Paul Schulte, MA, MALD

Paul@schulte-research.com

www.schulte-research.com

(+852) 9705 0777

Gavin Liu, M.Sc. – Senior Analyst

Financial Technology : Understanding the New Financial Architecture:

Mechanics, Applications and Case Studies

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Table of Contents

I. Overarching themes 3

II. Regional and International Trends 4

III. Fintech Application to Capital Markets 19

IV. Crowd funding, P2P & IPO catastrophes 33

V. Case Study – P2P platforms 45

VI. Bitcoin and Blockchain Technology 79

VII. Ant Financial 97

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I. Overarching themes

A. Capital Markets, Banking and Insurance are experiencing more radical

change than at any time in 300 years.

B. Technological advances in 6 bn. phones and 50 bn. sensors is making it

possible to quickly quantify financial activity in any facet of life.

C. These technologies are causing traditionally segmented banking, capital

markets and insurance to bleed into each other. (Zhong An, Amazon, Alibaba)

D. Regulators have great challenges to learn about these technologies but also

to realize that past regulatory structures may not work to manage this change.

E. Just as businesses are being forced to create a clean slate and reinvent

themselves, regulators must reinvent themselves.

F. A few new, successful paradigms are, I think, China (UK) and Singapore (US).

1. China likely to create super agency, combining PBOC, CSRC & CBRC

2. Singapore and US are changing their spots to accommodate startups.

How will you respond to these titanic changes? The status quo won’t work

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II. Regional and International Trends

Marriage of banking & social media, fin tech is hybrid of travel agent, facebook, financial adviser, ratings agency, shopping mall.

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IOT: Huge Growth in Financial Services due to sensor technology

Source: Gartner, Deloitte University Press, Schulte Research Estimates

Gartner forecasts thatabout 1/3 of sensors in2015 can be of use to

financial services & risingto about half by 2020.

Sensor examples:“smart” homes,commercial applications,monitoring manufacturingactivity, cell phones,logistics, on and on.

The growth in sensor deployments for financial services industry is as high as 100 percent yoygrowth, depending on the sector.

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Alibaba, Tencent, JD.com, Rakuten, M Pesa, Bkash capitalized on cell phone censors and reach more people in more cities than any banks.

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Are bankers ready to understand the physicality of this new world?

Source: Schulte Research Estimates

IoT Challenges Field Can a banker become a…

Optimization of physical

assetsLogistics

Software engineer, censor, bot,

artificial intelligence

Tapping into previously

“offline” operations

Digitalizing the

NetworkHardware engineer

Real-time and actionable

insights

Research and

IntelligenceData analyst

Anticipation, detection,

and controlOperations Industrial engineer

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FICA Credit Score

Criminal Record

Insurance

College Education

Assets

Call LogOffline Activity

Social Network

Chat History

Browsing

Online Service

Sensor DataOLD SCHOOL CREDITLittle data for most of the emerging worldNEW SCHOOL CREDIT

Full data for most of the emerging world

PHONE

The Financial Technology Clock

PRC IS FURTHER AHEAD THAN ANY OTHER GEMS IN FIN TECH . CREATING TAILORED CREDIT REPORTS, NEW FUNDING. SME, RETAIL … CORPORATES.

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Ecosystem is here, is irreversible & will eat into lending/fees.

BANKS

1. LendingLending Club

ProsperOnDeckKabbage

2. Personal FinanceBillguard

Hellowallet

3. SMEMoody’s Analytics

S&P IQPalantir

7. Infrastructure

DemystDataevospend

8. ResearchSeekingAlpha

PalantirKaggle

Alphaclone

6. Consumer Banking

SimpleCardlike

9. RemittancesTransferWise

AzimoWorldremit

ayannah

10. Back OfficeBilbus

Market Invoice

4. PaymentsPayPal

Apple PayAlipayStripe

5. Inst. Invest.AddeparEstimize

11. Equity FinanceCircleUpAngel.me

12. RetailPersonal Capital

Motif

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hThe Ant Empire: the whole eco-system is here. How in the heck do you regulate this beast?

Name Function Ownership

Payment

Alipay Payment 100%

Ant Check Later Pay later tool 100%

Bank

My Bank Online Bank 30%

Crowdfunding

ANTSDQ Online crowdfunding 100%

Funds

Tianhong Fund Money Market Fund 51%

Fund123.cn Fund selection platform 61%

Tebon Fund Mutal Fund 31%

Wealth Management

Yu'e Bao Money Market Fund 100%

Zhao Cai Bao WMP 100%

Ant Fortune One-stop Wealth Management 100%

Name Function Ownership

Insurance

ZhongAn Insurance Online insurance 16%

Cathay Insurance Property Insurance 60%

Cloud

Ant Financial Cloud Cloud computing 100%

Lifestyle

Koubei Restaurant rating & booking 50%

Ele.me Online food delivery 8%

Credit Rating

Sesame Credit Big Data Credit Rating 100%

Financing

Ant Xiaodai SME Loan 100%

Wang Jin She P2P Lending 25%

FinTech

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Sesame algorithm looks at 5 attributes:

1. Behavior Trait

• Consumption level / preference

2. Identity Information• Real name verification; info stability

3. Social Network

• Network Influence/creditworthiness

4. Credit History• Loans repayment/fine history/utilities

5. The ability to abide by the contract• Alipay, Yu’ E Bao balances; property

Behavior Trait

Identity Information

Ability to abide by the contract

Credit HistorySocial Network

Source: Company Data, Zhihu, Schulte Research Estimates

Sesame Credit Score ranges from 350 to 950

ALIBABA SESAME: 25% OF PRC ADULTS w/ CREDIT RATING (300 MN). 900 MN BY ’17. W/ FACIAL RECOGNITION (ALIPAY).

Alibaba will become the world’s

largest ratings agency

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How do we pay for this?

Source: Deloitte, FusionWire, Schulte Research Estimates

Any device that is connected, even a thermostat, will end up having financial servicesimplications.

An Emerging Opportunity for Financial Services

Credit Underwriting

The payments mechanismsused when a connectedrefrigerator needs toreplenish its shelves.

Examples:

The process may include

data derived from IoTdevices that accuratelymonitor a household’sspending.

Payments

Know Your Customers

If a bank knows which

customers are payingparking fees from a BMWversus a Toyota, the carpreferences might indicatea propensity for certainfinancial products.

Crowd Investing

Crowdfunding and micro-

investing opportunities canemerge based on analysisof investor behavior. Newcapital pools will emergewith new reward systems.

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Insurance Technology: IOT CAN DISMANTLE INSURANCE QUICKLY. MOST ARE ALSEEP.

InsuranceWarranties

Auto

HealthTravel

Life

Home CasualtyEnterprise P2P

Marketplace

Data/Analytics

Comparison

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IOT. Finternet of Things and insurance

Source: Deloitte, Okchexian, Schulte Research Estimates

Example:

The most mature case involves Okchexian’sdevelopment of usage-based insurance, inwhich sensors in automobiles and smartphoneapps automatically provide information onvehicles’ driving history and therefore theirdrivers’ performance.

Firms are using telematics to increase theaccuracy of underwriting automobile collisionpolicies, as well as the use of gamificationstrategies based on collected data to changeand incent lower-risk driver behavior. This hasbeen shown to be quite successful in the still-

early stages of deployment.

Nascent but growth is exploding

IoT’s role in the financial industry is stillnascent, but many firms are starting

to utilize sensor data to improveoperational performance, customerexperience, and product pricing.

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Insurtech Industry by Group

Source: CB Insights

A wave of tech startups is targeting opportunities in the insurance value chain

Health insurance Private health insurance companies

on the list ranged from software-

enabled brokerages to insurance

recommendation and comparison

engines to new health insurance

carriers

Auto insurance Private auto insurance startups on

the list include comparison platforms

to usage-based insurance startups

and mobile claims solutions

P2P Insurance Private peer-to-peer insurance

startups

Small Business

Insurance

Private commercial insurance

companies focused on SMBs

Insurance Industry

Software (SaaS)

Insurance-specific software providers

range from BI and data warehousing

startup to insurance fraud detection

to re-insurance SaaS analytics

Mobile Insurance

Management

Startups focusing on allowing

consumers to manage and purchase

insurance policies via their mobile

device

Product Insurance Companies providing insurance of or

tracking products

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Competition in Chinese Insurtech: Who regulates this?

Source: The Digital Insurer, Schulte Research Estimates

Approaches in insurtech adopted by China’s internet behemoths differ as much as they resemble each other

Taobao Marketplace

insurance portal

generated ~RMB1bn

worth of travel, auto &

health policies issued

22 insurance

companies. Daily

transactions total RMB

2mn

Recently invested

$120m into Guahao -

health platform that

has partnered with

Taikang Life and

private hospitals to

provide services to

private health care

Launched baidu.caifu

in 2014. Offers

comparison services for

insurance, loans,

wealth management,

credit cards.

Launched an

aggregator for

insurance related

queries.

