Qifu Technology: China Could Surprise Us (NASDAQ:QFIN)

Thesis Abstract

Qifu Expertise, Inc. (NASDAQ:QFIN) is a Chinese language based mostly Credit score-Tech agency. It is a digital lending firm that gives accessible and personalised credit score companies to customers and SMEs. Qifu Expertise makes use of large information, machine studying, and AI to streamline its audience’s decision-making course of. Its consumer-based audience contains younger city Chinese language professionals doing white-collar jobs.

The corporate lately introduced its Q2 2023 outcomes. Outcomes had been barely disappointing as its income was decrease than final yr’s quarter. As a result of this, the QFIN inventory did not surge a lot. The worldwide digital lending market is growing yearly, so traders are probably optimistic in regards to the firm, and the inventory hasn’t declined closely.

In my final article on QFIN, I talked about how the corporate had turn into a worthwhile enterprise over time and traded at a positive valuation. Although development has slowed since then, the corporate has continued to ship shareholder worth.

On prime of that, China’s current dedication to financial and monetary stimulus might pave the best way for a renewed surge in shopper lending.

Q2 2023 Highlights

On August 21, 2023, the corporate introduced its second-quarter outcomes. As quickly because the information of its outcomes hit the inventory market, its inventory barely surged. Regardless that the corporate noticed a decline in income yr over yr, its web earnings elevated. Its income missed the estimates, however traders look like betting on the corporate’s web earnings and elevated buyer base.

The corporate introduced its income was RMB3,914.3 million or US$539.8 million, barely decrease than RMB4,183.2 million in the identical interval final yr. Quite the opposite, its web earnings surged barely to RMB1,093.4 million or US$150.8 million, in comparison with RMB975.0 million in the identical quarter final yr. On the finish of the quarter, the corporate had round RMB8.5 billion in money and money equivalents and generated round RMB1.8 billion in money from operations. The corporate is devoted to delivering worth to shareholders. QFIN introduced a 20-30% dividend payout and a $150 million share repurchase program.

If we have a look at the corporate’s operations, it achieved vital milestones. They’ve linked over 153 monetary institutional companions and 220.6 million customers, surging 11.5% from 197.9 million 12 months in the past. In Q2, its complete facilitation and origination mortgage quantity reached RMB 124,225 million, a big improve of 26.4% from final yr, with 47 million customers having permitted credit score strains.

Development Outlook

In line with the corporate, China’s shopper credit score tech market in 2021 was RMB 5.2 trillion and is predicted to develop at a CAGR of 9.2% between 2021 and 2026. Equally, the SME Credit score-Tech market of China in 2021 was RMB 6 trillion and is predicted to develop 35.9% between 2021 and 2026. these estimates, the corporate has projected some long-term objectives.

Although the Chinese language economic system has little question confronted a big slowdown, the subsequent few quarters might see some restoration as each the PBoC and the federal government start to ease situations.

Again in August, the PBoC shocked traders with a charge minimize, and signalled that it could start easing conditions. Although pre-mature, we have already got some proof that is working. New financial institution loans jumped extra than expected in August.

To prime issues off, Beijing is now contemplating fiscal stimulus of around $137 billion, which might assist increase the economic system even additional,

With all of this, I imagine there are some causes to imagine the Chinese language shopper might shock us within the subsequent yr, and QFIN could be one of many main beneficiaries.

Valuation

QFIN inventory has been on a curler coaster experience because it introduced its Q2 outcomes. This irregular sample might be defined by the declining income.

Its EPS is estimated to be roughly $3.77, with a modest development of 0.10% YoY in FY23. In FY24, it’s anticipated to surge by 16% to $4.39. Equally, in FY25, its EPS is estimated to achieve $5.20 with an estimated YoY development of 18.5%.

Alternatively, its income is predicted to take a slight blow, declining by 8% to $2.19 billion in FY23. However in FY24, income is predicted to surge by 13.21% to achieve $2.48 billion.

QFIN inventory’s valuation metrics seem fairly favorable. QFIN’s Non-GAAP P/E ratios are 4.57 (‘TTM’) and 4.28 (‘FWD’), and its GAAP P/E ratios are 4.91 (‘TTM’) and 4.35 (‘FWD’). These numbers are 44% to 53% decrease than the sector median. It reveals that QFIN is perhaps priced decrease regarding its earnings than its rivals.

QFIN’s ahead PEG, based mostly on non-GAAP earnings, stands at 0.41, which is 65.37% beneath the sector median. A low PEG means that this is perhaps undervalued, particularly when contemplating its potential for development in future earnings.

QFIN’s EV-to-Gross sales ratios are 0.88 (‘TTM’) and 0.86 (‘FWD’), and its EV-to-EBITDA ratios are 1.71 (‘TTM’) and a couple of.77 (‘FWD’). These ratios are 70% to 85% decrease than the sector median. This reveals that, regarding its gross sales and earnings, QFIN’s complete worth (together with its debt and excluding its money and money equivalents) is significantly decrease than its sector counterparts.

In abstract, QFIN is undervalued in comparison with different shares in its sector.

Dangers

There are several types of dangers hooked up to a digital lending firm. These corporations present quick and short-term loans to debtors with zero collateral. There’s a potential threat that these debtors might default on their loans. So, the first problem for Qifu Expertise is to evaluate the monetary standing of its prospects, who’re more likely to keep away from defaulting on their loans.

Moreover, the regulatory authority might change its place on the legitimacy or tighten the foundations for them as quick loans are thought of dangerous and will create monetary hurdles for the overall populace. In such a situation, a regulatory authority might make guidelines which can be strict to observe and would create hurdles for the corporate to implement its enterprise mannequin effectively.

Any cyberattack on its platform might hurt its popularity, and its prospects might lose belief within the firm. It signifies that prospects’ information will probably be compromised. Not solely current ones but in addition new prospects will keep away from their platform. So, their platform have to be protected from any such assault.

Elevated competitors can be a serious menace to the corporate as there are a lot of gamers available in the market. Their profitable presents make the market extra aggressive, and the corporate has to enhance its USPs to extend its relevance.

Different dangers may very well be operational, fraud, and reliance on third-party techniques. These dangers might disrupt its enterprise mannequin. So, to function within the digital lending house, the corporate has to handle all these potential dangers.

Conclusion

Qifu Expertise, Inc.’s second-quarter outcomes present a dichotomy. Its revenues declined, however alternatively, its web earnings elevated. This led to a restrained inventory market response. The corporate’s expansive market technique within the on-line mortgage house, mixed with variables that counsel potential undervaluation in comparison with sector friends, paints a hopeful future. Mixed with China’s help to the economic system, this makes QFIN a compelling purchase, in my opinion.