Investors have been disappointed in the withdrawal of the Ant Group IPO but those still interested in the lending platform space in China should take a look at Peak Fintech Group (OTC:PKKFF). In contrast to Ant, who provides the soup to nuts of financial products as well as loan matching to the Chinese market, Peak in a pure play platform. Peak operates a lending platform that matches lending institutions and borrowers and earns a fee of between one and four percent of the value of those loans. It targets primarily small and micro businesses. Much of what it does involves financing inventory and as a result it has great visibility, in some cases going out months, and lots of repeat business.
Since its launch in 2018, it has grown to a $29 million revenue run rate and expects to reach $40 million in annual revenues this year. We expect it to have its first profitable quarter this coming December although it has been adjusted EBITDA positive since Q2 2019.
It recently closed a deal to create a joint venture with a large Chinese electronics wholesale distributor (Beijing Dianjing Company aka BDC) to use its platform to match lenders to its retail customers for funding their inventory purchases. This venture, which would be majority owned by Peak, has an addressable market of 60,000 online retail seller who could generate between $450 million and $1.35 billion in fees to Peak if they were to borrow the maximum possible. We expect the platform to be able to start to facilitate loans for these customers by year-end.
Despite the pandemic, Peak reported revenue growth of 293% for the first half of 2020 and cut its losses to common shareholders by $422,000. Its adjusted EBITDA for the first half was $348,000 compared with $318,000 a year ago. It is targeting $40 million in revenues and $4 million in EBITDA for the 2020 year.
Compared to its fintech peers who trade at an average of 13.8 times enterprise value to 2020 estimated revenues, Peak is currently trading at only 5.4 times using fully diluted shares. With a longer track record and more visibility we believe Peak will be able to trade closer to its peers. It is possible that it could double revenues next year which should make it a much more valuable company in the future.
Peak Fintech Group is a company headquartered in Montreal, but operating in the People’s Republic of China. On November 8th it officially changed its name from Peak Positioning Technologies to “Peak Fintech Group.” It was founded in 2011, pivoted to its current business in 2017, and launched its platform solution in 2018 in the city of Wuxi. It is a fintech business that matches micro, small, and medium businesses with lending institutions and collects a fee for completed transactions. It also has an $18 million loan portfolio, secured by the borrowers’ vehicles, that it funded just for proof of concept in order to jumpstart its operations. It owns 51% of that loan business which is consolidated on its financial statements.
Peak’s platform now has lending products from 54 different banks and lending institutions and operates in seven cities: Wuxi, Jiangyin, Xi’an, Changzhou, Suzhou, Nanjing, and Shanghai. Peak plans to expand into the cities of Xuzhou, Lanzhou, Qingdao, Huzhou, Taiyuan, Hangzhou, and Beijing by year-end. Today its commercial lending platform has 53,000 loan broker reps, 24,000 registered SMEs and has to date successfully matched loans valued at ¥1.3 billion (about $260 million). Although it’s rapidly closing the gap with the west, China can still be considered somewhat of a newcomer to fintech and Peak believes it is one of the first companies to launch such a lending platform in the country. In China, small business loans are typically sourced locally, are difficult to obtain and the industry is very fragmented. There are two major reasons why small businesses have a tough time obtaining loans. The first reason is that the lending institutions have difficulty obtaining the information they need about the small businesses to properly assess the credit risk they represent. The second reason is that the lending institutions all have their own lending criteria, which often don’t match with the small businesses that approach them for loan. Peak has signed up a variety of lenders all with varying criteria for making loans and through the platform gathers all of the data on the small businesses that lending institutions need to properly assess the credit of lending to the businesses. The platform then matches the compatible lenders and borrowers based on the business data and lending criteria resulting in loan transactions for which Peak charges a fee. The business is B2B. Consumers cannot provide funds on the platform as with Lending Club or Prosper; all the lenders are banks or financial institutions. Peak charges a fee per loan that is 1-4% of the loan amount depending on size and type of loan. Borrowers access Peak’s systems and enter their information and give Peak permission to access other types of data such as bank records. Peak then collects the permitted private data along with other public and private sources and matches the borrower with lenders that would make the loan based on the information gleaned. Using Peak’s prescreened information a lender can evaluate loans in minutes, reduces the lenders efforts in analysis as well as in sales and marketing to find the borrower. It also can process payments and pay the loan broker his commission. The company has two initiatives that could catapult sales:
The company is teaming up with municipalities to create commercial lending “financial centers” where the cities’ banks and lending institutions use the platform to foster business and lending activity in the cities. The company just signed its second city and we expect others to follow.
