CoAssets — Update 25 May 2016

CAX is headquartered in Singapore, with offices in China, Indonesia, Malaysia and Australia. It operates a peer-to-peer (marketplace lending) platform where it offers yield-starved investors superior interest rates to those offered by bricks and mortar lenders and provides borrowers with easier access to credit at rates below those offered by traditional financiers. As a marketplace lender, CAX enjoys the advantages of the financial system without its costs. CAX has no capital requirements, is able to leverage the existing payment infrastructure at minimal cost, and, because it has no bricks and mortar presence, it has lower operating costs. The use of technology-enabled ‘word of mouth’ or social media means that customer (lender and borrower) acquisitions costs are not excessive. CAX earns a fee based on the value of the loan. The debt has no recourse to physical assets and is supported by a promissory note and a personal guarantee from the borrower.

Our DCF based valuation range of A$0.26 to A$0.66 (WACC 10.8% and terminal value of 2%) assumes that CAX achieves growth in opportunities funded from S$44m currently to between S$435m and S$513m by FY19. We expect negative cash flows until FY19 when operations are forecast to become profitable. Our forecasts do not include earnings/costs of new businesses. Our DCF valuation range includes an estimate of between A$0.06 and A$0.16 for the existing business. The terminal value accounts for 72% of our DCF valuation. Our sensitivity analysis shows that if the CAGR in revenue falls from our forecast estimate of 31.6% to 28.2% (2017 to 2025), this would reduce cumulative loans financed by S$1bn and reduce the DCF from A$0.44 to A$0.26. The current share price implies that the CAGR in revenue to 2025 would need to increase from our forecast estimate of 31.6% to 32.5% and cumulative loans financed to 2025 would need to increase by ~S$330m. However, sustained successful execution on the broader offering and internationalisation should result in significant value appreciation beyond the bounds of our DCF valuation and sensitivity range.

CAX achieved a profit before tax of A$0.37m in H116 and our forecasts show losses for FY17 and FY18, as CAX invests in its platform and expands geographies and products. FY19 shows profitable operations with an EBITDA margin of 9.9%. The key driver of the restoration of profits is an additional ~S$390m of loans originated.

Deal quality: the key ‘make or break’ factors are the quality of the investment opportunities brought to the platform and the maintenance of CAX’s default free track record. We think that any doubts about the integrity of the platform would have a negative impact on valuation, as we have seen with Lending Club (NYSE.LC), and could see investors and borrowers withdraw from the site.

Macro factors: any increase in interest rates could lead to yield-focused investors looking elsewhere for acceptable yields at a reduced risk. Higher interest rates could lead to a higher loan default rate. CAX has not yet operated through a full credit cycle.

Regulatory: as marketplace lending grows, regulatory processes are being strengthened to protect borrowers and lenders, enforce obligatory disclosures by platforms, and combat fraud, cyber-crime and mis-selling. There are significant changes under consideration in both Singapore and Australia, which may require CAX to acquire additional licences.

CoAssets (CAX) undertook a compliance listing on the National Stock Exchange of Australia Limited (NSX) on 7 July 2015 by issuing 1,000 shares at A$0.10 per share. In May 2015 CAX acquired 100% of the share capital of CoAssets Pte Limited, a private Singaporean company with ownership of the intellectual property (IP) and operations of the CoAssets crowdfunding platform. The acquisition was by way of a 10:1 share swap (1 share in CAX for every 10 shares held in the Singaporean company). In Singapore CoAssets has a legal opinion1 that because the “Opportunity Providers” on the platform are corporations rather than individuals, it is not required to be licensed by the Monetary Authority of Singapore. Proposed changes to the regulations may mean a change in licensing requirements.

Since listing, CAX has undertaken two private placements: 31 December 2015 A$2.7m at A$0.20 per share; and a further A$2.1m at A$0.35 per share completed on 1 March 2016. A Prospectus for the issue of up to 25m shares at A$0.40 per share to raise up to A$10m together with one free option for every two subscribing shares was lodged on 24 May 2016. The minimum subscription is A$5m and the options convert to ordinary shares on 30 June 2019 at an exercise price of A$0.65 per share. Two million shares have been issued to corporate adviser Expara Group (Singapore), which now holds a total of 10.57m shares. The broker to the offer is to receive 4m options (exercisable on 30 June 2019 at A$0.65 per option) based on the maximum raise of A410m.

