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• We believe there is an increasing likelihood that the fallout in cash loan sector might spread to consumer finance. What might be at risk is Ant Financial’s (Ant Fin) balance sheet deleveraging;
• Deleveraging will impact Alibaba’s GMV growth in 2018. It might also hurt Baidu’s near-term outlook. We cut BABA, JD and BIDU’s TP’s from US$190, US$55 and US$295 to US$185, US$50 and US$285.

Regulators might require Ant Fin to put up more capital
The December 1st regulation on the cash loan industry required companies to include their asset-backed-securities (ABS) on their balance sheets to calculate leverage ratio. This will affect Ant Fin in particular. At this point it is not clear whether the regulators mean all ABS or just the self-funded portion (which typically<10% of total). The outcome will determine how much additional capital Ant Fin must put up to meet its capital requirement. Either way, we believe Ant Fin will turn cautious in lending next year, leading to slower GMV growth.
 
Both Ant Fin and JD Finance (JDF) will turn cautious in lending
(1)   We estimate Ant Fin’s consumer finance product Huabei (花呗) had a balance of RMB300bn and cash loan product Jiebei (借呗) RMB230bn as of C3Q17. According to Caixin Media, Huabei had RMB195bn and Jiebei 178bn ABS outstanding as of December 4, 2017. Huabei’s balance on Ant Fin’s micro-loan license holder in Chongqing had a balance of RMB99bn as of C2Q17. Yet Ant Fin’s registered capital was only RMB12bn, which means if regulators require all ABS balance to be included Ant Fin must put up RMB165bn (US$25bn) cash assuming 3x leverage ratio. If regulators only require self-funded (estimate 10%) portion then Ant Fin must put up RMB5bn;
(2)   JDF’s finance position was disclosed in JD’s financial statement as of C3Q17. Consumer finance product Baitiao (白条) had a balance of RMB17bn, with an ABS balance (non-securitization-debt) of RMB35bn. Yet JDF’s registered capital was only Rmb5bn. Therefore, JDF must put up RMB12bn (US$1.8bn) assuming 3x leverage ratio if all ABS balance must be included and RMB1.8bn if only self-funded portion must be included for leverage calculations.
In our view the risk is relatively moderate for JDF but more severe for Ant Fin.

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