Chinese Depository Receipts (CDR) launch

Highlights of the SCMP article

  • Qualification to list a-shares

    The State Council said qualified innovative companies with valuations of no less than 20 billion yuan (US$3.2 billion) and annual revenue of at least 3 billion yuan could embark on the CDR system to either float additional shares, or launch initial public offerings on the A-share market.

  • Potential companies

    About 30 “unicorns” – unlisted companies valued at more than US$1 billion – and Chinese internet giants that are already traded on equity markets abroad will be eligible for issuing CDR shares.

    Last week, a joint study issued by a Ministry of Science and Technology affiliate and a Beijing-based consultancy published a list of China’s 164 unicorns, which are worth a combined US$628.4 billion.

  • VIEs - this kind of validates the VIE structure

    The proceeds that companies net from CDR issuances can be transferred abroad, but the companies must be registered with the China Securities Depository and Clearing Corporation, according to the guidelines.

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Analysis of the VIE model from a legal perspective

An excellent article on Vantage Asia (China Business Law Journal) this morning about VIEs and their legal impacts. Key highlights are -

..often referred to as the “agreement control model” in China, in offshore listings means that a listed entity registered abroad is separate from a domestic business operating entity but the domestic business entity is controlled by the offshore listed entity by way of agreements. The business entity is the VIE of the listed entity.

According to incomplete statistics, among the Chinese enterprises listed on the three major US stock exchanges (the New York Stock Exchange, NASDAQ and the American Stock Exchange), 42% of them have adopted the agreement control model.

Potential issues for the education companies (EDU, TEDU, REDU, DL, COE, HLG etc.) using VIEs to list themselves in foreign markets -

Furthermore, the Supreme People’s Court expressly pointed out in the Ambow Case, “the possible entry of a foreign investor into the compulsory education sector in a disguised manner, and its involvement in the management of the school through control of the founder of the school, should be regulated and, through administrative law enforcement, penalties should be imposed for violation of the law”. In this respect, it issued a judicial recommendation to the Ministry of Education.

Possible conclusions for the VIE situations by the author -

Firstly, stop with the delusions, gambling that the government will continue to look the other way and the VIE model can still be used to circumvent the restrictions on foreign investment in laws and regulations.

Secondly, there is also no need to worry about the sky falling in, as the three methods mentioned in the Draft Law on Foreign Investment leave those enterprises that have used the VIE model and whose actual controller is a Chinese investor room for manoeuvre.

Thirdly, attention needs to be given to the negative list for access by foreign investors. For example, against the background of the relaxation of the restrictions on foreign investment in online data processing and e-commerce business in the Shanghai Free Trade Zone, there is absolutely no need to bring up the VIE model.

Article sums it up with this -

“What we really need to get rid of is not VIE itself, but the cause that gave rise to VIE.”

You can find the entire article here

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Amazon is selling physical assets to comply with the Chinese Law

There was a news about Amazon selling off their cloud assets in China to theri partner Sinnet - As per TechCrunch, Amazon did provide a clarification on this -

No, AWS did not sell its business in China and remains fully committed to ensuring Chinese customers continue to receive AWS’s industry leading cloud services. Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services. As a result, in order to comply with Chinese law, AWS sold certain physical infrastructure assets to Sinnet, its longtime Chinese partner and AWS seller-of-record for its AWS China (Beijing) Region. AWS continues to own the intellectual property for AWS Services worldwide. ‎We’re excited about the significant business we have in China and its growth potential over the next number of years.

Looks like the primary reason for this is due to the requirement for ICP licenses to operate any website. As a foreign company, Amazon cannot get the IDC/ICP license to operate in china - this is clearly highlighted on their website

ICP in China In accordance with Chinese law and regulations, the State subjects non-commercial internet information services to a record-filing system and commercial internet information services to a permit system. No one may engage in the provision of internet information services without having carried out record-filing procedures or obtained permission. If you use AWS China (Beijing) Region to host a website providing non-commercial Internet information services, you must undertake filing procedures for this non-commercial website (an “ICP Recordal”).

Sinnet, as the operator of AWS China (Beijing) Region, is also the IDC-licensed provider responsible for supporting and verifying ICP Recordal and ICP License for AWS China (Beijing) Region customers. Please click this link for downloading ICP recordal and ICP license introduction. To learn more information, please refer to Sinnet website http://en.sinnet.com.cn/home/service/records/55.

In order to use AWS in China, you need to get a separate AWS China account, the global account will not work in China.

