In addition to some lingering angst about the stock market in general, investor sentiment has been rather sour on Chinese IPOs, the trade wars and slowing economy there working against them. For instance, on October 19, Niu Technologies (NIU) was forced to decrease its deal size while its IPO also priced at the low end of expectations. Before that, Qutoutiao (QTT) also had to cut back on its deal size, and its IPO also priced at the low end of expectations. A few other recent examples of Chinese IPOs generating weak demand include 111, Inc. (YI) and X Financial (XYF).
Furthermore, from a company specific standpoint, CNF's financial performance is highly correlated to China’s economic health and growth. As we discuss in more detail below, its most recent financial results reflect a macroeconomic slowdown in China and growing uncertainties about conditions going forward.
The IPO itself was led by Roth Capital Markets and Shenwan Hongyuan Securities. The stock is now open for trading on the NYSE, currently lower by about 2%.
CNF is a home equity loan service provider in China. In fact, according to industry research reports, it is the second largest home equity loan service provider among non-traditional financial institutions in China in terms of outstanding loan principal. As of the publication of its IPO prospectus, it had established a national network of 75 branches and sub-branches in over 40 cities in China.
The company facilitates loans by connecting micro-and small-enterprise (MSEs) owners with its funding partners. MSEs refer to both individual business owners and registered micro-and small-enterprises with annual revenue of less than RMB20 mln.
Its primary targets borrower segment is MSE owners who own real properties in Tier 1 and Tier 2 cities in China. CNF originated home equity loans for 12,983 and 23,705 borrowers in 2016 and 2017, respectively, representing an increase of 82.6%. Furthermore, it believes that its target borrowers are underserved by traditional financial institutions. Traditional financial institutions often impose stringent and inflexible loan application requirements designed for large corporations, making it difficult for MSE owners to meet such requirements.
The loans it facilitates are primarily funded through a trust lending model with its trust company partners. The trust company partners are well-established with sufficient funding sources and have licenses to engage in lending business nationwide. Also, its trust company partners are regulated by CBIRC, and all the trust plans are registered with the CBIRC. This structure provides it with stable funding sources. Under the trust lending model, its trust company partners set up trust plans and acquire funding from their investors.
CNF says it has a rigorous and robust risk management system with a risk mitigation mechanism that is embedded into the design of its loan products, supported by integrated online and offline processes focusing on risks of both borrowers and collateral and further enhanced by effective post-loan management procedures. Additionally, its home equity loan products are typically installment loans, which require monthly payments comprising principal and interests repayments. The company monitors borrowers’ credit status, which enables it to take actions quickly if it believes there is a risk of default.
In its IPO prospectus, the company provides some preliminary results for 3Q18. The company's loan origination volume decreased from RMB3.6 bln for the three months ended June 30, 2018 to RMB2.6 bln for the three months ended September 30, 2018, representing a decrease of approximately 27.7%. CNF's outstanding loan principal amount remained relatively stable at RMB17.7 bln as of September 30.
Of some concern, its delinquency ratio and NPL ratio increased from 11.5% and 1.8% as of June 30, 2018 to 12.1% and 1.9% as of September 30, respectively. Consequentially, the performance of certain financial metrics, such as net income, has also been adversely affected by the lower loan origination volume. Its net income decreased by 2.7% to RMB234.9 mln (US$35.5 mln) in the three months ended September 30, as compared to a growth rate of 22.6% from RMB196.7 mln in the three months ended March 31, 2018 to RMB241.2 mln in the three months ended June 30.
In the prospectus, CNF noted that macroeconomic uncertainties had negatively impacted its results. Consequently, the company has been strategically balancing its business growth and loan quality. In particular, it has proactively strengthened risk assessment on loans for its trust company partners, which had resulted in a more selective loan approval process and lower LTV ratio.