P2P Lenders – Unicorn or Rainbow Dashed?

This will never work (Vol 1, No 21)
Source: Corsiworld via Flickr

“After a remarkable four-year journey of careful deliberation, HKEX’s new listing regime is finally open for business.  We are now at the dawn of an exciting new era for Hong Kong’s capital markets,” said HKEX Chief Executive Charles Li.

What Chief Executive of HKEX was referring to was the introduction of weighted voting rights structure, the listing of biotech companies that don’t meet the Main Board’s financial eligibility tests and new concessionary secondary listing routes for Greater China and international companies.

As Kevin Costner heard in Field of Dreams, “If you build it, they will come”.


Sure enough, there’s lots of excitement that a bunch of high-tech unicorns are now stampeding to list in Hong Kong.

Among these mythical creatures is the Peer-to-Peer Lenders. On the surface, there is a certain logic to it. Make use of the internet to connect the providers and users of capital. Sounds exciting, right?

or Rainbow Dashed?

The funny thing is that the US leader in P2P lending has struggled mightily since the sixth day of its listing.

The P2P theme was really hot back in 2014. In December 2014, Lending Club raised nearly US$900mn and on the first day of listing, it surged 56%. It rose for another five days and hit an intra-day high of US$29.29 on December 18, 2014. The current share price of US$3.37 is down 89% of all time high and puts its market captialisation at US$1.41bn. Still a unicorn, I guess.

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How do P2P Lenders make money?

As and when the Chinese P2P lenders come to market, they will certainly make a case that “it’s different in China, we’ve got 1.3bn borrowers and 1.3bn lenders”.

Maybe so, but let’s have a look at the “control group” first. Later, we can see if the China variable can materially improve the economics of the P2P-lending business model.

In 2017, Lending Club’s net revenues was US$575mn, up 15% y/y. Of this, three-quarters came from transaction fees and 14% came from investor fees.

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But what are transaction fees?

“Transaction fees are fees paid by issuing banks or education and patient service providers to [the P2P platform] for the work [they] perform through [their] lending marketplace’s role in facilitating the origination of loans by [their] issuing bank partners”.

Ok, quite a mouthful but it seems to be a fee for passing loan demand to issuing banks. Expressed as a percentage of loans originated, the transaction fee seems to be around 5%.

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But hang on, one of the other key metrics that Lending Club monitors is Customer Acquisition Costs as percent of loan origination. This is basically its sales and marketing expense. If one were to net off these two, then the net transaction fee earned has been hovering around 2.4% over the past three years.

So P2P lenders earn money by generating loans and then passing them over to the banks and taking roughly a 2.4% cut.

What are Investor fee?

But there is also an investor fee too. These seem to be service fees earned from investors who provide their capital to fund some of the loans. If expressed against the US$11.9bn of loans serviced on Lending Club’s platform, the investor fee works out to around 0.73%.

Okay, my head is starting to hurt but I think I still got this.

P2P lenders earn a fee based on the amount of loans originated and also from the amount of loans that it helps to service. So it seems that as long as the amount flowing through the pipes is increasing, the business should thrive, right?

Well, yes and no.

Over the past five years, the transaction and investor fee revenues (we are ignoring fair value changes and other one-off gains/losses) has grown more than five fold.

chart (90)

The trouble is that the higher volumes have not resulted in higher operating margins. For 2016 and 2017, even ignoring one-off expenses like goodwill impairment and litigation costs, operating income margins (after general and admin expenses and engineering and product development) were still -23% and -13%.

Let’s see how “We-” can tweak this equation

Maybe I’m missing something but can someone explain why investors are holding their breaths for the listing of Chinese P2P lenders.

If we use the US P2P leader as a control subject, to make the Chinese equation work, you will need the following:

  • Loan origination in excess of US$9.0bn a year
  • Loan servicing in excess of US$11.9bn a year
  • Net transaction fee on loan origination in excess of 2.4% a year
  • Investor fee in excess of 0.73%; and/or
  • Overheads (i.e. SGA and product development) that is less than 58% of revenues.

Or failing that, just make sure you include “We-” in your name, then none of the financials matter.

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Source: sushi-abc.com

The Kinki is very fresh indeed.


Beware the Buzzwords

This will never work (Vol 1, No 20)

A short post today. Feeling a bit distracted.

Photo by Andrea Sonda on Unsplash

We going to talk about “Buzzwords”.

