Analyst From Russia with Fintech Tel: +39 02 80886654 11 28 Zaim Credit... · 2. Highly cash generative business Payday loan provisioning is a highly cash-generating business if properly

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ValueTrack | Initial Coverage | 28 November 2019

Zaim Credit System Plc Sector: Consumer lending / Fintech

From Russia with Fintech Analyst Marco Greco Tel: +39 02 80886654 [email protected] Skype: marco.m.greco

Zaim Credit System Plc is the UK holding company of Zaim Express, Russian based fintech company providing consumers with difficulty in accessing traditional banking services small-size short-term loans aimed at facing unforeseen expenses.

One product, two distribution channels Zaim Express offers unsecured loans up to RUB30,000 (£366) for a maximum 30 days duration at 1% daily interest rate thanks to an omnichannel distribution strategy that couples a well distributed network of branches near urban areas and a starting up online platform targeting prospect clients all over Russia. In such a market, estimated to be worth ca. 45mn individuals, Zaim Express boasts over 376k customers and over 1.0mn loans issued so far.

Several strengths and some concerns In our view, Zaim Credit System boasts several interesting features:

1. Zaim operates in a clear legal framework, regulated by Central Bank of Russia (CBR), thus facing very low risk of legal claims from customers.

2. Market is estimated up at 20% plus CAGR over the next four years as only 2% of Russians signs payday loans vs. 20% in more developed markets.

3. Zaim credit assessment is becoming more and more successful thanks to its state-of-art machine learning / artificial intelligence IT platform.

4. Zaim can further scale up its business by widening its product portfolio and geographic footprint, and by adopting a P2P approach to fund raising.

Among the concerns and risks affecting Zaim equity story we highlight possible regulatory shocks, political and social turbulence, FX risks and competition from “native” online only players.

Break even in 2020E, maturity in 2024E As far as future profit outlook is concerned, we expect Zaim to achieve break even in 2020E and to get to its maturity in ca. four years from now, i.e. in 2024E when the company should achieve ca. £110mn of loans issued per annum, some £54mn Interest Income and £18mn Net Profit.

“Short term” fair Equity Value at £6.4cent per share A realistic short-term fair value can stand, at £28mn, £6.40cent per outstanding share (£5.85cent on a fully diluted basis). Such fair value is, in our view, poised to massively grow in the next quarters as long as the planned ramp up of business progresses in line with our estimates and visibility on 2020E and 2021E results increases.

Fair Value (£cent) 6.40

Market Price (£cent) 3.46

Market Cap. (£m) 15.1

KEY FINANCIALS (£’000) 2018PF 2019E 2020E

INTEREST INCOME 10,216 4,460 9,513

INTEREST EXPENSES -79 -81 -55

NET INTEREST INCOME 10,137 4,380 9,459

OPERATING INCOME 10,142 4,443 9,459

PROFIT BEFORE TAX 835 -1,403 2,280

NET PROFIT (LOSS) 835 -1,403 2,021

ADJ. NET PROFIT (LOSS) 835 -803 2021

TOTAL EQUITY -576 363 2,384 Source: Company (historical figures), Value Track (2019E-20E estimates)

RATIOS & MULTIPLES 2018PF 2019E 2020E

EPS (£cent) nm nm 0.46

ADJUSTED EPS (£cent) nm nm 0.46

BVPS (£cent) nm 0.08 0.55

DPS (£cent) 0.00 0.00 0.00

P/E Adj. (x) nm nm 7.5

P/BV (x) nm Nm 6.3

P/Sales (x) nm 3.4 1.6

ROE (%) nm nm 85% Source: Company (historical figures), Value Track (2019E-20E estimates)

STOCK DATA

FAIR VALUE (£cent) 6.40

MARKET PRICE (£cent) 3.46

SHS. OUT. (m) 436.9

MARKET CAP. (£m) 15.1

FREE FLOAT (%) 21.4

AVG. -20D VOL. ('000) 61.6

RIC / BBG ZAIM.GB / ZAIM LN

52 WK RANGE 2.60-4.00 Source: Stock Market Data

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Zaim Credit System Plc | Initial Coverage | 28 November 2019

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Table of Contents

Executive Summary 3

Zaim Credit System Plc at a glance 5

Unbanked and Underbanked market opportunity 7

Zaim Business Model 10

What we do like about Zaim Credit System 13

Concerns and risks 24

Financials 26

Valuation 33

Appendix: Top Management CVs 39

Appendix: Comparables 40

Appendix: Outstanding and fully diluted share capital 42

vvvv

Many thanks to Chiara Regis for her support in writing this equity research report.

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Executive Summary Zaim: Well established Russian player in microfinance business Zaim Credit System Plc is the London based holding company of a Russian financial services company named Zaim Express active in the microfinance sector. Its core business is to provide short term small unsecured loans to Russian “unbanked” and “underbanked” individuals, i.e. people without any type of banking account (“unbanked”) or having a banking account but limited to basic usage (“underbanked”). In such a reference market, estimated to be worth ca. 45mn individuals, Zaim Express boasts over 376k customers and some 11k loans issued / month, i.e. over 1.0mn loans issued so far with a gross loan book in excess of £30mn.

Business model: One product, Two distribution channels, Five steps loan life cycle Zaim Express current value proposition / business model is very straightforward and can be described as follows: one product, two distribution channels, five steps loan life cycle.

One product

Zaim Express is currently offering small size loans up to 30,000 RUB or less (ca. £360 or less) for a maximum duration of 30 days at 1% daily interest rate, provided in cash or credited on Zaim Express pre-paid card. Loans are aimed at facing personal needs for a very short term, in the event of urgent or unforeseen expenses or delays in monthly wage payments.

Two distribution channels

The company has developed an omnichannel strategy centered on easy and fast loan apply and provisioning. Currently there are two main distribution channels 1) a well distributed network of branches near densely populated residential communities in urban areas and 2) a starting up online platform aimed at targeting prospect clients all over Russia.

Five steps loan life cycle

Loans have a five steps life cycle that starts with the client generation and identification, moving through a credit assessment phase and loan provisioning and ending with the reimbursement.

Several key strengths, for the whole market and for Zaim in particular In our view, Zaim Credit System boasts several interesting features concerning both the reference market and Zaim itself. Among the most noteworthy we highlight the following ones:

1. Well-regulated market with huge potential for growth

Zaim operates in a clear legal framework, regulated by Central Bank of Russia (CBR) that supervises every detail of the loans ranging from the daily interest rate to the full cost of loans, and from the maximum number of loans that a borrower can sign to the maximum Payment-to-income (PTI) ratio. This well-defined regulatory scenario strongly reduces the risk of legal claims from customers.

In this market, room for growth is huge, estimated at least in the 20% plus CAGR over the next four years. Indeed, despite the tumultuous growth recorded so far (2012-2018 CAGR standing at 35%), at present microfinance services are still used by only 1%-2% of Russian population compared to ca. 20% of more developed markets such as the US and the UK ones.

2. Highly cash generative business

Payday loan provisioning is a highly cash-generating business if properly managed. Indeed, assuming monthly loans and no bad debt, annual cash on cash return would stand higher than 20x while IRR would stand in the “thousands” space. Obviously, the level of bad debt is a key driver of actual profitability, and from this point of view we note that Zaim Express credit assessment is becoming more and more effective.

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Indeed, Zaim performs clients credit assessment through its state-of-art platform based on proprietary machine learning and artificial intelligence techniques. This has a twofold positive implication:

® Zaim Express is able to efficiently manage large volumes of microloans applications at a time and to authorize them within 7-8 minutes;

® Average default rate on Zaim loans has been progressively reduced below 10%.

3. Massive scalability of the business model

Zaim boasts, in our view, several valuable opportunities to scale up its business. Ranked in “chronological” order i.e. from next quarter up to the next few years, we see:

® Scaling up the loan book by starting to raise funds from high net worth individuals thus featuring a P2P style business model;

® Widening proprietary product portfolio by starting to offer title loans and consumer microloans;

® Upselling with third party products as both traditional banks and insurance companies could profit from Zaim stores distributing products such as microinsurance policies or credit cards;

® Starting to license the whole platform (IT + Call Center + Backoffice) to smaller offline players based in remote Russian regions;

® Internationalization, i.e. replicating the Russian business model in additional countries.

Online competition and macro-scenario the main concerns Among the concerns and risks that possibly affect the equity story of Zaim Credit System we believe that a few are not to be underestimated including possible regulatory shocks, political and social turbulence and FX risks as the operating company manages its business in RUB terms while the listed company express its figures in GBP terms and has costs in this currency. Last but not least, a further threat could come from “native” online startups leveraging on Venture Capitalist funds, on the increasing number of consumers moving into digital only-bank world and on the lower and lower entry barriers granted by technological progress.

Financials and valuation As far as future profit outlook is concerned, we believe that Zaim Credit System could get to its maturity in ca. four years from now, i.e. in 2024E when the company should achieve, in our base case, ca. RUB9bn of loans amount funded per annum (ca. £110mn) driven by online channel boost and by the product portfolio enlargement. Based on these volumes, our “base case” forecasts as of 2024E are:

® Revenues –£50.4mn Interest Income;

® Profitability – £17.7mn Net Profit, after having achieved break even already as of 2020E;

® Balance Sheet - £47mn Net Equity.

As far as valuation in concerned, a realistic short-term fair value can stand, applying a Venture Capitalist based valuation methodology, at £28mn, £6.4cent per outstanding share (£5.85cent on a fully diluted basis).

Such fair value is, in our view, poised to massively grow in the next quarters as long as the planned ramp up of business progresses in line with our estimates and visibility on 2020E and 2021E results increases.

Zaim: Stock multiples 2019E-2021E at market price and at fair value P/Sales P/E P/BV

Company 2019E 2020E 2021E 2019E 2020E 20201E 2019E 2020E 2021E

Zaim @ £3.46cent mkt price 3.4 1.6 0.8 nm 7.5 2.7 n.m. 6.3 1.9

Zaim @ £6.40cent fair value 6.3 2.9 1.4 nm 13.8 4.9 n.m. 11.7 3.5

Source: Value Track analysis

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Zaim Credit System Plc at a glance Zaim Credit System Plc is the holding company of a Russian based company, Zaim Express, specialized in microfinance activities i.e. the provisioning of micro loans to Russian consumers with difficulty in accessing traditional banking services. Zaim boasts a 97 stores distribution network in Moscow and surrounding areas and is now pushing on online service as well, taking advantage of easier and easier digital onboarding procedures driven by the Unified Identification and Authentication System (USIA) national program launched back in 2017.

Key Facts & Figures Zaim Credit System Plc is the London based holding company of a Russian based financial services company named Zaim Express (Zaim from now on).

Zaim is active in the microfinance sector, with a mission to provide short term small loans to Russian consumers with difficulty in accessing traditional banking services, so called “unbanked” and “underbanked” people. Zaim boasts:

® Over 376k customers out of which 155k that took at least two or more loans;

® Over 10k loans issued per month for a total loan book in excess of £30mn;

® 97 directly managed stores providing baseline revenue;

® Proprietary and scalable IT system with a developed credit scoring model.

Primarily focused on establishing branches near densely populated residential communities in urban areas, nowadays Zaim is launching an online service as well and has also developed a pre-paid “Zaim Express” card to take advantage of the increasing availability of POS mobile devices to the internet, increasing retail customer’s ability to organize their finances online.