At the time of the acquisition by CAX, the CoAssets business model was to use its web-based platform to bring together property developers (labelled Opportunity Providers by CoAssets), mostly located in Asia, looking for alternative financing, with investors looking for investment diversification, bite-sized investments and higher yields. To gain entry to the platform, CAX requires Opportunity Providers to hold certain licences and provide proof of asset ownership; developers must provide a developer licence number, property agents must provide their agent licence number and property owners must provide documentary proof of ownership. CoAssets undertakes due diligence, using quantitative and qualitative techniques, on opportunities before they are listed on its website.

Since commencing business in 2013, CAX has crowdfunded over 60 investments, comprising 59 real estate investments and eight SME financing deals in both Singapore and Australia, raising S$44m at an average deal size of S$0.66m. This makes it one of the top crowdfunding platforms in South-East Asia by number of deals and in the top 20 globally for real estate crowdfunding.2

CAX offers a platform, where it presents on a web portal, listings of Opportunity Providers (real estate developers, owners or agents and since January 2016 non-real estate SMEs from Asia and Australia). These are viewed by potential Investors, who can indicate an interest in a project or opportunity, with a view to investing. CAX does not act as an agent and does not accept or collect any funds or deposits. It earns its revenue from the Opportunity Providers (via commission) on the loans (typically 3-4% and also referred to as administration fees) and fees charged through conferences and tradeshows and publication and distribution of the magazine “Crowdfunders Asia”.

As such, unlike banks, CAX does not need large amounts of capital and does not bear any credit risk. The credit risk is borne by the lenders. The CAX business model means that once the platform volumes are sufficient to achieve profitability, the largely fixed cost base will result in sharply rising profits and high returns on equity (ROE). Key costs comprise marketing, risk assessment, information technology costs and administration costs.

On listing in 2013, all income was generated in Singapore from real estate deals, but CAX now operates in Australia, China, Indonesia and Malaysia, and from January 2016 it commenced lending to SMEs.

CAX screens all projects using a quantitative and qualitative screen developed for CAX by a Big Four accounting firm as well as obtaining third-party credit reference checks. CAX does not provide advice on the viability or the commercial merits of any of the projects listed on its platform and does not act as an agent for either the developers or the investors. The borrowings are supported by a promissory note and where possible there is added security from personal guarantees. The funder has no recourse to the underlying asset. Potential investors are required to agree to comply with the terms and conditions of the CoAssets platform and to complete a “Know your Client” form. CAX checks the Bloomberg view money laundering and anti-counterfeiting record. The process for borrowers and investors is illustrated in the chart below.

CAX states in its May 2016 Prospectus that it plans to establish through the Australian business a wholesale global debt-based fund, designed to augment the platform and invest in debt opportunities that fall outside the reach of the current platform, that is beyond the S$100,000 and S$5m range. It also expects to expand into equity crowdfunding. CAX has not released any further details or a timeframe for the introduction of these businesses. We have not included the impact of these businesses in our forecasts.

In this low interest environment, funders are attracted to the CAX facilitation platform because it is an opportunity to invest relatively small amounts of capital (as low as S$1,000) for periods of up to 12 months for returns that are significantly higher than other debt instruments for similar risks. The debt advanced by CAX is unsecured and as the last slice of debt should, in our view, attract a return that is commensurate with the risk and akin to a short-term equity return. Returns vary with each investment, but are typically 7-19% pa, with an average rate of 14.25%pa.3 Transaction costs are low and there is no equity market risk, although there is asset class risk. The platform provides investors with a medium for asset diversification and the spread of platform investments across a number of projects adds further diversification. The typical CoAssets investor from Singapore is professional, has at least S$30,000 to invest and tends to be a repeat user of the CoAssets platform. There is, of course, nothing to stop a CoAssets investor investing on other crowdfunding platforms, or in multiple opportunities. In other markets such as Australia there are likely to be, in the legislation due to come into effect in September 2016, some restrictions on the types of investors that can participate on the CoAssets platform. In our view, it is likely that the legislation will require CoAssets to verify the credentials of the potential investors.

