets 3 , 8 17 8 , 7 20 1 4 , 73 0 2 3 , 06 8 3 4 , 44 7
ST Debt 3,159 7,039 10,694 17,278 25,940

Creditors 98 207 489 489 489
Other Current Liab 335 740 1,679 1,679 1,679
LT Debt 31 721 167 837 1,261
Other LT Liabilities 0 0 0 0 0
Shareholder’s Equity 194 14 1,702 2,786 5,080
M inority I nterests 0 0 0 0 0
T o t al Cap. & Liab. 3 , 8 17 8 , 7 20 1 4 , 73 0 2 3 , 06 8 3 4 , 44 7
Non-Cash Wkg. Capital (109) (534) (981) (981) (981)

Net Cash/(Debt) (131) (627) 692 840 1,985
Debtors Turn (avg days) 1.8 4.2 6.6 6.2 4.4
Creditors Turn (avg days) 6.9 14.9 29.9 35.6 29.8
I nventory Turn (avg days) 3.1 7.5 9.0 7.4 6.2
Asset Turnover (x) 1.3 0.7 0.5 0.4 0.4
Current R atio (x) 0.9 0.9 1.0 1.0 1.1
Quick R atio (x) 0.9 0.9 0.9 1.0 1.0
Net Debt/Equity (X) 0.7 45.1 CASH CASH CASH
Net Debt/Equity ex M I (X) 0.7 45.1 CASH CASH CASH
Capex to Debt (%) 0.3 0.4 0.3 0.6 0.8
Cash Flow Statement (RMB m)

F Y D ec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Prof it (399) (60) 475 1,332 2,818

Dep. & Amort. 1 5 19 29 63
Tax Paid 89 (58) (234) (248) (524)
Assoc. & JV I nc/(loss) 0 0 0 0 0
(Pf t)/ Loss on disposal of FAs 0 0 0 0 0
Chg in Wkg.Cap. (1,382) 194 796 0 0
Other Operating CF 206 288 602 1 1
N e t Operatin g CF ( 1 ,4 85) 380 1 , 6 62 1 , 1 13 2 , 3 58
Capital Exp.(net) (10) (32) (38) (105) (222)
Other I nvts.(net) (1,612) (4,315) (4,952) (6,373) (3,829)
I nvts in Assoc. & JV 0 0 0 0 0
Div f rom Assoc & JV 0 0 0 0 0
Other I nvesting CF 35 (156) (434) 0 0
N e t Investing CF ( 1 ,5 88) ( 4 ,5 02) ( 5 ,4 24) ( 6 ,4 77) ( 4 ,0 51)
Div Paid 0 0 0 0 0
Chg in Gross Debt 2,829 4,548 3,761 7,254 9,085
Capital I ssues 203 (88) 651 0 0
Other Financing CF 0 0 0 0 0
N e t Financin g C F 3 , 0 32 4 , 4 60 4 , 4 12 7 , 2 54 9 , 0 85
Currency Adjustments 15 7 (3) 0 0
Chg in Cash (26) 344 647 1,891 7,392
Opg CFPS (R M B ) (1.86) 3.36 15.25 6.72 14.24
Free CFPS (R M B ) (27.03) 6.28 28.59 6.09 12.90
Page 48
ZhongAn Online P&C Insurance
Version1 |Bloomberg: 6060 HK Equity | Reuters: HK6060
BUY (initiate coverage) The leading Insurtech player in China