Zaim Historical Milestones Zaim is not a startup, even if it is relatively young. Here follow Zaim’s main historical milestones:

® 2011 – Zaim started microfinance activities by Central Bank of Russia (CBR) authorization;

® 2014 – Start of operations in Moscow region and development of retail distribution outlets in other areas of Western Russia i.e. St. Petersburg and Volgograd;

® 2016 – Zaim obtained its current status of microcredit company (MCC);

® November 2019 – Listing on the Main market of the London Stock Exchange.

Zaim stores in Moscow and in the surrounding area

Source: Zaim

ST. PETERSBURG

MOSCOW

VOLGOGRAD

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Shareholders and Corporate Governance structure As an effect of the recent listing on the Main Market of London Stock Exchange, Zaim Credit System Plc shareholders’ capital is currently composed of 436.98mn ordinary shares (477.6mn ordinary shares on a fully diluted basis, i.e. post conversion of existing warrants and stock options), out of which 21.4% being represented by free float while the controlling shareholders is the non-listed Luxemburg based holding company Zaim Holding SA, i.e. Mr. Siro Donato Cicconi, CEO of Zaim Credit System Plc. (Please see Appendix for more details on current and fully diluted capital structure).

Apart from Mr. Cicconi the Board of Directors of Zaim Credit System Plc includes other seven members, i.e. the Finance Director Mr. Simon James Retter, the COO-CFO Mr. Vladimir Golovko, three additional members of the senior team management and two non-executive directors.

Mr. Cicconi and Mr. Retter are substantially based in Europe while the rest of top management team is based in Russia, managing day by day operations. (Please see Appendix for details on top managers’ curricula).

Zaim’s shareholders and corporate governance structure

Source: Zaim Credit System

Board of Directors

SIRO D.CICCONI

CEO

SIMON J. RETTER

Finance Director

MALCON GROAT

Non-Executive Chairman

PAUL J. AUGER

Non-ExecutiveDirector

VLADIMIR GOLOVKO

COO

VILDANVEGERIOHead of Network

Management

ALEXANDERAKHMETOV

Head of Legal

Department

ANDREY KATYSHKOV

CFO

ZAIM Holding SA73.2%

MPM & Partners4.6%

Shareholders Structure

Simon J. Retter0.8%

Free Float21.4%

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Unbanked & underbanked market opportunity Zaim is willing to provide access to credit to so-called unbanked and underbanked individuals in Russia, a country where there are ca. 30mn of people lacking any bank account and another 15mn are missing access to traditional credit services thus being obliged to utilize alternative credit services as payday loans. Within this huge potential market, we note that overall lending activity is steadily growing in the latest years and that households’ debt stands at ca. 17% of GDP.

Unbanked and underbanked people are a global problem Zaim mission is to provide financial products and services, i.e. access to credit, to so called unbanked and underbanked people, defined as:

® Unbanked. People without any type of banking account or relationship with traditional banking services;

® Underbanked. People having a banking account but limited to basic usage, e.g. paycheck cash in, while not having access to credit facilities such as loans or credit cards.

Just to give an idea of the magnitude of this phenomenon, we note that according to statistics there are ca. 1.7bn of persons worldwide lacking a bank account and missing access to traditional credit services, being thus obliged to utilize alternative credit services as payday loans.

Adult without a bank account worldwide, 2017

Source: Global Findex Database

Lack of money is the most commonly cited barrier to account ownership as well as the distance from financial institutions, but overall there are many reasons behind the unbanking / underbanking problem, such as the expensiveness of banking accounts, the lack of necessary documentation and the lack of trust into financial institutions.

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Worthy of notice, lack of money doesn’t necessarily mean lack of a source of income. Indeed, if we look at statistics, we reckon that nearly half of unbanked adults worldwide are employed or seeking work, with this percentage getting close to 70% for men.

If we deepen this analysis, we note that self-employment in 2017 was the most common form of work for unbanked adults (men+women), standing at 28% of total, while 18% had an “in wage” employment status.

Depending on genre, ca. 40%-60% of unbanked adults are employed or seeking work (%), 2017

Men

Women

Source: Global Findex Database

Russia not immune from the need of alternative credit providers As far as the alternative credit finance business is concerned, Russia is one of the places to be. In Russia there are close to 30mn people without a bank account at all, and we estimate that another 15mn people are the underbanked ones.

Adult without a bank account worldwide (mn, 2017) (*)

Source: Global Findex Database (*) The sample include only the first 20 countries.

224.3

191.3

99.0 96.6

62.7 58.7 57.9 49.3 48.4 46.0 42.8 39.3

31.3 28.9 28.4 20.1 18.7 18.2 18.0 17.1

China

India

Pakis

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Indon

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Nige

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Mex

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Viet

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Braz

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Dem

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Fed

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Mya

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Colom

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Turk

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Mor

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Unite

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ates Iraq

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This large potential reference market for microfinance activity complies with a macroeconomic situation that, despite remaining highly dependent and correlated to the exploitation of natural resources such as Oil, is not bad at all.

Indeed, Russia is the 12th largest economy worldwide with real GDP growing by 2.3% in 2018 and forecasted to grow at 1.1% and 1.8% respectively in 2019E-’20E. Macro-fiscal buffer is strong, with fiscal surpluses across all tiers of government and low public debt levels. Short-term inflationary risks have abated, with the bank of Russia adopting a neutral policy rate.

Russian Federation: Key Top Down indicators

Source: IMF (October 2019)

As far as the credit market is concerned, we note that the overall lending activity has been growing in the latest years and that households’ debt stands at ca. 17% of GDP.

Russian Federation: Credit market indicators

Household debt (% GDP, 2011-17)

Credit growth in Retail and Corporate segments (%, 2016-2019)

Source: Rosstat, CBR, World Bank staff calculations, IMF

10

12

14

16

18

2011 2012 2013 2014 2015 2016 2017

(% G

DP)

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Zaim business model Zaim Express (Zaim) currently has a “one product” business model with microloans being distributed by two channels: retail sales network and (much more recently) online platform.

Loans have a five steps life cycle starting with prospect client generation / identification, moving though a credit assessment to loan provisioning and closing with the reimbursement.

As we said before, Zaim Express is active in the provisioning of short-term small loans to Russian “unbanked” and “underbanked” consumers, with a total loan book standing in excess of £30mn at 2018 year-end.

Zaim Express current value proposition / business model can be described as follows:

® One product;

® Two distribution channels;

® Five steps loan life cycle.

One product Zaim is currently offering to its clients only “plain vanilla” unsecured loans with the following features:

® Small size: up to 30,000 RUB or less (ca. £360 or less);

® Short duration: Maximum duration 30 days;

® “One size fits all” interest rate: 1% daily interest rate (not to be compounded);

® Provided in cash or credited on the Zaim Express pre-paid card;

Two distribution channels Zaim Express has developed an omnichannel strategy centered on easy and fast loan apply and provisioning. Current distribution channels are two, i.e. a retail sales network and an online platform that has been recently launched.

Retail network Zaim started its operations back as of 2011 by developing a well distributed network of branches near densely populated residential communities in urban areas of Moscow and western Russia, thus being able to target relatively small populated communities.

As of now Zaim directly manages ca. 100 stores that have created a loyal client base. Indeed, the average store customer takes out loans two or three times per year and in ca. 50% of cases is a repeat client.

Online platform Retail network clients provide to Zaim a stable baseline revenue flow, but their growth potential is limited, at least if we consider only the microloan business.

In order to attract a much higher number of clients, Zaim is nowadays launching an online service as well, and has also developed a pre-paid “Zaim Express” card aimed at taking advantage of the increasing availability of ATMs and servicing the online proposition.

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Five steps loan life cycle The life cycle of loans provided by Zaim Express can be split into the following five steps moving from prospect client generation / identification / credit assessment, to loan provisioning and reimbursement.

Zaim Express: Loan life cycle

Source: Value Track Analysis

1. Prospect client generation Zaim’s marketing is essentially inbound as:

® Retail stores do naturally generate prospect clients by word of mouth in the two miles catchment area we described before;

® Online business is based on traditional SEO based digital marketing tools as Zaim managers do believe that acquiring list of prospect “digital” clients would be insufficient, leading to a very low conversion rate and, thus, to an inefficient allocation of resources.

2. Onboarding Microfinance organizations such as Zaim Express are not required to comply with “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML) norms and must have adequate systems in place to prevent criminal elements from misusing the company for money laundering and other criminal activities.

As the loans to clients are of a very small size, KYC and AML mainly relies on the execution of a proper “Customer Identification Procedures” (CIP).

Such a procedure up to a few years ago was based on face-to-face verification of necessary documents for personal identification but now, with the increasing penetration of mobile phones and other Internet-connected devices, is increasingly performed without the need for the customer to visit any office.

We’ll see later how such a non-face-to-face “remote identification” is benefitting from the Russian government push on the Digital Identity self-profiling, and how this is the game changer that has made possible digital onboarding and thus the online business for microfinance.

Credit Scoring System& Fraud-analysis

Prospect Client Generation

Loan

Collection

LOAN LIFECYCLE

Onboarding / KYC

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3. Financing authorization Before being issued, loans must be obviously authorized, based on a credit scoring assessment of applicants.

For each loan application, a detailed individualised assessment is made of the borrower including, among other checks, an assessment of the financial position of both to ensure that the loan is both affordable and sustainable.

Zaim Express performs such financing authorization process via a proprietary multi-parameters credit scoring model that runs a series of assessments including cross-referencing against database of prior defaults, personal identification records and sanction lists.

In this way, Zaim uses a mathematical regression model scoring algorithm that forecasts the likelihood of default of applicants, based on application data, Zaim’s database information, the Bureau of credit history and other information by third-party sources. Model’s parameters are regularly reviewed to determine whether any fine tuning is required.

Worthy of notice, the whole procedure takes not more than 7-8 minutes thus minimizing the possibility of clients accepting any competitors alternative offer.

4. Loan provisioning Once the client has been identified and “accepted” from a credit assessment point of view, the loan is immediately provided either in cash in the retail stores or credited on all VISA-Mastercard’s credit and debit cards or on the proprietary Zaim Express pre-paid card, issued by Mastercard, that takes advantage of the increasing availability of ATMs.

5. Loan reimbursement All back-office activities related to “live” loans are fully automated and managed by an integrated IT system, encharged of:

® Notifying to customers their key repayment date;

® Customer communications about overdue payments;

® In case of no repayment loans, submission of claims to the court or state of agency.

More in details, Zaim has an effective specialist in-house collection team that tailors the collection process to address the specifics of the non-standard customer base of its loan product.

Recovery activities comprise two main paths, being pre court letters sent to the borrower as well as court activity.

Zaim uses pre court letters to engage with the borrower in advance of the loan maturity date, however due to the small nature of the loans provided to its customers Zaim does not pursue official collections, instead after a delay in repayment of more than 90 days it fully impairs the loans and applies to the court to get official default status which implements a negative mark on the customer’s credit rating.

At the moment of loan reimbursement, Zaim’s customers may repay loans in several ways, such as:

® Zaim Express proprietary channels: Stores network, Call center, Website;

® Third party’s internet banking facilities that Zaim exploits as Contact Payment Systems thus getting able to manage cash loans in any region of Russia;

® Alternative tools such as the e-wallet and kiosks provided by QIWI, a well-known domestic provider of payment and financial services that operates an integrated network enabling payment services across online, mobile and physical channels. Nowadays, QIWI boasts a customer base of 65mn customers who pay more than RUB 39bn each month.

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What we do like about Zaim Credit System In our view, the equity story of Zaim Credit System boasts several interesting features, be them company specific or related to the overall Russian microfinance market.

