Yixin Finds New Road To Profits as Auto Loan Agent

Key Takeaways:

• Yixin posted a $43 million adjusted net profit last year, as its newer auto loan facilitation business rose 65% and its credit impairment losses dropped sharply
• The company’s asset quality has improved notably since its shift to loan facilitation from its previous business as a direct lender

By Ken Lo

It’s often said that when the main road is closed, try taking a side track that might lead to a different but no less wonderful journey. Such a path encapsulates the store of Yinxin Group Ltd. (2858.HK), whose latest financial results show strong progress in the new path it has found as a car loan facilitator.

Substantial growth of that loan facilitation business helped Yixin report a 28.95 million yuan net profit and 273 million yuan ($43 million) adjusted net profit last year, reversing losses in 2020. That reflects the success it has found in its new life as a loan middleman helping banks provide car loans to consumers, a strategy it adopted after regulators cracked down on its earlier direct-lending model.

The company’s annual results announced last Thursday showed Yixin’s total revenue grew 5.1% to 3.5 billion yuan ($549 million) last year. That included a hefty 72% rise in revenue related to its transaction platform business, driven mostly by a 65% rise in loan facilitation service revenue to 1.95 billion yuan. As its loan facilitation business grew, the business’ share of total revenue rose from 35.6% in 2020 to 55.9% last year. The company’s older direct lending business moved in the opposite direction, falling from 58.7% to 33.1% of the total, as revenue from that source sank by 40% to 1.19 billion yuan.

Yixin’s move from direct lender to middleman loan facilitator is part of a larger trend among China’s fintech companies, following a government crackdown that included heavy new regulation on their original direct-lending business model. Regulation has been relatively lighter on loan facilitation that doesn’t require such middlemen to handle actual money, prompting many companies like Yixin to move into that space.

Despite the steady progress in its transformation, Yixin’s shares tumbled by 8% last Friday after the announcement to close at HK$0.92. The price has moved steadily downward from a peak of HK$2.89 last April. The shares now trade at the low end of their 52-week range, suggesting investors still aren’t satisfied with its transformation story.

China’s auto financing market has grown rapidly in recent years, expected to reach 2 trillion yuan this year as more people in the world’s largest car market buy such big-ticket items on credit. The market hasn’t slowed despite repeated pandemic disruptions over the past two years, which have not only forced store closures and left consumers locked in their homes, but also led to supply chain shortages that have affected car production.

The company helped to make 45 billion yuan worth of auto loans last year through its loan facilitation and direct financing businesses, up 66% from 2020. The number of auto sales it helped finance also jumped by 49% to 530,000 for the year, much higher than the industry’s 3.8% rise in new car sales last year. Within the larger total, Yixin helped to finance 293,000 new car transactions, up 31% from 2020, and 237,000 used car transactions, up 80%, thanks in no small part to government policies that lowered the value added tax on used auto distribution and improved the ease of transactions.

Lower profits for middlemen

The company’s transition from direct lending and vehicle rentals to loan facilitation hasn’t been without its bumps. The main challenge lies in lower profits for the intermediary lending business compared with direct financing and rentals. To compensate, Yixin must find ways to boost its transactions. But a major upside to facilitation over direct lending is far lower risk from defaults for the former.

Consistent improvement of its asset quality has been the most important factor behind Yixin’s improving revenue. A notable example is its credit impairment losses, which fell 84% from 1.81 billion yuan in 2020 to just 286 million yuan last year. As it phased out its direct lending business, its ratio of loans more than 90 days overdue fell from 2.28% to 1.95%. Loans overdue by 30 days to 90 days also dropped to a historical low.

The company, which currently works with 23 banks and financial institutions for its loan facilitation business, has attributed those improvements to better risk control measures since the second half of last year. That includes raising the bar for borrowers who use its services, with a focus on higher-quality clients. The company has also used AI and big data technologies to improve its risk control capabilities and reduce delinquent loans.

The big scale-back of its direct financing business hasn’t hurt Yixin’s gross margin at all, with the figure rising about 4 percentage points last year to 51% as the company benefitted from rising economies of scale.

Two auto financing companies with business portfolios similar to Yixin include U.S.-listed Cango CANG and Autohome ATHM 2518.HK)), which is listed in both the U.S. and Hong Kong. Unlike Yixin, Cango has been scaling back its auto lending business in recent years due to its increased focus on providing a broader range of auto trading services. That includes a focus on new energy cars, which accounted for one quarter of the 23,000 cars Cango helped to finance last year.

Autohome, which is bigger and focused on new-vehicle transactions, reported its revenue fell last year by 16.4% to 7.24 billion yuan, while its net profit fell 36.9% to 2.15 billion yuan. That reflects the impact of a global chip shortage that is hurting new vehicle production and sales, as well as falling marketing budgets at auto manufacturers as a result of rising cost.

Yixin’s latest price-to-sales (P/S) ratio is 1.54 times, higher than Cango’s 0.32 times but lower than Autohome’s 3.5 times, putting it in the middle of the pack. Most investment banks are cautiously optimistic about the company. Citibank believes Yixin will benefit from steady improvements to its credit controls, but that it will take time for the company’s transaction platform to mature and ultimately provide stable growth. It has given the company a “neutral” rating, though its target price of HK$2.50 is quite far above the stock’s current levels.