In the investing world, buzzwords are like flies. If you see a lot of buzzwords, you know something stinks.

Beware “The kinki is very fresh today”

I have a theory that if you go to a Japanese restaurant and the chef/waiter tells you the “kinki” is very fresh, you’re going to get ripped off.

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The western names for the “kinki” fish is “thornhead”.

You won’t find this item on the printed menu because it is always “seasonal” and hence very expensive. Unlike Kobe beef, which is also very expensive, you know that when you order the A5 cut, so there is no surprise.

But with the “kinki”, the shock comes at the end when the bill arrives. What? HK$1,100 for a fish?

Beware the “We-” prefix

So, what is the “kinki” equivalent buzzword in the investment world?

It’s not “crypto” nor “blockchain” anymore, those died off as bitcoin got cut in half.

Instead, the buzzword to be wary of is “We-“.

Not the royal “we” but the “We-” prefix can be swapped out for “Co-” which is characteristic of the “sharing” economy.

Can we call this “Co-Computer” or “WeComputer”?

Not only are we “sharing” our cars, we are also sharing bikes and umbrellas.

While the economics of bikes and umbrella sharing are clearly doubtful, what about “co-working” and “co-living”?

These are better than umbrellas and bikes but someone needs to explain how come just by changing your name from Landlord to WeLandlord, the valuation goes from 10-15x PE and 4% dividend yield to Amazon and Tesla-like.

In Asia, we are a bit behind the curve. While the peer-to-peering lending craze is already well past their sell-by date, we are still hoping that things are different in Asia. Just, last week, we have the HKMA is pushing for more online lending.

I’m going to take a shallow dive into this at some point. But let me tell you, the only thing harder than trying to understand the business model for P2P lending is trying to understand General Electric.

I’ve been trying to do both but unfortunately both are being put into the “too hard” bucket. I’ll come back to them but I suspect there is little urgency since I won’t be ordering the “kinki” anytime soon.

Incidentally, another name for the “kinki” fish is “idiot” fish. How aptly named.

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Source: sushi-abc.com

This will never work.

Postcards from Xian

Greetings from Xian. The first time I visited this ancient city was 17 years ago. Coming back this second time, here’s what struck me from this trip (1) red bikes, yellow bikes, green bikes and bikes of all colours, (2) cleaner and more orderly and not just the toilets, (3) coffee vs. fried chicken – chalk up a win for Starbucks, (4) mobile technology is huge but there is a catch, (5) rise of the domestic brands – watch out Apple, (6) best and worst food experience of the trip.

Greetings from Xian, China.

Background on Xian, China

Xian is located in the Shaanxi Province in China. Geographically, it is almost right smack in the middle of China, located around the same latitude as Shanghai and almost directly above Chengdu.

Historically, Xian was the capital of China during many of the early dynasties like the Qin and the Tang Dynasty. Back in the day, it used to be known as Chang’An. Today, Xian has a population of 8.7 million and according to our driver, its key industries are (1) aerospace and defence, (2) higher education and (3) tourism.

To most people, when they think of Xian, they think of the Terracotta Warriors from the tomb of Qin Shi Huang, the first emperor of China and founder of the Qin Dynasty.

What’s changed from 17 years ago?

This was my second time visiting Xian. The first time was about 17 years ago. I remember visiting the Terracotta Warriors but other than that the only other memory was the proliferation of internet cafes in the city centre.

Fast forwarding 17 years to 2017, here’s what struck me from this time around.

Red bikes, yellow bikes, green bikes and bikes of all colours

We previously wrote about China’s sharing economy. While we did not see any umbrella sharing schemes in Xian, we did see a ton of shared bicycles. There were green bikes, yellow bikes, orange bikes and silver and red bikes. On the positive side, the bikes were being used. People were scanning the QR code, unlocking bikes, riding them and then leaving them behind once they reached their destination. On the negative side, there is a lot of excess capacity. Competition is very intense and until one or two of these operators out-spend and out-live the others, I struggle to see how they would recoup their capital.

Cleaner and more orderly and not just the toilets

My second key impression was how much cleaner and more orderly Xian has become. In the past, when I visited some of China’s tier 2 cities, the two things that I dread the most were (i) visiting the smelly toilets and (ii) crossing the street. In many emerging markets, although there may be traffic lights, crossing the street is always an adventure. Drivers  never give way to pedestrians. This time, to my surprise, half of the cars actually slowed down when we crossed at the cross walk.