® Russian microfinance market: Clear & favorable regulation framework and Supportive technological scenario resulting in a large and highly growing Total Addressable Market.

® Zaim specific: Cash generative business model leveraging a long track record in the business and a state-of-art IT backbone.

# 1 key strength of the market - Clear regulatory framework

2010 Federal Law allows Microcredit and Microfinance operations It was Federal Law No. 151-FZ, dated 2 July 2010 (“On Microfinance Activity and Microfinance Organizations”) to allow the set-up of a special category of financial organizations named Microfinance organizations (MFO), i.e. commercial or non-profit institutions other than banks specialized in the provisioning of loans on a regular basis but not subjected to strict banking regulations. Ordinary banks are not allowed to provide microfinance activities, neither directly nor indirectly.

The Law distinguishes between two types of MFOs, microcredit (MCCs) and microfinance companies (MFCs), with different requirements and allowed operating activities:

® MFCs must comply with capital requirements i.e. RUB70mn (ca. £0.84mn) of own capital, may fund themselves by issuing bonds and collect deposits and are allowed to delegate the Customer Identification Procedure;

® MCCs have no capital requirements but are restricted in their activities and sources of funding (no funding via deposits).

As of 1Q19, the number of MCCs was around 1,991 and there were only 51 MFCs, however representing ca. 54% of total consumer loan book standing at RUB174bn (ca. £ 2.13bn).

We note that Zaim Express is currently an MCC but is in the process to obtain the license to act as MFC starting as of 1H20.

1Q19 MCFs vs. MCCs: Number of active players and Payday loan book in Russia

Source: Buzko & Partners

51

1940

53.9%

46.1%

RUB 174bn1,991 MFOMFC

MCC

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The Law allows three different types of microloans:

® Microloans for entrepreneurs and companies. Loans in the amount of up to one million rubles for small business start-up, support and development.

These loans can be provided both to legal entities and individual entrepreneurs and are provided for a term of one to three years generally without pledge and pursuant to a short list of requested documents.

® Consumer microloans. Loans issued to individuals for personal needs, e.g. the purchase of major household appliances, for a term of one to six months but they can also be taken out for a term of up to two years.

A consumer loan is normally returned by several (weekly or monthly) installments.

® Payday microloans. Loans issued to individuals for personal needs for a very short term, in the event of urgent or unforeseen expenses or delays in monthly wage payments. Loan arrangements are quick and easy, but interest rates are high.

This loan has a term of seven to thirty days and its amount equals about a half of the borrower’s monthly income. A payday loan and interest on the use of money are returned by a lump sum payment on the last day of the term specified in the loan agreement.

As of the end of 2018, there were over RUB325bn (ca. £ 3.92bn) loans issued by MFOs, out of which nearly half represented by Payday loans.

Russian microloans issued per year by type

Source: Buzko & Partners

2013-19. Legal reforms to improve the regulatory environment Since 2013 the Central Bank of the Russian Federation (CBR) has been tasked as regulator and supervisor for both credit and non-credit financial institutions, giving it a substantial amount of extra authority (so-called “Super-regulator status”).

Governor of the Central Bank of Russia Ms. Elvira Nabiullina has repeatedly said that the Regulator supports microfinance in Russia as otherwise there could be an increase in the number of illegal creditors. (For more details on Ms. Nabiullina statements please see: 1) the speech at the plenary session of the State Duma of the Russian Federation, May 30th 2019; 2) the meeting with President of Russia Mr. Vladimir Putin, March 4th 2019).

At the same time, CBR believes that borrowers must be put in the condition to use microfinancing to settle their temporary financial problems without running the risk of ending up in an even worse

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situation. Indeed, if customers take more loans than they can service, it is a threat to their personal well-being and the stability of the whole financial system.

As an effect, regulation has become progressively more restrictive and this has nearly halved the number of MFOs in the market compared to five years ago, up to 1,991 companies (April 2019), thus reducing the competition for Zaim.

Number of microcredit licenses in issue 2014-2019(*)

Source: Central Bank of Russia (CBR)

(*) As of April, 2019

Indeed, Microloans have been furtherly regulated by a Federal Law issued at the end of 2013, (Federal Law 353-FZ, dated 21 December 2013, “On Consumer Loans”), and by CBR’s 2nd level regulations in July 2014, all these reforms being aimed at increasing consumer protection, by formalizing relations between borrowers and creditors, setting the limit for the maximum size of a penalty that organizations may impose on borrowers, and establishing some common principles of recovering overdue debts.

We underline that since July 1 2019, new restrictions on the maximum debt of citizens on loans taken for a period of up to one year have come into force in Russia and further tightening of the rules of microfinance organizations will occur from January 1, 2020.

Among the points addressed by regulatory reforms we mention the following.

® Daily interest rate (as % of loan). Since July 1 2019, the daily interest rate is limited to 1% (365% per annum as it cannot be compounded);

® Full cost of loans. The full cost of microloans with a term of less than 365 days including fines and penalties has been progressively reduced. Since July 1 2019, the total amount of accrued interest and penalties under a consumer credit or loan agreement up to one year will not be allowed to exceed twice the debt principal itself. Thus, if a client of a microfinance organization took out a loan of 10 thousand rubles, the company is not entitled to demand more than 30 thousand rubles from it.

Starting as of 1st of January 2020, the full cost of borrowing with all fines and penalties included is limited to 1.5 times the loan amount.

® Number of loans. The regulator has also decided to gradually reduce the maximum amount of debts that a person is allowed to have. At a certain point, individuals were allowed to have four debts, then, this number was reduced to three. In January 2019 it was cut to 2.5, in July 2019 it

1500

2000

2500

3000

3500

4000

4500

2014 2015 2016 2017 2018 2019

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was further reduced to 2.0 and from January 2020 it will go down to 1.5. In other words, this measure reduces the flat-out amount of debt that a person can have with microfinance organizations;

® Payment-to-income (PTI) limits. CBR has also implemented payment-to-income (PTI) limits, with the first step being obligatory reporting of the PTI ratio to the CBR by banks and microfinance organizations starting from October 2019. A debt burden indicator for individuals has been introduced (the debt-to-income ratio) and banks and microfinance organizations have to take into account this index when extending loans.

On June 2019, government started drafting a law to prohibit lending to borrowers whose monthly loan instalments exceed 50% of their family income.

The result is a low risk of legal claims As a result of the demanding but clear regulatory framework, we believe that the risk of receiving fines as a consequence of claims from customers is relatively low.

Indeed, we do not expect Russia to suffer the huge problems currently affecting the UK payday lending market where a number of leading players collapsed into administration, hit by a sharp rise in claims from former customers who say they have been mis-sold loans they cannot afford.

Among the players filing for administration there are CashEuroNet UK, the UK’s biggest payday lender with an estimated 25% market that went burst in October 2019 while Wonga, the former industry leader, filed for administration back in August 2018 and The Money Shop failed in June 2019.

Getting back to the Russian market, it’s worthy to give some numbers on Zaim Express itself. In the first six months of 2019, years 2018 and 2017, the Company received 627, 2305 and 871 non- monetary complaints, of which 436, 1361 and 667 were upheld and dealt with by the Zaim. The remainder were rejected by Zaim.

These complaints often relate to requests for loan restructurings, information requests and fraud complaints and usually require remedial action rather than fiscal reimbursement.

Out of these consumers’ claims, the CBR issued only 1 order in 2018 and 8 orders in 2017.

# 2 key strength of the market - Potentially huge size, further boosted by digitalization

Room for increased market penetration We saw before that the amount of payday loans is rapidly growing, with a 2012-2018 CAGR standing at 35% per year, and now accounts for ca. RUB150bn.

Despite such a tumultuous growth, at present microfinance services are still used by a very low percentage of Russian population i.e. some 1%-2% of total, to be compared with the higher than 30% of population that has no access to traditional banking service.

Therefore, Zaim management believes that the microfinance market could grow at least at 20% CAGR per year over the next four years with, by the way, a decreasing number of active players as smaller companies might not be able to cope with tighter CBR regulations.

Moving to online means multiplying growth opportunities Traditionally, payday loans takers are heavily relying on cash usage, in the form of bills and coins. This can be explained by two reasons:

® Lack of access to official banking system functionalities, i.e. debit / credit cards or wire transfers;

® Lack of alternative “digital” solutions.

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However, providing faster and cheaper access to credit to unbanked or underbanked people is not the only need to be fulfilled by regulated microfinance organizations. Also creating a more transparent system should lead to opportunities for more efficient and equal commerce, and society overall.

That’s why the Central Bank of Russia is pushing for a shift from cash to the use of digital money, also mounding on increasing mobile and internet penetration. Indeed, Russian Internet penetration figures are noteworthy (Source: The Global State of Digital by Wearesocial):

® There are currently close to 110mn internet users in Russia i.e. 76% Internet penetration;

® 85% of Russian internet users access the web every day;

® Desktop or laptop is the still preferred internet access device (68%) followed by smartphones (61%). Tablets fall far behind at 28 %.

And if we look at smartphones alone, i.e. the new generation mobile devices that are growing at the fastest pace among internet access devices, again we find that Russia ranks among the top countries both in terms of percentage penetration and of total absolute number of users.

Worldwide ranking of smartphone usage

Country Smartphone Penetration (%) Country Number (mn) of

Smartphone users

United Kingdom 82.9% China 851.2

Germany 79.9% India 345.9

United States 79.1% United States 260.2

France 77.5% Brazil 96.9

Spain 74.3% Russia 95.4

South Korea 70.4% Indonesia 83.9

Russia 66.3% Japan 72.6

Italy 60.8% Mexico 65.6

China 59.9% Germany 65.9

Japan 57.2% United Kingdom 55.5

Source: Statista

The increasing availability of smartphones and internet connections has prompted Russian authorities to introduce new ways to digitally perform the Customer Identification Procedure requested in KYC-AML procedures.

Indeed, since 2015 loans up to RUB15,000 (ca. £183) per borrower can be issued via remote simplified customers identification, i.e. without physical contact with the borrower. There are two possibilities to do so:

® First possibility, all MFOs may make use of the Unified Identification and Authentication System (USIA) which is a national digital identification system managed by a state-owned company. Currently it is estimated that more than 84mn Russian citizens are registered with USIA;

® Second possibility, client identification requirement may be satisfied by customer basic identification information, but this requires the delegation of document processing, only suitable by MFCs.

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So, we are not surprised that Microfinance services demand in Russia is growing mostly online. Online segment grew from 23% to 35% of total in 2018 and is expected to grow at 70% of total by 2022E.

On the offer side, currently only 35% of MFCs already provide online services and might increase at 50% in 2020E.

This is an opportunity for Zaim to gain market share on the online segment moving its core business towards the fintech market.

Microloans growth 2012-2018: Total vs. Online microloans

Source: Central Bank of Russia (CBR)

Microloans issued online by Russian players (RUB, bn) 2016 2017 2018 Equanta 3.3 8.8 9.5

Ezaem Moneza 1.5 3.8 9.9

Zaimer 0.9 3.4 7.2

MoneyMan 1.2 3.5 5.7

Webbankir 0.5 2.0 5.5

SrochnoDengi 0.3 1.2 1.5

Ecofinance - 1.3 2.9

Creddittech Rus 0.9 3.1 2.6

Plaztiza.ru 0.7 0.9 1.3

Konga 0.0 0.7 1.3

Do Zarplaty 0.0 0.2 0.8

Sammit and DobroZaim 0.0 0.0 0.1

Zaymigo 0.0 0.1 0.4

Credit 911 0.0 0.1 0.2

GreenMoney 0.1 0.1 0.4

Web-zaim 0.0 0.1 0.4

MigCredit 0.0 0.1 0.1

Viva Dengi 0.0 0.0 0.0

Total Online Market 9.6 29.3 49.8

Chg. % YoY 206% 70%

Source: Various

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 2017 2018

Amount funded, bln RUR Online amount funded, bln RUR

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# 3 key strength of the market - Highly cash generating business, if properly managed Payday loan provisioning is highly cash-generating business if properly managed. The math is simple, as by regulation the loan provider can earn up to 1% daily interest rate for maximum 30 days of loan duration. This means that in one year a loan provider can issue several subsequent loans and every time it can lend the initial capital plus accrued interest income.

