Sheng Ye Capital (SYC) has established differentiated advantages in the factoring industry thanks to its product innovation and risk management empowered by fintech. Rolling out its platform-based transformation, the company will obtain an asset-light growth driver.We expect SYC’s earnings to grow by 17.5%/20.8%/21.3% in 2021-23.Initiate coverage with BUY rating and TP at HK$7.38 per share.
Key Factors for Rating
SYC has established close relationships with 10 core enterprises, of which the supply chain presents a large upside potential for SYC’s business expansion. The total balance of the 10 core enterprises’ accounts payable exceeded RMB2trn as of end-2019, while the on & off-balance sheet factoring financing disbursed by SYC totalled RMB15.6bn in 2020. Therefore, it is reasonable to believe that SYC has a large room to expand its factoring business scope in the future.
SYC enjoys higher NIM thanks to the enhanced efficiency and product innovation. Empowered by its proprietary fintech, SYC is able to shorten the loan approval process and innovate data-driven non-confirmation factoring products. The strong competitiveness allows SYC to charge a higher interest rate compared with traditional factoring financing offered by banks.
We expect SYC’s NIM to remain at a high level, but it may contract moderately due to increased competition, its product mix, and reliance on borrowings to fund the future growth of on-balance sheet factoring assets.
SYC promoted a new asset-light, platform-based business model, aiming to achieve higher growth with less restriction by capital.
SYC’s loan facilitation business grew rapidly in 2020. Considering the strong financing needs of SME suppliers and the rich experience accumulated by SYC in servicing the infrastructure, pharmaceutical, and energy sectors, we expect SYC’s loan facilitation business to continue to embrace fast growth and drive up the proportion of income from other services in total revenues, and income from other services will account for 18.0%/25.0%/32.2% of total operating revenues in 2021-23.
Key Risks to Rating
SYC’s financial performance may be significantly affected by the stability of its funding sources, credit risk of the core enterprises it collaborates with, and changes in regulations on loan facilitation and online lending.
Valuation
We use the P/E valuation method to determine the reasonable value of SYC, and set our target price accordingly. Based on the result, we set TP at HK$7.38 per share (15.0x 2021E P/E) and initiate SYC with BUY rating.