With positive and growing net income in 2018 and offering loans with interest rates of 17%-21%, Samoyed (SMY) may seduce certain investors. With that, there are numerous risks on this name. Firstly, the company commenced operations three years ago, which means that the track record is not that long. If the Chinese economy does not perform in the future, the delinquency ratio, which is quite low right now, could increase. Additionally, it is a controlled company that will not have an independent Board of Directors after the IPO, which should worry minority shareholders. Finally, the company was incorporated in Cayman, where the protection of shareholders is not as large as in the United States. Many things need to be changed to see Samoyed as a buy.
Founded in 2015, Samoyed Holding Limited is a loan facilitator in China focused on facilitating credit card balance transfer products with a weighted average annual percentage rate lower than 18.25%. The company’s business seems well ranked. In 2017, Oliver Wyman reported that Samoyed was ranked third in terms of number of registered users.
Samoyed’s clients should interest investors. They are millennials in China, most of the times having a credit card. As of June 30, 2018, 78% of the company’s customers with an approved credit line had a credit card record. They do not only show an established credit history, but they are also at an early stage of their career. Samoyed expects its customers to increase their income quite a bit in the future. Creating credit relationships with them right now seems quite brilliant. The lines below provide further details on the credit profile researched by Samoyed:
“Unlike in the United States, credit card penetration in China is still comparatively low, making credit-proven millennials who already have established credit history with banks a cohort with prime credit quality and low delinquency rates. They are well-educated and at an early stage of their career with high potential for income growth. They have strong consumption demand but need access to credit due to inadequate savings.” Source: Prospectus
With that said, what investors should appreciate the most on this name is the annual return obtained. In the six months ended June 30, 2018, the company reported a weighted average annual percentage rate of 21.5%.
Furthermore, in the same time period, the weighted average annual percentage rate of the company’s credit card balance transfer and cash advance facilitated was equal to 17.33%. The delinquency rate seems also very beneficial. Samoyed reported delinquency rate of only 1.66% for the six months ended June 30, 2018 and 0.82% for the year ended December 31, 2017.
The number of registered users is increasing at a high pace. The number of users increased by 165% in 2017 and 43% for the six months ended June 30, 2018, 24.446 million users. As a result, the accumulated amount of total approved credit line increased by 71% for the six months ended June 30, 2018. The most relevant products sold by Samoyed are credit card balance transfers with 43% of the total amount of loan facilitated for the six months ended June 30, 2018. Cash advances represent 22%, and credit loans represent 35%. The table below provides further details on this matter:
With all these beneficial figures, investors should understand very clearly that Samoyed is a three years old company. The delinquency rate seems very low. However, the company has not operated for a long time, and the market should wonder whether these great figures will continue in the next five years. If the Chinese economy does not perform, seeing the delinquency rate declining is quite likely. Shareholders should keep this feature in mind.
Samoyed commenced to facilitate loans very seriously in 2017. The number of loans receivable as of December 31, 2016 was equal to zero, and it was $183 million as of December 31, 2017. The number of assets increased quite a bit also in 2017. As shown in the image below, the balance sheet shows 958% increase in assets in 2017 amounting to $238 million. Cash in hand was not large, equal to $10.6 million, and restricted cash was equal to $19 million in December 2018.
As of June 30, 2018, the number of loans receivable decreased to $158 million, and the cash reported was significantly higher. Cash was equal to $14.2 million and restricted cash was equal to $72 million in June 2018. As a result, certain investors will suppose that the appetite for credit decreased in 2018, which may not be great for Samoyed. It could mean that the company is executing its IPO when the upward trend in the amount of loans given has reached the top. The image below provides further details on this matter:
The list of liabilities shows what most investors should be expecting on this name. As of December 31, 2018, the number of liabilities is equal to $218 million, and the assets/liabilities ratio is equal to 1.09x. Samoyed received funding debt of $188 million, for which it is paying interest rates of 6.5% and 8.4%. The returns obtained lending this money seem appealing. The company lends at 6.5%-8.4% and offers loans asking for a weighted average annual percentage rate of 17%-21%. The images below provide further details on these matters:
The income statement will not be that appreciated by investors. The revenue increased in 2017 by 352% to $36.33 million as loan facilitation fees and interest income increased. With that, the company was not able to report profit at the net income level. The losses were equal to $10 million in 2017. The image below provides further details on this matter:
While revenue growth is quite impressive, growth investors should be careful. Samoyed does not seem a technological company offering something revolutionary. Revenue is growing because the company provided a massive amount of loans in 2017, much more than in 2016. This trend may not continue in the future as clients may not demand that amount of loans in the next years.