• Funding activity in insurtech are dominated by China’s BAT (Baidu, Alibaba, Tencent)

• Despite competition, rare instances of collaboration still happen when strategic interests align, as

evidenced by Alibaba, Tencent and Pingan’s JV in Zhongan Insurance• This shows how far China’s internet rivals will go to capitalize on the digital insurance opportunity

Zhongan Insurance

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Source: Company Website and Filings

Diverse product mix that specializes in the internet economy

Product Categories

Featured Insurance

Travel Insurance

Accident Insurance

Health Insurance

Group Insurance

Credit card, Cellphone, Drones, Tires

Family travel, Outdoor adventure, Backpacker

Public transport, private transport, air travel

Major diseases (adult, women, children), pregnancy, hospitalized treatment,

dental

SME worker compensation, O2O platform welfare

• Primarily covers various risk related to the internet economy such as logistics, e-commerce, mobile

payment, internet finance

• Generates revenue from return-delivery insurance products for buyers at Taobao (众乐宝）• Other flagship products include 37°C High temperature insurance, Xiaomi cellphone insurance (小米

手机意外保障计划), cyber security insurance in collaboration with Baidu Mobile Guard(百付安)and

insurance for Juhuasuan users (参聚险)

Zhongan Insurance: Ping An, Alibaba, Tencent

III. Capital Markets. New Business models & new services means new types of regulators.

Picture source: trulioo.com

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Fin Tech Capital Markets is ALREADY HERE. Every part of the traditional capital markets model is under threat.

Investor Research Trading Sales+Admin Retail Origination SME Origination

IRA Palantir Folio Biz2Credit Lending Club Kabbage

401K Sesame Lending Club Fundera Prosper OnDeck

Managed accounts Alpha Clone Lending Robot acxiom Zopa Funding Circle

Hedge Funds Experian PeerCube Orchard Kickstarter Can Capital

Banks

Insurance

Pension

SWF

Endosments

Software Banking Apps Big Data Providers Banks

LendKey Plaid Moody’s Anal. Palantir Wells Fargo Goldman Sachs

Exchanges Yodlee S&P IQ Sesame CBA BBVA

Which tech company would you pick if it were a bank? Square! In2005, 75% OF M&A WAS DONE BY WALL STREET. NOW ITS 20%

26%

26%

26%

29%

29%

29%

31%

41%

50%

Amazon

AT&T Mobility (US Only)

Sprint (US Only)

Costco

Apple

Google

T-Mobile

PayPal

Square

Sources: Accenture

Trust in Industries : People trust technology firms more than banks. TRUST IN BANKS AND EQUITY MARKETS HAS COLLAPSED. PEOPLE PREFER APPLE, GOOGLE, ALIBABA, AMAZON.

Sources: Edelman

79%

70%

66%

65%

59%

59%

51%

51%

Technology

Automotive

F&B

Consumer Packaged Goods

Energy

Pharmaceuticals

Media

Banks

2014

Companies like Amazon and Apple have a great deal of trust. They can establish

new and innovative ways to acquire deposits from loyal customer base.

“ Real Currency Of The World Is Trust” – Your Money For Nothing

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US Mobile Banking Usage: Weekly users show big growth. ACTION PLAN: VISION 2020: 100 % USAGE. Cell phones are forcing a migration away from “bank site” to “social network”

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What smaller banks are doing while global banks are dying. Ain both commercial AND investment banking. Or, eliminating investment banking for VC, crowd funding.

• BBVA : ACQUISITION OF SIMPLE; VC bank?

• Tokopedia: “We don’t want public listing-PE is good”

• ALIBABA: BANK, INSURANCE, UNDERWRITER, RATINGS AGENCY

• Tencent: INGENIOUS MARKETING. Became a bank overnite!

• Zopa: 1ST MOVER AMONG largest lenders in UK

• Atom: First online only bank in the UK – NO branches.

• GOLDMAN: WAY IN FRONT. SUPER COMPUTERS & AI.

• NOMURA: SHUT ALL RESEARCH & SALES/AUTOMATED TRADING.

• BCA: VISION AS ELECTRONIC BANK

• ICICI/HDFC LOOKING TO SILICON VALLEY.KABBAGE? AI BANKING

• CAPITAL MARKETS REGULATORS NEED LABS, CONNECTIONS TO

UNIVERSITIES AND DEFINITE CONNECTION TO ALIBABA GROUP.

Why Tech Giants are taking over financial services

Examples:

• Google: Building a payment solution based on Gmail.

• Facebook: e-money license for financial services in Europe.

• PayPal: Short-term funding to business clients in the UK.

• Alibaba: US$92 billion money market fund. New funding vehicle

• Tencent: Approval of WeBank.

“Banks that aren’t prepared for this new competition face death.”

Francisco Gonzalez , Chairman of BBVA in the Financial Times

“I would be a rich man if I were paid a dollar every time a private client

said they wished Apple was a wealth manager.”

Sebastian Dove, Managing Partner , Scorpio Partnership

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FinTech also specializing by industry . Niche P2P lending.? Is this the way to go? Specialize? THESE FORMS OF PE/VC LENDING THREATEN CAPITAL MARKETS.

Industry FinTech

Solar Mosaic, Safari.com

Education Quotanda, Gradurates

Medical United Medical Credit

Real Estate Privlo, LendingHome

Clean Water Safari.com

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1) SME software: Imagine the power of knowing all about your client in real time? CBA, BofA, BCA, SAN. Everybody wins! Bottom of 1st inning.

• Working Capital Knowledge at 9 AM every day for the corporate & the bank

• Payroll issues at 9 AM every day “

• Tax considerations at 9 AM every day “

• Inventory needs at 9 AM every day “

2) Creation of bespoke/customized software for corporate cash management

• Moody’s Analytics

• Deloitte

• S&P IQ

• Palantir

This will cause SME rates for lending to collapse from 35-40% to 15-20% . These entities will know about GDP trends before you do.

So, governments better get on board! PRC is one of the few to understand.

SME Banking: A new era. 1) This may eliminate capital markets demand as credit flows more easily. 2) SMEs may bypass equity/bond mkts3) Banks now know more than govts & sooner. Is this a good thing?

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Research: REGULATORS: LABOR REDUCTION; PRIVATE COS HAVE BETTER GDP DATA

1. Ant Financial: easy to use software for corporate results and manipulation

2. Zhong An: Completely online insurance which could eliminate agents

Behavior: REGULATORS: HOW DO YOU REGULATE ARTIFICIAL INTELLIGENCE RESEARCH

1. Samsung Deep Learning: powerful tools for why we buy what we buy

2. Isentia: tells you all about you or your company from social media

Analytics: REGULATORS: CAPITAL MARKET DATA WILL BE LINKED TO MILITARY DATA

1. Palantir Gothic: powerful algos for human queries funded by CIA

2. Sesame: face recognition & credit scores on 900 mn people. PLA assisted.

NEW Banking: REGULATORS: WILL ACCESS TO CREDIT BE RESTRICTED TO THE EDUCATED

1. Kabbage: uses external data bases (UPS) for credit to lend to people

2. Alibaba: Further ahead than anyone. Brilliant execution. Credit scores on 900 mn

Palantir, Moody’s Analytics, Kabbage. Ant. Huge questions for regulators. Big labor reduction with AI and Analytics. Elimination of equity sales & research. Wipeout of insurance agents.

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Sentient – Pioneer in AI Hedge Fund. Reduces Human

Research. Data from anywhere – scraping. All legal.

Source: Bloomberg, Schulte Research Estimates

• Founded in 2006 and based in San Francisco

• Uses AI inspired by Evolution Intelligence to create trillions of unique solutions

• Test solutions using real data and eliminate lower ranked ones like natural

selection

• Investors include Tata Communications and Access Industries

Funding - $136M

Nov 2014 Series C: $104M

Feb 2014 Series B: $30M

Apr 2010 Venture: $2M

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Investor Limits

• Limits meet PRC financial regulations in

line with local equity crowdfunding sites

• Participants are required to have

financial assets of at least ¥1 million

(US$170,000)

• Earned no less than ¥300,000

(US$48,000) in annual average income

for the last three yrs.

Main Competitors

JD’s DongjiaPing An’s Qianhai Crowdfunding

AngelListZhenFund

VC.cn

Antsdaq

Source: Antsdaq, Schulte Research Estimates

Launched in 2015 (beta), Antsdaq is Ant Financial’s online equity

crowdfunding platform. It is one of 3 official equity crowdfunding

platforms to be approved by PRC

Business Model’s Characteristics

• Projects must be registered

customers of Alipay for enterprise

• Investors must be registered users

of Alipay’s payment services &

Yu’ebao

• Doesn’t charge fees to investors

• Antsdaq has roadshows,

(Dingding)

• Ant Financial has also made a

strategic investment in 36Kr, a

startup database and their own

equity crowdfunding platform

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Blockchain allows banks to transfer & record assets besides bitcoin w/ no intermediary, i.e. US bonds, loans, private shares. AND…..