Every RUB100 provided as of the first of January can generate at the end of year, assuming twelve monthly loans issued and no bad debt, some RUB2,320 of total accrued interest income in excess of the initial RUB100 capital. Cash on cash return stands higher than 20x while IRR stands in the “thousands” space.

Payday loan returns in the “thousands” space if we assume 1 loan issued per month and 0% bad debt Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year1

# Days 31 28 31 30 31 30 31 31 30 31 30 31 365

Capital Start of Period 100.0 131.0 167.7 219.7 285.6 374.1 486.3 637.1 834.6 1,085 1,421 1,848 100.0

Capital End of Period 131.0 167.7 219.7 285.6 374.1 486.3 637.1 834.6 1,085 1,421 1,848 2,420 2,420

Total Income 31.0 36.7 52.0 65.9 88.5 112.2 150.8 197.5 250.4 336.3 426.4 572.8 2,320


The above-mentioned returns may seem excessive but are well-adjusted if we consider the risk profile of borrowers. Indeed, we calculate that issuing twelve monthly loans and suffering a 23.2% bad debt rate would imply zero return for the lender. Higher levels of bad debt would imply a loss of the initial capital put at work.

Payday loan returns abate to zero if we assume 1 loan issued per month and 23.2% bad debt Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year1

# Days 31 28 31 30 31 30 31 31 30 31 30 31 365

Capital Start of Period 100.0 100.5 98.6 99.0 98.7 99.2 98.9 99.3 99.7 99.4 99.9 99.6 100.0

Capital End of Period 100.5 98.6 99.0 98.7 99.2 98.9 99.3 99.7 99.4 99.9 99.6 100.0 100.0

Total Income 0.5 -1.9 0.4 -0.3 0.4 -0.3 0.4 0.4 -0.3 0.4 -0.3 0.4 0.0


Summing up, financial returns for payday loans providers are:

® Directly correlated to the duration of loans, i.e. the longer the loan and the higher the return, at parity of bad debt ratio;

® Inversely correlated to bad debt ratio, i.e. the higher the bad debt ratio and the lower the return, at parity of loan duration;

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# 1 Zaim specific key strength - Long track record i.e. bugs already solved Turning our focus on company specific strength points, we underline that Zaim Express was initially authorized to operate a microfinance business back as of 2011. This means that most of mistakes that startups usually suffer in their “learning curve” of the business have been already addressed and solved. Indeed, we remind that banking on its seven years of operations, nowadays Zaim claims very interesting figures:

® 97 directly managed stores providing baseline revenue;

® Over 376k customers out of which 155k that took at least two or more loans;

® Over 10k loans issued per month, over 1mn loans issued since 2011 out of ca. 1.9mn applications.

Zaim’s Customer Base: Some statistics

Gender Male Female

67% 33%

Age 18-35 35-55 >55

45% 45% 10%

Living Area Moscow or Moscow Region

Income, RUB/ month 30,000-60,000

Source: Zaim

This means a huge amount of data to be used to improve the competitive position and the efficiency of the business, in particular as far as the credit assessment algorithm is concerned.

# 2 Zaim specific key strength – Efficient and “superfast” credit assessment platform based on machine learning and artificial intelligence techniques The performance of Zaim’s total loan assets depends on its ability to collect each expected loan instalment, including interest and principal payments, on a timely basis. And this ability depends on the strength of Zaim’s credit underwriting process to ensure the affordability of the loan instalments and to assess the sustainability of such payments based upon known factors at the time of origination.

This is a crucial point for payday lenders as Zaim as their loans have structurally higher level of arrears than consumer loan assets of banks and mortgage lending companies, due in part to their customers having less regular income than the average Russian consumer and in part to a higher percentage of their customers having an impaired credit history.

Zaim Express performs clients credit assessment process through its state-of-art platform based on proprietary machine learning and artificial intelligence techniques.

Algorithms behind the credit scoring model are sophisticated and “well educated” as they bank on the above mentioned 2mn of already finalized transactions.

This has a twofold positive implication:

® Zaim Express is able to efficiently manage large volumes of microloans applications at a time and to authorize them within 7-8 minutes;

® Average default rate on Zaim loans has been progressively reduced below 10%.

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Zaim Express: Default Rate of payday loans issued since 2014 (%) is steadily decreasing

Source: Zaim

As an effect, Zaim’s current credit losses are relatively low in relation to the average credit profile and income level of its customer base. And this is true not only for existing recurring customers but also for new clients, obviously boasting higher default rates.

Indeed, the default rates on loans to new customers in 2016FY-’17FY-’18FY-1H19 were 41%, 34%, 38% and 29% respectively and to existing customers were 10%, 8%, 8% and 7% respectively. Worthy to note, the reduction of default rates continued in July and August 2019, new customers standing at 15% while for existing customers the default rates remained broadly stable.

Average Collection Rates New Customers

Date 2016 2017 2018 1H19

Paid on time 24% 29% 31% 32%

Paid delay of 30 days 19% 20% 19% 27%

Paid with delay of 30 – 60 days 4% 3% 4% 5%


Paid delay of 90 – 120 days 1% 1% 1% 1%

Partially paid +120 days 10% 10% 5% 5%

Default 41% 34% 38% 29%

Source: Zaim

Average Collection Rates Existing Customers

Date 2016 2017 2018 1H19

Paid on time 35% 38% 37% 36%






Default 10% 8% 8% 7%

Source: Zaim

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

11/1/2014

1/1/2015

3/1/2015

5/1/2015

7/1/2015

9/1/2015

11/1/2015

1/1/2016

3/1/2016

5/1/2016

7/1/2016

9/1/2016

11/1/2016

1/1/2017

3/1/2017

5/1/2017

7/1/2017

9/1/2017

11/1/2017

1/1/2018

3/1/2018

5/1/2018

7/1/2018

9/1/2018

11/1/2018

1/1/2019

3/1/2019

5/1/2019

7/1/2019

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# 3 Zaim specific key strength – Pre-paid card issued by Mastercard It’s extremely important for loan providers aiming to boost their online business, to have the possibility to remotely load funds on to a card that works as a pre-paid debit card, i.e. the consumer is limited to using the funds loaded and no overdraft fees are provided.

A proprietary branded card is a further competitive advantage, in terms of perceived reliability and brand awareness.

And if the proprietary branded card is issued by an international card circuit such as Visa or Mastercard, this is a further strength point.

Zaim Express is the only player in Russia so far to manage a proprietary branded card issued by an international circuity (MasterCard), operating on a worldwide network.

Apart from Zaim Express there are only two firms in Russia that issue online microcredit through a self-branded card, Equanta and SrochnoDengi.

# 4 Zaim specific key strength – Scalability i.e. a world of funding and cross-selling / up-selling opportunities Zaim boasts, in our view, several valuable opportunities to scale up its business, ranging from the possibility to obtain adequate funding expected “soon”, to the enlargement of product portfolio via both proprietary and third-party products and to the geographic expansion outside in Russia.

Here follows a list of the main growth opportunities that we see ahead, ranked in “chronological” order i.e. from next quarter up to the next few years.

Opportunity # 1: Scaling up the loan book with a P2P style business model We said before that Zaim Express is currently entitled of a Microcredit license (MCC), that implies no capital requirements but among others, it also limits the scalability of business as it is forbidden to raise deposits from clients.

Zaim Express is now in the process to obtain the license to act as Microfinance company (MFC), that implies RUB70mn (ca. £0.84mn) of own capital, and the IPO is also aimed at tackling this point, but also gives the possibility to raise funds by issuing bonds and collecting money from high-net worth individuals, for a certain term at a fixed interest rate, usually in the 10%-20% region.

We expect Zaim to obtain the license in 1H20 and start this funding activity at ca. 12% interest rate thus assuming a Peer-to-Peer style business model also leveraging the opportunities provided by USIA based onboarding process.

Opportunity # 2: Widening of proprietary product portfolio Starting from 1H22 we expect Zaim Express to evolve from its “one product” strategy by introducing new proprietary products to offer to its current and prospect client base, such as:

® Title loans, i.e. secured microloans where borrowers can gain some short-term liquidity by using their vehicles as collateral. According to the CBR regulation, title loans are allowed to earn 98% annual interest rate.

Worthy to note, title loans are characterized by almost null default rate.

® Consumer microloans, i.e. unsecured loans issued to individuals for personal needs, e.g. the purchase of major household appliances up to a maximum duration of six months, that imply stage payments and 1% daily interest rate.

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Opportunity # 3: Upselling with third party products We expect Zaim Express to evaluate if to leverage its 300k plus “offline” client base and the footprint granted by its 97 stores retail network.

Indeed, both traditional banks and insurance companies could profit from the distribution of products such as microinsurance policies or credit cards trough Zaim Express stores.

Opportunity # 4: Licensing of the platform Zaim Express business model is based on an omnichannel strategy leveraging the retail network with a recently launched online distribution channel.

We cannot rule out that in the next future Zaim may decide to license its whole platform (credit scoring algorithms, call center, administrative back office) to smaller offline players based in remote Russian regions, thus acting as BPO (Business Process Outsourcing) player.

In this way Zaim could scale up its Russian business without the need to put additional capital at work.

Opportunity # 5: Internationalization We’ve seen before that the unbanked and underbanked problem is a global one, but also that microfinance operations (be them offline or online) must necessary be compliant with local regulations.

There are already a number of players worldwide, but market growth potential is so large that also having a small market share in other countries would imply a huge growth opportunity for Zaim Credit System group.

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Concerns and risks Among the concerns and risks that possibly affect the equity story of Zaim Credit System we believe that a few are not to be underestimated, ranging from the competition from pure online players to regulatory, political, social turbulence and FX risks.

#1 Concern – Competition from pure online players Zaim aims to maintain its omnichannel strategy as it believes that the retail distribution network is a value still to be exploited. At the same time, its online is based on inbound web marketing only.

On the contrary, more and more startups are growing as pure online players, leveraging on Venture Capitalist funds and on the increasing number of consumers moving into the digital only-bank world.

As far as the latter point is concerned, we note that according to statistics 43% of adults in US would move into a digital only banking and this percentage goes to 48% among those below 34 years old.

Survey: Would you consider moving your bank to an independent digital-only bank?

Source: CB Insights

If demand of digital only services is growing also on the offer side the situation is getting more favorable for “online only” players. Indeed, entry barriers are getting lower and lower thanks to technological progress (Artificial Intelligence, Machine Learning and Blockchain) and to the possibilities granted by new regulations such as PSD2. Technological progress and new regulations are indeed fostering the creation of plug-and-play APIs (Application Program Interface) which enable third-party developers to build applications and services around data from financial institutions. Just to give some examples, APIs are being used as building blocks for fintech developers in:

® Data aggregation to access cleaned consumer financial data;

® Lending to automate funding and debt underwriting;

® Onboarding to provide compliance building blocks for fintech developers.