Customers who wish to use AWS resources in China (Beijing) Region operated by Sinnet are required to create an AWS (China) Account, a set of credentials that are distinct and separate from other global AWS Accounts. Only customers with an AWS (China) Account will be able to use resources in the AWS China (Beijing) region operated by Sinnet. All customers who wish to use other global AWS regions outside of China will need to create a global AWS Account by visiting http://aws.amazon.com

From Amazon’s FAQ section

Q: What are the requirements to register for a China (Beijing) region account? According to Chinese laws and regulators, we need to verify your identity before allowing access to China (Beijing) region. Companies that want to register for a China (Beijing) region account need to provide [1] a valid Chinese business license issued by the Bureau of Industry and Commerce, [2] valid contact information. Once you have completed the registration form, a representative will contact you to follow-up on the registration process.

Q: Can I use my existing AWS Inc. Account to access the China (Beijing) Region? Customers who wish to use the new Beijing Region are required to sign up for a separate set of account credentials unique to the Beijing Region. Customers with existing AWS credentials will not be able to access resources in the Beijing Region.

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Upcoming week's Chinese IPO stocks

Only one Chinese company is lined up for IPO the week of November 13th, 2017 (please correct me if this is wrong) - Jianpu Technology Inc (JT), Expected pricing date is on the 15th of November 2017. Here are some interesting facts -

JT offering Source: From Jianpu’s filing statement

  • As expected, JT uses VIE structure to operate in China - but their VIE revenue contribution to overall revenue is ~8%
  • The VIE, Beijing Rongdiandian Information Technology Co. Ltd. or RDD, is 40% owned by Ms. Dawei Huang, 40% owned by Mr. Jiayan Lu and 20% owned by Mr. Caofeng Liu. Typically in VIE strcutures, CEOs and key management team owns the VIEs - but in this case 40% of VIE is owned Ms.Dawei Huang, who is the wife of the CEO and CEO doesn’t have any ownership rights in the VIE.

    RDD is 40% owned by Ms. Dawei Huang, who is the wife of our CEO, Mr. Daqing (David) Ye, 40% owned by Mr. Jiayan Lu, who is our chief operating officer, and 20% owned by Mr. Caofeng Liu, who is our chief technology officer.

  • Here’s an example from the past (though it is little dated), when VIE was dragged into the divorce court.

    A further potential concern with VIE structures was highlighted during the recent initial public offering of online video service provider Tudou and the highly publicized divorce proceedings of Tudou’s founder, Gary Wang. In the months leading up to the IPO, the ex-wife of Mr. Wang, who holds 95% of the equity interests in Tudou’s VIE, initiated a lawsuit against him in connection with their divorce, seeking the division of the equity interest in the VIE held by Mr. Wang, arguing that it formed part of the community property during their marriage.

  • Recent quarter, JT made $76 million, with a net loss of $2.5 million. For the entire last year 2016, JT made revenue of $52.5 million with a net loss of $26.9 million.

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Comparison of China's US-listed Fintech companies (QD, XRF, HX, YRD, PPDF)

Quick look at the US-listed P2P and Microcredit companies

YRD - Yirendai Ltd

Based on the information disclosed to us, as of December 31, 2016, our historical borrower profile was 80.2% male and 19.8% female, while 73.9% were 35 years of age or less.

In 2014, 2015 and 2016, we facilitated loans to 39,344, 146,390 and 321,019 borrowers through our platform, respectively. We do not permit borrowers to hold more than one loan that has been facilitated through our platform at a time. The total amount of funds loaned to borrowers through our platform was RMB2,228.6 million, RMB9,557.6 million and RMB20,277.9 million (US$2,920.6 million) in 2014, 2015 and 2016, respectively.

Based on the information disclosed to us, as of December 31, 2016, our historical investor profile was 56.1% male and 44.0% female, while 78.5% were 40 years of age or less.

In 2014, 2015 and 2016, 34,527, 326,055 and 597,765 investors invested through our platform, respectively. The total amount of funds invested by investors through our marketplace was RMB2.6 billion, RMB11.9 billion and RMB25.0 billion (US$3.6 billion) in 2014, 2015 and 2016, respectively.