Secondly, the streets were a lot cleaner than I remember. There were many trash and recycle bins around town and they were being used for the most part. That said, there are some major hygiene issues (I’ve saved this for the ending) but China and Xian has come a long way.

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Guess where this was taken

Coffee Vs. Fried Chicken – Chalk up a win for Starbucks

Given our previous post on the fast food industry, we wanted to see how Starbucks and KFC were doing. By our rough count, Starbucks seems outnumbered KFC by a ratio of 5-to-3 in Xian. In total, I think we saw nine or 10 Starbucks and like six KFCs.

Starbucks in Xian

As a coffee lover, my first thought is that Starbucks is still very under-penetrated. Granted, Xian is not going to be like a typical US city where there are Starbucks around every corner but for a city of 8.7 million to only have a handful of stores clearly shows that there is scope for a higher concentration.

This impression was corroborated by what I saw when I visited the local Starbucks one day around 5pm. The first thing I noticed was that every single table was full. Secondly, the price point for a Grande Black Coffee in Xian (Rmb 22) is only 10% lower than that of Hong Kong (HK$29). Given the difference in overall cost of living, this gap is remarkably small. Overall, I came away feeling more optimistic that China will be the future growth engine of Starbucks.

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Dicos – Local competitor to KFC

Mobile technology is huge in China but there is a catch

Ahead of this trip, we’ve heard and read about how China is evolving into a cashless society where everything can be paid for using your mobile phone. Unlike the West where credit cards dominate, in China, it is all about AliPay and WeChat Pay. We were eager to try this out but there’s a catch. You need to have a local bank account.

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As Hong Kong residents, it is possible to set up an account with AliPay HK or WeChat Pay but that account would only allow us to transact in Hong Kong dollars. Since we could not top up our account in Rmb, we were stuck paying for most things using good old fashion cash. Although this is a problem for foreigners, with 1.3bn consumers, the domestic opportunity is arguably already big enough.

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Delivering one of the many online shopping parcels

Rise of the domestic brands – Watch out Apple

There’s good news and bad news for Apple from our trip. The good news is that despite the early knocks against the iPhone 8, the phone is actually pretty good. Despite only having one lens, the camera was a marked improvement over the dual camera of the iPhone 7-Plus.

The bad news is that China’s domestic consumers don’t seem to care about Apple much. When we asked our guide about the upcoming launch of the iPhone X, his response was  “I’m more looking forward to the Huawei Mate 10”. Around town, we also noted many more ads and store fronts featuring Vivo and Oppo mobile phones.

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Hua Shan – Taken with iPhone 8

Best and worst food experience of the trip

To finish off this post, we share our best and worst food experience from Xian.

One of the best foods that we tried was the Rou Jiaomo (肉夾饃). This is kind of like a Chinese hamburger. It can be filled with either beef, lamb or pork. It was delicious and only costs about Rmb 8. Definitely worth trying.

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Rou Jiamo – Chinese Burger

I’m a big fan of lamb and also a big fan of barbecue. So when you put them together in the form of roast lamb skewers, this combination is hard to beat. It was delicious, juicy and fragrant. It was really enjoyable until….(HEALTH WARNING: You might not want to read on if you have a weak stomach).

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Lamb skewers

I finished it and after walking down a couple of streets, I saw a lady rummaging through the trash and recovering the used sticks.

Source: Piccsy

Aaargghhh....I guess the cleanliness and orderly part has not reached everyone yet.







Care to share some toilet paper?

A short funny story for a Friday afternoon. After the amusing stories about umbrella sharing, this week, I bring you toilet paper. No, toilet paper sharing is not the latest fad in China. Instead, this story is about how facial recognition is changing toilet paper usage in China. Happy Friday!

A short funny one for a Friday afternoon.

For those that have been following my blog, I have been quite amused by some of the “silly” ideas that have popped up in China’s sharing economy. I had written about “Care to share an umbrella?” and “Care to return an umbrella?”

Well, this week I bring to you toilet paper.

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No, there isn’t an app for people to share toilet paper but there is a machine in China’s toilet which regulate how toilet paper is dispensed in public toilets.

How many squares is fair?

This story is from today’s HKEJ. For those of you that have visited China and had to go to the bathroom, you would have noticed that the way that toilet paper is dispensed is a bit different.