The numbers reported for the six months ended June 30, 2018 were slightly better than those in 2017. Revenues increased quite a bit. Samoyed reported $34 million in six months, almost the same amount reported in 2017. Additionally, the company reported positive net income of $3.87 million. The upward trend seems very beneficial. If Samoyed reports further growing net income in the future, the share price could increase. The image below provides further details on the income statement released in 2018:
Use Of Proceeds
The company will not use the money from the IPO to repay debt or acquire stock from existing shareholders. It is beneficial. The proceeds from the IPO will be used for increasing brand awareness, strategic acquisitions among other purposes. The lines below provide further detail on this matter:
After The IPO, The Equity Structure Will Be More Simple
While most companies simplify their equity structure right after executing IPOs, it is good to note it in this case. Not every investor should know it. Samoyed financed its activities through the sale of convertible securities and preferred shares. It is beneficial that they will be converted. New shareholders should not worry about the potential stock dilution of these securities. The image below provides further details on the expected capitalization of Samoyed:
The list of shareholders does not seem that beneficial. Directors own 77.4% of the total amount of shares outstanding. In addition, there are two directors owning a massive amount of class B ordinary shares, which provide 10 times more votes than class A ordinary shares. The amount of institutional investors does not seem very elevated on this name. It is quite worrying. The image below provides the list of shareholders:
On the top of it, the fact that class B shares can also be converted into class A shares is another feature that new shareholders should not appreciate. The lines below provide further details:
“Each Class A ordinary share will be entitled to one vote. Each Class B ordinary share will be entitled to ten votes and will be convertible into one Class A ordinary share.” Source: Prospectus
As the CEO owns a large amount of class B shares, this individual will control the company, which investors should not welcome. As a result of this feature, the Board of Directors will be controlled and may take decisions to benefit the largest shareholder. Minority shareholders could see how their interests are not protected by the Board of Directors, which is not ideal. The lines below provide several warnings from the prospectus:
“We will rely on the "controlled companies" exemption and will not have a majority of independent directors serving on our board of directors.” Source: Prospectus
Samoyed Was Incorporated In Cayman
Shareholders should understand very clearly that they are investing in an entity located in Cayman. The assets and operating subsidiaries are located in China. However, the owner of those assets is a company incorporated in the Cayman Islands. The image below provides the business structure:
As a result, the jurisdiction that should apply is not that of China or the U.S., but that of Cayman Islands. This is a bit problematic as shareholders will not be able to protect their interests. Firstly, the securities laws in Cayman are not that developed and shareholders are not as protected as in the United States. In addition, judges in the United States will not be able to act against the directors, or the management as the assets are in China. The lines below provide further details on this matter:
Lending money at 6.5%-8.4% and offering loans with interest rates of 17%-21%, Samoyed may seduce certain investors. With that, there are many risks on this name. Firstly, the company has operated for only three years, which means that investors don’t have a long track record. In 2018, the delinquency rate was very low, but these beneficial figures may not continue if the Chinese economy does not perform in the future. In addition, it seems also not beneficial that Samoyed will be a controlled company and the Board of Directors will not be independent. The rights of minority shareholder may not be respected. Finally, the fact that the company was incorporated in the Cayman is also worrying. Keep in mind that the securities laws in this jurisdiction are not developed. Shareholders are not as protected as in the United States.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.