Banking APIs

Source: CB Insights

52.0% 43.0%

46.8% 47.8%

47.6% 4.6%

62.2% 33.6%

5.0%

5.4%

5.5%

4.2%

TOTAL

18-34

35-50

51-56

BY AGE

Survey of 1,205 US adults conducted on January 2019

ALREADY HAVE

YESNO

APIs are building blocks for fintechdevelopers

ON BOA RDI N GLE N DI N GDA T A

ACCESS TO CAPITAL ACCESS TO UNDERWRITING ONBOARDING PROCESSDATA AGGREGATION

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An example of fintech startup involved in the microfinance business is the Spanish based ID Finance that has developed two fully automated microloan digital services (i.e. MoneyMan and Plazo) for several Spanish speaking countries that do not need any retail structure.

If we consider the competition coming from pure digital players as fintech startup, Zaim might be affected by an increase competition that could be tough to face, considering the potential number of new entrants and few barriers on the market.

Examples of Fintech startups involved in Lending and Credit access business

Source: CB Insights

#2 Concern – Regulatory shocks Zaim operates in a highly regulated financial service industry, and Russian operations are subject to regulations and supervision from CBR.

As we saw before, since 2010 CBR has adopted several amendments to microfinance business and consumer credit laws, imposing additional limitations on consumer lending products.

These requirements may limit Zaim activities including lending and may lead the company to seek additional capital in order to comply with applicable capital or liquidity requirements.

#3 Concern – Political / Social turbulence / International sanctions Russian economy is still heavily dependent on Oil price evolution while the political scenario might change in the next few years. Shocks on the political or macroeconomic side could thus trigger a deterioration in Russia investments climate that might have a material adverse effect on Zaim business, results of operations, financial conditions and prospects.

In addition, Russia relationship with foreign countries is not always smooth and this can deeply impact the economic and social environment. Just to give an example, we remind that back in late February 2014 it began a Russian military intervention in Ukraine that triggered international sanctions imposed by a large number of countries (United States, European Union and other countries and international organizations) against Russia and Crimea. These sanctions contributed to the collapse of the Russian ruble and to the Russian financial crisis in 2014-’15.

#4 Concern – FX risk (Rub and GBP) Zaim Express operations are conducted in Russian rubles while the listed entity Zaim Credit System plc maintains its financial reporting and also has some costs in UK sterling currency.

As a consequence, changes in exchange rates between sterling and rubles could significantly affect Zaim reported financial results.

Furthermore, Brexit could have further indirect implications that add volatility to FX and could imply a further level of uncertainty for Euro denominated investors.

23

Vertical challenger banks are specializing services for specific industries and demographics globally

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Financials Zaim issued £13.4mn of loans in the year ended 2018, generating Revenues of £10.2mn and made a pro-forma Profit of £0.8mn. As far as the near- and medium-term future evolution is concerned, we note that Zaim has already planned how to secure new funding to grow the loan book. We expect Zaim to massively increase the number of loans issued especially through the online channel that should exceed the retail channel incidence in a couple of years.

Introduction: Currency and timeframe of our analysis of financials Two points are worthy being mentioned before addressing current and forward-looking financial profile of Zaim Credit System Plc.

The first point relates to currencies, while the second one relates to the timeframe of our analysis.

Point #1: One business, two currencies i.e. RUB and GBP The underlying functional currency of the majority of the transactions and of the books and records of the group are denominated in Russian Roubles (RUB). On the contrary, UK Pounds Sterling is the presentation currency of consolidated financial statements i.e. Profit & Loss and Balance Sheet.

Translation of functional financial figures into the presentation currency is made in accordance with the requirements of International Accounting Standard IAS 21 “Effect of Changes in Foreign Exchange Rates” as follows:

® Assets and liabilities are translated into GBP at the exchange rate at the balance sheet date;

® Income and expenses are translated at the average rate for the reporting period;

® All items reflected in equity, with the exception of net profit, are translated at the rate prevailing at the time they occurred;

® All differences arising from the translation from the functional currency to the presentation currency are accounted for in the “Reserve for translation into the reporting currency”, which is included in other comprehensive income.

Point #2: 2016FY-18FY has little value in understanding the financial profile of Zaim Zaim undertook a significant restructuring during 2017 and 2018 at both the operating level and the financial one.

As far as the operating level is concerned, we remind that some important changes in regulation took place such as, on one side, the reduction of allowed daily interest rate and, on the other side, the possibility to identify new customers online without a face to face meeting.

Together, these changes determined the necessity to reduce the cost structure of retail stores network and the opportunity to start profitable online operations rapidly accessing a much larger target customer base.

As an effect, the number of stores was reduced from 241 in 2016 to 168 in 2017 and to 113 as at the end of 2018, being now stabilized at 97.

This business downscaling was also accompanied, on the financial side, by the repayment of certain liabilities under the so-called EER Master Debenture Agreement and subsequent contribution of it into equity at the end of 2018 and February 2019.

Last but not least, Zaim also used the restructuring circumstance in order to write off all the “unlikely to pay” and “nonperforming” loans it had accumulated in the past.

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For the above-mentioned reasons 2016-’18 figures have no value, in our view, in correctly profiling Zaim outlook ahead. By the way, 2018FY is to be taken into account on a pro-forma basis as if the Debt-to-Equity swap we mentioned before had taken place as of 1st of January 2018.

However, for the sake of clarity and completeness, we specify that:

® In the year ended 31 December 2016, the Group generated revenue of £13.8mn and suffered a loss of £2.7mn;

® In 2017, the Group increased its annual revenue to £15.3mn and made a loss of £12.1mn;

® For the year ended 31 December 2018, the Group generated revenues of £10.2mn and made a pro-forma profit of £0.8mn, although an unadjusted loss before tax of £1.5mn;

® In the six-month period to 30 June 2019 the group generated revenues of approximately £3.7mn and made loss before tax of approximately £0.6mn.

2019E-2024E forecasts

Loan volumes and Revenues to start back growing in 2H19E thanks to new funding Zaim issued £13.4mn of loans in the year ended 2018, and some £4.87mn for the six-month period to 30 June 2019, down YoY due to a lack of available capital. That said, the performance during the period to 30 June 2019 was in line with management expectations.

As far as the near- and medium-term future evolution is concerned, we note that Zaim has already planned how to secure new funding to grow the loan book. Indeed:

® Part of the £2.6mn IPO proceeds are going to be deployed on loan book funding;

® On 17 May 2019, Zaim entered into a loan agreement with LLC NOAH ARK 500 (“NA Loan”) for a loan facility of up to RUB30mn (approximately £380,000), at 15% fixed interest rate. This loan was originally to be repaid on 31 December 2019, but Noah have agreed to extend this date until 31 December 2020 at Zaim’s request. We underline that Zaim’s liabilities in respect of the NA Loan are secured against the Zaim shares and in the event that Zaim defaults on its repayment obligations under the NA Loan, Noah will have a right to seize the Zaim shares;

® Cash flow from operations should be reinvested in the business and the company has stated that if the Group requires additional capital to increase the speed at which it grows its loan book then it may evaluate alternate third-party sources of finance. Indeed, we remind that starting as of 1H20 the company should be allowed to raise funds dedicated at loans growth from all possible investors.

As far as the allocation of this funding is concerned, we expect the Group to:

® Maintain roughly flat its existing levels of funding dedicated to the existing 97 stores within Moscow and surrounding regions;

® Allocate all the remaining current and future availabilities to expand its online offering.

As a consequence, we believe that 2H19 should have marked the bottom in terms of loans issued by the company and a rebound should be seen from 2020E.

In 2021E and 2022E we expect the company to widely increase the number of loans issued especially trough the online channel that should exceed the retail channel incidence already as of 2021E.

Starting from 2022, we expect Zaim to launch two new additional products i.e. Title and Consumer loans, mainly distributed via the online channels.

These two products are characterized by higher loan size and higher duration than payday loans, while we expect them to be much lower in terms of absolute number of loans issued.

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All in all, we forecast the company to increase many times the number of loans issued in the next five years hitting over 900k level as of 2024E i.e. ca. 78k loans per month in 2024E to be compared with the 12k monthly figure of 2018A.

Number of loans issued in 2018A-24E 2018 2019E 2020E 2021E 2022E 2023E 2024E Total # Payday Loans (PDLs) Offline 146,673 100,500 201,000 250,000 280,000 280,000 280,000

Total # PDLs Online 0 0 70,000 302,000 433,700 540,000 622,300

Total # PDLs 146,673 100,500 271,000 552,000 713,700 820,000 902,300

Total # Title Loans Offline 547 1,353 2,668

Total # Title Loans Online 1,440 5,292 15,105

Total # Title Loans 1,987 6,664 17,773 Total # Consumer Loans Offline 547 1,353 2,668

Total # Consumer Loans Online 1,440 5,292 15,105

Total # Consumer Loans 1,987 6,664 17,773

Total # Loans issued 146,673 100,500 271,000 552,000 717,674 833,288 937,846

Source: Value Track’s analysis

Number of loans issued per month in 2018A-24E by type 2018 2019E 2020E 2021E 2022E 2023E 2024E PDLs / Month 12,223 8,375 22,583 46,000 59,475 68,333 75,192

Title Loans / Month 166 554 1,481

Consumer Loans / Month 166 554 1,481

Total # Loans / Month 12,223 8,375 22,583 46,000 59,806 69,441 78,154


In order to calculate the evolution of Zaim’s Interest Income based on the above forecasted volumes of loans issued we obviously have to make some further assumption on key driving metrics such as the average amount funded with each loan, the average duration (i.e. number of days) and the interest rate earned.

As far as payday loans are concerned, we are modelling a 1% daily interest rate, an average duration progressively increasing to 38 days (original 30 days terms plus time extension), and a ca. 7,700RUB (ca. £97) average size of the loans.

As far as the new additional products that the company wants to launch in 2022E i.e. Title loans and Consumer loans, we are taking into account much higher loan size and duration, while in terms of interest rate we are assuming Consumer Loans to stand at 1% daily and Title loans at ca. 0.15% daily interest i.e. ca. 50% of the allowed rate.

Loans key metrics at 2022E Payday Loans (PDLs) Title Loans Consumer Loans

Launched as of 2011 2022E 2022E

Average amount funded / products (RUB) 7,700 77,000 38,500

Average Interest Rate (%, daily) 1% 0.15% 1%

Average Duration (# days) 38 365 100

Source: Value Track’s analysis.

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Based on the above-mentioned metrics, we estimate Interest Income exceeding the £50mn threshold in the next six years.

Indeed, while 1H19 Interest income was down -35% YoY (and we estimate 2H19E as well) as a direct result of the lack of available capital to fund the loan book, we forecast that already as of 1H20 there should be a rebound driven by what we said before.

2018A-24E Interest Income evolution (£ ‘000) 2018PF 2019E 2020E 2021E 2022E 2023E 2024E PDLs 10,602 4,460 9,513 19,378 25,389 29,938 32,942

Title Loans 0 0 0 0 1,023 3,421 9,151

Consumer Loans 0 0 0 0 930 3,110 8,319

Total Interest Income 10,602 4,460 9,513 19,378 27,342 36,468 50,412


Operating Costs: It’s all about credit quality In terms of operating costs, we can distinguish between costs directly related to loan provisioning activity such as Interest expenses and Impairment charges and other “indirect” costs such as Staff and other Operating expenses. As we said before, (see the “What we do like about Zaim Credit System” paragraph), Impairment charges are the key driver of a higher or lower profitability of the business and need precise assumptions.

