In this era of universal debt, everyone's credit report doesn't look good. If this wave of market trends doesn't make money but loses money, it's probably even worse.
At the start of the bull market, there were many retail investors borrowing consumer loans on platforms to speculate in stocks. The fear of missing out clouded their judgment, leading to irrational behavior. It is illegal to use consumer loans to speculate in stocks. Not being able to make money is not scary, but going to jail for it is not worth it.
The consumer credit industry has not seen a revival for a long time, and the lack of support for incremental markets makes it even less suitable for stock speculation. However, in a period of poor industry conditions, Qifu Tech has achieved a cumulative increase of 137% since the beginning of the year, with its stock price nearing historical highs, achieving a turnaround in adversity.
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Being able to perform well in a weak industry environment and consumer softness after breaking away from strong regulation, Qifu Tech's secret lies in ensuring its own growth resilience while delivering high returns to shareholders.
I. Growth Resilience in an Optimized Landscape
The termination of Ant Group's IPO has given a yellow card to internet finance platforms, causing Chinese concept stocks in this sector to continue to struggle and become trapped in valuation quagmires.
The strong regulatory environment has accelerated industry consolidation, forcing small and medium-sized companies that are unable to achieve breakthrough development through aggressive means in the short term to be unable to compete with leading companies, leading to continuous exits during the industry reshuffle.
According to data from the People's Bank of China, as of the end of June 2024, there were a total of 5,428 small loan companies nationwide, a decrease from the peak of 8,965 companies, a reduction of 3,537 companies.
However, when industry consolidation reduces supply, demand has not decreased significantly. Leading companies, leveraging advantages such as business restructuring and complete licenses, absorb both existing and incremental demand, further expanding market share.
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Qifu Tech, hatched from 360 Group and primarily using 360 Jietiao as its main user interface, provides short-term (contract period of 10 months) small (average of 7,500 yuan per transaction) internet consumer credit products to low-income long-tail customers.
After years of trials and tribulations, the company has grown into a leading licensed internet finance platform in China, maintaining growth resilience in an optimized industry competitive landscape. In the first half of 2024, the company's platform registered users increased to 247 million, with 53.6 million service users. During the same period, revenue reached 8.313 billion yuan, a year-on-year increase of 10.65%, and net profit attributable to shareholders was 2.545 billion yuan, a year-on-year increase of 25.26%.
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However, the era of aggressive expansion in the industry has almost come to an end after continuous industry consolidation. In the second quarter of this year, Qifu Tech's proportion of repeat borrowers reached as high as 93%, making it unrealistic to acquire a large number of new customers. Industry participants are consciously adjusting their existing loans, with almost unanimous reductions in new loan volumes in the latest quarter.
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Source: Financial Report
What will obviously turn around the predicament for Qifu Tech is not a low double-digit revenue growth rate and a reduction in the volume of new loans, but the high returns brought about by its improved profitability.
II. High Returns Under Improved Profitability
The stringent regulatory environment has distorted the valuation of Qifu Tech, presenting a situation where the profit-making ability of a tech stock is valued at the PE ratio of a traditional bank stock, forcing it to offer dividends at the level of dividend stocks.
Of course, dividends are not distributed randomly, and Qifu Tech's confidence lies in the continuous optimization of its revenue structure.
In the early stages of development, credit-driven services were almost the company's sole source of income. This business model involved using its own funds to lend and providing guarantees to cooperative financial institutions, with a focus on heavy asset credit risk.
The high profits brought by the heavy asset model during periods of weak regulation were significant. However, this model was clearly unsustainable as excessive profits would attract market attention, and a single source of income would increase risk exposure.
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In 2018, the company diversified its revenue sources by expanding into light capital platform services that do not involve credit risk or involve &#34;negligible&#34; credit risk to optimize its revenue structure. By the first half of 2024, the proportion of loans matched through the light capital platform service in the loan balance exceeded 60%, becoming the largest source of business in the total loan volume.
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However, it is important to note that the changes in loan volume facilitated by platform income and platform service models are not consistent. As of the first half of this year, the proportion of platform service income to total income was only 28.7%.
This is because in platform services, Qifu Tech's main source of income is service fees, with rates only a few percentage points. In credit-driven services, the main source of income is interest differentials, with the company's loan interest rates reaching up to 24%, while China's LPR (Loan Prime Rate) has hardly ever exceeded 5%, resulting in an interest differential of close to 20%, equivalent to earning two pounds of pork with the cost of half a pound of eggs, a definite lucrative industry.
Such a large income gap also leads to inconsistencies in the changes in loan volume under the platform's revenue and platform service model.
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However, under regulatory red lines and the long-term operational needs of the company, the steps to reduce risk exposure and optimize income structure cannot stop. In loans that bear credit risks, the company also intends to increase the proportion of on-balance sheet loans, reduce off-balance sheet loans, and further diversify risks.
In on-balance sheet loans, Qifu Tech's financing method mainly involves issuing ABS. ABS is a type of security that packages a group of assets (mainly corporate receivables) into securities. Because it can be sold on the open market to multiple investors, the risk is relatively diversified, and the financing cost is relatively lower.
For example, on April 22, 2024, the one-year LPR in China was 3.45%. In the first three quarters of this year, the average issuance rate of one-year ABS products for Chinese enterprises was 2.08-2.15%. The financing cost of ABS products is significantly lower.
