Key points
　　Fintech supply chain factoring service company Shengye Capital (SYC)provides SaaS to core enterprises and acquires new customers in return.
　　We expect SYC to deliver strong profit growth in 2021E as it expands itsfunding sources.
　　We initiate with an OP and HK$8.00 target price, implying a 51% TSR.
　　Shengye Capital (SYC) is a fintech company engaged in the purchase ofaccounts receivable (i.e. factoring). We expect the company to deliver strongprofit growth in 2021E due to its increasing funding sources. With investments intechnology, SYC provides Software as a Service (SaaS) via its platform to coreenterprises in three sectors, infrastructure, energy, and medical, which in turnallows SYC to provide factoring services to thousands of vendors, mostly SMEs,in the supply chain.
　　Acquiring customers through SaaS
　　Amid tighter regulatory controls on the quasi-financial segment (includingcommercial factoring), we believe SYC will continue to gain market share fromother corporate-backed factors o n th e back o f its “1+N+Fin tech ” mo d el . Giventhat penetration remains quite low in core enterprise supply chains, we believenew customer acquisition should be low-hanging fruit.
　　Expanding funding sources to spur growth
　　To monetize customers, SYC provides factoring services in three ways:
　　(1) holding the factoring assets; (2) disposal of factoring assets; and (3) loanfacilitation. Given low leverage, we believe funding is the key constraint to itsgrowth. Because onshore funding is expensive and less accessible, SYC beganto diversify its funding sources via offshore markets. We believe it will acquiremore funding via cheaper overseas notes and syndicated loans.
　　Low credit risk driven by tech
　　Fraud risk is always the biggest challenge in commercial factoring. By connectingto th e co re en terp rises’ ERP systems, SYC can acquire customers with limitedcredit risks. It approves loans automatically based on data-driven transactionverification while enhancing risk control with closed-loop bank accountmanagement and the application of IoT technology. Though its scale will growquickly, we believe its credit cost will remain low.
　　Profit growth drives valuation
　　We believe a weak 2H20 and dilution from SYC’s recen t placement is reflected inthe price. With strong asset growth and an improving cost structure, we believeEPS growth will rebound to 13% in 2021E from 9% in 2020E and stay at 21-22%in 2022E/ 2023E. Our HK$8.00 price target is based on 2.0x 2022E PB in linewith th e comp an y’s historical mean and we expect its ROE to increase to 13% in2022E from 12% in 2020E.
　　Catalyst: Favourable regulatory change and increase in funding sources.
　　Risks: Macro economy, relationships with core enterprises, ability to increasefunding sources, and reliability of its risk management.