October 25, 2017 concludes the 180-day lockup period on China Rapid Finance Limited (NYSE:XRF). When the lockup period ends for XRF, its pre-IPO shareholders, directors and executives will finally be able to sell their more than 39 million previously restricted shares. Just 10 million shares are currently trading.

(Source S1/A)

We believe that there's a high probability that they will sell at least a portion of these previously restricted shares - XRF has a return from IPO of 74.3%. The potential for a sudden increase in stock available in the open market may cause a short-term decrease in the price of China Rapid Finance shares.

XRF's pre-IPO shareholders and insiders include numerous corporate entities, trusts, and individuals.

(Source: S-1/A)

Currently, XRF trades in the $9.50 to $10.00 range, above its IPO price of $6.00 and higher than its first day closing price of $6.40 on April 28, 2017.

Business Overview: Consumer Lender in China

China Rapid Finance Limited operates a consumer lending marketplace in the People's Republic of China. XRF offers a variety of loan products to meet the credit needs of its emerging middle-class made up of mobile adept consumers. The technology-based platform facilitates loans between investors and borrowers, which gives borrowers access to credit and investors attractive returns. Through its subsidiaries, China Rapid Finance provides consumption loans with terms from two weeks to three months. Lifestyle loans have terms from three months to three years. In addition, China Rapid Finance participates in the micro-lending segment. The company serves its investors and borrowers primarily online, although it also has a physical network of 107 data verification centers. Through August 2017, the company had made close to 20 million loans to approximately 2.7 million borrowers. The company was formerly known as China Risk Finance LLC and changed its name to China Rapid Finance Limited in August 2015. China Rapid Finance Limited was founded in 2004 and is headquartered in Shanghai, the People's Republic of China.

Financial Highlights

China Rapid Finance Limited reported the following financial highlights for the second quarter ended June 30:

• Total gross billings on transaction and service fees increased by 59% year over year to $24.5 million, or 46% over the previous quarter.

• Gross billings from consumption loans exceeded gross billings from lifestyle loans. Gross billings from consumption loans increased by 642% year over year to $13.2 million, or 97% over the previous quarter.

• Gross billings from consumption loans reached 54% of total gross billings as compared with 12% in the prior-year period and 40% in the previous quarter. Gross billings from lifestyle loans were $11.3 million as compared with $13.7 million in the prior-year period, or $10 million in the previous quarter.

• Net revenue increased by 9% year over year to $15.2 million from $13.9 million in the prior-year period and 45% over the previous quarter from $10.5 million in the previous quarter.

Management Team

Founder, Chairman, and CEO Dr. Zhengyu (Zane) Wang founded China Rapid Finance in 2004. He previously held senior positions at Sears Credit and advised the PBOC on the creation of the National Credit Bureau. Dr. Wang received his Ph.D. in Statistics from the University of Illinois and his Master of Science degree from the University of Illinois at Chicago.

CFO Junqing (Kerry) Shen has served in his position since 2013. His previous experience includes founding Neuventure Financial Advisors Ltd. and positions at Arthur Andersen in Shanghai and Hamburg. Mr. Shen holds a bachelor's degree from Shanghai International Studies University.

Competition: Visa, Mastercard, American Express, and other Lenders

In its SEC filing, China Rapid Finance notes that approximately 2,200 other marketplace lending platforms and peer-to-peer lenders exist in China. The company differentiates itself by targeting EMMAs (emerging market mobile active) users. Morningstar lists the company's primary peers as Visa (V), Mastercard (MA), American Express (AXP), PayPal (PYPL), Capital One (COF), Discover (DFS), Synchrony Bank (SYF), and other lenders.

Early Market Performance

China Rapid Finance's IPO priced at $6 per share, significantly lower than its expected price range of $9.50 to $11.50. The stock closed on the first day of trading at $6.40. Since then, the stock reached a high of $8.02 on May 9 before dipping down to a low of $5.76 on July 5. Currently, XRF trades between $8.50 and $8.90.

Conclusion: Short Shares of XRF Before October 25, 2017

When the 180-day IPO lockup period for XRF expires on October 25, XRF's pre-IPO shareholders and insiders - comprised of trusts, corporate entities, and individuals - will finally be allowed to sell their more than 39 million previously restricted shares. We believe that with XRF's significant return from IPO - more than 74% - they will be eager to cash in on some of their gains.

Because just 10 million shares of XRF are currently trading, any significant sales by these individuals and entities could flood the market with shares and cause a sharp, short-term downturn in share price. This creates a good short-opportunity for risk-tolerant investors.

We recommend that risk-tolerant investors short shares of XRF ahead of the IPO lockup expiration on October 25, 2017. We recommend that investors cover short positions on October 26 and October 27, 2017.