L ast Traded Price( 31 May 2018):HK$52.20(HSI : 30,493) A disruptive force to brick-and-mortar P&C segment ZhongAn Online
Pric e Target 12-mth:HK$68.00 (30% upside) P&C Insurance Co., Ltd (ZhongAn) is the leading Insurtech player in
China, with strengths in mass data computing capability, scenario-based
A nalyst
Ken SHIH+852 2820 4920 kenshih@dbs.com
setting ability to explore new business opportunity and ability to grow. It
started its business footprint in the consumer lifestyle and online travel
What’s New ecosystem, and strategises to accelerate its growth in health, consumer
 Accelerating into health, consumer finance, and finance, and auto ecosystem from FY18F . With its boundary less growth
auto enables premiums to post a 59% CAGR in model, we expect this to enable ZhongAn to deliver a 59% CAGR in
FY18-20F premiums from FY18-20F, and acquire 2%/1% of China’s P&C/auto
insurance market share.
 Monetising technology know-how and migrating
into O2O-integrated model the right direction M onetising technology know-how and O2O the right direction Efforts to
migrate into O2O-integrated model is the right move, as it will mitigate
 Growing premium scale and longer-tail product the reliance on major ecosystem partners for growth, which ultimately
mix to achieve underwriting profit by FY20F
helps to reduce the hefty service fees in the long term. In 2017, GWP
 Initiate with BUY and TP of HK$68 from top 5 partners accounted for 61% of total GWP, down from 81%
in 2016, and this trend will continue. Its strategy to export its technology
know-how by launching five modularised services will also accelerate the
Price Relative
HK$ Relative Index
monetisation of its technology investment, and we expect such revenue
stream to grow by tenfold to Rmb403m by FY20F.
90.2 209
85.2
80.2
189
T o achieve underwriting profit by FY20F With underwriting leverage at
169
75.2
149 only 0.3x in 2017, ZhongAn remains at the initial stage of its
70.2
65.2
129
development. Despite its growth into longer-tail products, i.e. health and
109
60.2
55.2 89 auto, it will incur higher unearned premium reserves in the near term.
50.2 69
However, these longer-tail products should enable ZhongAn to deliver
45.2 49
Oct-17 Jan-18 Apr-18 faster premium growth and economies of scale, and enable the company
Zhongan Online P&C Insurance (LHS) Relative HSI (RHS) to achieve underwriting profit by FY20F.
Forecasts and Valuation Init iate coverage with BUY call and TP of HK$68 We initiative coverage
FY Dec (RMB m) 2016A 2017A 2018F 2019F on ZhongAn with a BUY rating and target price of HK$68, which implies
Net earned premiums 3,225 4,614 6,959 11,743
Net investment income 140 838 759 1,035 30% upside. As the leading Insurtech player in China, we believe that
Net Profit 9 (996) (723) 160 ZhongAn possesses the greatest potential among scenario-based online
EPS (RMB) 0.01 (0.68) (0.49) 0.11 insurers to grab China’s brick-and-mortar P&C insurance market share.
EPS (HK$) 0.01 (0.83) (0.60) 0.13
EPS Gth (%) (78.8) N/A 27.4 N/A Valuation:
PE (X) 5647.7 nm nm 391.6 Our target price is based on 6x FY19F P/BV , which is in line with the
DPS (HK$) 0.00 0.00 0.00 0.00 upper-end of average multiples among major internet giants.
Net Div Yield (%) 0.0 0.0 0.0 0.0 Key Risks to Our View:
BV Per Share (HK$) 6.76 14.36 13.72 13.91
P/Book Va lue (X) 7.7 3.6 3.8 3.7
Substantial slowdown in GWP growth, rising competition from P&C
ROAE (%) 0.1 (8.3) (4.3) 1.0 insurers and internet giants, slower China economic growth, and policy
risks.
Cons ensus EPS (RMB) 0.69 1.56
At A Glance
Other Broker Recs: B: 5 S: 2 H: 6
Is s ued Capital - H s hares (m shs) 470
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX - Non H s hrs (m s hs) 1,000
Total Mkt Cap (HK$m/US$m) 74,210 / 9,456
Major H Shareholders (As % of H s hares)
SoftBank Group Corp (%) 15.3
CDH Avatar, L.P. (%) 13.2
Keywise Capital Management (HK) Limited (%) 13.0
SAIF Partners (%) 11.8
H Shares-Free Float (%) 46.7
I CB Industry :Financials / Life Insurance
ed-TH / sa- CS /AH

Company Guide
ZhongAn Online P&C
CRITICAL FACTORS TO WATCH Gross written premiums

RMB m
90%
Critical Factors 14,000 85%
80%
12,000
Combined ratio: 10,000
75%
70%
ZhongAn has been loss-making for the past four years, 8,000 65%
60%
registering combined ratios of 108.6%/126.6% /104.7% 6,000
55%
4,000
/133.1% in FY14/15/16/17. As its profitability is inversely 2,000
50%
45%
related to its combined ratio, the level of combined ratio is 0 40%
2015A 2016A 2017A 2018F 2019F
critical to ZhongAn’s share price performance.
Gross written premium (LHS) yoy growht (%) (RHS)
Ret urn on equity:

Net Investment return
With the loss-making history, ZhongAn has experienced
7.0%
multiple years of “negative” return on equity. ZhongAn has
6.0%
expanded its equity base significantly upon receiving IPO
5.0%
proceeds. The ability to improve its ROE is critical to share price
performance going forward. 4.0%
3.0%
P2P credit guarantee (Yirendai’s share price): 2.0%
ZhongAn provides credit guarantee insurance products and 1.0%

