Event Summary

The 25-day quiet period on China Rapid Finance Ltd (NYSE: XRF) will end on May 23, allowing the firm's IPO underwriters to publish reports and recommendations after this time.

We believe XRF's IPO underwriters could affect an additional price increase with the likely release of many positive research reports. Several years of our firm's research have shown abnormal price increases of 2%-3% in a week-long window surrounding the expiration date.

The influential team of underwriters includes: BofA, Citi, Deutsche Bank, Wells Fargo; BMO, JMP Securities, Robert W. Baird, William Blair.

While not all quiet period expirations present buying opportunities, we are excited by the combination of XRF's strong syndicate, market debut, and strong market position -- as well as the well tested event.

Steady Early Gains Following Market Debut

XRF was priced at $6, significantly lower than its expected price range. The stock closed at $6.45 on its first day of trading. It reached a high of $8.33 on May 1, and the stock closed at $7.24 on Friday).

Business Overview: Specialty Retailer of Hard Surface Flooring

China Rapid Finance operates one of China's largest consumer lending marketplaces by total number of loans. To date, the company has facilitated approximately 15 million loans to approximately 2 million people. China Rapid Finance focuses on the "Emerging Middle-class, Mobile Active consumers (EMMAs)" (S-1/A). These consumers regularly use mobile devices, and XRF believes this segment represents a significant opportunity in the consumer credit landscape. The company notes in its SEC filing that the People's Bank of China estimates that nearly 500 million citizens had good employment records, but no credit history.

China Rapid Finance acquires consumers through multiple channels, such as online travel agencies, social networks, e-commerce platforms, and payment service providers. Its business model offers smaller, shorter-term loans through its platform. The proprietary technology then analyzes the data and identifies borrowers who may qualify for larger, longer-term loans. In 2016, 89% of its total loan volume originated through this platform, and the borrowers were prime and near-prime consumers with creditworthiness closely comparable to FICO scores ranging from 660 to 720.

Financial Highlights & Loan Details

As we described in our IPO preview, XRF completed four rounds of financing pre-IPO, raising the equivalent of $173M. XRF is backed by Northwater Capital, DLB Capital, China United SME Guarantee Corporation and QED Investors, as well as Broadline Capital, which headed China Rapid Finance's $21 million Series B financing.

XRF's principal loan amounts range from RMB500 (US$72) to RMB6,000 (US$865). Longer-term loans range from three months to three years, with principal amounts from RMB6,000 (US$865) to RMB100,000 (US$14,400).

The total number of loans has grown from 63,251 in 2014 to 6.0 million in 2016. The number of borrowers has increased from 101,384 in 2014 to 1.4 million in 2016. However, net losses reached US$131,000, US$(30.0) million and US$(33.4) million in 2014, 2015 and 2016, respectively.

The average annual investment return for investors in lifestyle loans was 11.9% in 2014, 11.5% in 2015, and 11.3% in 2016.

Repeat borrowers represented 73% of total borrowers through the end of 2016. The company believes this reduces the cost of acquiring new borrowers. In addition, repeat borrowers tend to increase the size of their loans over time, this increasing the amount of fees generated per loan.

Management Team

Founder, Chairman, and CEO Dr. Zhengyu Wang has an extensive history of experience in the credit markets. He held senior positions at Sears Credit where he was the Head of Analytics. 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 Shen has served in his position since 2013. His previous experience includes senior financial positions at Neuventure Financial Advisors and Arthur Andersen. Mr. Shen graduated from Shanghai International Studies University, where he was awarded a bachelor's degree.

Competitors: Yirendai, Lufux, Ppdai, and Creditease

China Rapid Finance faces competition from other P2P lenders in China such as Yirendai (NYSE:YRD), Creditease, Lufux, and Ppdai. Other competitors include traditional banks including People's Bank of China, Agricultural Bank of China, China Development Bank, and Exim Bank.

With a market cap of $1.475M, net income of $1.116M, and a P/E of 9.1; YRD appears to be more reasonably priced in general than XRF.

Conclusion: Chance To Buy Prior To Event

We were quite interested in XRF stock going into the IPO. Although we recommended only a modest allocation, given strong competition in the space (as highlighted with YRD above), we still view the upcoming quiet period expiration as a buying opportunity for this very well backed firm.

We expect a stock bump of 2%-3% in a window of time five days prior and two days following the quiet period expiration, scheduled for 5.23.

XRF's large team of underwriters will likely be eager to release reports once restrictions are lifted (see SEC guidelines), leading to more widespread interest from retail and institutional investors.

We recommend purchasing shares ahead of the 5.23 quiet period expiration to benefit from this expected price increase.