The protection offered by CAX for investors who participate in investment opportunities on the CAX platform includes the following (refer to the business process chart in Exhibit 1):

Developers and businesses (the project creators or Opportunity Providers) see the CoAssets crowdfunding platform as a way to access capital quickly at competitive rates and as a way of filling the lending gap. After the financial crisis of 2008-09, banks cut back lending and tightened lending criteria to both SMEs and large companies. As financial conditions improved (in the last two to three years), banks have begun to cautiously grow their SME lending books. Crowdfunding platforms such as CoAssets are aiming to win business from traditional lenders as well as providing debt funding for opportunities that are not funded by the banks. Marketplace borrowers enjoy speedy funding and have transparency about the status of the loans. The typical investor that lists a project on the CoAssets platform is looking to raise less than 10% of the overall project value and usually between S$1m and S$5m. For some SME lending the amount can be as low as S$100,000. The project creators are able to make a single pitch online that is able to be accessed by a global audience. Without a crowdfunding platform, the project creators are forced to make personal pitches to many possible financiers.

Since April 2013 CAX has attracted 60 property developers from 11 countries and facilitated S$44m of deals through its platform. 88% of the transactions have been real estate deals and 12% were business deals executed throughout South-East Asia.

A key part of CAX’s strategy is holding events whereby investors and Opportunity Providers can meet face to face. The first such Expo for Property Investing & Crowdfunding (EPIC) was held in Singapore in July 2014. There were 500 attendees, S$70m of deals were offered and indicative pledges were received for S$20m. CAX believes that its strategy of holding EPIC events is an important method of building the trust needed for investors to be comfortable with doing deals online. CAX holds EPIC events throughout the region on a regular basis.

Indonesia – On 1 October 2015, CAX announced a strategic joint venture with Java Land Pte Ltd in Indonesia. CAX will have a 49% interest in the JV, will operate the JV, will control IP, and will receive an annual licence fee of the greater of 15% of the JV NPAT or S$50,000. Java Land will utilise the CoAssets platform for all its property developments in Indonesia and will help CAX to bring more Indonesian developers on to the platform.

China – On 19 November 2015 CAX announced a JV with Fujian Yaosheng Zichan, a conglomerate with a development arm that funds in excess of S$200m of property-related investments in Fujian Province alone. CAX has a 40% interest and will operate the JV, retain control over all IP and receive an annual licence fee of the greater of 15% of the JV’s NPAT or S$50,000. Yaosheng has agreed to help CAX expand crowdfunding operations into neighbouring provinces in China.

In Australia following a review of the Financial System released in December 2014, the Federal Government has issued a response, which made the following observations and recommendations that are relevant to the SME market being targeted by CAX:

The Federal Government of Australia’s response also addressed the use of technology as one way to narrow the information gap between lenders and SME borrowers. Technology is seen as a way to introduce more competition and to reduce costs. New equity crowdfunding regulations are expected to be in force by September 2016.

The average deal size funded by CAX to date is S$0.7m and the deal size range is from S$0.1m to S$2m.

CAX funded its first Australian SME crowdfunding debt funding deal in April 2016. CAX raised A$105,000 in two days for Stapleton Associates, a nine-person, WA-based electrical engineering consulting firm. The loan is for a seven-month period with an interest rate of 5% (equivalent to 8.57% per annum).

Examples of real estate funding deals undertaken by CAX in Asia in 2016 are set out below:

Crowdfunding or marketplace lending has been defined as “the pooling of the financial resources of many individuals to convert an idea into a project or business. Instead of relying on a few participants it requires many small ones.6 An alternative definition is provided by Massolutions: “Any kind of capital formation where both funding needs and funding purposes are communicated broadly, via an open call, in a forum where the call can be evaluated by a large group of individuals, the crowd, generally taking place on the internet.”

Crowdfunding developed as an online extension of friends, family and community pooling of money to fund members with business ideas. In the wake of the global financial crisis of 2008, when traditional lenders tightened their credit standards, entrepreneurs and early stage enterprises started looking elsewhere for funds and this together with technology advances saw crowdfunding develop.

The major forces that have made crowdfunding possible are the widespread adoption of information and communication technology, which has opened funding opportunities to millions of investors on a worldwide basis, and the development and acceptance of social networks. Social networks allow potential investors to interact online and develop a relationship with other would-be investors.

