yintech investment holdings limited (nasdaq: yin) momentum ... · momentum continues with record...

Please see last page for important disclosures 1441 Broadway, 3rd Floor New York, NY 10018 www.diamondequityresearch.com

Company Sponsored Research Update Note 06/02/2020

Closing Price (As of 06/01/2020) $5.74

52 Week Range $3.66-$6.87

Average Daily Volume 12,261

Shares Outstanding (M) 73.04

Market Capitalization (M) 419.26

Dividend Yield 5.00%

Number of Analysts Covering 1

Enterprise Value/Revenue N/A

Dec. FY 2018A 2019A 2020E

1Q 37.59A 63.61A 69.33A

2Q 36.86A 40.47A 83.79E

3Q 37.49A 70.17A 88.51E

4Q 41.32A 64.23A 93.14E

FY 153.26A 243.01A 334.77E

Dec. FY 2018A 2019A 2020E

1Q (.10)A .13A .17A

2Q (.09)A (.11)A .18E

3Q (.07)A .18A .23E

4Q (1.40)A (.05)A .02E

FY (1.68)A .16A .61E

Yintech Investment Holdings Limited is a leading provider of comprehensive investment and trading services primarily for individual investors in China. The company currently offers commodities

services including the trading of spot and futures commodities, as well as securities services which include securities advisory services, overseas securities trading services, and asset management

services. Yintech Investment Holdings Limited was founded in 2011 and is headquartered in Shanghai, the People's Republic of China

Yintech Investment Holdings Limited (NASDAQ: YIN)

Momentum Continues with Record Trading Volumes and Commissions for Spot Commodities

Hunter Diamond, CFA Vivian Zhang (Equity Research Associate) [email protected] 1441 Broadway, 3rd Floor New York, NY 10018

Company Description

Revenue ($ in millions)

Investment Highlights:

• Yintech delivered strong quarterly results despite impact and challenges caused by COVID-19 pandemic. The company reported total revenue of RMB490.9 million (US$69.3 million) for the first quarter ending March 31, 2020, an increase of 8.1% year over year, with customer trading volume reaching RMB846.5 billion (US$119.5 billion), primarily due to the increase in trading volumes of commodities services specifically spot commodities. Net commissions and fees increased by 68.8% year over year to RMB416.0 million (US$58.7 million) while expenses increased by 22.6%, indicating operating leverage. Net income attributable to shareholders expanded by 28.0% to RMB88.6 million (US$12.5 million), or RMB1.18 (US$0.17) per diluted ADS. Yintech’s growth momentum continued in line with our expectation, as the company maintained in depth insights to market trends and guided customers to make proactive investment decisions through its financial expertise and integrated portfolios with volatility creating opportunity for Yintech, which helped expand its market positions and gain customers, evidenced by record commissions for spot commodities and growing numbers of both active accounts and tradable accounts. A completely digital engagement model also enabled the company to operate with limited disruption during COVID-19, versus peers with physical infrastructure. Yintech appears well positioned with its highly agile business model and strong cash generation abilities and substantial cash position with no debt.

• Valuation model indicates upside potential. Yintech beat estimates for revenue and EPS reinforcing our view of the strong business potential and highlighting a potential valuation discount compared to peer financial service companies in China and U.S. CEO mentioned an increased potential dividend plan, which may attract more income focused investors. Our model maintained a fair value of $11 per ADS, contingent on the company maintaining its growth trajectory.

Price- Volume History

Key Statistics

China Emerging Growth

Revenue($ in millions)

EPS($)

Source: Yahoo Finance

2 Please see last page for important disclosures 1441 Broadway, 3rd Floor New York, NY 10018 www.diamondequityresearch.com

