If there's one thing I love, it's a good SEC filing. I know you feel the same way -- you'd just rather I read through them for you. Hey, I don't mind.
Having determined that there's potentially huge money for us to make in the small-sum lender space in China, of all things, I've had a great time poring over the filings for the companies that are in this business.
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Consider Golden Bull, a recent IPO. It's a teeny $80 million company that connects lenders to borrowers. If I have some cash I'd like to lend, I go to its website and find a loan to fund. I get paid a rate of return on my money for the short-term loan -- usually between 30 and 90 days -- and the borrower gets credit that he or she otherwise might not qualify for with a traditional bank lender.
Every loan is backed by collateral -- in this case a vehicle unencumbered by a lien. Borrowers can qualify for 70% loan to value. If their auto is worth $10,000, they can borrow up to $7,000. The maximum personal loan is about $30,000; the largest possible business loan is about $160,000. The lender collects an average rate of return of 11.6%. Golden Bull makes its cut from service fees of about 5.4% on average. Chinese consumer credit outstanding is on the rise and so is the number of vehicles on the road. In 2007, there were 59 million cars on the road in China. Today there are nearly 200 million.
This is remarkably big business, and it is hugely fragmented. It is today what the coffee shop space looked like before Starbucks (Nasdaq: SBUX) grabbed its disproportionate share. There are 2,448 companies in this business in China. The Financial Times reports China's P2P lenders' transactions volume was $445 billion in 2017. Golden Bull made it to the IPO stage on a U.S. market, so we can assume that regulators signed off, which is good, and that investment bankers were willing to sell the shares, which is better.
It's probably a good business and maybe has the potential to be a great one. But even so, I'm a little leery -- because of what I found in the filing:
-- Golden Bull represents that it has never had a loan default. The fact is I just don't believe this. No matter how good you are at lending money, sooner or later -- and my bet is on sooner -- someone somewhere is going to default. That's just life. Saying that no one has defaulted strikes me as suspicious.
-- Every bank lender in the United States has a reserve fund to cover bad loans. Every bank income statement looks the same, with a quarterly provision that goes into the fund to cover bad loans. Golden Bull doesn't do this. On some levels, that makes sense, as it is not putting stockholders' cash at risk; it simply matches up borrowers and lenders. Still, the absence of a reserve is troubling. I know that I would feel more comfortable with some cash in reserve to protect me as a lender than I am with the company just shrugging it off and claiming that none of its loans ever go bad.
-- The ownership structure is Byzantine. I think I could study it for days and not really get it. There's just no reason for it to be as complicated as it is. The good news is that the company's founders own enough stock to control the company, but the flip side of that is that investors have no say. To be sure, that's true at Berkshire Hathaway, where Warren Buffett is the majority shareholder. But I trust Buffett. I have a harder time trusting this company -- its filing clearly states that the founders are fully able to take actions that are not in shareholders' best interest.
I'm not a lawyer, and as such I'm not an expert on the ins and outs of fiduciary duty. But I know that Buffett always acts in the best interest of Berkshire's owners. Berkshire never says, "Hey, our CEO is the de facto ruler and can do whatever he wants." Buffett thinks and, critically, acts like he has a fiduciary responsibility to his company. Golden Bull's owners not only don't do this, they expressly state that they might not. And since the company is based in China -- outside of the strictures and norms of Corporate America -- I just don't as an investor know what I could do, if anything, in the event the owners decided, for whatever reason, to go off the reservation.
-- The filing takes a flippant view of regulation. China recently tightened its regulation of small nonbank lenders, limiting loan balances, among other things. Golden Bull in effect said, well, yeah, we made loans bigger than the new rules, they're on our books now, but they'll be paid off before the new rules will affect us and, basically, we're not really sure if the penalties are worth worrying about. To be sure, this is not the exact verbiage that they use, but that was the feeling I got -- I'm a kid who's been reading bank filings for way too long, and I've simply never heard anything but absolute and unwavering deference to regulators.
Let me be clear: Golden Bull says it will comply. Maybe it will, maybe it won't. For my part, I'm walking away from it with more suspicion than confidence.
Still, Golden Bull could hold some promise -- it's a mid-size player in a massive and growing industry that seems to be riding the wave. The fact is, this very well may be a company that could rise tenfold in the next two years -- frankly, I'd give it even money. But those are gambling odds, and I don't want to take a gamble.
What I do want is for you to get a sense of how important these filings are and why we must scrutinize every detail. In this instance, the details show me two things: One, I really do want to find a way to be invested in this industry and, two, I really need to find a company that doesn't present the red flags I came away with.
Golden Bull IPO'd on the cheap with a discount underwriter and a registration statement that was clearly written by lawyers to provide the bare minimum. If that's the way the company chooses to present itself, that's its choice. But I expect for companies to be on their best behavior in their filings, to offer with objective facts a cogent case for investing. Golden Bull failed to do this.
But I'm stoked about the sector, so I kept looking. Frankly, I got a little disheartened -- I didn't see what I really wanted.
Then, finally, I found a $2 billion company that trades on the New York Stock Exchange. It has Fast-Track Millionaire potential written all over it. There's no limit to where and how far this company can go -- it's a $100 billion industry leading blue-chip in the making.
Sadly, I can't share the name of this pick with you today, because it just wouldn't be fair to my Fast-Track Millionaire subscribers.
But watch this space closely, because there's a ton of potential for investors here. In the meantime, if you'd like to get the name and ticker symbol of my pick, along with all of the rest of my Fast-Track research, go here.