A First Look: China Commercial Credit

Aug.22.13 | About: China Commercial (CCCR)

The Company

China Commercial Credit (NASDAQ:CCCR), through its subsidiaries and certain contractual arrangements,
controls a micro-credit company, Wujiang Luxiang, that provides direct loans and loan guarantee services to
small-to-medium sized businesses ("SMEs"), farmers and individuals in the city of Wujiang, Jiangsu Province, China.

Jiangsu, which is an eastern coastal province, has among the highest population density in China and is home to many of the world's leading exporters of electronic equipment, chemicals and textiles. As a result, the city of Wujiang ranks as one of the most economically successful cities in China.

  • CEO and Chairman of the Board - Mr. Huichun Qin, age 49: Mr. Huichun Qin was appointed as the CEO of CCCR on August 7, 2012 and has been the CEO of Wujiang Luxiang since its inception in 2008. From 2006 to 2008, he served as a Vice President of Wujiang Brach of PBOC, and at the same time he also served as a Deputy Director of Wujian State Administration of Foreign Exchange, where he was ... responsible for implementing a program relating to anti-money laundering management, in charge of management and monitoring local and foreign currency; foreign currency reserve and exchange, investigation, statistics, analysis and monitoring other financial institution in Wujiang area. He has extensive experience in the banking industry. Mr. Qin received a bachelor degree from Southwest Tech University in Mianyang, China. In 2012, Mr Qin received an annual salary of $75,000 plus bonuses totaling $142,433. Mr Qin is employed as CEO in agreement with CCCR for a term of five years and renews for an additional one year term unless previously terminated on three months written notice.
  • CFO - Mr. Long Yi, age 36: Mr Yi was appointed as the CFO of CCC on January 1, 2013. His annual salary is $50,000 on a two year term.

The Business (Microcredit business in China)
Microcredit companies, which provide lending services for farmers, individual industrial and commercial households, and small and medium-sized enterprises, have become an important channel for private capital to enter the financial market and a significant supplementary power of China's credit market.

Microcredit companies, which provide lending services for farmers, individual industrial and commercial households, and small and medium-sized enterprises, have become an important channel for private capital to enter the financial market and a significant supplementary power of China's credit market.

China has experienced explosive growth in micro-credit companies in recent years. According to the 2011 Statistical Report of Micro-credit Companies issued by the People's Bank of China ("PBOC"), as of the end of December 2011, there were 4,282 microcredit companies in China, which was more than 8 times the number in 2008. In 2011, microcredit companies employed 47,088 people nationwide, with a total loan balance of 391.5 billion yuan (62.05 billion U.S. dollars), said in the report.

Since the microcredit industry is in its infancy in China, it still faces strict scrutiny from regulatory authorities. The major regulations on microcredit companies applicable throughout the country are the Notice of the People's Bank of China and the China Banking Regulatory Commission on the Relevant Policies for Village and Town Banks, Loan Companies, Rural Mutual Cooperatives and Micro-credit Companies, promulgated and effective on April 24, 2008 and the Guiding Opinions of the China Banking Regulatory Commission and the People's Bank of China on the Pilot Operation of Micro-credit Companies ("Guiding Opinions"), promulgated and effective on May 4, 2008. In addition, many local regulations on micro-credit companies have been enacted based on the specific circumstances and actual needs of the locality.

This essay describes the legal developments of micro-credit industry by comparing the regulations applicable nationwide ad the regulations issued by local governments. We chose the regulations of Inner Mongolia Autonomous Region, Shandong Province, Zhejiang Province, Tianjin and Shenzhen as examples to illustrate the developments of regulations of microcredit companies in different regions of China.

The main resources of fund of a microcredit company, as provided in the Guiding Opinion, comprise capital paid by shareholders, donated funds and loans granted by banking financial institutions of no more than two as long as the aggregate amount of which does not exceed 50% of registered capital of the micro-credit company. In addition, absorbing public deposits or borrowing funds from individuals or enterprises other than banking financial institutions is not allowed.

The Investor's Corner

Financial innovation is emphasized in China nowadays. On March 28, 2012, the State Council declared its reform program to establish a finance comprehensive reform pilot area in the eastern city of Wenzhou to regulate private financing activities. The reform program, among other things, encourages private capital to participate in the reform of local financial institutions and specifies that eligible micro-credit companies could be transformed into village and town banks.

The reform program is a good signal for the development of micro-credit companies in China but it is still too early to judge the real effects without specific supporting rules.

Year over year, China Commercial Credit, Inc. has seen little change in their bottom line (from $8.3M USD to $8.3M USD) despite revenues that grew from $1.5M USD to $1.7M USD. A key factor has been an increase in the percentage of sales devoted to income tax expenses from 81.98% to 102.39%.

The Chinese Micro-Credit Business Opportunity
China has over 6,000 micro-credit companies and activity in this sector has mushroomed in recent years as the government has encouraged their development in order to boost lending to small businesses. The number of new micro-credit companies has risen 64% in less than five years as companies rush to capitalize in this financial market.

The number of micro-credit companies increased from less than 10 in 2005 to over 6,000, Jiao Jinpu, secretary of the China Microfinance Institution Association, said at a recent forum.