2020 First Quarter Results

For the three months ending March 31, 2020, the company generated total revenue of RMB490.9 million (US$69.3 million) versus RMB454.3 million in the previous year’s quarter and RMB447.2 million in the previous quarter, representing growth of 8.1% year over year and 9.8% from previous quarter. Net commissions and fees were RMB416.0 million (US$58.7 million), compared with RMB246.5 million for the same period in 2019, up 68.8%, primarily due to the increase in trading volumes of commodities services specifically spot commodities, with the numbers of active account and tradable account both growing. Net commissions and fees from commodities services for the quarter were RMB304.4 million (US$43.0 million), an increase of 146.1% compared to RMB123.7 million in Q1 2019, while net commissions and fees from securities services were RMB111.6 million (US$15.8 million), representing a decrease of 9.1% year over year. Expenses for the quarter were RMB375.6 million (US$53.0 million), an increase of 22.6% year over year and a decrease of 12.5% from previous quarter. The company delivered RMB88.6 million (US$12.5 million) in net income attributable to shareholders, or diluted earnings per ADS of RMB1.18 (US$0.17), another profitable quarter attributable to the core business growth in the past two years since transformation began.

Source: Diamond Equity Research Analysis/ Yintech Financial Report

Liquidity and Balance Sheet

The company as of March 31, 2020 had RMB2,082.2 million (US$294.1 million) in cash and investment securities. Total shareholders’ equity increased to RMB2,851.4 million (US$402.7 million), from RMB2,771.4 million as of December 31, 2019. Yintech had no long-term debt as of the quarter and has authorized a new share repurchase program, effective on June 2, 2020, to buy up to U.S. $20 million worth of its ADSs over next 12 months. We believe the repurchase program is a strong initiative, allowing Yintech to repurchase shares when they feel they trade below their intrinsic value. The company appears well positioned financially to continue its growth trajectory without additional equity financings.

Second Quarter 2020 Guidance

Yintech guided for revenue related to the business of RMB570 million to RMB590 million, representing an increase of 77.6% to 83.8% year over year. The company guided for total revenue of RMB590 million to RMB610 million representing an increase of 104.2% to 111.1%. We are encouraged by strong guidance given the challenging economic environment.

Q1 2020 E Q1 2020 A Variance (Actual Versus Results)Revenue 66.19 69.33 3.14EPS 0.15 0.17 0.02

Variance Table ($ in millions except EPS)


Investment Thesis

Yintech operates as a leading provider of comprehensive investment and trading services targeting the 160 million individual investors in China1. The company has emerged as the largest online provider of spot commodity trading services in China by customer trading volume from 2014-2016 according to Euromonitor, and has transformed into a leading comprehensive online financial service provider offering an integrated portfolio of financial products and services to address the growing needs of retail investors since the second half of 2017. According to a recent research report by Deloitte, retail wealth in China is projected to reach $30.2 trillion by 20232 presenting enormous opportunity for well positioned companies in the sector in our view. Yintech currently is focused on providing two categories of services: (i) commodities services, which includes the trading of spot and futures commodities; and (ii) securities services, including securities advisory and information platform services, overseas securities trading services, and asset management services, which enables the company to cross-market its existing clients into complementary product suites and contributes to more flexible, stable, and sustainable long-term growth and also enables synergies between the businesses. Synergies and flexibility in its business model were apparent when company reported guiding investors to seize opportunity within securities and gold trading in 2019, resulting in revenue growth of Gold TD of three times that in previous period and financial advisory growth of over 100%.We view the synergies between the businesses as a competitive advantage and view the differentiated mobile application services as integral in helping the company operate in a variety of market cycles. Additionally, we view Yintech being fully licensed with ten different global licenses as a strong barrier to entry, licenses are very difficult to acquire despite recent news that Wall Street banks JPMorgan and UBS were entering China3 with majority or minority owned securities companies, it is still advantageous in our view to be a China based financial services business with respective licensing in terms of regulatory oversight and policies. Given the strong balance sheet ($300 million in cash and short term investments as of December 2019 and no long-term debt), Yintech is well positioned to complete acquisitions, such as its previous acquisition of Forthright, which allowed it to offer online trading services to trade Hong Kong and U.S. stocks. We anticipate the company to continue to pursue relevant acquisitions, either to expand its services or provide access to new markets which we view as positive as it expands the company’s addressable market and ability to cross sell offerings.