In the second quarter of this year, the company's service revenue driven by credit reached 2.91 billion yuan. Among them, on-balance sheet loans accounted for 28% of the total loan amount, a slight increase in proportion, leading to a 56 basis point decrease in overall financing costs compared to the previous period, with a total decrease of 132 basis points in the first half of the year.
The dual-business-driven business model has helped Qifu Tech reduce risks in a challenging environment and achieve better financial performance. The latest quarter's take rate has increased to 4.4%. This means that for the money equivalent to a customer's loan for an iPhone 15 Pro, the company can earn a pair of Huawei earphones.
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Looking at non-GAAP metrics, the company's non-GAAP return on equity reached 21.9% for the full year 2023. It further increased to 25.4% in the second quarter of this year, demonstrating the company's profitability in the tech sector.
As of August this year, the company has repurchased $361 million worth of ADS. From 2021 to date, the cumulative cash dividend is $380 million. If we consider buybacks as a special form of &#34;dividend&#34; that indirectly increases shareholder wealth, the total dividend amount should be $741 million. Based on the current market value, the dividend yield is as high as 14.25%.
In the Seeking Alpha consensus, Qifu Tech's expected P/E ratio for 2024 is approximately 6 times, a typical valuation for traditional bank stocks. The strong earning ability and generous dividend yield clearly indicate that this valuation is undervalued.
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Of course, the above dividend yield calculation method is somewhat simplistic and underestimation may also be due to the market still being wary of the Ant Group incident. Moreover, looking at the current domestic consumer market, the lending business itself is not easy, as evidenced by the contraction in new loan sizes, making it difficult to justify a high valuation. Therefore, a more cautious approach should be taken in evaluating investments in Qifu Tech.
III. Sustainability of Shareholder Returns
From the perspective of stock price performance, Qifu Tech has already achieved a turnaround from its difficulties and is approaching historical highs. This means that with reduced expectation gaps and odds, the sustainability of shareholder returns becomes more critical at this point.
For the sustainable development of the company, three main aspects are considered: 1. Regulatory risks and consumer economy, 2. Leverage ratio and bad debt provisions, 3. Determination to continuously reward shareholders.
Firstly, regarding regulatory risks in the consumer finance industry, the strong regulatory environment has somewhat eased after Ant Group's penalty and the initiation of a new round of organizational restructuring. From the company's perspective, Qifu Tech's loan interest rate is below 24%, within the red line range set in the 2021 guidelines, indicating relatively lower regulatory risks compared to enterprises with interest rates above 24% in the future.
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Recent policy releases have improved expectations for the consumer economy. Loose monetary policies are indeed beneficial for the development of the consumer finance industry. However, the transmission path from policy implementation to actual consumption improvement is lengthy, with slow short-term effects and potential long-term uncertainties, requiring continuous observation.
Secondly, the leverage ratio and bad debt provisions are crucial for the long-term development of the company. If the leverage is too high and bad debt provisions are insufficient, the company may face bankruptcy before policies take effect. According to financial data, after the contribution of a light capital model increased, the company's leverage ratio in the second quarter was 2.4 times, reaching a historical low. The provision coverage ratio in the second quarter was 421%, further increasing from 414% in the first quarter, providing a sufficient safety cushion.
Lastly, the improvement in loan quality has led to a continuous increase in the company's take rate. Looking ahead, the management believes that a take rate of 4%-4.5% is a relatively reasonable level. However, compared to the current 4.4%, there is not much room for further improvement.
The improvement in loan quality also led the company to reverse provisions of approximately 480 million yuan in the second quarter of this year. With the overall reduction in risk exposure, the company expects more provision reversals in the coming quarters. As of the second quarter of this year, Qifu Tech's total cash and cash equivalents amounted to 8.5 billion yuan, representing a 2.4% increase from the previous quarter
The current cash position and optimistic performance expectations have led the company to announce a new share repurchase plan in March 2024 without stopping. The firm's firm ability and determination to reward shareholders also gave the company the confidence to refute rumors of fraud and strongly counter the short-selling reports by bears.
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With the firm determination of the management, relatively low operational risks, and the expected improvement in the overall environment, Qifu Tech's shareholder returns are sustainable. However, it is also important to note that the platform service revenue, which does not bear credit risks, currently accounts for only 28% of the total, indicating that more time is needed to truly succeed in the light capital transformation.
Conclusion
Qifu Tech, which was the first to achieve a turnaround in the undervalued sector, has solid internal strength. However, by the time the market reacts, the current value for bottom fishing is limited, like a Davis double-click, leaving only one click.
For peers who may still find value in bottom fishing, Qifu Tech's various performance and market value management behaviors provide a good reference for investment decisions with detailed data.
Furthermore, as the financial industry exhibits clear cyclicality, this experience can also serve as preparation for the next turnaround in difficulties

QFIN

03660

QFIN-S has performed outstandingly in the industry consolidation, with a stock price increase of 137% since the beginning of the year. Despite challenges in the consumer credit industry, QFIN-S has expanded its market share through business restructuring and complete licenses, attracting both existing and new demand. The company provides small consumer credit to low-income customers, with registered users increasing to 247 million and revenue growing by 10% year-on-year

- In an era of widespread debt, many individuals face poor credit ratings, exacerbated by losses in recent market conditions.  
- Despite challenges in the consumer credit industry, Qifu Technology has achieved a 137% increase in stock price this year, focusing on resilient growth and high shareholder returns.  
- The company has optimized its revenue structure, reduced risk exposure, and maintained a strong cash position, indicating potential sustainability in shareholder returns despite ongoing regulatory risks.

Why can QFIN-S lead the way?