1. Interbank Payment: Earthport & Ripple Labs have launched payments network

2. Gold: Real Asset Co. permits traders to record bullion on blockchain

3. Remittances: MeXBT is a web-based app: migrants send money via blockchain

4. Diamonds: Everledger uses blockchain to record & track diamonds

5. Property Titles: Factom: land title registry in Honduras (unlawful seizures).

6. Airline Miles: Chain can transmit anything of value on ledger, i.e. loyalty points.

7. Music: Can clarify musicians’ income from streaming services

8. CAPITAL MARKETS: ALREADY BEING USED IN ASX, NASDAQ & U.S. BOND REPOS

Source: Bloomberg Markets, Schulte Research Estimates

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Tencent Wechat Red Packet: Created in one weekend what took Bank of America two generations.

• Tencent developed red packet function for its wechat in 2014 (Red Packet)

• Wechat changed from message app to financial platform --payment/funds.

• ~200mn bank accounts were newly connected to wechat wallet in 2015

• Wechat - fixed amount of money to one person & Group Red Packet.

Red Packet Records

• Number of red packets sent through wechat in CNY Eve (one day):

2014 CNY: 16 million;

2015 CNY: 1.01 billion;

2016 CNY: 8.08 billion;

• Number of users participating in wechat red packet activities reached 420 mn

during 2016 Chinese New Year.

IV. Crowd funding, P2P & IPO problems. ALL OF THESE ARE TRANSFORMING CAPITAL MARKETS BY THE DAY.

Definitions: 1. Crowdfunding: Typically philanthropic/inventions: 90 day projects. KICKSTARTER.

2. Big Data Crowd funders: Firms buy/create massive data bases and lend based on data analytics. KABBAGE.

3. P2P: Person A invests in Person B because of stated credit rating/risk. LENDING CLUB & PROSPER

4. Institutional Funding: Firm A gives $10 mn to be spread to hundreds of individuals on a platform. ON DECK

5. Conglomerate style: Ping An starts funding entity due to its knowledge/funding thru insurance: Lufax.

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Year founded 2009 2010 2008 2012

Total fund

Pledged (US$)

1 billion+ 390 million 200 million 180 million

Industry Focus Creative projects Personal use or

charity

Personal use,

charity or start-up

business

Small business or

start-up

Type of

Crowdfunding

Reward-based Donation-based Reward-based Reward-based

Equity-based

Fee charge 5% of raised fund

if funding goal

achieved

5% of raised fund 4 - 9% of raised fund

depends on the

scheme you choose

A flat monthly fee of

US$179

Successful

Funding Cases

Pebble,

a customizable

watch for iPhone

and Android,

raised $10mnin

funding

A victim of the

Boston Marathon

Bombing raised

over $800,000 to

pay for medical

costs

Ubuntu Edge, a

smartphone and

desktop computer in

one device, raised

$12mn in funding

Plum raised $760,000

to develop software

to control household

lights from

smartphones

1. Crowdfunding Platform

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Kickstarter: Created by two millennials – 6 years old.

• A global crowdfunding platform based in the US launched in April 2009

• The company’s mission is to “bring creative projects to life” including films,music, stage shows, video games etc

• Kickstarter has reportedly received over US$1 billion from 5.7 million backers tofund 135,000 projects

• Kickstarter projects are reward-based and can’t fundraise for charity

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Kickstarter: How does it work?

Project creator

Create a project,set deadline and minimum funding goal

Backers

Pledge money to fund the project via Amazon Payments

GOAL ACHIEVED

Kickstarter takes 5% Amazon charges 3–5%

Tangible reward to backers

GOAL FAILED

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Gofundme

• A US-based crowdfunding platform launched in May 2010

• GoFundMe is a crowd funding platform that allows people to raise money forevents ranging from life events such as celebrations and graduations tochallenging circumstances like accidents and illnesses

• GoFundMe is unique to other crowdfunding platforms as they are donation-based crowdfunding website

• It received over US$380million in pledges from 6M million donors

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Project creator

Create a project,NO deadline and funding goal

Donators

Donate to fund the projectviaWePay (US and Canada)Stripe (UK)PayPal (international )

gofundme takes 5%

Payment charges 3–5%

Gofundme: How does it work?

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Indiegogo

• An international crowdfunding site established in San Francisco, California in2008

• It was one of the first sites to offer crowd funding

• Indiegogo allows people to solicit funds for an idea, charity or start-up business

• It runs on a rewards-based system. However, the company is interested inmoving towards equity funding once the laws become clearer in US

• Nine million people from all around the world visit the site on a monthly basis

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Indiegogo: How Does It Work?

- Create a project and set funding goal- Choose between Flexible/Fixed Funding

Contributors

Fund the project via credit card or PayPal

Indiegogo:

takes 4% if goal achieved

takes 9% if goal failed

Payment charges 3–5%

Flexible FixedGOAL ACHIEVED

Indiegogo takes 4% Payment charges 3–5%

GOAL FAILED

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Focused on capital access for SME businesses

Founded by Robert Frohwein, CEO Co-founder: Kathryn Petralia, COO

& Marc Gorlin, Chairman at 2009

Online financing corporation basedin Atlanta, Georgia that providesworking capital to small businesses

Partnerships: Kabbage and UPSentered into an agreement to letsmall businesses direct UPS to sharetheir shipping histories withKabbage.

YOY Growth: 298%

Investors: BlueRun, UPS, Thomvest,Mohr Davidow

What is Kabbage?

Kabbage Inc

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A working capital provider targeting online small retailers that leverages Business

Banking Telematics, including social media data, to take underwriting decisions.

Kabbage uses UPS shipping data, and other online tools including large ecommerce

sites like eBay, Amazon, Etsy, Shopify, and the Yahoo! Store to reach small businesses

looking for capital.

2. KABBAGE: Now a bank worth $1 bn . Didn’t exist 5 years ago.

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What businesses are Kabbage customers in?

54% in clothing & accessories

52% in electronics, cell phones & pdas

43% in books, cds & video games

37% in antiques

28% in toys & games

17% in consulting & professional services

Customer Base

Kabbage Inc

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1. Simple and much quicker than traditional banking channels: Cash in less than 10mins

Short application time

Funds transferred as soon as contract signed

2. Use of innovative big data analytics to assess SME’s credit

status Analyze transactions via online eCommerce business to

lend capital

3. Can access Kabbage service anywhere, anytime Mobile App access

StrategicAdvantage

Disadvantage

1. Quicker application process and less onerous security

requirements could leave businesses saddled with debt they

cannot afford

2. Limited scale of financing achievable, covers only very small

business’ working capital requirements.

Kabbage Inc

V. Case Study - P2P Lending Companies

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P2P Liability structure. P2P is a “personal loan” matching system and OnDeck/Can are debt funded SME entities using algorithms. How it works.

Source: Bloomberg, Schulte Research Estimates

Business Model Company Liability Structure

Individual/SME

P2P matching

Platform

Lending ClubP2P Platform, acting as middle man to connect borrower and lender, which will

not take credit risk. Mostly focus on consumer credit, by helping individuals

refinance their high-APR credit card debt or to finance major purchases. Most

borrowers and lenders are individuals.Prosper

Individual / SME

/institutional

matching

Platform

Lufax

P2P Platform, acting as middle man to connect borrower and lender, which will

not take credit risk.

Lufax.com focus on consumer credit, by helping individuals refinance their

personal debt. Most borrowers and lenders are individuals and SME, and some

borrowers are financial institutions.

Lfex.com focus on helping financial institutions and corporates trade non-

standard debt assets. Most borrowers and lenders are financial institutions and

corporates.

Long term debt

Funding

OnDeck SME Lending Provider, providing loans to SMEs directly, where they take the

credit risk by using its balance sheet to originate loans.

Funding source: mainly debt funded and securitization.Can Capital

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P2P IPO Companies: what they said they would do.

Source: Company Website, Schulte Research*Including Lufax and Lfex

Company Est. Market Cap ($BN) Loans Funded ($BN) Average Lending Rate NPL Rate

Lending Club 8.2 (actual) 6.2 14% 4%

OnDeck 1.3 (actual) 1.7 18%-36% 6.2%

Prosper 3 2 14.8% 4%

Can Capital 3.5 4 15% 5%

Lufax 10 10* 17% NA

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How They Make Money

Source: Company Website, Financial Times, Goldman Sachs

Company Business How they make money

Lending Club P2P Lending Origination fee (1% to 6%)

OnDeck SME Lending Interest Income and Origination fee (2.5% of loan)

Prosper P2P Lending Origination fee (1% to 5%)

Can Capital SME Lending Origination fee and interest earned on loans

Lufax P2P Lending Origination fee (0% - 4%), transaction fee 0.2% in secondary market

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Comparison of Small Business Lenders: What they said they do.

Source: Hiveage, Company Website

SME Lenders

CAN Capital Kabbage OnDeck PayPal Working

Capital

Loan Amount$2.5K-250K

monthly rev

$2K to $100K $5K- $250K

annual rev8% of PayPal sales

Repayment 4 – 12 months 6 months 3 – 24 monthsDaily, payments

via Paypal

Repayment

MethodDaily Monthly Daily 10% - 30% of Rev

Qualifications$4,500/ mt of

Rev, >4 mts biz

Borrowers link

online biz

$100 K in Rev,

>1 yr in biz; 500+ Paypal user

Note: Rev=Revenue

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Valuation. Recent IPOs. Lending Club was an issue of mis-communication and poor investor relations.