1 Yintech Investment Holdings Limited December 2019 Investor Presentation 2 China’s investment management opportunity . https://www2.deloitte.com/us/en/insights/industry/financial-services/china-investment-management-industry.html 3 Detrixhe, John. “For Wall Street Banks in China, Is This Time Different?” Quartz, Quartz, 23 Dec. 2019, qz.com/1773984/western-banks-like-jpmorgan-think-their-chances-in-china-have-improved/.

Source: Yintech Corporate Presentation/ Diamond Equity Research Graph

Yintech offers investors a high-risk

high reward opportunity to invest

in China’s rapidly expanding financial services market at a

relatively unassuming valuation

Yintech is positioning itself to increase

shareholder value through continuing to grow its client base, optimizing product

offerings, and exploring international growth opportunities


According to Chinese tech consultancy EqualOcean, the growth of fintech has become one of the key mis-sions for Chinese regulatory agencies which bodes well for Yintech and any relevant acquisitions in the sector. In 2019 the company offered products and services to 90,000 clients, with the proportion of clients purchasing two or more products increasing from 3% in 2017 to over 16% in 2019. Yintech’s Chunda fund was awarded the winner of the top 10 PE fund by performance in Q1 2019, we view the company’s investments as a positive for shareholders as assets under Yintech’s management can potentially further expand given strong performance and offers a stable fee based revenue stream. Yintech in our view has a large market opportunity at the intersect of financial technology and financial services, both markets projected to expand dramatically over the coming years with Yintech holding a relatively small share of the markets at less than a $1 billion market capitalization. Yintech is differentiated in our view from other technology-oriented competitors such as Futu Holdings Limited (NASDAQ:FUTU) and Up Fintech Limited (NASDAQ:TIGR) by its expansive investment research and education offerings designed by highly experienced financial services professionals, coupled with a deep understanding of Chinese retail investors.

China Financial Services Market Growth China Financial Technology Market Growth

Dividend for Income Focused Investors

Yintech has maintained a consistent dividend in every profitable year. Investors should pay attention to the payout ratio, as Yintech should continue to provide an attractive dividend if their turn around continues as anticipated and their payout ratio has been reasonable in the years it paid a dividend, which was in years it was profitable. Yintech paid out $0.80 per ADS representing a 42% payout ratio in 2016, the company paid $0.40 per ADS or 39% payout in 2017 and $0.30 per ADS (including special dividend of $0.20 in 2019 per ADS) equivalent to a 40% payout ratio in 2019. Thus, the company has paid a high dividend historically in profitable years and has also returned capital to shareholders via opportune repurchases. Yintech thus may also to appeal to income focused investors, if turn around continues with limited disruption to profitability.

Source: Statista Research Department 2019 Source: China Banking and Insurance Regulatory

Commission, Asset Management Association of China, Securities Association of China, Oliver Wyman, Casey

Quirk, Bloomberg Economics

Yintech is differentiated in our

view from other technology-oriented competitors such as

Futu Holdings Limited

(NASDAQ:FUTU) and Up Fintech

Limited (NASDAQ:TIGR) by

its expansive investment research

and education offerings designed by highly experienced financial services

professionals, coupled with a deep

understanding of Chinese retail

investors

Yintech has a strong history of focusing on shareholder returns

with a consistent dividend payment in profitable years for

income focused investors, as well as a

share repurchase strategy


Yintech’s leading position in commodities, drastic growth of advisory services, proven performance in asset management and high potential in overseas securities provides a strong foundation and offers significant synergies for the company’s secular growth, trends evidenced in the recent quarter. If Yintech can continue to expand its client base and seize market share, the company in our view could have its trading multiples shift higher more in line with larger financial service public companies, which trade at higher valuations. Given Yintech’s growth potential and relatively inexpensive valuation with income generating potential, the company in our view offers investors a high-risk high reward opportunity to invest in China’s rapidly growing financial services market alongside a highly experienced financial services management team with a strong balance sheet relatively well positioning Yintech in current pandemic environment.


