After the sudden departure of the founder two years ago, Huaxing Capital will acquire two non-performing personal loan asset packages to restore its business.
<h4>Key Points:</h4>
<ul>
<li>Huaxing Capital will acquire two non-performing personal loan asset packages from a company under the online lending platform Qifu Tech for 308 million yuan.</li>
<li>Against the backdrop of China's economy still in an adjustment period and the continuous accumulation of non-performing debts, such assets, while risky, can also provide private investors with opportunities for potentially substantial returns.</li>
</ul>
Liang Wuren
As financial pressure on Chinese borrowers rises, the market is presenting private investors with potentially lucrative investment opportunities. In the context of expanding non-performing debt, Huaxing Capital Holdings Limited (1911.HK) has also joined this trend, attempting to find profit space from problem assets in its new role as a &#34;debt collector.&#34; However, recovering non-performing debts has never been easy, and Huaxing Capital itself is still in a recovery phase following the turmoil two years ago; turning bad debts into profits will likely require considerable luck.
Last Wednesday, Huaxing Capital announced that it would acquire two non-performing personal loan asset packages for 308 million yuan (approximately 44 million USD) from Qifu Tech (QFIN.US; 3660.HK) subsidiaries Fuzhou Qifu Financing Guarantee and Fuzhou Qifu Online Microloans. Among them, Fuzhou Qifu Financing Guarantee mainly provides payment guarantee services for lending partners of Qifu Tech, while Fuzhou Qifu Online Microloans directly engages in lending business.
The most attractive aspect of non-performing debt investment is that original lending institutions often sell assets at prices far below their book value, leaving considerable return space for buyers. Huaxing Capital will pay approximately 277 million yuan for non-performing loans totaling about 6.7 billion yuan under Fuzhou Qifu Financing Guarantee; for Fuzhou Qifu Online Microloans, involving debts of about 752 million yuan, the consideration is only about 31 million yuan. With such significant discounts, the potential return seems quite substantial.
Huaxing Capital stated in its announcement that the acquisition provides a good opportunity for the group, and as the market continues to recover, it expects the recovery of related debts to improve over time, expressing confidence that a considerable portion of the debts can be gradually recovered, thus bringing attractive investment returns.
However, whether non-performing loan investments can be profitable ultimately hinges on the recovery of funds. This is itself a significant variable, as even experienced professional collection agencies find it challenging to recover payments from distressed debtors, let alone participants like China Huaxing with limited experience in this field.
The non-performing loans acquired have been overdue for quite a long time, making actual recoverability even more uncertain. Among them, loans from Fuzhou Qifu Financing Guarantee have an average overdue period of over two years; the related debts of Fuzhou Qifu Online Microloans have also been overdue for an average of over 400 days. More importantly, all loans are unsecured, and if recovery fails, Huaxing Capital will have no collateral to pursue.
Although Huaxing Capital's main business is investment banking and asset management, it is not entirely without experience in dealing with defaulting borrowers. For example, in 2022, Huaxing Capital provided a loan of 25 million USD to an unrelated entity, Wallaby Medical Holding
Subsequently, the loan encountered issues, prompting Huaxing Capital to make significant impairments and confirm related impairment losses. After extending the maturity date by 12 months, Huaxing Capital completed the loan settlement in the first half of last year, which likely ended in a loss.
<h4>Accumulation of Non-Performing Debts</h4>
However, facing a few borrowers is one thing, while pursuing debts from potentially hundreds of thousands of borrowers is an entirely different challenge. This is the reality that Huaxing Capital must confront when attempting to recover non-performing debts. What complicates matters further is that consumers using non-bank lending platforms like Qifu Tech already have a relatively high risk level. Among them, those who have defaulted are often the highest-risk group. Therefore, recovering funds from these borrowers is understandably difficult.
As the slowdown in the Chinese economy continues, the scale of such non-performing debts that Huaxing Capital attempts to profit from will keep increasing. Although the officially announced non-performing loan ratio remains well below the warning level, the market generally believes that the relevant data may be underestimated, as some lending institutions delay classifying loans as non-performing through deferred recognition methods. Regardless of how overdue loans are handled, banks are under increasing pressure to accelerate the cleaning of their balance sheets, which has created a continuously expanding market for non-performing asset buyers.
To prevent the risk of struggling state-owned enterprises from spreading and impacting the overall economy, China established four major asset management companies in the late 1990s to take over non-performing loans from state-owned banks. Over the past decade, many local asset management companies have also been established across various regions. However, the scale of non-performing debts is so large that these state-owned institutions cannot fully take on the burden. At the same time, as their own impairment losses increase, asset management companies are also beginning to feel pressure, gradually weakening their ability to further acquire non-performing assets.
This has left room for private capital to enter, especially concerning non-performing debts from non-state enterprises and individuals, which have never been the core focus of asset management companies. For many years, foreign hedge funds and institutions specializing in investing in non-performing assets have been active in the Chinese market. In recent years, local institutions have also joined, including DCL Investments, established in 2015 and focused on non-performing asset investment. These investors have primarily focused on corporate loans in the past, but since the pilot program for bulk transfer of personal non-performing loans was launched in 2021, they have gradually shifted towards the personal loan sector. This pilot program has opened up institutional space for the centralized transfer of personal non-performing loans.
Huaxing Capital is attempting to venture into non-performing asset investment as part of its efforts to revitalize its business and prospects after its founder and core revenue-generating figure was detained on bribery charges in 2023, leading to significant setbacks for the company. As part of its recovery strategy, Huaxing Capital also announced plans to invest in Web 3.0, which is based on decentralized networks built on blockchain and crypto assets.
Since encountering turmoil in 2023, Huaxing Capital has been gradually advancing its recovery process. In the first half of last year, the company's financial performance improved, recording profits again driven by a rebound in the Hong Kong IPO market. Within a week of announcing its non-performing asset investment plan, Huaxing Capital's stock price rose by 16%, reflecting investors' relatively positive attitude towards the company's new direction
Currently, the stock's price-to-sales ratio (P/S) is approximately 2.2 times, which is close to the level of China International Capital Corporation (CICC) (3908.HK; 601995.SH) listed in Hong Kong at about 2.5 times. CICC is generally regarded as the largest domestic investment bank in China. In contrast, Huaxing Capital's price-to-sales ratio is also about twice that of Qifu Tech's 1.15 times, reflecting the market's generally cautious or even pessimistic view towards fintech lending institutions

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Huaxing Capital plans to acquire two non-performing personal loan asset packages under Qifu Tech for 308 million yuan. Despite facing non-performing debt risks, this move could bring considerable returns to private investors. Huaxing Capital hopes to leverage the market recovery through this acquisition, gradually recover debts, and achieve profitability. The company is in a recovery phase following the departure of its founder and is attempting to transform into a "debt collector" to seek profit opportunities

Seeking fortune in risk: Huaxing Capital tests the waters with non-performing loans