2015A 2016A 2017A 2018F 2019F
solutions to financial institutions by protecting capital security
Net investment return Total investment return
based on big data risk control. The credit quality for P2P
play ers’ portfolio is therefore important to ZhongAn. Yirendai's Expenses ratio and loss ratio
share price partly reflects the credit risk implied from the
100 %
market, and therefore the share prices of ZhongAn and
80%
Yirendai have a strong correlation of 0.84x.
60%
40%
20%
0%
FY2015 A FY2016 A FY2017 A FY2018 F FY2019 F FY2020 F
Expense ratio Loss ratio
Underwriting profit
500
-500
-100 0
-150 0
-200 0
FY2015 A FY2016 A FY2017 A FY2018 F FY2019 F FY2020 F
Source: Company Data, DBS Vickers
Page 50
Company Guide
ZhongAn Online P&C
A ppendix 1: A look at Company's listed history – what drives its share price?
Share price history
100
Announced strategic Built China's first
90 co-operation with blockchain
Shanghai Pharma reinsurance
80 experimental
platform
70
60
50 Signed a comprehensiv e
cooperation agreement with
40 Initial public UnionPay Signed a comprehensive
offering F ormation of cooperation agreement with
30 J V with YunChe Finance
Sinolink
20
10
0
Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18
Critical Factor #1 – Combined ratio
100 150%
90 140%
80 130%
70 120%
60 110%
50 100%
40 90%
30 80%
20 70%
10 60%
0 50%
ZhongAn's share price - LHS Combined ratio - RHS
Page 51
Company Guide
ZhongAn Online P&C
Critical Factor #2 – Return on equity
100 -4%
90 -5%
80
-5%
70
60 -6%
50 -6%
40 -7%
30
-7%
20
10 -8%
0 -8%
ZhongAn's share price - LHS Return on equity - RHS
Critical Factor #3 – Yirendai’s share price
100 60
90
50
80
70
40
60
50 30
Correlation: 0.85x
40
20
30
20
10
10
0 0
ZhongAn's share price - LHS Yirendai's share price - RHS
Page 52
Company Guide
ZhongAn Online P&C
Balance Sheet:
Solvency level:
ZhongAn managed to increase its solvency ratio from 722% in Expense/Loss/Combined ratio
F Y16 to 1,178% in F Y17, substantially higher than CIRC’s
140%
required solvency margin.
120%
100%
L ev erage level (total asset/total equity): 80%
ZhongAn's leverage level remains relatively low, declining 60%
slightly from 1.36x to 1.22x in FY17. 40%
20%
Share Price Drivers: 0%

2015A 2016A 2017A 2018F 2019F
Combined ratio:
Expense ratio Loss ratio
As its profitability is inversely related to its combined ratio,
ZhongAn's level of combined ratio will affect its share price Solvency ratio
performance.
1180.0%
Ret urn on equity: 980.0%
ZhongAn has incurred losses for multiple years. The ability to 780.0%
improve its ROE is critical to its share price performance going 580.0%
forward.
380.0%
180.0%
P2P credit guarantee (Yirendai’s share price): 2015A 2016A 2017A 2018F 2019F
As ZhongAn provides credit guarantee to P2P portfolio, the

credit quality , reflected by P2P player's share price (Yirendai), is
therefore vital to ZhongAn's share price performance. ROE
1.0%
Key Risks: 0.8%
Worse-than-expected combined ratio, weaker-than-expected 0.6%
gross written premium, weak-than-expected investment

0.4%
performance
0.2%
Company Background 0.0%

2015A 2016A 2017A 2018F 2019F
ZhongAn was incorporated in 2003 as a joint stock limited

company and launched its first product in November 2013.
ZhongAn is an online-only Insurtech company in China. Its PB Band
(x)
products include accident, bond, health, liability, credit, cargo 7.3
and household property insurance. The company leverages on 6.8
6.3 +2sd: 6.37x

technologies to develop ecosystem-oriented insurance 5.8
+1sd: 5.58x
products. 5.3
4.8 Avg: 4.79x

4.3
-1sd: 4x
3.8
3.3 -2sd: 3.22x

2.8
Oct-17 Jan-18 Apr-18
Page 53
Company Guide
ZhongAn Online P&C
Key Assumptions
F Y D ec 2015A 2016A 2017A 2018F 2019F
Gross written premium growth 187.5 49.3 74.7 60.2 64.4

Expense ratio 58.1 62.7 73.6 77.1 72.1
Loss ratio 68.5 42.0 59.5 47.1 37.4
Combined ratio 126.6 104.7 133.1 124.2 109.5
Net investment return 1.7 1.8 3.8 3.6 4.0
Total investment return 6.8 1.2 4.8 3.6 4.0
Solvency ratio 1,620.4 722.5 1,178.3 747.8 447.5

F Y D ec 2015A 2016A 2017A 2018F 2019F
Gross written premiums 2,283 3,408 5,954 9,538 15,682

Net earned premium 1,921 3,225 4,614 6,959 11,743
I nvestment income 561 140 838 759 1,035
Other operating income 27 47 131 195 302
T o t al i ncome 2 , 5 09 3 , 4 13 5 , 5 83 7 , 9 13 1 3 , 08 0
B enef its and claims (1,316) (1,355) (2,746) (3,280) (4,394)

Underwriting and policy acquisition costs (1,130) (2,041) (3,488) (5,366) (8,468)
Finance cost (3) 0 (4) 0 0
Other expenses 0 (3) (344) 0 0
T o t al expenses ( 2 ,4 50) ( 3 ,4 00) ( 6 ,5 83) ( 8 ,6 46) ( 1 2 ,862)
Share of prof it of associated and JVs 0 0 (3) (5) (5)

