After transforming from direct lender to loan facilitator, the fintech led by ‘internet bad boy’ Zhou Hongyi has found a way forward in the face of regulatory headwinds

Key Takeaways:

  • 360 DigiTech has reported strong third-quarter results, with both turnover and net income posting solid gains
  • Investment banks are optimistic on the company, with Morgan Stanley raising its target price to $54 – nearly double the current share price

By Fai Pui

Following Beijing’s determination to clean up China’s fintech sector, “survival” has become the mantra for all companies in the space. If making a fast and effective transformation is key to catching investors’ eyes, 360 DigiTech (QFIN.US) has done the job well. Since having its main 360 Jietiao app removed and later returned to China app stores earlier this year, the company has shifted to an asset light strategy, combined with automation. Judging from its third-quarter results, the company seems to be on the right path.

360 DigiTech’s revenue rose 24.6% year-on-year to 4.6 billion yuan ($716 million) in the three months through September. Its net income increased by 27% to 1.56 billion yuan. The company announced it will distribute a dividend of $0.14 per ordinary share, or $0.28 per American depositary share (ADS), for the third quarter, and commit to maintain its quarterly dividend payout at 15% to 20% of net income, to achieve “common prosperity” with shareholders.

The stock traded higher after the results were announced as investors welcomed the report. Its share price and volume jumped 6.5% and 86%, respectively, last Tuesday. But the initial euphoria later waned, and the shares slid 4.1% and 2.6% the next two trading days.

Investment banks remained positive on the company after the results and rated it a “buy” or “outperform,” with some lifting their target price. Morgan Stanley was the most optimistic, raising its target price from $32 to $54, versus the stock’s latest close of $26.01.

360 DigiTech has improved its delinquency rate for loans overdue by more than 90 days to 1.17%. Its average capital cost is 6.6%, Bank of Communications (BOCOM) said, which is the lowest such rate among online lending platforms BOCOM covers. BOCOM says it expects the rate to further decrease to about 6% next year. The company’s focus on small and medium-sized businesses and its asset-light transformation strategy also put it in a favorable position in the current regulatory climate, BOCOM added, raising its target price for the company to $36 from $30.

Booming Loan Assistance Business

Shares of consumer lenders like 360 DigiTech have been on a rollercoaster ride this year as China ramps up regulation of the formerly freewheeling sector. 360 DigiTech’s own stock began the year at $12 and surged to a peak of $45. But it later fell sharply as the central government stepped up its latest “rectification” campaign on the fintech sector.

360 DigiTech is a subsidiary of 360 Group, whose founder Zhou Hongyi is known as China’s “internet bad boy,” but who also has a penchant for technology innovation. Zhou’s efforts to reform the company started around the time Ant Group was forced to suspend its blockbuster IPO last November. Since then the company has shifted from its original role as a direct consumer lender to middleman facilitating loans between borrowers and traditional banks. It has also sought to assist its financial partners’ lending processes using its own technology in areas such as artificial intelligence and big data. 

The total amount of loans granted by its financial institution partners totaled 97.6 billion during the third quarter. Some 56.8% of those loans were made using the company’s light asset model and other technology solutions, up 205% year on year, according to its results. Thus it seems the transformation process is going smoothly, and the company’s future growth engine could lie in digital automation.

360 DigiTech currently owns 991 technology patents, including core technologies used on its financial platforms such as artificial intelligence algorithms, big data risk management, and AI voice robotic platforms. Those technologies are mainly used to help companies and its partners enhance the efficiency of their loan approval processes in order to lower operating costs, making them key to 360 DigiTech’s transformation.

Blue Ocean in Small Borrowers

Small and micro enterprises with no bank credit history have traditionally had difficulty applying for loans from financial institutes. After Covid-19, many such companies required emergency funds in order to tide them over through the difficult period – providing a “blue ocean” for 360 DigiTech.

The company and its financial partners recorded 8 billion yuan in loans to assist small and micro enterprises in the third quarter, up 12.7 % from the second quarter. Some 60% of those borrowers have registered capital of less than 5 million yuan, and 70% of them are “first time borrowers.”

360 DigiTech stock has performed well since its transformation, currently trading at a price-to-earnings (P/E) ratio of 10 times. But with its improving profitability the forward P/E drops to just 5 times, compared with a 5.3 times forward P/E for peer FinVolution Group (FINV.US); and 6.8 for market leader Lufax Holding Ltd. (LU.US), which is backed by financial giant Ping An Insurance.

360 DigiTech also trades at a discount compared with other U.S.-listed fintech companies. Fischer Financial (FISV.US) trades at a forward P/E of about 18 times. The relative undervaluing of Chinese fintechs shows that investors still worry about China’s regulatory uncertainty.

The latest regulatory wave dates back to the beginning of this year, when the company was among 13 of China’s biggest tech names summoned to a meeting with officials. 360 DigiTech CEO Wu Haisheng was among those who attended. He later disclosed that nearly 1,000 “rectification” issues were raised by regulators, half of which have since been resolved. Progress is expected on more issues by the end of this year. He said 360 DigiTech also plans to obtain personal credit business licenses through various means.

Its August return to China app stores shows the company has earned the title of “survivor” amid all the regulatory headwinds. Its share price has climbed from $17 early this year when the latest regulatory wave began to their recent level of $26, reflecting a gradual return of confidence by investors betting that 360 DigiTech will not only survive but may also thrive after the latest regulatory campaign.

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