Source: Bloomberg, Schulte Research

Recom. Market Cap

($BN)P/B P/Sales EV/EBITDA EV/Sales

Altman Z Score

Market Impact

Asset/EquityNet Debt

($MN)

Lending Club SELL 8.2 56.6 16.6 55.1 22.0 3.1 86% 28.5 NA

OnDeck SELL 1.3 12.6 19.4 Negative 19.1 3.1 112% 12.5 10

NASDAQ Avg.

52.9 9.7 4.7 19.6 4.8 7.2 67% 4.5 -654

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Valuation: Upcoming IPOs: Lending Club has cast a pall on On Deck. In China, Ezubo is another cautionary tale.

VALUATION Consumer Focused SME Focused

Company Lufax ProsperLending Club

(newly listed comparable)CAN Capital

OnDeck(newly listed comparable)

MK/Loans

Funded1.37* 1.37* 1.37 0.88* 0.88

MK/Net Revenue 40* 40* 40 NA NA

Market Cap $8.3/$13.6bn* $2.7 / $3.2bn* $9.2bn $3.5bn* $1.5bn

Source: Company WebsiteNote: 1. Prosper’s valuations are based on Lending Club’s multiples. 2. CAN Capital’s valuation is based on OnDeck’s multiples.*Estimated numberData as of 30th December 2014

A. Lufax: New part of a listed conglomerate

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Lufax Introduction

• China's Lujiazui International Financial Asset Exchange Company (Lufax) was incorporated in

Shanghai on 29 September 2011.

• A leading online financial asset market in China

– The third largest P2P platform in the world

– Most important P2P platform in China nominated by Lending Academy

– The largest securitization platform in China

Two online platforms:

www.lufax.com

Online investment and financing platform for SME and individuals;

Launched in March 2012.

Till 20 March 2015, the number of registered users in Lufax achieved 7.7 Million, 100%

of investors received expected return.

www.lfex.com

Financial asset trading platform for institutions, corporate and qualified investors;

Launched in late 2013.

Till 2014, its transaction volume exceeded RMB 30 billion.

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P2P lending market in China (Cont’d)

55 50

54 57

70

83

93

106

131

136

127

119

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-

20

40

60

80

100

120

140

160

Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15

Tra

nsa

ctio

n v

olu

me

Online P2P lending market in China from Mar 14 to Feb 15

Transaction volume (RMB Billion) Average daily number of online lenders (thousand)

(RMB Billion) (Thousand)

Source: Sootoo Research

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P2P lending market in China (Cont’d)

RankCompany

Name

Platform

NameBrand

Transaction volume for one

year from 25/3/2014 to

24/3/2015 (RMB in billion)

Market

share

Average

interest rate

per annum

Average

borrowing

period (mths)

1Hongling

CapitalMy089.com 28.52 9.0% 13.6% 6.2

2 Lufax Lufax.com 12.99 4.1% 8.4% 32.1

3 Gujin Wzdai.com 10.43 3.3% 13.9% 0.7

4 Xinhehui Xinhehui.com 7.47 2.3% 10.2% 1.1

5 Wan Hui Ppmoney.com 7.08 2.2% 12.9% 2.8

6 Ruituo Weidai.com.cn 6.88 2.2% 15.4% 2.0

7 Honghe Boji Yooli.com 4.93 1.6% 10.1% 11.3

8Lerong

DuoyuanJimubox.com 4.89 1.5% 10.0% 6.1

9 RenRenDai RenRenDai.com 4.69 1.5% 12.3% 28.9

10 Antourong Itouzi.com 4.34 1.4% 13.0% 9.1

Source: Wangdaizhijia

Top 10 P2P lending platforms in China (highly competitive market)

Note: This list only includes transaction in Lufax.com, but doesn’t include amount in Lfex.com which has

accumulated loan funded amount of more than RMB 30 billion since late 2013.

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B. Lending Club

Source: Company Data, TechCrunch, Financial Times, Schulte Research Estimates

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1) Overseas P2P lending platforms: have potential to bypass equity market

Overseas P2P lending platforms

• US

– Lending Club: set up in 2007, first P2P company to list on NYSE in Dec 2014,

raised USD 870 million, w/market cap of USD 8.2 billion. 2014 loans $4.4 billion.

– OnDeck: A marketplace for loans to small businesses set up in 2007, listed in NYSE

in Dec 2014, raised USD 200 million with market cap of USD1.3 billion.

• UK

– Total transaction volume in P2P lending market achieved GBP1.2 billion in 2014

– Zopa: 2004, first P2P firm. Avg return since 2010 is 5%. 2014 volume GBP 268 mn.

– Other major competitors includes Funding Circle and RateSetter.

– Now we have Atom, the first all online bank.

• Germany:

– Auxmoney: volume achieved EUR 128 million, some of its loan have collaterals.

– Other major competitors include Lendico set up in Dec 2013, Zencap set up in 2014

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2) Lending Club: Valuation Analysis . Overvalued by any stretch. Why didn’t regulator intervene in valuation question?

Lending Club is relatively small yet has high growth potential

Growing revenues at CAGR of > 100% for the last 2 years

But, Lending Club has very high valuation ratios:

2014 forward P/B is 56x

2014 forward EV/Sales ratio of 22.

Every metric is large multiples of NASD.

Scarcity value will undoubtedly dissolve as far more IPOs happen in 2015.

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3) Reckless valuations for new industries. Lending Club: Valuation. One of the most expensive stocks ever. SEC should have intervened.

• Founded in 2007, Lending Club is an online marketplace that facilitates loans to

consumers and businesses, offering investors the opportunity to fund loans.

• More than 60% market share of US consumer P2P lending market.

Recent IPO(NYSE: LC)

• First P2P company to list on NYSE, in Dec 2014, raised $870 million

Key statistics

• $6.2 billion in loans funded on the platform (Sep 2014)

• Over $500 million in interest paid to investors

Source: Company Data, Schulte Research Estimates

Market Cap ($BN) P/B P/Sales EV/EBITDA EV/Sales Altman Z Score Market Impact Asset/Equity

Lending Club 8.2 56.6 16.6 55.1 22.0 3.1 86% 28.5

NASDAQ Avg. 52.9 9.7 4.7 19.6 4.8 7.2 67% 4.5

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Source: Bloomberg, Schulte Research Estimates

CBRC issued the “Notice of the P2P lending risk”, pointing out there is large potential

risk for P2P lending due to lack of regulation and low entrance requirement.

Lack of risk control

Due to lack of regulation, some illegal activities emerged:

o Illegal channel funding from platform account, rather than as a middle-man

o Ponzi scheme

o Fraud

o Fake borrower information

P2P lending market in China: Ezubo was a shoddy Ponzi scheme. Why did none of the regulators visit the offices?

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4) Overseas P2P lending platforms : Can P2P defaults cause seizure in equity/fixed income markets. Can capital markets regulators do this alone? I don’t think so.

China US

Credit system P2P platforms need more recommendation

from authorities. CSRC and CBRC. Public

feedback ended Feb 29.

Satisfactory credit system. Defaults on P2P

platforms are acceptable by investors.

Supervision and

regulation

Barriers to entry are low. No specific

requirement on entering the industry. More

tightening regulations expected. More

tightening here inevitable.

Barriers to entry are high. SEC requires

transparent disclosure and US$4 million as

guarantee money. Only two P2P companies

including Prosper/ Lending Club got license.

Financial

market

development

With high charges and low service quality in

financial market, people had great demand on

financial innovation of P2P platform. The P2P

lending market shows great growth potential

The financial market is highly developed

with a full range of products and services.

Market size Due to high saving ratio and large population,

the available money for P2P market is huge.

Due to developed pension system, credit

consuming habits, the amount of money for

investment on P2P may be limited.

P2P lending market in China vs US. This is an SEC regulated market.

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5) Lending Club: Management , Board Members: Very bad behavior. No investigation & sudden resignation of Laplanche looks bad.

Source: Company Website

Name Title Experience

Renaud Laplanche Founder and CEOPreviously Founder and CEO of TripleHop

Technologies, acquired by Oracle in 2005.

Scott SanbornChief Operating and Marketing

Officer

Former Chief Marketing and Revenue Officer for eHealthInsurance, a publically traded

ecommerce company.

Carrie DolanChief Financial

OfficerFormer Treasurer for the Charles Schwab

Corporation.

Chaomei Chen Chief Risk OfficerPreviously Chief Risk Officer at JP Morgan Chase Card Services for the Washington

Mutual portfolio.

John MacllwaineChief Technology

OfficerPreviously Head of Global Development at

Visa.

Lawrence Summers Board Member Former US Treasury Secretary.

John Mack Board Member Former Morgan Stanley CEO.

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6) Lessons for regulators on Lending Club: There are many risks. Capital market regulators need to decide on secured/unsecured debt.