Social media can be a powerful force in marketing the idea/project/business, in raising funds and in holding entrepreneurs to account. The ‘crowd’ phenomena acts as a pull factor for other investors who are able to watch the interest in a particular investment build in real time online. The crowd impact is similar to the crowd impact experienced in online bidding platforms such as eBay.

Crowdfunded equity-based and lending-based platforms both use social media and investors are able to assess the equity-based or debt-based investment opportunity with a similar degree of diligence. The main distinction between the two types of financing platforms are that if the stake is an equity stake there are no guarantees of a return but investors do get the opportunity to share in any upside. Debt-funded platforms offer fixed rates of interest and specified repayment dates and in some cases there is a debt instrument that provides some security. Debt funders have no rights to any upside.

A crowdfunded lending based offering for a small business is typically used to fund a short-term financing shortfall to fund additional working capital, to fund equipment or to provide a bridging loan until longer-term finance can be obtained. At this stage, a small business may not easily or economically have access to debt funding from a traditional banking source.

Government regulations vary from country to country, and in the two key jurisdictions of Singapore and Australia, fundamental changes are underway that could have an impact on the CAX business.

Prerequisites for a successful online alternative finance market are regulation, high levels of internet usage, an active social media environment, smartphone penetration and machine-to-machine connections.

There are a wide range of estimates for growth in global marketplace lending. Morgan Stanley, in ‘Global Marketplace Lending: Disruptive Innovation in Financials’ 19 May 2015, estimated that this market could reach ~US$290bn by 2020, implying a CAGR from 2015 to 2020 of 51%. Morgan Stanley also notes that Australia is a market to watch, given the high levels of household debt and the concentration of consumer finance with the ‘big four’ banks (75%).

In Singapore CAX is not required to hold any licences to operate its business, because it is acting as an administrator and is not deemed to be offering advice or issuing securities. There are proposed changes, described below, which may change this position.

In Australia CAX does not hold an Australian Financial Services Licence but operates under a Class Order exception (Business Introduction or Matching Services), which is in place until 1 April 2017, unless remade before that date. On 2 March 2016 CoAssets Australia became an authorised representative of Melbourne Securities Corporation Ltd. This allows CoAssets Australia to deal in a financial product/provide advice on behalf of, and to, retail and wholesale clients via the platform.

The burgeoning of marketplace lending, peer-to-peer businesses, direct equity investment and pooled funds investing in these still relatively new and non-traditional funding mechanisms present new challenges in terms of the regulatory environment. Borrowers and lenders require protection. All parties involved, including platforms such as that of CAX, have regulatory and licensing obligations. Business counterparties must be verified. Money laundering, cyber-crime and mis-selling need to be curtailed, with appropriate legal process and penalties in place.

To operate within this increasingly stringent regulatory environment, platforms such as CAX must have adequate risk management, conflict resolution and IT resources and processes.

The regulations across Asia-Pacific, CAX’s current main area of operation, vary quite materially.

In Australia in March 2016 Crowd-sourced Equity Funding amendments to the Corporations Act were passed and the first equity-based crowdfunding platforms will be able to be licensed from September 2016. Unlisted companies will be able to raise A$5m per year with a A$10,000 limit per investor. There is no regulation governing equity-based real estate crowdfunding, therefore most investment crowdfunding to date has been by way of private placements to sophisticated investors.

In New Zealand legislation to register new financial intermediaries was passed in April 2014.

In Singapore it is not necessary to hold a Moneylender’s licence if, as is the case for CAX, the Opportunity Providers who use the platform are corporations and not individuals. There is no specific legislation governing equity-based crowdfunding, which means that it is necessary to register under the Securities and Futures Act, which means significant compliance costs. The Monetary Authority of Singapore (MAS) is proposing legislative amendments, expected to take effect in December 2016, which will mean that promissory notes issued on a crowdfunding platform will be classified as a security and the platform operator will need to hold a Capital Markets Services Licence (CMS). CAX has stated in its May 2016 Prospectus that it is taking steps to apply for a CMS licence, a process that could take 12 months and cost S$30,000.