Prof it bef ore tax 60 13 (1,002) (738) 214
I ncome tax expense (15) (4) 6 15 (53)
M inority interest 0 0 0 0 0
Pref erred dividend 0 0 0 0 0
N e t income att ributable to sharehol ders 44 9 ( 9 9 6) ( 7 2 3) 160
Balance Sheet(RMB m)
F Y D ec 2015A 2016A 2017A 2018F 2019F
Total I nvestment 7,709 8,379 16,397 21,317 25,580

Property, plant and equipment 15 54 85 170 341
Other assets 345 900 4,577 2,373 5,167
T o t al assets 8 , 0 69 9 , 3 32 2 1 , 05 9 2 3 , 86 0 3 1 , 08 8
Net lif e reserves - traditional 616 797 2,430 5,318 10,383

Net lif e reserves - investment contracts N/A N/A N/A N/A N/A
Other Liabilities 555 1,676 1,449 2,039 3,969
T o t al l iab ilities 1 , 1 71 2 , 4 73 3 , 8 79 7 , 3 57 1 4 , 35 2
Shareholder's equity 1,241 1,241 1,470 1,470 1,470

M inority interest 5,658 5,618 15,801 15,034 15,266
T o t al equ ity 6 , 8 98 6 , 8 59 1 7 , 27 1 1 6 , 50 3 1 6 , 73 6
Page 53
Company Guide
ZhongAn Online P&C
Key Financials & Ratios

F Y D ec 2015A 2016A 2017A 2018F 2019F
Du Pont analysis (%)

Net prof it / premium income 1.9 0.3 (16.7) (7.6) 1.0
Premium income / total asset 28.3 36.5 28.3 40.0 50.4
Total asset / total equity 1 1 1 1 2
R eturn on equity 1.1 0.1 (8.3) (4.3) 1.0
Per share analysis(RMB)

EPS 0.04 0.01 (0.68) (0.49) 0.11
B PS 5.56 5.53 11.75 11.23 11.39
DPS 0.00 0.00 0.00 0.00 0.00
EVPS 0.00 0.00 0.00 0.00 0.00
Capital Strength (%)

Leverage ratio 1 1 1 1 2
Solvency ratio 1,620.4 722.5 1,178.3 747.8 447.5
Page 55
Qudian Inc
Bloomberg: QD US Equity | Reuters: U:QD Refer to important disclosures at the end of this report
NOT RATED In transition