Source: Company website, WSJ, LendingMemo

• Loans are unsecured and default rates may increase. Should they be secured?

• Peer-to-peer loans offer similar returns to high-yield/junk bonds. However, unlike

high-yield bonds, investors are unlikely to recover anything if borrower defaults.

• Lack of liquidity. The platform operated by ‘Folio Investments’ enables lenders

to buy and sell notes on the secondary market. Trading is thin.

• Default rates are dependent on the platform’s algorithm/underwriting ability.

• EV/EBITDA grossly overstates income generating power and is deceptive in that

it includes interest income but not interest expense.

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Lender

• Lufaxregistered customers

Borrower

• Lufaxregistered customers

Sign one-to-one private lending and guarantee contract

Fund transfer via third-party payment

• Review risks and provide guarantee

Ping An Financing Guarantee (Tianjin) Co., Ltd

• Release borrowing information and match borrowers with lenders

• Debt transfer• Sign lending contracts

online

Lufax Platform

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ZhongAn Online P&C Insurance

Source: Company Filings, Schulte Research Estimates

China’s first online-only insurer backed by Alibaba, Tencent and Pingan

*Green denotes original shareholders**Blue denotes new shareholders from 2015’s fundraising

Overview

• Company registered in Shanghai

• Registered capital of RMB1.2bn

• Raised USD934mn in 2015 round, valued at US8bn

• Planning domestic IPO this year to raise ~US$2bn

• More than 200 insurance products

• Written more than 3.6bn policies to 369 million

customers in 2015

Business Model

• Utilizes big data & analytics to ensure accurate

product pricing & risk control

• Online business model means lower operating &

distribution costs

• Bulk of insurance revenue from return-delivery

insurance products for buyers at Taobao (众乐宝）• Other flagship products include 37°C High Temp.

insurance, Xiaomi cellphone insurance (小米手机意外保障计划), cyber security insurance in

collaboration with Baidu Mobile Guard(百付安)and insurance for Juhuasuan users (参聚险)

Shareholding Structure

1. Ant Financial 16.0%

2. Tencent 12.0%

3. Ping An 12.0%

4. Unifront Holdings (优孚控股) 12.0%

5. Jiadexing Investment (加德信投资) 11.3%

6. Rixun Technologies (日讯网络科技） 6.5%

7. Ctrip 5.0%

8. CDH Investment 5.0%

9. Keywise Capital 4.9%

10. SAIF Partners 4.5%

11. CICC 2.5%

12. Morgan Stanley 2.5%

C. OnDeck

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OnDeck

Source: Company Data, CrunchBase, CNBC

• Founded in 2007, OnDeck is a marketplace for loans to small businesses.

• OnDeck sources capital through debt facilities, securitization, and OnDeck

marketplace.

Recent IPO (NYSE:ONDK)

• Raised $200 million in IPO (Dec 2014)

Key statistics

• OnDeck has funded $1.7 bn in loans

Market Cap ($BN)

P/B P/Sales EV/EBITDA EV/SalesAltman Z

ScoreMarket Impact

Asset/EquityNet Debt

($MN)

OnDeck 1.3 12.6 19.4 Negative 19.1 3.1 112% 12.5 10

NASDAQ Avg. 52.9 9.7 4.7 19.6 4.8 7.2 67% 4.5 -654

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OnDeck: Business Model

Source: Company website, Bloomberg, WSJ

OnDeck is a provider of small business loans and cash advances.

Appeal to small businesses

• Better rates compared to merchant cash advances or bank loans.

• Up to 50% less expensive than a merchant cash advance.

• Faster loan processing. 10 minutes application process, decision in minutes.

• Funds provided in as fast as one business day.

Appeal to investors

• Attractive returns

• Payments are collected daily or weekly (instead of months) to reduce risk.

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OnDeck: Competitors

Who does OnDeck threaten?

Banks, merchant cash advance providers and other small business lenders.

Competitors:

Source: Company Website, WSJ. Businessweek

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OnDeck: Loan Process and Lending Criteria

Loan process

• Small businesses can borrow $5,000 to $250,000 for between 3 to 24 months.

• Algorithms replace loans officers.

• OnDeck’s algorithms assess the creditworthiness of potential borrowers using

thousands of variables from cash flow metrics to information on social

networks.

Lending criteria

• Over 1 year in business

• $100,000+ in annual revenue in the past 12 months

• Personal credit score 500+

Source: Company Data, Businessweek, WSJ, Company SEC Filing

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OnDeck: Net Revenue

8.710.7

13.6

17.8

23.2

28.6

35.5

43.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

(in

US

D M

illi

on

)Quarterly Net Revenue

Source: Company Data, Bloomberg

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OnDeck: Quarterly Net Income

-7.9-7.3

-6.4

-5.1-5.6

-13.7

-1.1

0.4

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

(in

US

D M

illi

on

)

Quarterly Net Income

Source: Company Data, Bloomberg

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OnDeck: Funding

Funding Type DateAmount

($ Millions)Valuation Investors

Series E Mar 2014 77 NA

Tiger Global Management, Institutional

Venture Partners, Industry Ventures, Peter

Thiel, Google Ventures, First Round

Debt

FinancingSep 2013 130 NA Keybank, Deutsche Bank, Square 1 Bank

Series D May 2013 17 NAIndustry Ventures, Google Ventures, Peter

Thiel

Series D Feb 2013 42 NAInstitutional Venture Partners, RRE Ventures,

First Round, Sapphire Ventures

Debt

FinancingJul 2012 100 NA Fortress Investment Group, Goldman Sachs

Series C Jan 2011 25 NASF Capital Group, Sapphire Ventures, SF

Capital, Village Ventures

Series B 2007 16 NAVillage Ventures, RRE Ventures, First Round,

Khosla Ventures, Contour Venture Partners

Series A 2006 2 NAVillage Ventures, First Round, Contour

Venture Partners

Source: CrunchBase

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D. Prosper

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Prosper

Source: Company Data, TechCrunch

• Founded in 2006, Prosper is a U.S.-based peer-to-peer lending site connecting

borrowers and lenders

• Prosper uses algorithms to assess a prospective borrower’s credit worthiness.

Key statistics

• 2 million members

• Over $2 billion in loans funded

• Prosper has ~35% market share of the US online consumer P2P lending market

(April 2014)

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Prosper: Business Model

Source: Company website, Bloomberg

Prosper is a marketplace for borrowers to obtain loans and investors to fund loans.

Appeal to borrowers

• Lower interest rates compared to credit card balances or bank loans.

• No prepayment penalties.

Appeal to investors

• Attractive returns and access to consumer credit as an investment asset class.

• Investors can diversify risk by investing in 100 loans for a minimum of $2,500.

Origination fees

• Prosper charges an origination fee between 1% and 5% depending on

borrower’s rating and amount borrowed.

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Prosper: Risks

Source: Company website

Risks to lenders (potential risks to Prosper’s appeal)

• Lenders could suffer larger than anticipated losses if default rates increase.

• Loans are unsecured. Lenders are unlikely to recover any of their money if a

borrower defaults.

• Lack of liquidity. The platform operated by Folio Investments enables lenders to

buy and sell notes on the secondary market, but trading is thin.

• Default rates are dependent on the platform’s underwriting ability. For

example, the algorithm’s ability to detect fraud.

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Prosper: Loan Originations

Source: Lend Academy

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VI. Bitcoin and Blockchain Technology.

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1. Conclusion. THE FOUNDATION OF BITCOIN IS BLOCKCHAIN. BITCOIN IS THE FIRST GLOBAL APPLICATION OF BLOCKCHAIN.

• It has no rating, no refund, no hedging tools, no usability

• It is impossible to police and retrieve stolen bitcoins

• The FBI is a major holder of bitcoins and DOES NOT like this market

• It is absolutely non-refundable; execution errors are not fixable

• It can’t be used as collateral and is completely unregulated

• 10% of its activity still involves criminality (Silkroad 2.0)

• It is tightly held and subject to manipulation.

• It is wildly volatile and no hedging devices exist.

BUT, Really smart people like Founders Fund (Peter Thiel), Fortress, BBVA, Levchin, and Goldman Sachs swear by it. But they see the value in blockchain – not bitcoin.

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How Bitcoin works:

For users, it is very easy to start using Bitcoin. Users only needs to register a bitcoin

wallet account like registering an email account.

Users can send or receive bitcoins by providing bitcoin addresses associated with his/her

account.

Source: Bernstein, bitcoinwiki, Schulte Research Estimates

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Bitcoin Feature: Problems

Volatility

Bitcoin is 7 times more volatile than gold and 8 times more volatile than S&P 500.

High volatility not only discourages investing, but also affect its use as payment.

Security

Many people keep their bitcoins in online bitcoin wallets, which can be hacked. It

is impossible to retrieve stolen bitcoins due to the non-traceability. Bearer bonds.

Supply Dilemma

Supply is limited and is decelerating. If retailers start to accept it, demand will

outpace supply & will keep appreciating Vs. other FX. Hoarding will follow.

