YRD - Yiren Digital: Spotlight On Capital Return And Corporate Actions

2023-12-11 13:21:52 ET

Summary

• Yiren Digital's stock price is now 70% below its IPO price, and its current valuations are depressed.
• The stock has staged a decent recovery in the past year, but there is a lack of new catalysts to push up YRD's share price further.
• The initiation of dividends or potential privatization is unlikely, as the company prioritizes growth and staying listed.

Elevator Pitch

I have a Hold rating for Yiren Digital Ltd. ( YRD ) stock. The focus of this article is on YRD's corporate actions (e.g., diversification, potential privatization, etc.) and shareholder capital return (e.g., buybacks, dividends, etc.).

YRD's shares have performed pretty well in the past year thanks to the market's recognition of its diversification efforts and accretive share repurchases. The stock's valuations are still undemanding, but there is an absence of catalysts relating to potential privatization and dividend initiation. Taking into account these factors, I view Yiren Digital as deserving of a Hold investment rating.

Company Description

YRD calls itself a "one-stop select financial and lifestyle services platform in China" in the company's media releases . Yiren Digital was first established in 2014 , and its shares have been traded on the New York Stock Exchange since December 2015.

Yiren Digital's Key Revenue Streams

As revealed in its Q3 2023 earnings release , Yiren Digital derived 40%, 22%, and 9% of its most recent quarterly revenue from loan facilitation services, insurance brokerage services, and post-origination services, respectively. Financing services, electronic commerce services, and other revenue accounted for the remaining 7%, 6%, and 16% of YRD's third quarter top line, respectively.

Stock Price Underperformance And Valuation Compression In Recent Years

Yiren Digital's shares have underperformed substantially in the past five years, and the stock's valuations have de-rated significantly during this same time frame.

YRD's IPO price was $10 when the company's shares were listed on the NYSE in mid-December 2015. Yiren Digital's last traded stock price of $2.99 at the end of the December 8, 2023, trading day is -70% below its IPO price. The company's shares have fallen by approximately -80% in the last five years as per Seeking Alpha price data.

In early July 2019, the market valued Yiren Digital at a five-year peak trailing twelve months' price-to-revenue and price-to-book multiples of 2.07 times and 3.11 times (source: S&P Capital IQ ), respectively. In comparison, YRD is now trading at trailing twelve months' price-to-sales and price-to-net asset value ratios of 0.41 times and 0.26 times, respectively. Yiren Digital's current trailing twelve months' normalized P/E multiple is also an undemanding 0.98 times.

Unfavorable regulatory developments weighed on the share price performance of YRD and its peers. Seeking Alpha News reported on February 19, 2019, that "Chinese online lending stocks slump after the Chinese government said it has investigated 380 online lenders and froze $1.5B of assets" in the "industry that until 2017 was lightly regulated."

Apart from regulatory headwinds, the weak Chinese economy had also hurt the stock price performances of Yiren Digital and its China online lending peers. A December 8, 2023, Seeking Alpha News article noted that "China's economy has been struggling" despite the pivot away from the COVID-zero policy last year as "industrial profits in the first 10 months of the year (2023) dropped by 7.8%." As a comparison, Yiren Digital's trailing twelve months' revenue of RMB4,806 million (source: S&P Capital IQ ) was -57% lower than YRD's top line of RMB11,244 million for FY 2018.

Positive On Business Diversification And Share Buybacks

YRD's shares have done badly for the last five years as detailed in the preceding section. But Yiren Digital's stock has staged a solid recovery in the past year, and I think this is attributable to YRD's business diversification efforts and share repurchase program.

Even though Yiren Digital's closing price ($2.99 as of December 8) is only a fraction (30%) of the company's December 2015 IPO price, YRD's stock price surged by +135% (source: Seeking Alpha price data) in the last 12 months. The market is rewarding Yiren Digital for its more diversified revenue mix and meaningful share buybacks.

In its 20-F filing , YRD disclosed that the proportion of revenue contributed by its online lending or consumer credit business (impacted by regulatory headwinds) declined from 63.8% in FY 2020 to 57.1% in FY 2022. During this same time period, the insurance brokerage services' revenue contribution almost doubled from 10.9% to 21.3%. Furthermore, Yiren Digital's new electronic commerce services business started in 2021 accounted for as much as 8.8% of the company's total sales for FY 2022.

Separately, Yiren Digital initiated a new $20 million share buyback plan in September last year. YRD has already spent $7 million buying back its own shares between September 2022 and November 2023, as disclosed at the company's Q3 2023 earnings briefing . As I highlighted earlier, Yiren Digital is currently valued by the market at roughly a quarter of its book value, so it is reasonable to assume that recent buybacks have been value-accretive and well-received by the market.

But the stock needs new catalysts for its share price to rise further, which is the topic of the next section.

Dividend Initiation And Potential Privatization Seem Unlikely

I am of the opinion that the initiation of dividends or potential privatization are the key catalysts for Yiren Digital.

It is good that YRD is returning excess capital to shareholders in the form of share repurchases as discussed earlier. But Yiren Digital has the financial capacity to explore various forms of shareholder capital return. As of September 30, 2023, YRD has cash of around RMB5.4 billion or $760 million on its books. In contrast, Yiren Digital's market capitalization is below $300 million.

Nevertheless, YRD hasn't paid any dividends since 2019 . The likelihood of Yiren Digital initiating dividend payments in the near term seems low. The company shared its view at its Q3 2023 results call that "once you pay dividends, you become a category of dividend paying companies as opposed to high-growth companies." Instead, Yiren Digital emphasized at the latest quarterly earnings call that it prefers "sticking to being a high-growth company" and "putting cash to better use." This implies that it is unlikely that YRD will be able to attract a new group of income-focused investors anytime soon.

Also, there is a remote chance of YRD being privatized in the near future, as the company sees value in staying as a listed entity, despite the fact that its stock's valuations are very depressed.

At the company's recent third quarter results briefing, Yiren Digital stressed that its listed status offers a "vehicle" or platform" to do "acquisitions globally", and "reward our employees and partners globally with the stock."

In a nutshell, there aren't any visible catalysts for YRD in the short term.

Closing Thoughts

I am impressed by Yiren Digital's recent share buybacks and its success in achieving a more diversified business mix. But it seems tough for YRD's shares to climb further in the near term considering the weak economic environment for China and the absence of catalysts such as dividend initiation or privatization. My neutral view of YRD translates into a Hold rating.

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