Rather than putting a roll within each stall, they have a central dispenser outside near where you wash hands. So, if you need to use the toilet, you take a few or a lot of squares and then go and do your business inside the stalls.

The problem was that some individuals took too many squares. Rather than taking what they needed, they just grab a lot, perhaps to save for later or use somewhere else.

In order to combat against wastage and improper use, someone came up with a technological solution – Facial recognition.

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Image from cnn.com

In order to obtain toilet paper from the central dispenser, you need to look into the facial recognition camera. At that point, the machine will spit out a few squares for your use. However, let’s say you’ve eaten something bad and need a few more squares. In that case, you’ll have to hold it for nine minutes longer as the machine knows you have just taken some toilet paper and won’t dispense more to the same person until nine minutes have passed.

Did it work?

Yes. According to the story, the city government found that on average the number of toilet paper rolls used declined from 6-8 rolls to about 3 rolls.

Now, if someone can do a similar tally to see if the usage of hand soap has also seen a corresponding increase, that would be fun. Hope you’re not reading this as you are eating.

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Happy Friday!


Care to return an umbrella?

About a month ago, we wrote about the latest fad in China, umbrella sharing. Today, the Chinese press provided an update on how that venture has gone. I’m not making this stuff up.

About a month or so ago, I wrote about the latest fad in China’s shared economy – Sharing umbrellas (link here).

There’s been an update. According to the Hong Kong Economic Journal, one of these umbrella sharing companies started operations in April and had rolled out its sharing service in 12 cities including Beijing, Shanghai, Nanjing and Guangzhou. It invested in 300,000 umbrellas with a “no fixed-base” approach. At Rmb60 per umbrella, its initial outlay was Rmb18mn.

Under this system, the umbrellas have a lock on it and in order to use it, you have to pay a Rmb19 deposit and would be charged 50 cents for every 30 minutes of usage. Once the deposit is paid, the renter would receive a four digit code to unlock the umbrella. This is how many of the bike sharing systems are set up.

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That was the theory. In the real world, what wound up happening was that after a few months, most of the umbrellas have disappeared, rendering the initial Rmb18mn a complete loss.

The real winner? The umbrella makers

Normally, one would have thought that a Rmb18mn loss would have kicked some sense into investors but in the current easy money environment where profits don’t matter, the company is doubling down. The umbrella sharing start-up is now saying that the real money is in advertising. You see, there are eight sides to an umbrella and surely someone would be willing to give them money so that they can advertise some dot-com venture on the umbrella. That’s not the end, The company’s ambition have grown, it is now targeting to buy another 30mn umbrellas (i.e. stepping up its initial investment 100x), some with night glow feature and some with a GPS so that they will at least know where the umbrellas have gone.

I imagine that the GPS will show many of the umbrellas in the closest dumpster.

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Postcards from London

Greetings from London! We have just spent two weeks vacationing in London. It seems like everyone had the same idea and chose the UK for their summer holidays. According to stats from VisitBritain, in the first four months of 2017, visitor arrivals are up 11% while spending is up 14%. In addition, in this post, we share some of our new economy impressions on car services, shared accommodation and cord cutting.

Greetings from Sunny London!

For some strange reason, I’ve always been very fortunate with getting great weather whenever I visit London. During this recent trip, it only rained for one out of the 14 days that we were there. And as you can see from the various photos, we are talking about clear blue skies and the need for 50+ SPF sunscreen.

Although I have been to London many times on business before, this was our first family vacation there in like 20 years ago.

In keeping with our Postcard series (e.g. Tokyo and Causeway Bay), here are some takeaways from this trip.

  • (1) Cheaper currency really drawing in the tourists – Tourist arrivals up 11%, spending up 14%
  • (2) New economy experiences – Impressions on Uber, AirBnB and cord cutting

Cheaper currency => Tourist arrivals up 11%, spending up 14%

Chatting with family and friends, it seems like everyone is heading to London this summer. Although we didn’t ask why they were vacationing in London this year, I suspect the cheaper Sterling probably had something to do with the decision.

In order to find some data to back up this gut feel, this was what I found from the VisitBritain website. In the first four months of 2017, the number of visits is up 11% YTD and the total amount of Spending is up 14% YTD to £6.2bn. On a rolling twelve month basis (from May 2016 to Apr 2017), the number of arrivals and the total spend are up 6% and 5%. Both are at the highest levels on record.