No hedging instruments

Currently no hedging instruments for retailers to hedge Bitcoins. Given high price

volatility, most retailer switch immediately their bitcoins income into USD/EUR/RMB.

Not widely held

There are 1.2 million users. But 90% own only 121 bitcoins. Winklevoss’ own 5%. 900

own about 50% of the supply.

Source: EconoMonitor, bitcoinwiki, Wikipedia, Bernstein, Schulte Research Estimates

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Problems cont.: Criminal Activities

Open and anonymous feature makes Bitcoin an ideal platform for illegal activities.

Black markets• CMU estimate: In 2012, 4.5% -9% of Bitcoin transactions globally were for drugs.

• Silk Road was shut down by US law enforcement in 2013. Silkroad 2 up now.

• Child pornography, murder-for-hire, narcotics, weapons available with bitcoin.

Money launderingUS Bitcoin operator BitInstant.com was arrested for money laundering in 2014.

Theft• If a victim’s Bitcoin private key is stolen, all bitcoins could be transferred

• The network does not have any provisions to identify the thief, block further

transactions of those stolen bitcoins, or return them to the legitimate owner.

• Bitcoin exchanges and wallets are also targets for theft. In Feb 2014, Mt. Gox

filed for bankruptcy in Tokyo when bitcoins worth $350 million had been stolen.

Source: EconoMonitor, bitcoinwiki, Wikipedia, Bernstein, Schulte Research Estimates

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Can Bitcoin replace money? No

• After the gold standard age, money systems are now based on fiat money,

which is built on the credit-worthiness of the government which issues it.

• Bitcoin, as a decentralized currency, is not backed by any govt. or economy.

• Bitcoin has no intrinsic use value as a physical commodity. “Trust” can only be

based on the existence of internet and the clear rules.

• Its value comes precisely from scarcity

Source: EconoMonitor, bitcoinwiki, Roubini, Bernstein, Schulte Research Estimates

The current total market cap for Bitcoin is only $3.3 bn. As a comparison:

• USD in circulation: $1.4 trillion

• Gold: $7 trillion

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What are Central bank attitudes?

• Central banks act as the central authority to control the money system.

• Bitcoin is in the exact opposite – it is a globally decentralized currency.

• Bitcoin was invented to avoid the interference on money from governments.

• Bitcoin is a philosophy of Anarchism. But central banks will not give up control.

• Criminal activity in Bitcoin reinforces central banks’ desire for control.

• THE FBI still has more than $300 mn in bitcoin it confiscated from Silkroad.

Source: EconoMonitor, bitcoinwiki, Wikipedia, Bernstein, Schulte Research Estimates

Central bank actions:

• Financial Crimes Enforcement Network (US Secret Service), a bureau of the US

Treasury Department, issued a non-binding guidance on virtual currencies.

• Some jurisdictions, like Argentina, severely restrict virtual currencies.

• Other jurisdictions, like Thailand, limit the licensing of BTC exchanges.

• China bans financial companies from Bitcoin transaction.

• Bitcoin has not been made illegal in any jurisdiction.

• Governments are adopting a cautious ‘wait and see’ attitude toward Bitcoin.

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Will banks/capital markets embrace Bitcoin exchanges? Probably.

• Bitcoin is a direct threat to banks; it eliminates the need of intermediary.

• Bitcoin moves every bank function online with less manpower and lower fees.

• They can be stored in Bitcoin wallets outside banks. Transaction can be P2P.

• Bitcoin can be programed for customized needs (instalment, heritage, trusts.

• Bitcoin transactions don’t need a bank intermediary; transaction is irreversible.

• No middle man; no insurance; no CDS

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Bitcoin exchanges

Company Location Description

BTC China Shanghai Largest Bitcoin exchange globally by trading volume

Bitfinex Hong Kong Run by French software developer Raphael Nicolle

Bitstamp UK 0.2%-0.5% fees

itBit Singapore 0.35%-0.5% fees

BTC-E Bulgaria Once the largest in the world

LakeBTC Shanghai Highly promote market-maker activity

Kraken California Combines forex trading and Bitcoin exchanges

Virtex Canada First Bitcoin exchange in Canada

OKcoin Beijing 0.1%-0.2% fees

ANX Hong Kong Licensed as money services operator

Source: Coindesk, bitcoinexchangeguide, Schulte Research Estimates

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BTC China

• Founded in June 2011, BTC China is China’s first bitcoin exchange

• In 2014, it expanded to a fully integrated service provider for exchange,

payment processing and mining.

• Started as 2 person company in Shanghai.

• In 2013, Bobby Lee, current CEO, approached the company and invested his

own money and attracted investors for expansion.

• Bobby Lee previously work for Yahoo! In US and for Walmart as VP of

technology. His brother founded the cryptocurrency Litecoin.

• BTC China raised $5mn in Series A funding from Lightspeed Partners

• BTC China is one of the largest bitcoin exchange globally by trading volume

Source: Company website, Wikipedia, Schulte Research Estimates

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2. Blockchain

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What is block chain? It is a decentralized registry!

• Block chain is a PUBLIC ledger that records bitcoin transactions.

• Maintenance of the block chain is performed by a network of communicating

nodes running bitcoin software (miners). The cost is borne by these miners.

• Transactions between Bitcoin users are broadcast to all miners who create

blocks and compete to verify them.

• Miners receive monetary incentives for being “first”.

• Blocks are secured by cryptography. Other computers merely verify the work.

• The blockchain has records of every Bitcoin transaction ever executed.

• It can provide insight about facts, ie how much belonged a particular address.

Source: Financail Times, EconoMonitor, bitcoinwiki, Schulte Research Estimates

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Will banks embrace Bitcoin? Block Chain Technology

Block Chain Technology

• Bitcoin’s key technology innovation--the block chain technology is real.

• It can help banks lower their collateral and settlement costs.

• GFC regulation forced more OTC derivatives to be processed thru centralized

clearing houses. This has increased demand for rapid collateral sending. Block

chain tech may be the solution.

• Many financial institutions are testing the use of block chain technology to

improve their network infrastructure. Goldman, Sachs is ahead on this.

Source: Financail Times, EconoMonitor, bitcoinwiki, Schulte Research Estimates

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The blockchain opportunities

• Long transaction/settlement time leads to greater exposures to default risk.

Blockchain can be used to shorten settlement time so to free up capital.

• It still takes 20 days, on average, to settle syndicated loan trades with current

opaque and clunky back office process.

• Financial firms are dealing with greater requirements for reporting, transparency,

and dissemination of data. Blockchain gets to the core of those issues.

• Santander InnoVentures estimated blockchain could save lenders up to $20bn

annually in settlement, regulatory and cross-border payments cost.

Source: Bloomberg Markets, Schulte Research Estimates

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The blockchain opportunities

Source: Bloomberg Markets, Schulte Research Estimates

• Financial institutions can use blockchain technology to create internal private chains, where they can have completely known transaction processors instead of unknown miners for Bitcoin.

• Blythe Masters, who helped give the world CDS, joined Digital Asset as CEO to develop blockchain based software for 3 inefficient markets:

a) Syndicated Loans: Digital Asset Holdings is creating a distributed ledger to handle the settlement of pooled corporate debt.

b) Private Shares: Nasdaq is developing a blockchain-based system for trading shares in closely held companies.

c) US Treasury Repos: Digital Asset is developing a way to record and settle these short-term government bond trades on a distributed ledger.

• $400mn VC/PE money into digital currency startups in the 1st half of 2015, a fourfold jump from all of 2013.

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The blockchain enables institutions to transfer and record assets other than the digital currency without an intermediary.Current uses:

1. Interbank Payments: London-based Earthport and SF based Ripple Labs have launched a new international payments network on a private blockchain.

2. Gold: Real Asset Co. in London permits gold bugs to record their bullion on the blockchain and will soon enable them to trade the metal.

3. Remittances: MeXBT in Mexico City provides a web-based app that lets migrants send money via blockchain to Mexico and withdraw cash from ATMs.

4. Diamonds: London startup Everledger uses fingerprint tech and blockchain to record & track large diamonds from the mine to someone’s finger.

5. Property Titles: Factom is building a land title registry in Honduras on the blockchain for citizens to defend their property from unlawful seizures.

Future uses:

1. Airline Miles: Chain, a SF based firm, offers software tools for developers to build apps to transmit anything of value on the ledger, including loyalty points.

2. Music: Can clarify musicians’ income from streaming services (music rights

ownership).

Source: Bloomberg Markets, Schulte Research Estimates

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Bitcoin vs Block chain

Block chain can be used to keep record for anything

• Banks may not use Bitcoin, which is a currency or payment tool.

• BUT, they may use block chain, the network technology of Bitcoin, after removing

Bitcoin features.

• Decentralization: Bitcoin is fully decentralized, while banks may use block chain’s decentralized nodes structure to reduce cost but add a central control over it.

• Anonymous: Bitcoin is anonymous, while banks will identify the true owner of each node when using block chain.

• Incentive system: Bitcoin rewards miners with new bitcoins generated, while banks may set an internal rewarding system when using block chain.