In China, as stated in “Harnessing Potential – the Asia-Pacific Alternative Finance Benchmarking Report” published in March 2016 by Cambridge Centre for Alternative Finance, the number of platforms increased from 800 in 2014, to 1,575 by 2014, to 2,595 by the end of 2015. The number of problem incidents has increased from 92 in 2013, to 367 in 2014, to 1,263 in 2015. A recent peer-to-peer lending platform E’zu Bao, which offered a financial leasing product with ‘guaranteed returns’ to 900,000 investors, was the subject of a Ponzi scheme whereby the executives were alleged to have defrauded investors of US$7.3bn. In 2015 the People’s Bank of China (PBOC) introduced regulations whereby borrower and lender funds must be held in custodian accounts rather than on the funding platform. China’s policy position is to support internet finance and the development of new platforms across lending, asset management and insurance and at the same time it is introducing regulations described as “moderately loose”.7

In Japan, alternative finance providers need to register as a Money Lender and a Type 1 or Type 11 Financial Instruments Business Operator. Crowdfunding platforms do not need registration under the Financial Instruments and Exchange Act if total annual amounts raised are less than JPY100m.

Equity-based crowdfunding regulations were introduced in South Korea on 25 January 2016. Funders can raise KRW700m per year. There is no regulation in South Korea for marketplace peer-to-peer lending.

In Hong Kong it is necessary to have a money lender licence.

In Taiwan, marketplace peer-to-peer lending is not allowed due to a conflict with the Banking Act. However, from April 2015 equity-based crowdfunding has been allowed with a minimum capital requirement of TW$50m (US$1.53m) and a restriction on the amount that can be lend (currently TW$30m).

There is a strong correlation between GDP per capita and the value of alternative finance in all countries in the Asia-Pacific region except China. As GDP increases, the volume of alternative finance rises due to growth in financing needs and higher disposable income per person.

China is the largest online alternative finance market in the region by transaction value: US$101.7bn in 2015.8 However, in the context of the total volume of bank lending (US$8.8trn)9 alternative finance is a relatively small market. Marketplace peer-to-peer (P2P) lending in China of US$52.4bn is only 8% of the value of short-term consumer loans made by banks of US$652bn in 2015. China is yet to open up to equity-based crowdfunding. To date there are eight platforms that have registered with the Securities Association of China (SAC). To become eligible to invest investors need to have net assets of RMB10m, or financial assets of RMB3m or average annual income over the last three years of RMB500,000. These criteria mean that the large pool of retail investors are unable to participate.

Australia: Rapid growth in alternative finance in Australia has seen it become the second largest market in the Asia-Pacific region, excluding China. The average annual growth rate between 2013 and 2015 was 281%, with balance sheet lending and invoice trading accounting for 65% of the A$348m lent in 2015. Peer to peer consumer lending in Australia has grown from A$2m in 2013 to A$43m in 2015. The penetration of the SME market (comprising automotive, credit cards and unsecured credit) and the consumer finance market remains small, with the big four banks controlling about 91% of the A$150bn SME market and the A$100bn consumer finance market. Annual SME funding is estimated at A$70bn.10 Details of peer-to-peer businesses operating in Australia are set out in Appendix 1: Marketplace lenders – Australia.

East Asia, comprising Japan, South Korea, Hong Kong and Taiwan, is the third-largest region by market volume. Japan is the dominant country, accounting for 87% of the region’s volume, followed by South Korea with 10% of the market. Taiwan and Hong Kong have a combined 3% share of the East Asia market.

In New Zealand, Harmoney has lent over NZ$229m since September 2014, with12,000 registered lenders and 114,000 registered borrowers. The realised annual return was 11.83% as at 19 April 2016, with the portfolio split between retail and institutional being 25/75 and total interest paid to investors being NZ$18.9m. Of total funds lent, ~50% has been classified by the company as Grade A or B with interest rates of 12-15%. The other 50% of the portfolio is priced at rates of 23% to 37%.11

South Asia

India, Sri Lanka and Pakistan together raised US$57.32m between 2013 and 2015, of which India accounted for 99.5% of the total market volume. 47% of the lending was marketplace/peer-to-peer consumer lending, 44% was equity-based crowdfunding, with the balance from reward-based projects. India has more than one billion people but only 10% have access to formal bank credit. Traditionally Indians have filled the gap by borrowing from friends and family. The vision of Prime Minister Narendra Modi is to use technology to lift the living standards of the nation’s poor. In our view this presents significant opportunity for crowdfunding platforms. To date there are no regulations governing crowdfunding. However, the Securities and Exchange Board of India released a consultation paper on the subject in 2015. There are no legislative changes to date.

