Yiren Digital (NYSE: YRD)

When your earnings increase by 74% YoY and your P/E is still below 2

Yiren Digital Ltd. ("Yiren Digital", the "Company" or the "Stock")

Disclaimer:

Please conduct your own thorough research. As the author of this post, I have a stake in Yiren Digital (NYSE:YRD) and own shares in the company. If you are considering investing in this company, please be aware that the stock has low liquidity, which means that the stock price can be volatile. The following content is intended solely for entertainment purposes and should not be construed as financial advice.

Why Yiren Digital?

I believe the stock is currently mostly undiscovered because of the following reasons:

• Small-Cap with around US$467m in market cap

• Operates within the (Small Cap) Chinese market, an area that continues to receive comparatively limited coverage from international analysts (Analysts have ignored the stock since 2020)

And now let me tell you why I believe that this stock will at least double in the near future:

• Both revenue and net income experienced significant growth over the past year

• The company's cash and cash equivalents amount to twice the value of its market capitalization

• The total shareholder equity exceeds 3x the market capitalization

What does the company do?

Yiren Digital is engaged in 3 key sectors:

1. Financial Services: Offering revolving loan services to individuals, families, and businesses.

The financial services are marketed under various names. Yixianghua is an online lending platform providing small revolving loan facilitation services. Yiren Credit is the financial services platform that offers a wide range of online multi-channel loan products for individual borrowers and small business owners, funded by financial institutions.

2. Life & Property Insurance: Providing tailored insurance solutions to meet diverse needs across education, healthcare, retirement planning, asset protection, and business expansion. The insurance products are distributed through both Yiren's subsidiary, Hexiang Insurance Brokers, and other channels.

3. Consumption and Lifestyle: Meeting a broad spectrum of quality-of-life requirements through membership perks and a range of products and services. This includes entertainment, travel, skincare, and other amenities to cater to varied lifestyle preferences.

Yiren Select (operated by Yiyouxuan, which holds both an ICP License and EDI License) is the “Finance Plus Life” super-app designed to meet the diverse and comprehensive needs of the mass affluent group in various life scenarios, offering a range of non-financial products and services alongside wealth solutions.

Bullish reasons

In the subsequent section, I will articulate the reasons for my conviction that the company is currently significantly undervalued:

Great financial performance

It's important to evaluate all figures in the context of the current market capitalization of US$467 million.

During fiscal year 2023, the company witnessed a remarkable 42.5% YoY surge in total net revenue, soaring to US$689 million. When dissected across the company's core operational domains, the revenue growth manifested as follows:

- Revenue from loan facilitation services experienced a 64% YoY uptick ($315 million).

- Revenue generated from insurance brokerage services rose by 31% YoY ($135 million).

- Electronic commerce services showcased a staggering 318% YoY increase in revenue ($178 million).

The net income for fiscal year 2023 surged by 74% YoY to $292 million, resulting in a current P/E ratio of under 2.

Beautiful balance sheet

Upon review of the balance sheet, it is evident that the company maintains a strong financial position. In fiscal year 2023, cash and cash equivalents increased by 35% YoY to $815 million.

Total assets also experienced a notable growth of 20% YoY, reaching $1.44 billion. Concurrently, total liabilities stood at $308 million, resulting in a total shareholder equity of $1.138 billion.

Advancing AI Integration and Expertise

Under the 'AI Lab' initiative, the company has been actively refining its Large Language Models and developing its proprietary LLM operations platform. This endeavor has two primary objectives.

• Firstly, it aims to deepen AI integration across the company's operational spectrum, leading to increased efficiency and an enhanced customer experience.

• Secondly, the company intends to broaden its AI expertise beyond the fintech verticals into selected sectors, empowering both B2B and B2C clients and partners with advanced technological capabilities.

Moreover, the company has recently identified high-quality AI companies and plans to expand its AI ecosystem through strategic partnerships and investments. The horizon is filled with exciting prospects.

Future Outlook of Chinese Stocks

Presently, we are navigating a period where all Chinese stocks are experiencing a downturn, marked by significant declines in stock prices over the past year. Notably, even prominent technology stocks, such as Alibaba, are currently assessed at a P/E ratio of approximately 13. I anticipate a alleviation of the current challenging market conditions, with the expectation that Chinese stocks will rebound and appreciate in the future.

Valuation

The current stock price is: $5.23 (March 21, 2024)

Below are my assessments of the fair stock price in three distinct growth scenarios:

Margin of Safety

My Margin of Safety Stock Price is: $7.65

Normal case

I expect the following stock price in a normal growth scenario: $23.09

Best case

My best case scenario calculation gives the following stock price: >$47.68