• Supply algorithm: banks will not use Bitcoin’s decreasing supply algorithm, since banks just want to use the network technology The currency running in the system

will still be the same.

Source: Financail Times, EconoMonitor, bitcoinwiki, Schulte Research Estimates

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Which banks are embracing block chain technology?

Name Action

Santander Santander has found over 25 possible use-cases of the blockchain that could be implemented to traditional banks

BBVA Invested in Coinbase’s $75 mn series C funding

Goldman Sachs Arguably the most passionate supporter of blockchain technology in banking sector. Led a $50 mn funding for Circle Inc. Also keen on searching blockchain application on trading

Barclays Launched a startup accelerator for fintech and blockchain related startups

BNY Mellon Trying to integrate bitcoin’s p2p model into their own client-server system. Launched their own BK coins, which is used internally by staffs.

CBA & Westpac Partnered with Ripple Labs to incorporate the blockchain technology into their systems.

DBS Hosted a blockchain hackathon sponsored by IBM

Citi Citi is testing blockchian application and working on its own digital currency-Citicoin

NASDAQ Partnered with Chain to use blockchian platform to facilitate the secure issuance and transfer of shares of privately-held companies

Source: Cointelegraph, Schulte Research Estimates

VII. Special session on Ant Financial

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History of Ant Financial and its relationship with Alibaba

• Alibaba established Alipay in December 2004

• PBOC issued 2010 regs that required license for non-bank payments

• Due to license uncertainties, Alibaba divested Alipay in 2011.

• Ant Financial became the parent entity of Alipay after divestment.

• Softbank & Yahoo final agreement on Ant in 2014:

1. Alibaba is set to receive a 33% stake in Ant when Ant goes public.

2. Until then, Alibaba receives 37.5% of Ant's pre-tax profits

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Shareholder Structure: Jack Ma has full control of voting rights

Ant Financial

Jun Han LP Jun Ao LP

42.3% 34.2%

• Jack Ma

• Xie Shihuang

(Alibaba co-founder)

Alibaba Management Team

• Liu Zhenfei

• Wu Yongmin

• Lu Zhaoxi

• Peng Lei

PE Investors

• Social Security Fund

• CDB

• CIC

• CCB

• Postal saving bank

• Insurance cos.

23.6%

Note: The GP of both Junao and Junhan is 100% owned by Jack Ma

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hThe Ant Empire: the whole eco-system is here. How on earth do you regulate this creature.

Name Function Ownership

Payment

Alipay Payment 100%

Ant Check Later Pay later tool 100%

Bank

My Bank Online Bank 30%

Crowdfunding

ANTSDQ Online crowdfunding 100%

Funds

Tianhong Fund Money Market Fund 51%

Fund123.cn Fund selection platform 61%

Tebon Fund Mutal Fund 31%

Wealth Management

Yu'e Bao Money Market Fund 100%

Zhao Cai Bao WMP 100%

Ant Fortune One-stop Wealth Management 100%

Name Function Ownership

Insurance

ZhongAn Insurance Online insurance 16%

Cathay Insurance Property Insurance 60%

Cloud

Ant Financial Cloud Cloud computing 100%

Lifestyle

Koubei Restaurant rating & booking 50%

Ele.me Online food delivery 8%

Credit Rating

Sesame Credit Big Data Credit Rating 100%

Financing

Ant Xiaodai SME Loan 100%

Wang Jin She P2P Lending 25%

FinTech

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PE Funding

Round TimeRaised ($bn)

Valuation ($bn)

Investors

Series B Apr 2016 4.5 60

CIC, CCB, CDB, Postal Saving Bank, Shanghai Financial Development Investment Fund, China Life Insurance, PICC , China Pacific Insurance, New China Life Insurance

Series A July 2015 1.2 45

Social Security Fund (5%, discount price), CDB (0.5%), China Life Insurance (0.5%), PICC (0.5%), China Pacific Insurance (0.5%), New China Life Insurance (0.5%)

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1. Payments

• 450mn Alipay annual active users• $519 billion total payment value in 2013, est. 2015 payment value: $993 bn*• 270 million monthly active mobile users• 70% market share for Chinese mobile payment markets

PlatformAnnual Transaction Value

(in USD bn)

Alipay 993*

Wechat Payment 550

PAYPAL 282

Square 170

*Estimation based on 2013 and 2015 Alibaba GMV

Source: company reports, China Daily, Schulte Research Estimate

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Ant Check Later (Huabei)

Introduction• buy now and pay back one month later; credit card w/ credit is based on sesame• Support installment payment• All users of Alipay can sign up to Ant Check Later with just a few clicks• On-time repayment will increase a user’s sesame credit score

Data• More than 60 million payments on Alibaba’s Nov. 11 Shopping Day (9% of total).• 60% of Ant Check Later users have never used credit card before• Monthly transaction value increased more than 50% for people with sales of <1000.• 82% of Ant Check Later payments were made on mobile• User distribution: 40% female and 60% male.

Source: Company website, technode, sina, rong360,

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2. Wealth Management. Yu’e Bao

Introduction• Online money market fund launched in June 2013 based on Alipay flatform.• Users can deposit as low as RMB 1 yuan into Yu’e Bao and can withdraw it anytime.• Largest money market fund in China.

Data• Number of users: 260 million• Total AUM: RMB 621 bn• 2015 Return: 3.67%• 41% users were born after 1990

The rural opportunity• 15% of Yu’e Bao users are from rural area of China, increased 65% yoy• Number of users increased fastest in tier 4 & tier 5 cities, 48% & 46% growth in 2015.• Half of new users joined in 2015 at tier 1-2 cities are migrant workers.

Source: Company website, techweb, baike.com

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Zhao Cai Bao

Introduction

• Online wealth management platform founded in April 2014

• Partnered with insurance companies and credit guarantee corporations to

connect SME/personal borrowers with retail investors.

Data

• Total transaction value: RMB 512 billion

• Number of investors: 12 mn; average investment per user: RMB 41,475

• Number of borrowers: 4.8 mn; average borrowing: RMB: 106,939

Current Annualized Return

• 3-6 months: 3%

• 6-12 months: 4-4.5%

• 12-24 months: 4.5-4.57%

• >24 months: 4.5%-4.56%

Source: Company website, wangdaiabc

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Structure

charges a 0.3% management fee for its money market fund compared to the peer average of 1.5%.

Shareholders

3. Funds. Tianhong Asset Management

Source: Tianhong, China Daily, Schulte Research Estimates

Tianhong Asset Management, founded in 2004, is an open-ended mutual fund. Yu’ebao, its onlinemoney market fund, is its main investment product offered through Alipay. There is no minimumamount and customers can withdraw their cash anytime.

24%

74%

2%

Yu’ebao Fund Asset Allocation

Fixed Income

Bank Savings andSettlement Provisions

Others

Ant Financial 51%

Tianjin Trust 16.8%

Inner Mongolia Junzheng 15.6%

Wuhu High Tech 5.6%

Employees 11%

Key Financials (As of Dec. 31 2015)

• Yu’ebao is China’s largest fund with alsothe most investors

• ¥1.07 trillion AUM ($163.6 billion)

• 260 million users (+42% YoY) of theonline wealth management service,Yu’ebao, with total value of ¥620.7 billion

• Generated a total gain of ¥57.3 billion($8.7 billion) in the three years since itwas established

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Fund123.cn & Tebon Fund

Source: Fund123, Tebon Fund, Asia Asset Management, Schulte Research Estimates

• Founded in 2006, Fund123 is an independent fundsales, that provides financial news, data, and otherinteractive services

• Target customers are retail and small businesses; ithas 5 million registered users

• Services are offered on multiple platformsincluding software for phones and computers

Fund123

Main productsi. comprehensive list of funds with

performance dataii. estimation of funds’ net worthiii. filtered search of funds using conditions

such as type (ETF or bond), 6 monthreturn

iv. personalized fund management toolv. publishing investment fund analysis and

strategiesMajor Shareholders

1. Ant Financial2. Hundsun – Financial technology, network provider

• Mutual Fund founded in 2012• ¥1.1 billion AUM• Ant Financial owns 30% with option to be raised up to 60%• Formerly a competitor of Tianhong

Tebon Fund

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4. Insurance. ZhongAn Online P&C Insurance

Source: Company Filings, Schulte Research Estimates

China’s first online-only insurer backed by Alibaba, Tencent and Pingan

*Green denotes original shareholders**Blue denotes new shareholders from 2015’s fundraising

Overview

• Company registered in Shanghai

• Registered capital of RMB1.2bn

• Raised USD934mn in 2015 round, valued at US8bn

• Planning domestic IPO this year to raise ~US$2bn

• More than 200 insurance products

• Written more than 3.6bn policies to 369 million

customers in 2015

Business Model

• Utilizes big data & analytics to ensure accurate

product pricing & risk control

• Online business model means lower operating &

distribution costs

• Bulk of insurance revenue from return-delivery

insurance products for buyers at Taobao (众乐宝）• Other flagship products include 37°C High Temp.