South-East Asia

Equity-based real estate crowdfunding is the largest market segment in South-East Asia with 37% market share, with most of the activity in Singapore. Invoice trading was 20% and peer to peer accounted for 13%. The total market volume between 2013 and 2015 was US$83.99m, of which CAX raised US$33m (using a US$0.75/S$ exchange rate). Singapore is the market leader with 84% of online volume. In 2015 the Monetary Authority of Singapore (MAS) set up a fund of US$166m to support the development of the Fintech industry. In our view, this bodes well for the future of the alternative finance industry in Singapore.

Regulatory risk. The regulations in Australia and Singapore are undergoing fundamental change, which could require CAX to obtain additional licences, which would add more regulatory costs to the platform. Our forecasts assume that regulatory costs will increase because our view is that regulations will continue to be tightened or changed as the market matures and these changes are very likely to bring with them additional costs.

Contagion risk. Business failure in the industry could compromise others operating in the crowdfunding space. For example, the recent issues affecting Lending Club (NYSE.LC), together with the relatively short operating history of the crowdfunding model could discourage investors from participating.

Barriers to entry. The barriers to entry are licensing and compliance with regulation, integrity and performance of the technology platform and credit risk methodology. These barriers are in our opinion relatively low. Traditional lenders would find it relatively simple to enter the market and they have the advantage of well-established credit checking methodologies.

Need for institutional funding. Experience of other platforms suggest that in time there is likely to be a decline in the number of new users attracted to the platform, which may then mean that CAX would need to source wholesale or institutional funds. The proposal disclosed in the May 2016 Prospectus to set up a Global Crowdfunding Opportunities Funds in our view suggests that this is a possibility that is already being considered by management.

Macro factors. CAX is exposed to the economic and interest rate cycles. It has direct exposure to the notoriously volatile property sector in Asia where double-digit annual swings in values are not unusual. Also governments in Asia are not slow in putting property market cooling measures in place. Higher growth is likely to lead to more SME loans and lower interest rates increase the supply of finance to crowdfunding platforms, both of which should have a positive impact on CAX. Conversely lower growth rates and higher interest rates could lead to more defaults and have a negative impact on CAX.

Limited operating experience. CAX has only operated in a low interest environment. Its ability to perform and compete in a high interest rate environment is yet to be tested. With interest rates low investors are looking for opportunities to increase yield, which is one of the reasons for the growth in crowdfunding.

Strength of the deal. CAX’s success is directly related to the financial calibre of the investment deals on its platform. To date there have been no defaults.

Building a community of trust. Crowdfunding is dependent on the development of trust in the platform. CAX uses a third-party custodian to hold its investment funds in escrow during the time that it takes for investors to provide the funds required by the Opportunity Provider. When all the funds are raised the third-party escrow provider remits the funds to the Opportunity Provider. If there is a funding shortfall, the funds raised will be returned by the third-party escrow provider to the investors (see Exhibit 1) CAX is cognisant of the need to build trust within its borrower and lender community and for this reason holds its EPIC events, which allow potential investors to meet face-to-face with borrowers.

Founder Getty Goh: Getty began his business career in 2008 founding Ascendant Assets Pty Ltd, providing research and reports to Singapore realtors and property portals. He holds a bachelor of building science and master of real estate degree from National University of Singapore.

Chief Technical Officer and Co-Founder Huankiat Seh: Huankiat studied at Imperial College London and holds a PhD from Massachusetts Institute of Technology. His previous position was with Intel, where he managed suppliers in Japan and Taiwan.

Chief Operating Officer Lawrence Lim: Lawrence has had a career in the Singapore army and was Singapore’s chief artillery officer. He has particular expertise in human resource management, operational planning and organisation. Lawrence holds three master’s degrees and a master of business administration from Massachusetts Institute of Technology.

Executive Director and Company Secretary Dan Smith: Dan has a finance background and has experience in primary and secondary capital markets. He is a director of Perth-based Minerva Corporate, a private corporate consulting firm.