Direct Cost #1: Impairment charge on bad debt

We saw before that in the latest three years Zaim Express has progressively fine tuned its credit assessment algorithms thus effectively reducing the default rate of loans issued to clients.

As an effect, Zaim’s actual default rates on customer loans are relatively low in relation to the average credit profile and income level of its customer base and as of the end of June 2019 stood at 29% and 7% for new customers and existing (recurring) ones, respectively.

Also, recently Zaim has continued to improve its default rates for new customers which stood at 15% for July and August 2019 while for existing customers the default rates remained broadly consistent with the first half of the year.

Average Collection Rates on New Customers and on Existing (recurring) ones New clients Existing (recurring) clients

2018 1H19 2018 1H19

Paid on time 31% 32% 37% 36%






Default 38% 29% 8% 7%

Source: Zaim

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From an accounting point of view, we note that as per IFRS 9, the calculation of impairment of loans to customers requires a forward-looking approach, as it is based on credit losses expected to arise in the future, calculated on either an individual basis or a collective basis, depending on the nature of the basic portfolio of financial instruments. Such value is named Expected Credit Losses (ECL).

For financial assets for which Zaim-Express has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced, with the charge being expensed in the P&L. And if later on the client reimburses its debt, (the incentive to remove any negative marks on an individual’s credit history is an effective deterrent in Russia), there’s a positive impact on interest income. Indeed, some 13% of all interests received by Zaim in FY18 were due from fully impaired loans, sometimes up to 4 years old.

All in all, in 2018FY the impairment charge was £4.2mn and during the first half of 2019 it was lower YoY, at £1.8mn. Based on these values we calculate that:

® Gross Interest Margin, (the percentage value that we obtain dividing the Interest income gross of any impairment charge by new loans issued during a certain period) remained steady at ca. 77% in 2018 and 1H19 as a result of a high performance of the loan book;

® Net Interest Margin, (the percentage value that we obtain dividing the Interest Income net of associated impairment charges, by new loans issued), stood at 45% as of 2018FY and 38.8% as of 1H19, healthy values driven by significant improvements in the internal credit scoring system resulting in lower default rates and a higher proportion of the loans being repaid.

Zaim’s Gross & Net Margin 2018-1H19 (£’000) 2018 1H19E Total amount funded (a) 13,339 4,870

Interest Income gross of Impairments (b) 10,216 3,728

Gross Interest Margin (c) = (b) / (a) 76.6% 76.6% Total Impairment charges on PDLs -4,213 -1,840

Interest Income net of Impairments (d) 6,003 1,888

Net Interest Margin (e) = (d) / (a) 45.0% 38.8%

Source: Zaim

As far as the future evolution of impairment charges is concerned, we assume that:

® There will be a further reduction as a proportion of the outstanding loan book after a one-off adjustment for the above-mentioned introduction of IFRS 9. This has been also stated by the company in the IPO Information Memorandum;

® New clients deriving from the online channel should have higher expected default rates, as they are traditionally more opportunistic;

® Payday loans and Consumer loans should be almost aligned in terms of expected default rates, while Title loans are historically characterized by much lower default rates.

Zaim Loans: Expected default rate at 2022E Payday Loans (PDLs) Title Loans Consumer Loans

Default Rate Offline clients 8% 5% 8%

Default Rate Online clients 13% 5% 13%

Avg. Default Rate 10.5% 5% 10.5%


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Direct Cost #2: Interest expense

Interest expense represents interest payments on the borrowings. Up to 2018FY this was mainly related to the EER Loan Facility Agreement held with the shareholder.

As the loan was converted into equity at the end of 2018, in 1H19 this amount was substantially abated while 2019E-2020E interest expenses should be driven by £621k NA Loan agreement previously mentioned.

Other Costs # 1: Staff costs

Staff costs increased from £3.1mn during 2016 to £4.3mn for 2017 as a result of increase in work restructuring the business, streamlining operations and investing time and resources into advancement of the IT systems which were all developed in house.

As a consequence of the 2016FY-18FY restructuring, Zaim is now benefitting from a low-cost base. In FY18 staff costs stood at £2.3mn and further decreased during the first half of 2019 due to improvements in operational efficiencies resulting in an expense of £0.7mn.

We expect them to have a moderate increase going forward.

Other Costs #2: Operating expenses

Operating expenses include both the costs of managing the retail distribution network and those related to Back Office, IT Systems / Infrastructure and so on.

In 2018FY these costs amounted to £2.7mn, down YoY thanks to the retail network downsizing process. In 1H19 as well the cost base was down YoY, standing at £1.4mn.

In the short term we believe that the Group is well positioned to increase lending and scale up its business as sufficient investment has already been made in Zaim’s IT systems so that they are able to cope with a higher volume of loans with only a small increase in operational expenditure and benefit from the use of low cost digital marketing.

Starting as of 2021E we believe, however, that growth will have to be sustained by higher marketing and IT costs.

Please note that 2019E P&L figures should be burdened by ca. £600k non-recurring IPO costs unless the company should decide to capitalize these costs and amortize them in more years. For the time being we entirely included these non-recurring IPO costs in 2019E P&L but in the calculation of Adjusted Net Profit (Loss) they have to be written off.

Zaim’s cost breakdown 2018PF-2024E (£’000) 2018PF 2019E 2020E 2021E 2022E 2023E 2024E

Interest Expenses 79 81 55 0 0 0 0

Impairment charges for ECL 4,213 1,599 2,357 5,548 7,576 9,352 11,521

Direct Costs 4,292 1,680 2,412 5,548 7,576 9,352 11,521

Staff Costs 2,336 1,516 1,587 1,657 1,850 1,981 1,991

Operating Expenses 2,758 2,130 3,235 5,813 8,203 10,941 15,124

Non-Recurring IPO costs 0 600 0 0 0 0 0

Other Costs 5,094 4,246 4,821 7,471 10,052 12,922 15,676

Source: Zaim, Value Track’s analysis

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Net Profit The company recorded £0.8mn Net Profit in 2018PF, then as a consequence of top line drop, Zaim declined in £0.5mn Reported Net Loss in the first half of 2019, out of which ca. £250k IPO costs.

As far as future profit outlook is concerned, we expect Zaim to achieve break even already as of 1H20 and to boost Net profit growth at close to 17% CAGR 2018A-2022E getting close to £8.7mn as of 2022E and to double further within 2024E thanks to the introduction of additional products.

We note that part of the Net Profit boost is driven by the fact that corporation tax should be paid at 10% tax rate at least up to 2023FY while from 2024FY, Zaim should pay 20% “full” tax rate.

However, Zaim currently has significant unused tax losses in Russia due to historical operational losses, and such tax losses can be carried forward indefinitely.

Zaim’s P&L 2018-2024E

(£’000) 2018 2019E 2020E 2021E 2022E 2023E 2024E

Interest income 10,216 4,460 9,513 19,378 27,342 36,468 50,412

Interest expenses -79 -81 -55 0 0 0 0

Net interest income 10,137 4,380 9,459 19,378 27,342 36,468 50,412

Foreign exchange -821 -23 0 0 0 0 0

Other income 826 86 0 0 0 0 0

Operating income 10,142 4,443 9,459 19,378 27,342 36,468 50,412

Impairment charges for ECL -4,213 -1,599 -2,357 -5,548 -7,576 -9,352 -11,521

Staff Costs -2,336 -1,516 -1,587 -1,657 -1,850 -1,981 -1,991

Operating Expenses -2,758 -2,130 -3,235 -5,813 -8,203 -10,941 -15,124

Non-Recurring IPO costs 0 -600 0 0 0 0 0

Profit before tax 835 -1,403 2,280 6,360 9,713 14,194 21,776

Income tax 0 0 -259 -668 -1,005 -1,454 -4,046

Net Profit (Loss) after tax 835 -1,403 2,021 5,691 8,709 12,740 17,730

Adjusted Net Profit (Loss) 835 -803 2,021 5,691 8,709 12,740 17,730


Shareholder’s equity Zaim total equity has always been negative reaching £-0.5mn in 2018 and £-0.8mn in the first half of 2019. Starting from 2019-year end, total equity attributable to equity holders should turn into positive thanks to EER debt swap and to IPO equity injection. Starting as of 2020E we expect Equity to massively increase thanks to cumulated Net Profits. Please note that we are not assuming any change in RUB / £ exchange rate and no consequent impact on translation reserves.

Zaim’s BS 2018-2024E (£’000) 2018 2019E 2020E 2021E 2022E 2023E 2024E Share capital 2,446 2,446 2,446 2,446 2,446 2,446 2,446

Reserves -9,024 -8,030 -6,009 -317 8,391 21,132 38,862

Translation reserves 6,002 5,947 5,947 5,947 5,947 5,947 5,947

Total Equity -576 363 2,384 8,076 16,784 29,525 47,255


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Valuation Venture Capitalist based valuation methodology leads to a £6.4cent short term fair value, i.e. ca. 88% upside. Further upside should arise in the future if the planned ramp up of business progresses in line with our estimates.

£6.4cent “short term” fair equity value per share Based on £3.4cent share price, Zaim Credit System currently boasts a £14.9mn market capitalisation and is up 36% vs. its IPO price.

A realistic short-term fair value can stand, applying a Venture Capitalist based valuation methodology, at £28mn, £6.4cent per outstanding share (£5.85cent on a fully diluted basis), i.e. a ca. 88% upside. Such fair value is, in our view, poised to massively grow in the next quarters as long as the planned ramp up of business progresses in line with our estimates and visibility on 2020E and 2021E results increases.

Zaim: Stock multiples 2019E-2021E at market price and at fair value P/Sales P/E P/BV


Zaim @ £3.46cent mkt price 3.4 1.6 0.8 nm 7.5 2.7 n.m. 6.3 1.9

Zaim @ £6.40cent fair value 6.3 2.9 1.4 nm 13.8 4.9 n.m. 11.7 3.5


Long term shot. Can Zaim be the new “unicorn” in town? Fintech is one of the hottest sectors among Venture Capitalist investors, boasting crazy valuation around the globe. Latest statistics hint at 58 “unicorns” worldwide, i.e. companies with a valuation in excess of $1bn. And sometimes these unicorns are still in a pre-revenues phase.

VC backed Fintech companies: 58 “unicorns” worldwide valued $213.5bn

Source: CB Insight

17

SWEDENEUROPE

$7.6B$3.5B valuation $5.5B

$1.2B

$1.4B

$35.3B valuation

$1.2B$3.2B

$4B

$2.9B

$3.8B $2.1B (as of Q2’15)

58 fintech unicorns valued at $213.5B Global VC-backed fintech companies with a private market valuation of $1B+ (11/11/19)

UNITED KINGDOM

$1B $4.8B

SOUTH AMERICA

$10B valuation

BRAZIL

$1.1B$1.6B

$2.7B $3.5B

$1.7B

$2.7B

$2.6B

$2.6B

$1BAUSTRALIA

$2B$2.8B

$1.8B

AUSTRALIA

$1B valuation

UNITED STATESGERMANY

$3.5B

$1.5B

$10B

CHINA

INDIA

ASIA

$1.4B

$39.4B valuation

$1B

$1.5B

$1B

SOUTH KOREA

$2.2B

$1B

JAPAN

$3.5B

$1.7B

$1B

$2B

$2B $1.1B

$1.9B

$3B

$8B

$1.4B

$1B (Q4’19)

$1B (Q4’19)

$1B (Q4’19)

$1B

$1.2B

$1B

$1B

NORTH AMERICA

$1B

$1.9B

$1B

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Venture Capitalist valuation method Zaim is not a startup from the point of view of operations and market presence, as it is active since 2011. However, we can consider Zaim as a startup or scaleup company from the point of view of financials as the restructuring that took place in 2017-’19 determined a temporary stop to the lending activity that is due to start back in 1Q20 and to ramp up in the following quarters.