Microcredit companies have issued nearly 150 billion yuan ($23.83 billion) in loans so far this year, and their outstanding loans exceeded 540 billion yuan, according to Jiao.

Micro-lending companies have become an important component of, and supplementary power in China's credit market. They have also been important routes for private capital to enter the financial market. South and East Asia lead the world in micro-finance markets.

The Micro-Credit Outlook
For 2013, industry analysts project a global growth in the micro-finance of 15% to 20%, depending on region. South and East Asia microcredit outlook is estimated to be 20-30% (Source: responsibility Research).

Of the experts interviewed, 58% (15) expect interest rates on micro-loans in their region to fall next year. Almost all say that the main reason for this is the pressure of competition.

The End Result
Given the robust fundamentals, the micro-finance industry is expected to grow by 15% to 20% in real terms in 2013. Against this backdrop, the accustomed solid performance from micro-finance products in 2013 is expected. Overall economic growth in the 15 most important markets is predicted to increase from 4.7% to 6.2% in 2013. Moreover, the consensus among the 26 microfinance experts interviewed is that the coming year will be about as good as 2012.

The Financials

Income Statement

Currency in
Millions of US Dollars

As of:

Dec 31
2010

Dec 31
2011
Reclassified

Dec 31
2012

TOTAL REVENUES

9.0

11.0

12.6

GROSS PROFIT

9.0

11.0

12.6

Selling General & Admin Expenses, Total

1.0

1.1

1.3

Other Operating Expenses

0.2

0.4

1.2

OTHER OPERATING EXPENSES, TOTAL

0.2

0.4

1.2

OPERATING INCOME

7.8

9.5

10.0

Interest Expense, Total

1.0

1.6

1.3

EBT, INCLUDING UNUSUAL ITEMS

7.8

9.5

10.0

Income Tax Expense

1.0

1.2

1.7

Earnings from Continuing Operations

6.8

8.3

8.3

NET INCOME

6.8

8.3

8.3

NET INCOME TO COMMON INCLUDING EXTRA ITEMS

6.8

8.3

8.3

NET INCOME TO COMMON EXCLUDING EXTRA ITEMS

6.8

8.3

8.3

Click to enlarge

Balance Sheet

Currency in
Millions of US Dollars

As of:

Dec 31
2010

Dec 31
2011
Reclassified

Dec 31
2012

Assets

Cash and Equivalents

0.7

3.5

1.6

TOTAL CASH AND SHORT TERM INVESTMENTS

0.7

3.5

1.6

Other Receivables

1.2

1.2

1.2

Other Current Assets

0.2

1.0

0.4

TOTAL CURRENT ASSETS

82.9

94.5

99.7

NET PROPERTY PLANT AND EQUIPMENT

0.1

0.1

0.3

Other Intangibles

0.0

--

--

Other Long-Term Assets

0.0

--

--

TOTAL ASSETS

83.0

94.6

100.0

LIABILITIES & EQUITY

Accrued Expenses

0.1

0.6

0.7

Short-Term Borrowings

19.7

23.6

20.6

Other Current Liabilities

9.2

0.1

0.1

TOTAL CURRENT LIABILITIES

30.0

24.2

21.4

Other Liabilities, Total

10.2

11.3

11.5

TOTAL LIABILITIES

30.0

35.4

32.8

TOTAL PREFERRED EQUITY

--

--

0.5

Common Stock

44.1

0.0

0.0

Additional Paid in Capital

--

44.1

43.8

Retained Earnings

7.4

11.3

18.8

Comprehensive Income and Other

1.6

3.7

4.2

TOTAL COMMON EQUITY

53.0

59.1

66.8

TOTAL EQUITY

53.0

59.1

67.2

TOTAL LIABILITIES AND EQUITY

83.0

94.6

100.0

Click to enlarge

Cash Flow

Currency in
Millions of US Dollars

As of:

Dec 31
2010

Dec 31
2011
Reclassified

Dec 31
2012

NET INCOME

6.8

8.3

8.3

DEPRECIATION & AMORTIZATION, TOTAL

0.0

0.0

0.1

Provision for Credit Losses

0.1

0.0

0.1

Other Operating Activities

0.2

0.2

0.0

CASH FROM OPERATIONS

6.9

9.0

8.3

Capital Expenditure

0.0

0.0

-0.3

CASH FROM INVESTING

-14.0

-5.0

-6.5

Short-Term Debt Issued

39.5

49.1

23.8

TOTAL DEBT ISSUED

39.5

49.1

23.8

Short Term Debt Repaid

-27.8

-38.2

-26.9

TOTAL DEBT REPAID

-27.8

-38.2

-26.9

Common Dividends Paid

-4.3

-4.4

--

Common and/or Preferred Dividends Paid

--

--

-0.8

TOTAL DIVIDEND PAID

-4.3

-4.4

-0.8

Other Financing Activities

--

-7.9

-0.4

CASH FROM FINANCING

7.4

-1.3

-3.7

Foreign Exchange Rate Adjustments

0.1

0.2

0.0

NET CHANGE IN CASH

0.4

2.9

-2.0

Click to enlarge

Disclosure: I am long CCCR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.