What's new
ZhengTong has announced plans to form an auto internet financejoint venture with XFin-Tech; the pair will hold respective 80% and20% shares in the JV, Zhengyuan Technology Company, which has aregistered capital of Rmb500mn.
Comments
Strengthening ZhengTong’s dominance in auto finance bycompleting an internet finance ecosystem and closed platform. TheJV will give ZhengTong’s auto finance business a second growthengine alongside Dongzheng AFC, which focuses on ZhengTong’s 4Scustomer base. With the help of its Zhengyuan JV and partnerXFin-Tech, ZhengTong could apply its internet finance system to newcar sales, used car sales, and car loans―allowing it to target a largercustomer base with much more interest-bearing asset resources.
Zhengyuan JV to mainly function as a risk assessment center,developing a more mature risk control model. We assumeZhengyuan’s role in the ZhengTong ecosystem will be as platformdesigner to solve the problem of risk pricing auto finance products, asinternet-led products might pose more diverse risks that must first beassessed. We also think Zhengyuan may help the platform to build uprisk control systems; meanwhile, Zhengyuan’s risk control model willbecome more mature as it gains more data.
XFin-Tech to enlarge funding scale and cooperate to run an ABS“factory”。 To realize a closed platform, ZhengTong needs to increaseits funding, which XFin-Tech and the ZhengTong-invested XIFAE couldfacilitate. XFin-Tech’s core business is ABS production, handling thefull process from base assets to ABS products, connecting the largeamount of ABS products purchased by banks with the small loanspurchased by auto finance companies.
Valuation and recommendation
We believe ZhengTong’s auto finance business will boost its growthand raise our 2018 earnings forecast by 11.2% to Rmb1.8bn.
We maintain our BUY rating, and lift our target price by 11% toHK$13, implying 14x 2018e P/E.
Risks
Consolidation misses expectations.