For these reasons, we believe appropriate to apply a very forward-looking valuation methodology such as the so-called Venture Capital method. This model is based on three main steps:

Step 1 - Estimating the expected financial KPIs of the target company in a future year (not too far into the future, generally from three to five years);

Step 2 - Applying traditional valuation techniques (e.g. Peers’ Price-Earnings and Price-to-Book Values) in order to figure out an exit value “post money”, i.e. post any capital injection that is necessary to fund the business plan;

Step 3 - Converting post money exit value into a present value by applying a considerably high discount rate aimed at capturing the business risk and the likelihood that the firm will not survive.

Step 1 – Maturity means RUB9bn loans issued p.a. In our view, Zaim Credit System could achieve its maturity in ca. four years from now, i.e. in 2024E when the company should achieve, in our base case, some RUB9bn of annual loans amount funded and ca. 1mn of loans issued per annum driven by online channel boost and by the product portfolio enlargement.

In our base case as of 2024E we have the following financial KPIs:

® Revenues –£50.4mn Interest Income;

® Profitability – £17.7mn Net Profit;

® Balance Sheet - £47.2mn Net Equity.

Step 2 – Valuation at maturity To figure out a “post money” equity value we apply short term (i.e. 2019E) peers’ multiples to 2024E Zaim’s financials.

As far as the choice of Zaim peers is concerned, and leaving Fintech crazy valuations aside for a while, we find it appropriate to evaluate Zaim’s payday loan business by taking into account comparables active in the “enlarged” Microfinance / Consumer lending business around the world, (please see the Appendix for a detailed description of companies included in our comparables analysis), such as:

® Players listed in UK and US stock markets, as Zaim is listed in UK and these countries are among the most developed ones in terms of Consumer lending business. We include in this cluster: ASA International Group, Non-Standard Finance, H&T Group, International Personal Finance, Provident Financial Plc, Elevate Credit, World Acceptance Corp., Regional Management Corp.;

® Players listed (and active) in developing countries (e.g. India and Mexico) as Zaim is currently active in Russia, a G8 country but with several features in common with emerging and developing countries. We include in this cluster: Creditaccess Grameen Limited, Crédito Real.

We calculate peers trading at ca. 1.2x P/Sales, 9.5x P/E and 1.3xP/BV 2019E median respectively, which imply €60.5mn, €61.4mn and €168mn fair 2024E Equity Value respectively.

Zaim peers: Stock multiples 2019E P/Sales P/E P/BV

Peers multiples - Average 1.8 11.7 1.5

Peers multiples - Median 1.2 9.5 1.3

Source: Market Consensus figures, Value Track analysis

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Step 3 - Discounting back Zaim’s value at maturity yields a £30mn fair value Last step, we discount back as of today (or better, January 1st 2020) the obtained valuation at maturity by taking into consideration the years necessary to arrive at maturity and the risk profile, measured by an appropriate required internal rate of return which is a function of the development phase and of the intrinsic business risk.

VC Methods: IRR to be applied to discount back as of today the valuation at maturity

Business risk

(£mn) High Medium Low

Development phase

Seed > 70% > 60% > 50%

Start-Up 70% 50% 30%

Early Development

50% 30% 20%

Source: VC market practice, Value Track analysis

Considering the Early Development phase of Zaim, we use three IRR settings in our analysis: 20% for P/Sales based value, 30% for P/BV based value and 50% for P/E based value.

Indeed, we believe that visibility on future top line evolution is high while net profit is strictly dependent on loans default rates and, more importantly, on the interest rates allowed by Central Bank of Russia. We cannot rule out that as long as Russian players become more profitable, CBR could lower the “cap” rates.

Based on these IRRs, we get a £28mn fair Equity Value as of today, due to become £40mn and £56mn in 12 and 24 months respectively if the ramp up of the business goes on as planned.

Cross check #1: Peers analysis

Comparing Zaim with listed microfinance / consumer lending companies A useful valuation hint is to cross check the £28mn fair valuation with previously selected Peers stock trading multiples, taking into account that:

® As Zaim is in a ramp up phase, we believe it appropriate to look at 2021E as reference year. For the sake of completeness, we’ll also show 2019E-’20E multiples;

® P/Sales (be it P/Fees or P/Interest Income), P/E and P/BV are the most suitable multiples.

We calculate peers trading at ca. 0.9x P/Sales, 6.5x P/E and 1.0xP/BV 2021E respectively. This means that at £28mn fair value Zaim would be trading at premium on P/sales and P/BV and at discount on P/E multiple.

Zaim peers: Stock multiples 2021E P/Sales P/E P/BV

Peers multiples - Average 1.2 7.3 1.1

Peers multiples - Median 0.9 6.5 1.0

Zaim multiples @ £28mn fair value 1.4 4.9 3.5


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Microfinance /Consumer Finance players around the world: Stock trading multiples 2019E-2021E P/Sales P/E P/BV


UK listed

ASA International Group 2.2 1.8 1.4 8.8 7.4 6.1 2.6 2.0 1.6

Non-Standard Finance 0.6 0.5 0.5 nm 5.5 3.9 0.6 0.6 0.5

H&T Group 1.0 0.9 0.9 11.6 9.7 9.4 1.3 1.2 1.1

International Personal Finance 0.3 0.3 0.3 4.6 4.3 3.8 0.6 0.6 0.5

Provident Financial Plc 1.0 1.0 0.9 11.4 8.2 7.3 1.5 1.4 1.3

Average 1.0 0.9 0.8 9.1 7.0 6.1 1.3 1.2 1.0

US listed

Elevate Credit 0.2 0.2 0.2 6.9 5.6 4.4 1.2 1.0 0.8

World Acceptance Corp 1.7 1.6 0.2 25.2 15.9 13.5 1.6 1.5 1.3

Regional Management Corp 1.0 0.9 0.8 25.2 15.9 13.5 1.6 1.5 1.3

Average 1.0 0.9 0.4 13.5 9.5 8.1 1.3 1.1 1.0

Developing countries

Creditaccess Grameen Limited 8.7 6.8 5.3 23.4 18.1 14.1 3.6 3.0 2.5

Crédito Real 1.3 1.1 1.0 4.6 4.2 4.0 0.6 0.5 0.5

Average 5.0 3.9 3.1 14.0 11.1 9.1 2.1 1.8 1.5


Cross check #2: Lending marketplaces stock trading multiples In order to cross-check Zaim peers’ multiples, we take into consideration online lending marketplaces multiples as well. These platforms can be considered as one of the possible future evolution of microlending business, even if value drivers are not always the same, depending on who is bearing the credit risk. It’s very different if a platform merely acts as an intermediary and doesn’t bear the credit risk itself, or if it bears the credit risk and earns not only intermediation fees but also Interest income.

These peers are trading at higher multiples if compared to traditional microfinance businesses i.e. ca. 1.5x P/Sales, 20xP/E and 1.3x P/BV 2021E respectively.

This means that at £28mn fair value Zaim would be trading at premium on P/BV, at massive discount on P/E and in line on P/Sales multiple.

Online lending platforms stock multiples 2019E-2021E

P/Sales P/E P/BV Company 2019E 2020E 2021E 2019E 2020E 20201E 2019E 2020E 2021E

LendingTree 4.4 3.6 3.0 nm nm 39.3 12.7 10.5 8.3

Funding Circle 2.1 1.7 1.4 nm nm nm 0.7 0.8 0.9

Lendingclub 1.6 1.5 1.4 nm nm 18.6 1.4 1.4 1.3

On Deck Capital 0.8 0.7 0.7 14.6 15.1 11.3 1.0 1.0 1.3

Average 2.2 1.9 1.6 14.6 15.1 23.1 4.0 3.4 2.9

Median 1.8 1.6 1.4 14.6 15.1 18.6 1.2 1.2 1.3


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Cross check #3: Growth adjusted stock trading multiples Higher long term expected growth rates usually couple with higher stock trading multiples, and Fintech public companies do confirm this point, with Price Earnings to Growth (PEG) ratios in the 1.5x-2.5x region.

Banking & Lending Technology stocks, in particular, usually stand in the upper part of the range, i.e. 2.0x-2.5x.

Fintech Public companies’ valuation: P/E and PEG ratios

Source: GCA Advisory (Apr. 2019)

Looking at traditional microfinance players, we observe a less straightforward relationship, but still there.

And Zaim ranks among the highest growing players both in terms of top line and bottom line.

Value Maps: Microfinance /Consumer Finance players

P/E 2020E vs. Net Income CAGR 2018A-2021E

P/Sales 2020E vs. Sales CAGR 2018A-2021E

Source: Value Track analysis NB: Outliers are not included for graphical reason

11

14.5x

17.2x

19.4x

21.1x

21.3x

22.9x

24.0x

26.3x

28.4x

28.4x

0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x

Investment Technology6

Real Estate & Mort. Tech9

Long-term growth is not necessarily correlated with FinTech public company P/E multiples or PEG ratiosFINTECH PUBLIC COMPANY VALUATION (CONT’D)

Notes: Figures represent medians of sub-sectors.Market data as of 4/30/19.Long-term EPS growth covers last 5 years.

19%

20%

10%

16%

17%

8%

14%

17%

12%

14%

2.1

2.2

2.4

2.4

2.3

2.8

1.7

1.5

1.4

1.1

2019 P/E Ratio PEG Ratio Long-Term EPS Growth

Banking & Lending Tech1

Financial SaaS3

Information Services4

Insurance Technology5

Liquidity Venues7

Payments8

Trading Technology10

Benefits Admin/Payroll2

International Personal Finance

Crédito Real

World Acceptance

CreditAccess G.

Zaim

ASA International

H&T Group

Elevate Credit

Provident Financial PlcRegional Mgmt

0

5

10

15

20

25

0 10 20 30 40 50

P/E

2020

E (x

)

Net Income CAGR 2018A-2021E (%)

H&T GroupNon-Standard Finance

ASA International

International Personal Finance

Crédito Real

Elevate Credit

World Acceptance

Regional Management Zaim

Provident Financial Plc

0

1

2

3

0 5 10 15 20 25 30

P/Sa

les 2

020E

(x)

Sales CAGR 2018A-2021E (%)

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Cross check #4: M&A deals / Fund raising rounds The list of M&A deals / funding rounds in the Fintech space is quite long but it’s definitively not easy to find data on the implied deal multiples. However, as we saw before the implied valuation in absolute terms are impressive and often higher than the $1bn “unicorn” threshold.

Founding rounds in the Fintech space: Huge implied valuations

Source: CB Insight

A useful valuation hint comes from the recently finalized £4.95mn crowdfunding round of ID Finance, an online payday lender, data and credit scoring company operating in European and Latin American markets where it addresses non-banked or underbanked population.

According to the offering page 1,223 individual investors participated in the round at a pre-money valuation of £81mn i.e. ca 1.8x and 0.9x P/Sales 2018A and 2019E respectively.