Board: The non-executive chairman is Nicholas Ong, who holds a BCom and MBA from the University of Western Australia. He was principal adviser to the ASX in Perth. The other non-executive directors are:

CoAssets is an early stage business in the rapidly emerging market for crowdfunding solutions. It has demonstrated the viability of its platform in the Singapore real estate market and is raising capital to expand into new geographies and into SME working capital finance. Investing into early stage, disruptive business models carries inherently high risk, as success is not a given. Equally, successful execution should result in very significant value appreciation. To deliver our base (mid) case valuation of A$0.44, CoAssets needs deliver significant growth (54% CAGR in EBITDA to S$21.4m from 2016 to 2025), but equally, we believe that this EBITDA could be achieved through penetrating only a very small proportion of the addressable market. Our lower case valuation of A$0.26 still prices in reasonable success (45%% CAGR in EBITDA to S$12.6m in 2025), while our upper case valuation of A$0.66% (61% CAGR in EBITDA to S$30.7m) assumes the same market penetration rate but uses a commission rate of 4% compared with the rate used in our forecasts of 3%.

Our DCF using a number of sensitivities on the key variables used in our forecast results in a valuation range of A$0.26 to A$0.66 (refer to Exhibit 10 for details). We have also included in our sensitivities a case that determines the key variables that are priced into the current share price of A$0.50 (refer to Sensitivity E in Exhibit 10). Our forecasts assume that net cash flows are based on 2.4% of members converting to investors who invest a total of between A$12,500 and A$20,000 each year, depending on the length of the investment. The DCF valuation assumes a WACC of 10.8% and a terminal growth rate of 2%. The terminal value accounts for 72% of the value. The DCF valuation does not include the impact of acquisitions, further joint ventures the proposed Global Crowdfunding Opportunities Fund or the proposed equity crowdfunding business, all of which, in our view, have the potential to be value accretive.

Using our forecasts we have estimated the value of the current business excluding earnings from new territories and the products (for example for the SME market in Australia). On the assumption that the CAGR in revenue from the existing business is 20%, the DCF valuation is A$0.16. Using a CAGR in revenue of 15%, the DCF valuation is reduced to A$0.10.

We have conducted the following sensitivity analysis on key variables (refer to Exhibit 10 for results):

Comparative company analysis is problematical because most of the marketplace lenders are unlisted. We have examined three listed companies: Lending Club (NYSE.LC), On Deck Capital (NYSE.ONDK) and DirectMoney (ASX.DM1). There are no marketplace lenders listed in Asia.

Lending Club (LC) claims to be the world’s largest online marketplace connecting borrowers and investors.13 Since its launch in 2007, LC has facilitated ~US$16bn in loans. LC listed in December 2014 at US$15 per share. In late 2014 the shares had peaked at US$28, giving LC a US$10bn market capitalisation at a time when revenue was US$211m and the net loss US$33m. LC has increased revenue from US$12.5m in 2011 to US$430m in 2015 and became profitable in the September 2015 quarter although was loss making for the full 2015 year. A recent loss of confidence following the resignation of the founding CEO and irregularities relating to the sale of US$22m of loans to an institutional investor has seen the shares fall to US$3.51 as at 16 May 2016 and a market capitalisation of US$1.25bn. The size of the company and its nine-year operating history make its comparison with CAX less relevant.

OnDeck Capital (ONDK) was formed in 2007 and is focused on online small business lending. ONDK has facilitated more than US$4bn in loans to 50,000 customers in 700 different industries in the US, Canada and Australia. Its proprietary scoring system used advanced analytics and enables ONDK to make loans and deliver capital within 24 hours. ONDK has grown revenue from US$25m in 2012 to US$255m in 2015, but is yet to return a profit due to increases in marketing spend.

DirectMoney (DM1) listed on the ASX in July 2015 and raised A$11.2m at A$0.20 per share. Its business model is different from LC and ONDK in that it operates an equity-funded warehouse that is onsold to investors after a period of 30 days. Investors invest in a portfolio of loans rather than a single investment, which provides diversification. During the 30-day warehousing period the risk is borne by DM1. Since October 2014 it has raised A$15.65m for 810 borrowers who have paid on average 12.7%. The current share price is A$0.065 per share as at 16 May 2016 and the market capitalisation is A$8.48m.