insurance, Xiaomi cellphone insurance (小米手机意外保障计划), cyber security insurance in

collaboration with Baidu Mobile Guard(百付安)and insurance for Juhuasuan users (参聚险)

Shareholding Structure

1. Ant Financial 16.0%

2. Tencent 12.0%

3. Ping An 12.0%

4. Unifront Holdings (优孚控股) 12.0%

5. Jiadexing Investment (加德信投资) 11.3%

6. Rixun Technologies (日讯网络科技） 6.5%

7. Ctrip 5.0%

8. CDH Investment 5.0%

9. Keywise Capital 4.9%

10. SAIF Partners 4.5%

11. CICC 2.5%

12. Morgan Stanley 2.5%

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ZhongAn Online P&C Insurance

Source: Company Filings, Schulte Research Estimates

Experienced management team with business, finance and technology backgrounds

Ou Ya PingChairman

• Founder of Sinolink Worldwide Holdings and

Towngas China Company

• Former chairman of Enerchina Holdings

• Bachelor of Engineering Management from

Beijing Institute of Technology

Management Team

Chen JingCEO• Former deputy director on the board of directors of

China Merchant Bank and• Former president of CITIC Bank credit card division• DBA at USC and EMBA at Cheung Kong Graduate

School of Business

Jiang XingCTO• Former manager and senior director at Alibaba• Lead the development of Taobao online

development center• Bachelor of Computer Science at Hunan

University

Xu WeiCOO• Held managerial positions at China Mobile and

Google• Over 11 years of management experience• Masters in Computer Science at BUPT and MBA

at Tsinghua

Financials (RMB mn)

12/31/2015 12/31/2014

Assets

Money funds 718.2 129.9

Interest Receivable 23.5 12.2

Premiums Receivable 133.1 21.6

Deposit of Capital Guarantee 248.1 200.0

Total Assets 8098.8 1239.0

Other Financials

Net Income 168.4 27.3

ROE 2.43% 2.70%

ROA 2.08% 2.20%

Product Category

Featured Insurance

Travel Insurance

Accident Insurance

Health Insurance

Group Insurance

Credit card, Cellphone, Drones, Tires

Parental travel, Outdoor adventure,

Backpacker

Public transport, private transport, air travel

Major diseases (adult, women, children), pregnancy, hospitalized treatment, dental

SME worker compensation, O2O platform welfare

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Cathay Insurance (Taiwan and China)

Source: Schulte Research Estimates

Bringing big data analytics and cloud computing into the insurance industry

Acquisition Overview

• Alibaba affiliate, Ant Financial, invests $188mn for 60% of Cathay Insurance (China), a controlling stake

• Ant Financial is expected to take three of the five director seats

• Insurance products are still created by Cathay Insurance but sold through Alipay

Why

• Allow Ant Financial to gain a license to develop insurance products in China instead of applying for its own

license, which takes a lot of time

• Acquiring Cathay Insurance allows Ant Financial to link its big data analytics and cloud computing

expertise with Cathay’s insurance system

• According to Min Xu, head of Alibaba Cloud, cloud platforms can help insurers shorten the launch

cycle from 3-6 months to 1-2 weeks. It can also reduce development and deployment costs by 90%

• Ant Financial wants to be involved in the insurance business – not just platform offering insurance products

• Alibaba’s stake in Zhongan got diluted from 19.9% to 16%. While Alibaba is still the biggest shareholder, its

control over the company is no longer dominant given new investors (MS, CDH, CICC).

Headwinds

• Foreign companies are unsuccessful in breaking into PRC insurance market, which is dominated by state-

run firms such as China Life and Ping An

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5. Financing. Ant Micro Loan & My Bank

Source: Ant Financial, Alizila, Crowdfund Insider, Schulte Research Estimates

Ant Micro Loan, founded in 2010, provides financial services to small businesses and merchants onAlibaba’s shopping marketplaces (Taobao and Tmall). Currently, Ant Micro Loan is moving towardsintegrating its electronic lending platform with big data analysis.

Ant Micro loan

• Has lent over ¥400 billion to 1.6 million small and micro enterprises and entrepreneurs• Offers loans up to ¥1 million compared to ¥5million for MYbank• Bad-debt ratio stands at less than 1.5 percent, much lower than the banking industry

Ant Financial’s new MYbank

• Alibaba recently launched a 100% digital, branchless bank to put it up against Tencent’s WeBank• MYbank is dedicated to urban and rural small and micro enterprises and entrepreneurs• Investors include Shanghai Fosun, Wanxiang Sannong, and Ningbo Jinrun Asset Management• Backed by ¥4 billion in capital• Offers loans up to ¥5 million

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P2P: Wangjinshe

Source: Wangjinshe, Schulte Research Estimates

Wangjinshe, founded in 2014, is a p2p lending ecosystem for businesses and upper middle class retailcustomers. Its financial asset trading platform is the first to be approved by the government.

Major Investors

Wangjinshe will leverage Ant Financial’s large user base and Alipay’s system, Chinese National’s guarantee services, and Hundsun’sexperience in technology to develop its p2p platform.

1. Chinese National Investment and Guaranty Corporation

2. Hundsun

3. Ant Financial

Business Overview

i. P2P platform with asset trading servicesii. Investment management consultingiii. Financial information and dataiv. Economic data consulting

Key Financials

• Total transaction value of ¥10 billion in 6months since the platform was launched

• Achieved 200,000 registered users in 7months

• Registered Capital of ¥50m

Product Characteristics

• 5~8% annual returns• Transferrable• Flexible withdrawal• Credit rating from Alipay

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Investor Limits

• Limits are set to meet Chinese financial regulations in line with other local equity crowdfunding sites

• Participants are required to have financial assets of at least ¥1 million (US$170,000)

• Earned no less than ¥300,000 (US$48,000) in annual average income for the last three years

Main Competitors

JD’s DongjiaPing An’s Qianhai Crowdfunding

AngelListZhenFund

VC.cn

6. Crowdfunding: Antsdaq

Source: Antsdaq, Schulte Research Estimates

Launched in 2015 (beta), Antsdaq is Ant Financial’s online equity crowdfunding platform. It is one ofthe first three official equity crowdfunding platforms to be approved by Chinese authorities.

Business Model’s Characteristics

• Projects must be registered customers ofAlipay for enterprise

• Investors must be registered users ofAlipay’s payment services as well asYu’ebao

• Does not charge investors for any fees• Antsdaq has investment roadshows,

known as Dingding• Ant Financial has also made a strategic

investment in 36Kr, which operates astartup database and their own equitycrowdfunding platform

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7. Credit Rating: Sesame Credit

Sesame Credit: • Ant Financial launched its credit rating service Sesame Credit on

Jan 28th, 2015.

• Sesame Credit uses big data technology and customer behavior

analytics to generate credit rating.

The Name: In the folk tale “Ali Baba and Forty Thieves”, the woodcutter Ali Baba opened the

chamber of treasures with the words “Open sesame”.

License: On Jan 5th 2015, PBOC asked 8 institutions to prepare personal credit reporting

operations. Sesame Credit(Alibaba) and Tencent Financial Data Services

(Tencent) are the only two internet companies among the 8 firms in the list. Others

are local financial firms (e.g. Ping An).

Market Potential:• In China, there are only 320 million people, 25% of total population, have credit

record in PBOC’s system. In US, the percent is 85%.

• Sesame Credit can provide credit rating for those people who do not have a

credit record, the area where traditional credit firms cannot cover.

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Sesame Credit: The Algorithm

Sesame Credit’s algorithm looks at 5 attributes:

1. Behavior Trait

• User activity

• Consumption level

• Payment level

• Consumption preference

2. Identity Information

• Real name verification

• ID information

• Information stability

3. Social Network

• Social connections

• Credit level of connections

• Influence level in social network

4. Credit History

• Credit card repayment history

• Loans repayment history

• Payment history for water, electricity and gas bills

• Fine history

5. The ability to abide by the contract

• Account balance of Alipay and Yu’ E Bao

• Private car information

• Personal property information

Behavior Trait

Identity Information

Ability to abide by the contract

Credit HistorySocial Network

Source: Company Data, Zhihu, Schulte Research Estimates

Sesame Credit Score ranges from 350 to 950

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8. Life-style

Koubei

• Restaurant rating and booking businesses set up by Ant Financial and Albaba

as a Joint Venture in Sep 2015, each holds 50% shares.

• O2O services in conjunction with Alipay and AutoNavi’s map navigation

• Koubei generated RMB 21 bn in GMV for 3 months ended Mar 2016.

• Recorded RMB 1.7bn loss since inception due to the large early investment

and promotional spending

Ele.me

• China’s largest food delivery company with a 34% market share

• Alibaba invested $900mn and Ant Financial invested $350mn, in total for a

27.7% shares. Alibaba now is its largest shareholder.

• Current valuation near $4.5 bn.

• Joseph Tsai became one of the nine board members of Ele.me.

• Ele.me daily number of orders reached 5 million in its promotion day in May.

Source: Company Data, 36kr, sina.com, Schulte Research Estimates

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regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is,

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information will be made available upon request.

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