Company’s latest quarterly results show it’s bouncing back strongly from regulatory overhaul for former P2P lenders

Key takeaways:

•      FinVolution’s user base increased sharply in the third quarter, leading to 41% revenue growth

•      The company posted only a small net profit gain because of swelling costs

By Warren Yang

FinVolution Group (FINV.US) is making respectable strides as it rises from the ashes of its former life as a peer-to-peer (P2P) lender. The company is spending heavily to grow under a new business model as an online loan facilitator, following a years-long regulatory crackdown on its once-booming P2P lending model.

Not all investors will appreciate its swelling expenses in that transformation, even though the progress it’s making under the watchful eyes of Chinese authorities is no small feat.

The number of individuals using FinVolution’s platform, which connects consumers and businesses seeking short-term loans with banks, nearly tripled in the third quarter from a year earlier to break the 1 million mark. At the same, time the number of small business owners that borrowed through the company during the period increased almost fivefold, according to its latest quarterly results released last Thursday. Transaction volume also surged 120%.

As its user base expanded, net revenue rose about 41% to 2.5 billion yuan ($391.9 million) in the three months to September from a year earlier, the strongest quarterly growth this year. 

The results, which FinVolution CEO Zhang Feng described as “stronger than expected” on a conference call with analysts, came after the company raised its guidance for total transaction volume for this year.

Investors were underwhelmed by the report, with FinVolution’s shares sagging more than 6% the day the earnings came out, and continuing to fall in the next two trading days. Some of that was likely profit taking after a big run-up for the stock this year. Investors also may have been spooked by the company’s rapidly rising costs, which we’ll examine more closely later.

Formerly known as Ppdai, FinVolution is among a small group of former P2P lenders that have made it through China’s prolonged regulatory crackdown that peaked in early 2018, driving many of the company’s former competitors out of business. FinVolution has survived by transforming into an intermediary between borrowers and institutional lenders in late 2019.

Now that it appears to have weathered the regulatory storm, FinVolution’s focus should naturally be on reigniting growth. But its latest numbers show it isn’t hunting for new customers just for the sake of growth. Instead, the company is concentrating on high-quality borrowers to avoid waves of defaults on loans that can follow rapid growth in users.

Loans delinquent for 90 days or longer, which are typically considered non-performing in the banking industry, accounted for only 1% of the company’s total loans as of the end of September, down sharply from more than 3% a year earlier.

Improved borrower quality reduces FinVolution’s burden of setting aside provisions to repay partner lenders in case of defaults. Such charges increased about 67% year-on-year in the third quarter, a much slower pace than the total rise in transaction volume during the period.

Despite the tougher regulatory climate, China remains a promising market for consumer lenders because the country wants private consumption to play a bigger role in driving economic growth.

Traditional major lenders in China are predominantly state-run and focus on serving large businesses, especially state-owned companies that pose smaller default risks due to their possession of land for collateral and government ownership. That creates opportunities for private companies like FinVolution to expand in the space of lending to consumers and smaller, privately owned businesses.


In a diversification move, FinVolution is also stepping up an overseas expansion. Its user base in international markets increased about 78% in the third quarter from the same period in 2020, while transaction volume outside China jumped 230% to more than 1 billion yuan. In the third quarter, FinVolution signed an agreement to work with Indonesia’s PT Bank Jago and started “buy-now-pay-later” services with e-commerce platforms in Southeast Asia’s most populous nation.

The company also made headlines last month when it raised a modest 200 million yuan through its first-ever issue of asset backed securities (ABS), an investment product that has been criticized sometimes for its lack of transparency.

While FinVolution’s growth story looks compelling, it is coming at a high cost. The company’s sales and marketing expenses more than tripled year-on-year in the third quarter because of spending to acquire new customers. That came on top of a 36% increase in expenses related to loan origination and servicing.

As a result, the company’s net profit, on a diluted per-share basis, increased just 4.9%.

High costs can be a concern because at the end of the day, FinVolution operates in a highly sensitive and risky sector. Thus all the spending can be for naught if things go wrong, especially on the regulatory front. It’s true that FinVolution’s new business model is under less regulatory oversight than direct lending, which some rivals like Qudian (QD.US) are sticking to. But FinVolution still faces significant regulatory risk and uncertainty in China, which continues to account for the bulk of its business even as it eyes international expansion.

In particular, the banks that are FinVolution’s key business partners have become subject to new restrictions for lending through third-party platforms. That could make many of those banks think twice about working with intermediaries like FinVolution.

Outside China, FinVolution is also in untested waters full of new risks. For one thing, its capability to assess the riskiness of borrowers in new markets may be more limited than in China, which could lead to higher default rates than at home.

Even so, investors seem to appreciate the fact that FinVolution has carved out a solid path to new growth. Like other fintech shares, the company’s stock plunged last year in the aftermath of the regulatory clampdown. But it’s bouncing back strongly this year, up more than 130%, far outperforming shares in competitors like Qudian, which has gained less than 9%, or another online loan facilitator LexinFintech (LX.US), which is down more than 20%.

There are a few other rivals faring well in the market too. Among them are 360 DigiTech (QFIN.US), which has made a similar transformation to FinVolution’s and posted a 25% year-on-year rise in revenue for the third quarter, according to its latest results. That is more modest than FinVolution’s revenue growth during the same period. But 360 DigiTech generates larger sales, and most importantly, 360 DigiTech’s net profit grew by a decent 27%.

While FinVolution shares have gained a bit more than 360 DigiTech’s, which have risen an equally respectable 118% this year, the two stocks trade on similar earnings-to-price (P/E) ratios of slightly less than 5. That said, those levels are still well below international peers that face sharply lower regulatory risks.

It’s hard to say FinVolution is completely out of the woods yet, as its shares still down more than 50% from its 2017 IPO price in the pre-crackdown era. But investors seem to feel the stock has taken enough of a beating, and the company’s fresh growth trajectory makes it one of the more promising Chinese fintech plays in the new era of stronger regulation.

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