The Prospectus states that if the capital raise is successful and raises the minimum subscription of A$5m then CAX will embark on a two-year plan to increase its marketing efforts, improve the IT platform and accommodate an increase in corporate costs. The Prospectus states that funds raised plus cash on hand of ~S$2m are to be used as follows:

Our forecasts are based on the following assumptions:

CAX is expected to be cash positive from H216 and to remain cash positive for the forecast period. We have assumed that all costs relating to the development of the platform will be expensed in the period in which they occur. Our forecasts assume no capital expenditure.

We have assumed that the proposed June 2016 issue will be successful, reaching 25m shares, at A$0.40, to raise A$10m. We also assume that the free options granted (one for two with an exercise period of three years and an exercise price of A$0.65 and the 4m options issues to the float brokers on the same terms) will be converted on 30 June 2019 to raise a further A$10.725m. We have also assumed that the 5.05m performance rights convert to ordinary shares in four tranches (two tranches in December 2017 and two tranches in December 2018).

Our forecasts show a build of up of cash because we have not made any assumptions about acquisitions or other investments. We have also assumed that dividends are not paid during the forecast period. It is always possible that costs, especially for employees, directors, legal, insurance etc, may increase faster than we have assumed.

RateSetter, which was founded in the UK in late 2009, launched its first site outside Europe in November 2014. It is the first company in Australia to be licensed by the Australian Securities and Industries Commission (ASIC) to provide peer-to-peer lending to retail investors and self-managed superannuation funds (SMSF). The UK platform has facilitated 160,000 loans totalling over A$2bn in value. In 2015 total funds lent were £579m with an average amount invested of £21,264. The investment allocation in 2015 was 65% lent to individuals, 11% for property-related loans and 24% for commercial transactions. The number of registered lenders on the platform was 39,127 and the number of borrowers was 227,685. RateSetter places a levy on borrowers and sets up a provision fund. The amount of the levy is dependent on RateSetter’s assessment of the borrower risk. The Australian business was reported in The Age to have outstanding loans of A$18m as at January 2016.14 The CEO of the Australian business was quoted as claiming that peer-to-peer lenders could attract as much as 20% of these markets, or A$20bn.15

SocietyOne is privately owned and undertook a Series A capital raising in February 2014. The Series B capital raise was in December 2014. Its share register includes Reinventure (partly owned by Westpac), Consolidated Holdings, News Corp and Australian Capital Equity. SocietyOne charges an establishment fee of 2-5% and lends at interest rates of between 7.75% and 24.25% depending on the credit assessment of the borrowers. Total loans issued reached A$100m in April 2016. SocietyOne completed a A$25m capital raise in April 2016. It is understood that existing major shareholders took up their full entitlements. The company has stated that investors have earned an effective rate of return of more than 8.5% since January 2013 and that 70% of them had chosen to reinvest their principal and interest payments.

ThinCats (privately owned) offers business loans with investments between A$50,000 and A$2m with security via a fixed and floating charge over company assets and personal guarantees by directors and sometimes a second mortgage on property. The investment horizon for these SME loans is two to five years. Revenue is by way of fees rather than an interest spread.

DirectMoney is the only listed marketplace lender in Australia. It floated in July 2015 and rather than do retail to retail deals, it has created a loan warehouse whereby a small number of loans are aggregated to a total of about A$10m and sold to one or two investment funds. Retail investors can then buy into those funds and receive interest payments paid by the investor.

MoneyPlace was launched in October 2015 to provide loans of A$5,000 to A$35,000 through a P2P platform. Auswide Bank has taken a 20% equity interest and provided A$60m to assist the platform to grow its consumer lending. Auswide Bank commented that changing technology means that to take advantage of the opportunities for growth it needs to be in this new market

The management of Lendex, a peer-to-peer lending start-up backed by Thorney Investment Group, expects to raise A$25m for SMSF borrowing, particularly those who want to borrow large sums to purchase investment properties. Targeted lenders will be those seeking an alternative asset class that is not correlated to the share market. All transactions will be secured by property. The revenue model for Lendex is a 1% pa of asset value management fee. Investors are given added comfort from funds being held by a third-party custodian. Management expects A$25m of loans to be turned over in the September 2016 quarter.