L ast Traded Price ( 31 May 2018):US$8.25 (NA SDAQ: 7,442)  Regulation brings challenges to cash loan business,
which has slowed down
A nalyst
Cindy WANG +852 28638830  Expect auto financing to accelerate in 2H18 to meet
cindywangyy@dbs.com full year target of leasing 100K cars
Ken Shih +852 2820 4920
kens hih@dbs.com  Delinquency rate normalised in late March
Regulators are discouraging small-ticket cash loans. Through offering
small-ticket and short tenure loans in the past, Qudian’s loan
Price Relative
US$ Relative Index
origination surged dramatically by 357% CAGR in FY15-17 to
12.2
207 RMB89bn, supported by 208% CAGR in active borrowers and high
11.2
187
167
frequency of repeat borrowing. However, as regulators are
10.2 147
127
discouraging small-ticket loans without a specified usage, the so-called
9.2
8.2
107
payday loans, Qudian has adjusted its loan profile to offer slightly
87
7.2
Apr-18
67 larger-sized loans of RMB1.4K and a credit term of 5.1 months (vs
Qudian Inc (LHS) Relative NASDAQ (RHS)
prev ious RMB1K/2mths), suggesting that the fast churn of payday
loans to drive top-line growth rapidly would not exist going forward.
Forecasts and Valuation
FY D ec (RMB m) 2 0 15A 2 0 16A 2 0 17A A nimble player in auto financing market. Qudian launched Dabai Auto
Turnover 235 1,443 4,775
EBITDA (230) 715 n.a. in Nov to provide auto financing to existing borrowers, supporting by
Pre -tax Profit (233) 703 2,420 its 175 offline stores in tier 3-4 cities. Compared to banks which
Net Profit (233) 577 2,164 require 25-30% down payment and charge 10-11% annual
Net Pft (Pre Ex.) (233) 577 2,164 percentage rate (APR), Dabai provides a four-year car leasing plan with
EPS (RMB) n.a. 1.96 17.12 10% down payment and 15-16% APR. The spread for auto financing
EPS (US$) n.a. 0.31 2.67 at 6-7% is much smaller than 27-28% for cash loans. Qudian targets
EPS Gth (%) n.a. n.a. 773.5 to facilitate 100K cars in 2018. This target, however, looks quite
Diluted EPS (RMB) n.a. 1.95 7.09
BV Per Share (RMB) n.a. n.a. 28.91 challenging given the current run rate of 6.3K cars in 1Q18, despite the
PE (X) n.a. 27.2 7.5 company expecting this to accelerate in 2H18.
P/Cas h Flow (X) n.a. 19.4 2.2
P/Free CF (x) n.a. 19.5 n.a. Bet ter credit quality helped by Zhima Credit. Qudian has a low
EV/EBITDA (X) n.a. 18.3 n.a. delinquency rate and charge-off rate compared to peers, as it largely
P/Book Value (X) n.a. n.a. 1.8
Net Debt/Equity (X) (1.4) Cas h Cas h relies on Zhima Credit for risk pricing which may offer the most reliable
ROAE (%) n.a. 61.3 35.9 credit data apart from PBOC’s credit bureau. Despite Qudian’s M1+
Other Broker Recs: B: 6 S: 0 H: 2 delinquency rate rising to 1.7% in 1Q18 from 0.9% in 4Q17 amid the
like-credit cycle that took place in Dec-17, the management stated that
I CB Industry: Financials credit risk has returned to a normal level at the end of March. Asset
I CB Sector: General Finance
Pr incipal Business: A lead Chinese online credit products provider quality for auto financing is good with M1+ delinquency rate at zero,
likely helped the collateral loan feature. Qudian currently trades at 6x
Source of all data on this page: Company, DBSV, Thomson Reuters, fwd 12M PER, below industry’s 3-year average of 8x.
HKEX
A t A Glance
Is s ued Capital (m shrs) 265
Mkt Cap (US$m) 2,162
Major Shareholders (%)
Min Luo 19.3
Li Du 17.1
Kunlun Group Ltd 16.9
Yi Cao 13.7
Ant Financial 11.5
Zhu Entities 6.2
Free Float (%) 71.4
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV.
ed-JS/ sa- CS / AH
Qudian Inc
Qudian mobile app interface
Source: DBS Vickers
Qudian mobile app interface
Source: DBS Vickers
Page 57
Qudian Inc
I n co me Statement (R MB m) B a lance Sheet (RM B m)
F Y D ec 2015A 2016A 2017A F Y D ec 2015A 2016A 2017A
Net Fixed Assets 2 5 5
R evenue 235 1,443 4,775 I nvts in Assocs & JVs - - -
Cost of Goods Sold (148) (268) (881) Other LT Assets 229 184 190
Gr o ss Profit 87 1 , 1 75 3 , 8 95 Cash & ST I nvts 2,355 6,629 16,442
Other Opg (Exp)/I nc (318) (462) (1,473) I nventory
O p e rating Profit ( 2 3 1) 713 2 , 4 21 Debtors 9
Other Non Opg (Exp)/I nc - - - Other Current Assets 90 300 2,735
Associates & JV I nc T o t al Assets 2 , 6 76 7 , 1 18 1 9 , 38 0
Net I nterest (Exp)/I nc - - -
Exceptional Gain/(Loss) - - - ST Debt 3,169 4,204 8,699
Pr e - tax Profi t ( 2 3 3) 703 2 , 4 20 Creditors - - -
Tax (127) (256) Other Current Liab 49 324 631
M inority I nterest LT Debt 89 76 510
Pref erence Dividend - - - Other LT Liabilities - - -
N e t Pr ofit ( 2 3 3) 577 2 , 1 64 Shareholder's Equity (631) 2,514 9,540
Net Prof it bef ore Except. (233) 577 2,164 M inority I nterests
EB I TDA (230) 715 - T o t al Cap. & Liab. 2 , 6 76 7 , 1 18 1 9 , 38 0
R evenue Gth (%) - 514.0 231.0
EB I TDA Gth (%) - (410.1) - Non-Cash Wkg. Cap - - -
Opg Prof it Gth (%) - (408.6) 239.5 Net Cash/(Debt) (904) 2,349 7,233
Ef f ective Tax R ate (%) 18.0 10.6 Net Fixed Assets 2 5 5
I nvts in Assocs & JVs - - -
C a s h F low Statement (R MB m) R a tes & Ratio
F Y D ec 2015A 2016A 2017A F Y D ec 2015A 2016A 2017A
Pre-Tax Prof it (233) 703 2,420 Gross M argin (%) 36.8 81.4 81.6
Dep. & Amort. 1 2 - Opg Prof it M argin (%) (98.3) 49.4 50.7
Tax Paid - (54) - Net Prof it M argin (%) (99.2) 40.0 45.3
Assoc. & JV I nc/(loss) - - - R OAE (%) n.a. 61.3 35.9
(Pf t)/ Loss on disposal of FAs - - - R OA (%) (8.7) 11.8 16.3
Non-Cash Wkg. Cap. - - - Asset Turnover (x) 0.1 0.3 0.4
Other Operating CF 130 143 - Debtors Turn (days) n.a. n.a. 0.3
N e t Operatin g CF ( 1 0 2) 794 3 , 0 76 Current R atio (x) 0.8 1.5 2.1
Capital Exp. (net) (2) (5) - Quick R atio (x) 0.8 1.5 2.1
Other I nvts. (net) (1,864) (3,594) - Net Debt/Equity (X) (1.4) Cash Cash
I nvts. in Assoc. & JV - - - Capex to Debt (%) 0.0 0.1 n.a
Div f rom Assoc. & JV - - - N. Cash/(Debt)PS (R M B ) n.a. n.a. 21.92
Other I nvesting CF 1 - - Opg CFPS (R M B ) n.a. 2.70 24.33
N e t Investing CF ( 1 ,8 65) ( 3 ,5 98) ( 7 0 6) Free CFPS (R M B ) n.a. 2.68 n.a
Div Paid - - -
Chg in Gross Debt 1,844 2,589 -
Capital I ssues - - -
Other Financing CF 332 790 -
N e t Financin g C F 2 , 1 75 3 , 3 80
Chg in Cash 208 576 2,371
Pre-Tax Prof it (233) 703 2,420
I n terim Income Statemen t (RM B m) C o m pany backgro und