The first city, signed in September, is Jiangyng who created a commercial lending financial center to foster business in the city. This center is comprised of 30 banks, eight insurance companies, and three investment funds. Peak is providing its Lending Hub platform to link the city’s more than 200,000 micro, small, and medium-sized businesses to loan and credit offers from these banks. Peak earns a service fee ranging from 1% to 2.5% of all loans granted through the Financial Center. Jiangyng was familiar with Peak, as it had used Peak’s Lending Hub to help qualify and distribute government financial aid to the city’s COVID-19 affected businesses. All the banks are already signed on and Peak expects revenues generated from this center to grow steadily over the next few quarters.
On October 23, 2020 Peak announced it had won a bid from the city of Nanjing to provide the platform for its lending financial center. Similar to the Jiangyin Financial Center, its objective will be to make loans and credit more accessible to the city's 620,000+ small and medium sized businesses, particularly those involved in the supply chain. Peak is particularly pleased as it won this deal through open bidding against 42 other tech companies throughout Jiangsu province. It was told it won because of its platform’s user-friendly interfaces and its on-going credit risk evaluation and monitoring capabilities. Peak has since signed an official agreement with the city and the project is underway.
Supply Chain Funding
In the same vein as the financial centers, Peak is using the wholesale distribution vertical as a means to accelerate the expansion of its services. Here it targets large distributors who can offer financing solutions to their own customers via Peak’s platform. The idea is to match retailers to lenders specifically to supply inventory financing for goods bought from that distributor. The retailer and wholesaler each contribute data to help lenders make quick and efficient decisions on loans. In addition to financing their inventory POs, these new retail customers are also eligible for other types of loans offered by the lenders on Peak’s platform.
Joint Venture with Beijing Dianjing Company Ltd.
A large joint venture deal was finalized with Beijing Dianjing Company (BDC) on October 20th. Although the details had not yet been made public as of the date of this report, it is expected to be up and running and begin operations by year-end. Peak will be the majority owner of this joint venture. BDC is a large wholesale electronics distributor. The joint venture will use Peak’s platform to facilitate inventory financing to BDC’s 60,000 online retail customers who buy $50 billion worth of goods from BDC each year. The customers will be able to finance up to 90% of their inventory purchased from BDC through the platform, and the JV will collect between 1% and 3% of the value of the loan as a fee from the lenders. Hypothetically the potential revenues to the joint venture could be between $450 million at 1% and $1.35 billion at 3%. Even if only 5% of sales were financed at the lower 1% that could be $23 million in revenues to the JV.
As all these customers sell online, the JV also plans to offer fulfillment and shipping to these customers for an additional cost. The two partners plan to use a third party, Wuxi Industry Development Group (WIDG), to execute the fulfillment services. For the turnkey solution, financing, storage, fulfillment and shipping the joint venture expects to charge 12%-14% of the value of the sale with WIDG earnings 8%-10% and the JV keeping the rest. Peak is working to integrate its platform with both BDC and WIDG and expects to begin generating revenues by year-end. Both partners will contribute capital and the JV will have its own staff.
Legacy Loan Portfolio
Since the launch of its platform, Peak has been making loans to small and micro businesses primarily as a way to prove its model to potential platform users. It has an $18 million portfolio with funds it has reinvested to keep that amount steady. The loan business is only 51% owned by Peak and it consists of loans made to small and micro businesses that are, for the most part, collateralized by vehicles. Since the beginning of the pandemic its loan quality has deteriorated significantly as businesses were shut down. While business has mostly returned to normal in China, we are keeping an eye on these loans. Since Q1 2019, the percent of loans that haven’t paid on time ballooned from 1.4% to 29.8% by the end of June. The company has been taking reserves for these delinquent loans and as a 51% holder of these loans is ultimately responsible for only half of any potential losses. The plan is to reduce this number and get closer to December 31, 2019 percentages. The company expects the COVID-19 effect on the borrowers’ finances to eventually dissipate and that loan repayment habits will return to normal. $1,125,881 of the overdue loans are over 180 days, making that 6% of total loans and 20% of the non-current loans.
The average loan balance in Q2 2020 was $121,366 and was 16.3% lower than the average loan balance in Q2 2019 following a market slow down from the COVID-19 pandemic. The loans yielded an effective average annual interest rate of 15.5% in the second quarter of 2020, compared to 17.3% for the same period last year. Loan mix type resulted in a lower average interest rate in Q2 2020 compared to the same period in 2019. The average maturity was 16.4 months during the quarter ended June 30, 2020, compared to 16.1 months for the same period in 2019.
In concert with the delayed Ant Group IPO, the Chinese government is proposing rule changes to micro lending requirements for lenders and borrowers. Once the new rules are decided, the entities will have 12 months to comply. While we do not know if this will affect Peak’s lending entity we believe the worst-case scenario is it would just sell its ownership in the lender, as it is no longer a necessary part of the business.
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