Key Insights:
- Qifu’s revenue grew 13% year-on-year in the fourth quarter, and its net profit rose by more than 20%
- The company announced plans to repurchase up to $350 million worth of its shares, exceeding its previous buyback amount of $132 million in the last nine months
Authored by Warren Yang
Qifu Technology Inc. QFIN is hitting all the right notes to captivate potential investors.
To begin with, the online loan facilitator exhibited robust profit growth in the closing quarter of the previous year, a notable feat amidst the challenging economic landscape of China’s current times. Yet, more significantly, Qifu disclosed intentions to allocate a substantial portion of its ample cash reserves towards its shareholders. Such announcements are often like a symphony to the ears of investors, particularly in challenging economic climates where reinvesting profits into the business may not yield substantial growth.
Qifu’s revenue showed a commendable 13% year-on-year increase to 4.5 billion yuan ($633 million) in Q4 of the preceding year, as outlined in the company’s latest earnings report unveiled last week, surpassing the S&P Capital IQ consensus. The standout performance continued in the bottom line, with a 21.5% surge in net profit to 1.1 billion yuan, propelled partly by effective cost management.
The quarterly display outshone Qifu’s overall 2023 results, a period where revenue dipped by 1.6% to 16.3 billion yuan, although profit saw a 6.6% uptick. Looking ahead to the first quarter, the company foresees a consistent performance, with CFO Alex Xu projecting a non-GAAP net profit growth of 17% to 22% year-on-year for the upcoming quarter. On this adjusted basis, Qifu’s net profit for Q4 soared by nearly a third.
In contrast, FinVolution Group FINV, a prominent rival of Qifu, disclosed a modest 6% year-on-year revenue rise coupled with a 5% profit decline for Q4, reflecting the hurdles in China’s sluggish economy. FinVolution displayed stronger performance overseas, with a revenue surge of over 50% in that segment, comprising nearly 19% of its total, as it strives to diversify beyond its domestic market.
While Qifu’s double-digit revenue and profit growth stand out in the current landscape, the highlight for investors in the latest report may be its proactive approach to significantly enhance its existing share buyback program.
Between June last year and present, Qifu repurchased $132 million of its American depository shares (ADS), with plans to intensify this pace under a newly unveiled scheme to buy back up to $350 million of its shares. The company also announced its commitment to distribute 20% to 30% of its GAAP-based net profit in dividends.
Investor response to Qifu’s heightened focus on shareholder returns was enthusiastic, propelling the company’s shares by over 10% post the latest financial release. The upward trajectory persisted the next day, with a cumulative increase of over 20% from pre-announcement levels.
Security in Payments
A breakdown of the company’s Q4 earnings unveiling a delicate balancing act between expanding its business while mitigating risks.
Qifu saw a significant decline in revenue from its “capital-light” loan facilitation, constituting a considerable share of its operations, in the fourth quarter. Under this model, Qifu primarily acts as an intermediary between banks and borrowers, extending minimal or no guarantees against loan defaults for its lending associates.
While such services are advantageous for Qifu due to fee earnings and minimal credit exposure, they may be losing appeal for the company’s lending partners as default risks rise amidst the current economic climate.
The evolving preference of its lending partners manifested in a substantial upsurge in Qifu’s loan facilitation sector, which includes default guarantees. Revenue from these services rose by a third year-on-year in Q4, with income from loans funded by Qifu’s trusts or other subsidiaries, entailing greater risk due to Qifu acting as the lender, rising by close to 50%.
Qifu’s relatively high bad-debt ratio, standing at 2.35% of total loans at the close of 2023 for loans delinquent by 90 days or more, exceeds the 1.93% for FinVolution and 1.62% for the banking realm. This implies that Qifu might need to set aside larger provisions for bad loans compared to its peers, potentially eroding its profits.
Notwithstanding its heightened exposure to possible loan defaults, Qifu compensated in Q4 through a nearly fivefold surge in revenue from its referral services. Typically a minute component of Qifu’s operations, these services involve linking borrowers with lenders using platform data, playing a crucial role in elevating its Q4 revenue.
As Qifu’s profits expanded in Q4, its cash reserves saw a modest increase to about 3.38 billion yuan by the end of the year. The generation of operational cash is a positive sign, hinting at the company’s ability to create sustained value. While the investor community appreciated Qifu’s inclination to share some of this cash, it also stirred concerns over future growth pathways and investment limitations.
For the time being, Qifu’s leadership appears keen on bolstering the company’s share price.
“We are firm in our belief that our company’s shares are substantially undervalued and the current market assessment fails to capture the company’s true worth,” stated Qifu CEO Wu Haisheng during the earnings call.
Presently, Qifu’s shares trade at a price-to-earnings (P/E) ratio of 5, surpassing FinVolution’s 4. Such valuations might appear depressed for a tech entity like Qifu, notably when considering that industry peer LendingClub LC currently boasts a P/E ratio of 21. The discount could reflect China’s economic slowdown and stricter market regulations, though critics contend it remains excessively steep.
In conclusion, Qifu’s performance in the waning months of the previous year stood commendably strong, especially amidst existing conditions, justifying the company’s strategic emphasis on proactive share repurchases to boost its value. Nonetheless, such an approach possesses limits, as investors might interpret it as a sign of diminishing growth prospects over the long haul.
This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