F Y M ar Q 2 2 01 7 Q 3 2 01 7 Q 4 2 01 7 Q 1 2 01 8 Qudian started its business as Quf enqi in M ar 2014, extended cash credit
R evenue services and merchandise credit to college students in China, and created
Cost of Goods Sold 998.4 1,451.0 1,491.2 1,716.6 another platf orm called Laif enqi started operating in Dec 2014 targeting
Gr o ss Profit 1 9 4 .3 2 5 8 .9 3 0 5 .4 6 8 6 .4 young white collar workers. The company f ormed a strategic alliance with
Other Oper. (Exp)/I nc 804.1 1,192.1 1,185.9 1,030.2 Ant Financial in Sep 2015, starting to mitigate the business f rom of f line to
O p e rating Profit 14. 5 2. 3 10. 9 5. 5 online, and terminated its credit service to college students in 2016.
Other Non Opg (Exp)/I nc 607.9 695.8 559.1 326.4 Qudian currently targets young, mobile-active consumers in China who
Associates & JV I nc (0.3) (0.8) (6.9) (20.0) need access to small credit amounts f or their discretionary spending, or
Net I nterest (Exp)/I nc 0.0 0.0 0.0 0.0 budget auto f inancing solutions, but also underserved by traditional
N e t profi t bef Except. n . a. 0. 7 5. 5 19. 5 f inancial institutions due to lack of credit data. Qudian was listed in the US
EB I TDA 0.0 0.0 0.0 0.0 in Oct 2017 and an I PO price of US$24.
607.5 696.6 558.8 324.5
R evenue Gth (%) 99.0 45.9 18.8 8.7
EB I TDA Gth (%) n.a. n.a. 0.0 0.0
Opg Prof it Gth (%) 0.0 0.0 0.0 0.0
Net Prof it Gth (%) 508.5 650.7 540.1 315.8
Net Prof it M argins (%) 0.0 0.0 0.0 0.0
R evenue n.a. 3.9 4.6 7.6
Page 58
Hexindai Inc
Bloomberg: HX US Equity | Reuters: @HX Refer to important disclosures at the end of this report
NOT RATED A nimble P2P player