Risk Factors

• Changes in exchange rules and regulations could impact revenue and profitability. Yintech operates on Shanghai Gold Exchange (“SGE”) and various other trading platforms

• Yintech’s performance may be affected by its collaborators including members of SGE and futures companies. If it fails to maintain its relationship with collaborators, the business would be negatively impacted

• The company may have difficulty in expanding or retaining its trading client base and may struggle to innovate relative to competitors

• Yintech may not be able to maintain a strong brand image, which is critical in financial services

• Various regulatory changes are being proposed for Chinese listed equities by NASDAQ and SEC, which Yintech may be affected by

• The company is subject to cybersecurity risk factors, including data breaches and hacking • The company faces the risks inherent in establishing new business lines and acquisition

related risks • The company is subject to PRC related business risks including but not limited to the trade

war, regulations on offshore holdings companies, restrictions on remittance of currency, enforcement of business laws and labor laws, and preferential tax treatments

• Trading range of ADS shares are highly volatile, which could result in large losses for investors

• Yintech is registered in Cayman Islands, which may result in less protection of investors’ interests versus U.S. based equities, with judgements enacted possibly not enforceable in Yintech’s home jurisdiction

• Founders hold substantial ownership of company; three founders own roughly 70% of outstanding shares and their interests may not always be aligned with independent shareholders

• COVID-19 may have impact on Yintech’s operations and/or financial condition, in part due to instability in client’s investment assets

• Yintech is a small public company and has limited liquidity and sell-side coverage, this could limit its ability to achieve a fair valuation and investors ability to establish or exit positions and/or lead to investors suffering losses.

These Risk Factors Are Not Comprehensive. For Full List of Risk Factors Please Read Yintech’s Latest Prospectus and/or Annual Filings


Disclosures

Diamond Equity Research, LLC has created and distributed this report. This report is based on information we consider reliable, including the subject of the report, but have not been provided any non-public information. This report does not explicitly or implicitly affirm that the information contained within this document is accurate and/or comprehensive, and as such should not be relied on in such a capacity. All information contained within this report is subject to change without any formal or other notice provided. Diamond Equity Research, LLC is not a FINRA registered broker/dealer or investment adviser and does not provide investment banking services and follows customary internal trading procedures pending the release of the report found on disclosure page.

This document is not produced in conjunction with a security offering and is not an offering to purchase securities. This report does not consider individual circumstances and does not take into consideration individual investor preferences. Recipients of this report should consult professionals around their personal situation, including taxation. Statements within this report may constitute forward-looking statements, these statements involve many risk factors and general uncertainties around the business, industry, and macroeconomic environment. Investors need to be aware of the high degree of risk in micro capitalization equities.

Diamond Equity Research LLC is being compensated by Yintech Investment Holdings Limited for producing research materials regarding Yintech Investment Holdings Limited and its securities, which is meant to subsidize the high cost of creating the report and monitoring the security, however the views in the report reflect that of Diamond Equity Research. All payments are received upfront and are billed for an annual or semi-annual research engagement. As of 06/02/2020 the issuer had paid us $50,000 for our services, which commenced 11/22/2019 and is billed annually. Diamond Equity Research LLC may be compensated for non-research related services, including presenting at Diamond Equity Research investment conferences, press releases and other additional services. The non-research related service cost is dependent on the company, but usually do not exceed $5,000. The issuer has not paid us for non-research related services as of 06/02/2020. Issuers are not required to engage us for these additional services. Additional fees may have accrued since then.

Diamond Equity Research, LLC is not a registered broker dealer and does not conduct investment banking or receive commission sharing revenue arrangements related to the subject company of the report. The price per share and trading volume of subject company and companies referenced in this report may fluctuate and Diamond Equity Research, LLC is not liable for these inherent market fluctuations. The past performance of this investment is not indicative of the future performance, no returns are guaranteed, and a loss of capital may occur. Certain transactions, such as those involving futures, options, and other derivatives, can result in substantial risk and are not suitable for all investors.

Photocopying, duplicating or otherwise altering or distributing Diamond Equity Research, LLC reports is prohibited without explicit written permission. This report is disseminated primarily electronically and is made available to all recipients. Additional information is available upon request. For further questions, please contact [email protected]

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