Yirendai: Leaked Internal Emails Raise Much Deeper Concerns

Summary

• Shares of YRD have been shunned by traditional China smart money. Outside ownership is dominated by a few US "quant funds" which perform little fundamental research.
• Existing concerns have weighed on the stock, including fraud, an explosion of guaranteed subprime credit exposure and new illegal activities in China.
• To entice lenders, YRD guarantees deep subprime loans. But YRD's risk reserve is deeply under capitalized while deep subprime exposure now exceeds 80%.
• An unnamed fund affiliated with Chairman quickly dumped nearly all of its YRD shares following the new PRC guidance which made such guarantees illegal.
• Recently leaked internal emails show that YRD's Chairman is forcing parent company employees to make undisclosed USD purchases or be fired.

Note #1: Everything in this article represents solely the opinion of the author. Nothing herein comprises a recommendation to buy or sell any security. Information in this post has been obtained from sources believed to be reliable, including SEC filings from the company named. As always, readers should conduct their own research and form their own opinions and conclusions.

Note #2: Prior to publication, the author shared information and documents from below in a written report to the United States Securities and Exchange Commission.

Company Overview

Name: Yirendai (NYSE:YRD)

Industry: China P2P lending/finance portal

Market cap: $1.3 billion

Share price: $20

52-week low: $3.35

Options: Liquid calls and puts

Short Thesis:

- Deep subprime overexposure

- Industry rife with fraud that is directly affecting Yirendai

- Undisclosed illegal activities risk in China

- Stock price irregularities/trading activity in the US ADRs

- Predatory related party transactions benefiting parent company over US investors

PART A: INDUSTRY PREVIEW - P2P IN CHINA IS COMING UNRAVELED (YOU SHOULD HAVE KNOWN BETTER)

In just the last few days, US investors have begun to find out what Chinese investors have known all along. This information comes from two articles last week in the Wall Street Journal and the English language South China Morning Post over the past few days.

As I will show, the problems facing China's P2P lending space are transparently awful. Investing in this space defies commons sense. But as I will show later, the problems specific to YRD are actually even worse than the generic problems of the industry as a whole.

Just from a macro common sense perspective, it is safe to say this: anyone dumb enough to be LONG on stocks with heavy exposure to China's domestic credit markets should probably not be managing money. Evidence of China's "

Analyst’s Disclosure: I am/we are short YRD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Everything in this article represents solely the opinion of the author. Nothing herein comprises a recommendation to buy or sell any security. The author was previously an investment banker for a major global investment bank and was engaged in investment banking transactions with a wide range of companies. The author has not been engaged in any investment banking transactions with US listed companies during the past 5 years. The author is not a registered financial advisor and does not purport to provide investment advice regarding decisions to buy, sell or hold any security. The author currently holds a short interest in YRD and during the past 12 months has shared his fundamental and/or technical views with other investors. The author may choose to transact in securities of one or more companies mentioned within this article within the next 72 hours. Before making any decision to buy, sell or hold any security mentioned in this article, investors should consult with their financial adviser. The author has relied upon publicly available information gathered from sources, which are believed to be reliable and has included links to various sources of information within this article. However, while the author believes these sources to be reliable, the author provides no guarantee either expressly or implied