L ast Traded Price ( 31 May 2018):US$11.82 (NA SDAQ: 7,442)
 A relatively small P2P platform backed by parent
A nalyst company, Hexin Group, on referring borrowers
Cindy WANG +852 28638830 cindywangyy@dbs.com
Ken SHIH +852 2820 4920 kenshih@dbs.com  High investment yield of 11% provides potential
earnings upside once it matches the market rate of 9%
Price Relative  Time needed to truly reflect the credit profile given its
late entrance into the market
Back ed by Hexin Group. Similar to Yirendai’s business model (YRD
US), Hexindai operates online/offline P2P platform backed by its
parent company, Hexin Group, to provide large-sized and longer-
tenure loans. Since 2016, Hexindai has shifted its focus from
secured to unsecured loans which delivered a substantial growth
at 15x/2x y -o-y in FY16/17. Currently , 76% of borrowers are
referred by Hexin Group (vs +90% in 2016/17), which have offline
teams to screen and transfer loan applications to Hexindai,
Forecasts and Valuation lowering the probability of fraud.
FY M ar (US$m) 2 0 14A 2 0 15A 2 0 16A 2 0 17A
Turnover 5 12 23 High investment yield among peers. With the rising middle class,
EBITDA (0) 4 10
Pre -tax Profit (0) 4 10 investors have a strong appetite to invest in a consumer lending
Net Profit (0) 4 9 platform which offers attractive returns and better risk
Net Pft (Pre Ex.) (0) 4 9 management. Thereby, Hexindai’s strategy is to provide a higher
EPS (US$) (0.01) 0.08 0.20 investment yield of 11%, vs peers’ ~9%, to attract investors and
EPS Gth (%) n.a. n.a. 150.0
Diluted EPS (US$) (0.01) 0.08 0.20 secure stable funding sources. A 2% investment spread compared
BV Per Share (US$) n.a. 0.33 0.55 to peers provides a potential earnings upside for Hexindai once it
PE (X) (1,182.0) 147.8 59.1 matches the market rate.
P/Cas h Flow (X) 192.3 70.8 61.1
P/Free CF (x) 210.5 72.0 63.3 Credit profile appears fine but only time will tell. Hexindai has had
EV/EBITDA (X) n.a. 116.5 48.1 a low charge-off rate of 3.1% since inception (March 2016),
P/Book Value (X) n.a. 35.5 21.6
Net Debt/Equity (X) n.a. Cas h Cas h compared to Yirendai’s 9% for a lifetime loan (30 months), and
ROAE (%) n.a. n.a. 45.7 we think this is likely due to 1) Hexindai’s lifetime loan cycle has
not been completed given its average loan tenure of three years,
I CB Industry: Financials 2) more than 90% of loans were referred by offline sources, vs
I CB Sector: General Financial Yirendai’s 50-60%, which provides one more level of scrutiny. The
Pr incipal Business: A fastgrowing consumer lending marketplace in management expects the charge-off rate for a lifetime loan to be
China
~5%, but we think it will take time for credit control to achieve
Source of all data on this page: Company, DBSV, Bloomberg Finance
L.P., HKEX the numbers once Hexindai increases its online borrower
acquisition. Hexindai currently trades at 8x 12-month forward PE,
in line with the industry ’s 3-year av erage.
A t A Glance
Is s ued Capital (m shrs) 48
Mkt Cap (US$m) 567
Major Shareholders (%)
Hexin Group 66.7
Anhe Holding Ltd 16.7
Free Float (%) 16.7
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV.
ed-TH / sa- CS / AH
Hexindai Inc
Hexindai mobile app interface
Source: DBS Vickers
Hexindai mobile app interface
Source: DBS Vickers
Page 60
Hexindai Inc
I n co me Statement (US$ m) B a lance Sheet (US$ m)
F Y M ar 2015A 2016A 2017A F Y M ar 2015A 2016A 2017A
R evenue 5 12 23 Net Fixed Assets - 0 0
Cost of Goods Sold - - - I nvts in Assocs & JVs - - -
Gr o ss Profit - - - Other LT Assets - 13 0
Other Opg (Exp)/I nc - - - Cash & ST I nvts 8 19
O p e rating Profit ( 0) 4 10 I nventory -
Other Non Opg (Exp)/I nc - - - Debtors -
Associates & JV I nc Other Current Assets - 2 8
Net I nterest (Exp)/I nc - - - T o t al Assets - 22 28
Exceptional Gain/(Loss) - - -
Pr e - tax Profi t ( 0) 4 10 ST Debt -
Tax (0) (1) (2) Creditors - - -
M inority I nterest Other Current Liab - 8 5
Pref erence Dividend - - - LT Debt -
N e t Pr ofit ( 0) 4 9 Other LT Liabilities - - -
Net Prof it bef ore Except. (0) 4 9 Shareholder's Equity - 14 24
EB I TDA (0) 4 10 M inority I nterests -
R evenue Gth (%) - 156.0 92.7 T o t al Cap. & Liab. - 22 28
EB I TDA Gth (%) - (1,606.4) 138
Opg Prof it Gth (%) - (1,486.5) 139.4 Non-Cash Wkg. Cap - - -
Ef f ective Tax R ate (%) (14.3) 15.1 15.1 Net Cash/(Debt) - 8 19
R evenue 5 12 23
Cost of Goods Sold - - -
C a s h F low Statement (US$ m) R a tes & Ratio
F Y M ar 2015A 2016A 2017A F Y M ar 2015A 2016A 2017A
Pre-Tax Prof it (0) 4 10 Gross M argin (%) n.a. n.a. n.a.
Dep. & Amort. 0 0 0 Opg Prof it M argin (%) (6.4) 34.8 43.3
Tax Paid - - (0) Net Prof it M argin (%) (7.5) 29.7 37.4
Assoc. & JV I nc/(loss) - - - R OAE (%) n.a. n.a. 45.7
(Pf t)/ Loss on disposal of FAs - - - R OA (%) n.a. 15.8 33.8
Non-Cash Wkg. Cap. 2 2 (3) Asset Turnover (x) n.a. 0.5 0.9
Other Operating CF 1 1 1 Current R atio (x) n.a. 1.1 5.6
N e t Operatin g CF 3 7 8 Quick R atio (x) n.a. 1.1 5.6
Capital Exp. (net) (0) (0) (0) Net Debt/Equity (X) n.a. Cash Cash
Other I nvts. (net) - - - Capex to Debt (%) n.a. n.m. n.m.
I nvts. in Assoc. & JV - - - N. Cash/(Debt)PS (US$) n.a. 0.19 0.45
Div f rom Assoc. & JV - - - Opg CFPS (US$) 0.06 0.17 0.19
Other I nvesting CF - - - Free CFPS (US$) 0.06 0.16 0.19
N e t Investing CF ( 0) ( 0) ( 0)
Div Paid - - -
Chg in Gross Debt (5) (7) 2
Capital I ssues - - -
Other Financing CF 4 7 1
N e t Financin g C F ( 1) ( 0) 4
Chg in Cash 1 7 11
Pre-Tax Prof it (0) 4 10
C o m pany backgro und
Founded in M ar 2014 in B eijing, Hexindai established a consumer lending
marketplace in which it f acilitates loans to meet the increasing
consumption demand of the emerging middle class in China. Since
inception, HX has f acilitated R M B 20bn of accumulated loans and more
than 140K borrowers and 200K investors as of M ar 2018. The company
completed an initial public of f ering at US$10 per share on Nov 3, 2017.
Source: Bloomberg Finance L.P.
Page 61
Industry Focus
DBSVHK recommendations are based an Absolute Total Return* Rating s ystem, defined as follows:
S TRONG BUY (>20% total return over the next 3 months, with identifiable s hare price catalysts within this time frame)
B U Y (>15% total return over the next 12 months for s mall caps, >10% for large caps)
H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FU LLY VALUED (negative total return i.e. > -10% over the next 12 months)
S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 4 Jun 2018 09:29:38 (HKT)