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Source: http://www.visitbritain.org

As to be expected, the increase in arrivals was mostly driven by higher tourist arrivals. Those travelling to Britain for holidays were up 26% in 4M 2017  while those visiting friends and relatives were also up 7%. Conversely, given the uncertainty caused by Brexit, the number of business travellers decreased by 4% in 4M 2017.

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Among the various regions, the cheaper currency appears to draw those from the furthest away. Travellers from EU countries only grew 7% in 4M17, North American visitors rose by 16% while those from the Rest of the World was up a whopping 24%.

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Since the visitor data is only released 7 weeks after the end of each month, it would be interesting to see if our impression of strong tourist arrivals is born out for the summer holiday months (June-August).

Implication – UK retailers may surprise on the upside.

New economy experiences – Impressions on Uber, AirBnB and cord cutting

One of the other key notables from this trip is our first time trying AirBnB. Although we had known about AirBnB for some time, in the past, we had always shied away from it for family vacations. I always had this recurrent worry that we would show up with kids in tow only to find accommodation cancelled at the last minute.

Well this time, we gave it a try. To a large extent, this decision was driven by costs. London hotels prices are outrageous. With AirBnB, we were able to cut our hotel bill by 50%.

Are we sold on AirBnB? I’m not sure. While the savings are substantial, every member of our family was very happy when we transited back to the hotel at the end of the first week. We are not talking about a fancy hotel like a Four Seasons but just a solid 4-star hotel. So what did we like and what did we not like about the AirBnB experience?

  • Pros – Savings. Get to see and experience a nice residential neighbourhood. Full working kitchen. Access to washing machine.
  • Cons – You have to really scrutinize the specs. Our assumption that the place will have a TV and A/C was wrong. Cleanliness – it was tidy and neat but it just did not feel as clean as a hotel. We all wished for disposable slippers. The neighbours – As the flat is being used by all sorts of people, we could feel some grumbles directed from our neighbours partly due to the previous occupiers’ behaviour.

Incidentally, during our stay, I read an article that AirBnB is readying a Premium Tier to try to attract higher paying travellers who prefer the amenities guaranteed by fancy hotels (Bloomberg article here). This point definitely resonated with us but I can’t help but wonder what is the right price point for this service. If the savings for this Premium Tier is just 25%, would it be enough to draw higher paying travellers from hotels? I’m not sure.

Ubers, car services and taxis

Relative to AirBnB, I am more sold on Uber. For one, the commitment level is much lower. If one were unfortunate enough to get a bad driver or a bad car, you just have to suffer through the car ride. Rather than being on the hook for thousands of dollars, we’re only talking about tens of dollars.

During our stay, in addition to Ubers, we also rode on taxis and/or booked a car service when possible. From a cost perspective, I was surprised that the cheapest option was actually the car service. Taxi’s were the most expensive option, especially since we usually ran into traffic and what was supposed to be a 15-20 minute ride often took twice the amount of time. Comparing the three, if it costs £20 for the cab ride, the car service would cost £11 while the Uber would be slightly more expensive at about £12. Using another example of a trip to Heathrow, the car service costs £48 whereas a taxi would have cost around £70.

In terms of ease of use, the car service’s app is very similar to that of Uber. You can also track your driver and settle all payments through the app. The only draw back is that it needs a longer lead time (around  20-45 mins) if you want your car. Whereas for Uber, you can usually find a car that is just minutes away.

Implication – If Uber and AirBnB were both to list, I think I would be more positive on Uber than AirBnB.

Cord cutting and unbundling

The last takeaway from our London vacation is “cord-cutting”. Since our AirBnB flat did not come with a television, so for one week, we did away with traditional television. Instead, since the flat had wifi, our family turned to their respective iPhones and iPads for entertainment during those early morning jet-lag hours.

The conclusion is that one really does not need the traditional cable subscription. YouTube and the other streaming service offer more than enough entertainment. Even if one were to be seriously addicted to sports or some premium TV shows, it may be more cost-effective to get a subscription to Netflix or get an NBA/NFL league pass. Rather than spending HK$580/month on a Sports/Entertainment bundle where one only watches 2-3 channels, it makes much more sense to unbundle and pay for what you want.

Implication – Cut cable TV subscription.

To finish this Postcard, I like this quote from our visit to the Harry Potter Warner Brothers Studio Tour – “No story lives unless someone wants to listen.”