Source: 2016 Annual Report

XRF - China Rapid Finance Ltd

Our marketplace enables investors domiciled in China to invest in loans with varying principal amounts, fees and interest rates and terms. Investors are attracted to our marketplace because of the range of loan durations available on our platform, including short-term loans, our marketplace’s risk-adjusted investment returns, our track record, the intrinsic diversification on our platform and our corporate governance standards. For the years ended December 31, 2014, 2015 and 2016, average annual investment return for lifestyle loan investors on our marketplace was 11.9%, 11.5%, and 11.3%, respectively. Annual investment return for investors of consumption loans was 12.8% and 10.4% in the years ended December 31, 2015 and 2016. As of December 31, 2016, we had approximately 9,850 investors on our marketplace.

Source: Amended Form F1 Registration Document

QD - Qudian Inc

We have experienced significant growth in the number of borrowers since inception. As of December 31, 2014, 2015 and 2016 and June 30, 2017, approximately 0.2 million, 1.5 million, 11.2 million and 17.6 million registered users were approved with credit, respectively. In 2014, 2015 and 2016 and the six months ended June 30, 2017, we arranged credit for approximately 0.2 million, 1.2 million, 6.1 million and 7.0 million active borrowers, respectively. Out of the total active borrowers in 2014, 2015, 2016 and the six months ended June 30, 2017, respectively, repeat borrowers, made up approximately 14.7%, 40.4%, 68.4% and 82.7% of our total active borrowers, respectively. We believe the increase in repeat borrowers reflects borrower loyalty and our credit products’ ability to address borrower consumption needs. On average, an active borrower drew down approximately six times in the six months ended June 30, 2017.

In the six months ended June 30, 2017, we facilitated approximately RMB38.2 billion (US$5.6 billion) in transactions to 7.0 million active borrowers.

Source: Amended Form F1 Registration Document

HX - Hexindai Inc

In the fiscal year ended March 31, 2016, we facilitated loans to 11,120 borrowers with a total amount of loans of RMB2,976 million (US$470 million), compared to 28,738 borrowers with a total amount of loans of RMB3,318 million (US$493 million) in the fiscal year ended March 31, 2017. In the three months ended June 30, 2016, we facilitated loans to 4,994 borrowers with a total amount of loans of RMB827.7 million (US$126.7 million), compared to 14,736 borrowers with a total amount of loans of RMB1,278.2 million (US$186.4 million) in the three months ended June 30, 2017. From inception of our business to June 30, 2017, we had a total of 56,230 borrowers, cumulatively.

The number of investors who invested on our marketplace increased from 17,483 in the fiscal year ended March 31, 2015 to 31,783 in the fiscal year ended March 31, 2016, and further increased to 63,335 in the fiscal year ended March 31, 2017. The number of investors who invested on our marketplace increased from 20,201 in the three months ended June 30, 2016 to 37,033 in the three months ended June 30, 2017. From inception of our business to June 30, 2017, we had a total of 110,156 investors, cumulatively.

Source: Amended Form F1 Registration Document

PPDF - PPDAI Group Inc

We have experienced fast growth in the number of unique borrowers in recent years, from over 135,000 in 2014 to over 666,000 in 2015, and further to approximately 3.4 million in 2016. In the six months ended June 30, 2017, we had approximately 4.9 million unique borrowers.

Our marketplace features a high proportion of repeat borrowers. Out of the total loan volume facilitated through our marketplace in 2015, 2016 and the six months ended June 30, 2017, 55.7%, 55.6% and 67.4%, respectively, was generated from repeat borrowers who had successfully borrowed on our platform before.

The total outstanding balance of loans invested through our platform grew from RMB607.4 million (US$89.6 million) as of December 31, 2014 to RMB2.8 billion (US$0.4 billion) as of December 31, 2015 and further to RMB10.4 billion (US$1.5 billion) as of December 31, 2016 and RMB20.6 billion (US$3.0 billion) as of June 30, 2017.

We accept investments primarily from individual investors. As of June 30, 2017, we had 461,651 cumulative individual investors. We have experienced strong growth in both the number of individual investors and the investment amount per investor in recent years. The number of individual investors invested through our marketplace increased from 134,734 in 2015 to 240,990 in 2016, and from 134,287 in the six months ended June 30, 2016 to 201,624 in the six months ended June 30, 2017. During the same periods, average investment amount per individual investor increased from RMB29,938 (US$4,416) in 2015 to RMB57,918 (US$8,543) in 2016, and from RMB37,398 (US$5,516) in the six months ended June 30, 2016 to RMB99,136 (US$14,623) in the six months ended June 30, 2017.

Source: Amended Form F1 Registration Document

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