Dis s emination Date: 4 Jun 2018 10:41:48 (HKT)
Sources for all charts and tables are DBS Vickers unless otherwise s pecified.
GEN ERAL DISCLOSURE/DISCLAIMER
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
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Page 62
Industry Focus
A N ALYST CERTIFICATION
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Page 63
Industry Focus
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China Fintech Sector: China / Hong Kong Industry Focus

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China Fintech Sector

DBS Group Research . Equity 4 Jun 2018

On the other hand, China banks are mainly focusing on

Source: China Internet Network Information Center (CNNIC); DBS

items such as luxury products, electronics and vacations, etc. 19.6%

borrowers on the online consumer lending platforms. RMB2K- RMB3K 16.6%

RMB1.5K- RMB2K 9.2%

RMB1K- RMB1.5K 6.0%

< RMB500 17.7%

0% 5% 10% 15% 20% 25%

Source: CNNIC; DBS Vickers

Near prime P2P/ online

- Prime [FICO= 670-799]: This group of borrowers are

of the population, and is the main targeted customers for

Fig 10: China P2P industry development

P2P investors P2P borrowers

Accumulated problem platforms

Source: WIND, DBS Vickers

Fig 14: P2P regulation details

Date Regulator Regulations Key rules

Source: CBRC, PBOC, DBS Vickers

Based on disposable income per capita of Rmb26,000 in China

200 Source: PBOC, Oliver Wyman, DBS Vickers

was only 12% of consumer loans (excluding mortgage) in

Under the new regulation, loans without designated usage are

Fig 20: Market map of consumer finance - by product type

Source: WIND; DBS Vickers

Fig 21: Competitive landscape

Source: WDZJ, Company, DBS Vickers; data as of March 2018

Source: Company, DBS Vickers Fig 25: Borrowers’ APR breakdown

2015 2016 2017 2017 YoY (RHS)

Most platforms incurred losses in 2014/2015 due to lack of

Average of borrowing size

Source: Company, DBS Vickers

Source: Company, DBS Vickers

St rengthening customer retention rate to reduce acquisition

As Yirendai’s loan products have a tenure of around 2-3 years

Source: Company, DBS Vickers; data as of 2017

Av erage investor returns for the P2P industry is around 8.9%,

Fig 30: Funding sources comparison Source: WIND; DBS Vickers

Source: WIND; DBS Vickers

Source: Company, DBS Vickers

Fig 35: Credit model, delinquency rate, and charge-off comparison

ov erdue loan after the regulation announcement jump to 50- 2.0%

monitor regarding credit risks. But as the previous like-credit

Source: WIND; DBS Vickers

Fig 39: Listed P2P players - key comparisons

Source: Company; DBS Vickers; data as of 2017

223 Source: Insurance Association of China, DBS Vickers

600 41% Cagr Fig 42: China’s online/total insurance premium

302 2000 250%

alternative channel and could be subject to tightening

Fig 44: China’s online/total insurance premium

Zhong An insurance monthly premium YoY (%) - RHS

L ev eraging on online ecosystems in race for consumer data

Online ins urer Zhong An TK.cn 1an.com Answern

Xilinmen Family P&C Policy, Property

Techno lo gical applicat io n

Source: Company, DBS Vickers

A means to an end – higher efficiency despite the cost

commission, and serv ice fees to their respective ecosystem 120%

attracts competition especially from newcomers and the cost is 60%