ID Finance at a glance

Source: ID Finance web site

83

Company HQDeal Date // Amount Raised

Total Disclosed Funding Select Investors Description

Sweden Aug19 // $460M $957.2M($5.5B Valuation)

Dragoneer, IVP, Blackrock, General Atlantic, DST Global

Payments infrastructure provider for e-commerce

Brazil Jul’19 // $400M $1.1B($10B Valuation)

Ribbit Capital, DST Global, Tencent Holdings, TCV, Thrive, Sequoia Capital

Robotic process automation software

OH Aug’19 // $350M $614M($3.7B Valuation)

Ribbit Capital, DST Global, Coatue Management, Tiger Global Management

Auto lending and finance management platform

CA Jul’19 // $323M $862M($7.6B Valuation)

Ribbit Capital, DST Global, Sequoia Capital, Thrive Capital, NEA

B2C digital brokerage

Australia Jul’19 // $276M $801M($1.4B Valuation)

Ironbridge Capital, SPF Investment Management, Bain Capital Credit, Tikehau Capital, Abu Dhabi Capital Group

Small to Medium Enterprise (SMEs)

Brazil Sep’19 // $250M $336M($1B Valuation)

SoftBank, Kaszek Ventures, General Atlantic, Dragoneer

Real estate tech marketplace for residential rentals

Brazil took 2 of the top deals while China and India took none10 of the top 11 deals went to existing unicorns or minted new ones ($1B+ valuation)

*Indicates unicorn deal 83

Company HQDeal Date // Amount Raised

Total Disclosed Funding Select Investors Description

Sweden Aug19 // $460M $957.2M($5.5B Valuation)

Dragoneer, IVP, Blackrock, General Atlantic, DST Global

Payments infrastructure provider for e-commerce

Brazil Jul’19 // $400M $1.1B($10B Valuation)

Ribbit Capital, DST Global, Tencent Holdings, TCV, Thrive, Sequoia Capital

Robotic process automation software

OH Aug’19 // $350M $614M($3.7B Valuation)

Ribbit Capital, DST Global, Coatue Management, Tiger Global Management

Auto lending and finance management platform

CA Jul’19 // $323M $862M($7.6B Valuation)

Ribbit Capital, DST Global, Sequoia Capital, Thrive Capital, NEA

B2C digital brokerage

Australia Jul’19 // $276M $801M($1.4B Valuation)

Ironbridge Capital, SPF Investment Management, Bain Capital Credit, Tikehau Capital, Abu Dhabi Capital Group

Small to Medium Enterprise (SMEs)

Brazil Sep’19 // $250M $336M($1B Valuation)

SoftBank, Kaszek Ventures, General Atlantic, Dragoneer

Real estate tech marketplace for residential rentals

Brazil took 2 of the top deals while China and India took none10 of the top 11 deals went to existing unicorns or minted new ones ($1B+ valuation)

*Indicates unicorn deal

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Appendix 1: Top management CV

Siro Donato Cicconi Siro Donato Cicconi is the CEO of Zaim and an experienced Italian executive director.

In late 1990s, Mr. Cicconi advised on fundraising for strategic R&D projects for several organizations (including Alfa Gomma Group and Benelli Motors SpA), managing relationships with European and Italian administrations. From 2005 to 2010, he provided corporate finance advices to several businesses. Between 2011 and 2013 he was managing director of IMT SpA. After this role, he became managing director of EER to fund Zaim.

Simon James Retter Simon James Retter is the Finance Director of Zaim.

Mr. Retter started his career at Deloitte & Touch where he qualified as Chartered Accountant specialising in corporate transactions. He undertaken several IPO’s and reverse takeovers and has a wealth of public market experience. He holds a position of CFO in Horizonte Minerals and as Finance Director of SulNOx Group.

Vladimir Golovko Vladimir Golovko is the COO of Zaim.

Between 2004 and 2011, Mr. Golovko was general manager of the Pyaterohka retail chain and previously communication director (1999-2011). He worked as sales and marketing manager at Uniland. In 2011, Mr. Golovko was COO of Zaim.

He graduated in management at Moscow State University of Commerce in 1997.

Malcom Groat Malcom Groat is the Non-Executive Chairman of Zaim.

After an early career with Pwc in London, he held CFO, COO and CEO roles in international businesses. Since 2005 has held non-executive board positions, mainly with growth ventures listed on AIM and the main markets i.e. UK’s former Milk marketing Board, Corps Security, and Baronsmead Second Venture Trust PLC. Between 2010 and 2012, he chaired a Singapore-based consulting firm and between 2013 and 2015 a UK-based technology group.

He is a Chartered Accountant and MBA graduate.

Paul J. Auger Paul J. Auger is the Non-Executive Director of Zaim.

He has been a director of Essex based and FCA regulated microlender TFS Loans Limited (“TFS”) for over 10 years. In 2009, he established TFS, focused on the guarantor loans market and currently offers guaranteed loans under £15,000 to retail consumers. At the end of 2016, FCA granted TFS full authorization.

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Appendix 2: Comparables

Choice of comparables There are plenty of players in the microfinance industry thus, it is not easy to identify suitable peers with a business model totally aligned to Zaim.

The selection of the following companies has been made by considering the geographical area and reference business, split in four groups: 1) UK based, 2) US based, 3) India and Mexico based microfinance / consumer lending companies and 4) US and UK based lending marketplace platforms.

Zaim Comparables – Business Profiles

ASA International Group Plc UK based company active in microfinance for enhancement of small-sized businesses and economically active low-income female micro-entrepreneurs. Company’s operational segments are mainly located in developed countries of Asia and Africa.

Non-Standard Finance Plc Non-Standard Finance operates in the UK non-standard consumer finance sector, providing unsecured consumer loans through its brands i.e. Loans at Home and Everyday Loans, to unbanked and underbanked people.

H&T Group Plc UK based consumer lending which provides a range of tailored financial products i.e. pawnbroking, gold purchasing and retail, personal loans, third party check encashment, buyback and prepaid debit card products.

International Personal Finance Plc UK based company, IPF is offers unsecured consumer finance products i.e. home credit cash loans, money transfer loans, home, medical and life insurances, micro-business loans and provident-branded digital loan products.

Provident Financial Plc UK based consumer lending company specialized credit cards and unsecured loans granting in UK and Ireland areas.

Elevate Credit , Inc. US based consumer lending company specialized in online credit solutions i.e. online installment loans and lines of credit to non-prime consumers in US and UK. Its products include credit building and financial wellness programs.

World Acceptance Corporation US based company that operates a small-loan consumer finance business in US and Mexico offering short-term medium-term installment loans, related credit insurance and ancillary products to unbanked or underbanked consumers.

Regional Management Corporation US based consumer finance company that provides an array of loan products as consumer, automobile and retail loans, optional payment and collateral protection insurance products to unbanked or underbanked consumers.

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CreditAccess Grameen Ltd Indian microfinance company that engages the provision of microcredit and microinsurance to rural poor and low-income households, particularly women and to micro-enterprises.

Crédito Real Mexico based company that provides consumer financing directly or by establishing financing programs with consumer financing dealers that sell to Crédito Real the collection rights from consumer financing products.

Lendingtree, Inc. US based company engaged in operating an online loan marketplace for consumers seeking loans and other credit-based offerings as mortgage loans, home equity loans and lines of credit, auto loans, credit cards, student and small business loans.

Funding Circle Holdings Plc UK based online marketplace that provides both secured and unsecured loans and allows entrepreneurs to access funding from investors and also allows them to borrow business loans for small and medium sized enterprises.

Lendingclub Corp US based fintech company that operates through its peer-to-peer lending platform enable to provide unsecured consumer loans including also automobile refinance transactions, home loans, business loans or medical expenses loans.

On Deck Capital, Inc. US based online platform that aggregates and analyzes data to assess the creditworthiness of small businesses. Its platform is focused on customer life cycle aspects i.e. customer acquisition, scoring and underwriting, funding, servicing and collections.

Source: Various, Value Track Analysis

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Appendix 3: Outstanding and Fully diluted share capital From the IPO Information Memorandum, we quote the following:

Outstanding share capital As a consequence of the IPO, Zaim Credit System Plc shareholders’ capital is made of 436.98mn ordinary shares out of which 73.23% owned by the non-listed Luxemburg based holding company named Zaim Holding SA whose controlling shareholder is Mr. Siro Donato Cicconi. Free float stands at 21.4% while the remaining 5.40% is held by minority shareholders.

Outstanding share capital

Shareholder Number of Existing

Shares Held Percentage of Existing

Shares Held

Zaim SA (1) 320,000,000 73.23%

MPM & Partners (Monaco) (2) 20,000,000 4.58%

Simon James Retter 3,600,000 0.82%

Free Float 93,375,000 21.37%

Total 436,975,000

Source: Zaim (1) Siro Cicconi wholly owns Zaim SA. (2) MPM & Partners (Monaco) holds its shares on behalf of a number of EEA based clients, none of whom hold more than 3%

of the issued share capital.

Share Option scheme As of 29 October 2019, Unapproved Share Options were granted to certain Directors and to an employee of the Group, as detailed below:

Share Option Scheme

Name of Option Holder

Shares subject to Options

Percentage of share capital on

Admission Date of Grant Exercise Period Vesting

Conditions Exercise

Price

Siro Cicconi 10,750,000 2.5% On Admission 5 Years from Admission N/A Placing Price

Vladimir Golovko 8,600,000 2.0% On Admission 5 Years from Admission (*) Placing Price

Stonedale Mgmt. (1) 6,450,000 1.5% On Admission 5 Years from Admission N/A Placing Price

Malcom Groat 2,150,000 0.5% On Admission 5 Years from Admission (**) Placing Price

Andrey Katyshkov 4,300,000 1.0% On Admission 5 Years from Admission (*) Placing Price

Total 32,250,000

Source: Zaim (*) 50% of options shall vest on the first anniversary of grant and 50% of options shall vest on the second anniversary of grant. (**) Options shall vest on the first anniversary of grant. (1) Simon Ratter is the sole director and sole shareholder of Stonedale Management and Investments Ltd.

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A term of the Options is that the respective holder shall not exercise rights under the Option (and require new Ordinary Shares to be issued to such party) to the extent that to do so would result in their interest in Ordinary Shares, or the interest of any Concert Party (as defined in the City Code) of which they are a member, being equal to or greater than 30% (the threshold under Rule 9 of the City Code above which such individual or Concert Part is required to make a mandatory offer for the outstanding shares of the Company).

A further term of the Options is that the collective number of Options shall not exceed 10% of the Ordinary Shares.

Warrants The company has also agreed to issue warrants over ordinary shares exercisable in whole or part within a period of three years at the £0.025 placing price and implying a conversion rate as 1:1.

If converted, the cash in for Zaim would be £210k.

Warrants

Name of Warranty Holder Shares subject to Warrants

Percentage of share capital on Admission Date of Grant Exercise Period Exercise Price

Optiva 770,000 0.18% On Admission 3 Years Placing Price

Green Blue 7 SA 3,200,000 0.73% On Admission 3 Years Placing Price

Other managers and advisors 4,430,000 1.01% On Admission 3 Years Placing Price

Total 8,400,000

Source: Zaim

Fully diluted share capital In case of full conversion of options and warrants, the resulting share capital would be as follows.

Fully diluted share capital

Shareholder Shares Held (#) Shares Held (% of total)

Zaim SA 330,750,000 69.25%

MPM & Partners (Monaco) 20,000,000 4.19%

Stonedale Management and Investments Ltd 10,050,000 2.10%

Other managers and advisors 4.430,000 0.93%

Andrey Katyshkov 4,300,000 0.90%

Green Blue 7 SA 3,200,000 0.67%

Malcom Groat 2,150,000 0.45%

Optiva 770,000 0.16%

Free Float 101,975,000 21.35%

Total 477, 625,000 100.0%

Source: Zaim

ValueTrack | www.value-track.com |

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