360 DigiTech (NASDAQ: QFIN) Q1 2022 Research Summary

360 DigiTech, Inc. (NASDAQ: QFIN) is a leading online consumer finance company with focus on underserved borrowers, offering a technology-empowered platform that allows financial institutions to connect with customers. The company serves loan-seekers mainly in China through its proprietary system that supports the full cycle of the lending process, from credit application to settlement.

Overview

Founded in July 2016, 360 DigiTech is headquartered in Shanghai, China. It operates as a link between retail consumers and financial institutions mainly through the 360 Jietiao app. The use of cutting-edge technology like artificial intelligence differentiates the company from mainstream banks, which also allows it to carry out activities like post-lending management and identity authentication more efficiently.

The main stages of the lending process are customer acquisition, product matching, risk management, and post-lending management. The company owes its success mainly to strategic partner 360 Group. In addition to consumer finance, it also offers insurance/banking products and wealth management services.

The Market

Others engaged in similar businesses in the U.S. include LendingTree, Inc.  (NASDAQ: TREE)  and Mr. Cooper Group Inc. In China, 360 DigiTech competes with Ant Financial, which is promoted by e-commerce giant Alibaba Group Holdings (NYSE: BABA), and Tencent Holdings’ subsidiary WeBank. Customer credit technology firm Qudian Inc. (NYSE: QD) and Yirendai (NYSE: YRD), a provider of education and home remodeling loans, also share the market with 360 DigiTech.

360 DigiTech enjoys an edge over most of its rivals in the fast-growing fintech industry, aided by the capital-light business strategy and competitive pricing. The data-driven model attracts customers to the platform and superior risk management capabilities allow the business to remain sustainable. It has stayed on the growth path consistently over the years despite rising competition and China’s changing regulatory environment.

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Read management/analysts’ comments on 360 DigiTech’s Q4 2021 earnings report

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Financial Highlights

Over the past several quarters, 360 DigiTech has reported strong revenue growth, which translated into a steady improvement in profitability. Extending the uptrend, the top line grew by a third to RMB4.42 billion in the fourth quarter of 2021, with strong contributions from the Platform Services segment. Net income, adjusted for one-off items, moved up 5% year-over-year to $1.38 billion during the three-month period.

The borrower base expanded further and reached a new high, while total loan origination volumes hovered near the record highs seen in the previous quarter. At the end of fiscal 2021, the platform connected 119 financial institutional partners and 188.2 million consumers with potential credit needs, which is up 116% from the prior year. Buoyed by the continued growth of the SME business, the management is increasing its focus on that segment by enhancing the services and pursuing new partnerships.

Business Segments

Subsidiaries:

HK Qirui International Technology Company Ltd.
Shanghai Qiyue Information Technology Co., Ltd.
Shanghai Qidi Information Technology Co., Ltd.
Beihai Qicheng Information & Technology Co., Ltd.

Variable Interest Entities:

Shanghai Qiyu Information Technology Co., Ltd.
Fuzhou 360 Online Microcredit Co., Ltd.
Fuzhou 360 Financing Guarantee Co., Ltd.
Shanghai 360 Financing Guarantee Co., Ltd.

Updates

In May 2022, 360 DigiTech provided an update on being identified by the Securities and Exchange Commission — under the Holding Foreign Companies Accountable Act — as a company that used a registered public accounting firm whose working paper cannot be inspected or investigated completely by the Public Company Accounting Oversight Board of the United States.

Earlier, the board of directors had approved a dividend of US$0.13 per ordinary share, or US$0.26 per ADS, for the fourth quarter of 2021 in accordance with the management’s dividend policy. The dividend will be paid on May 13, 2022, to shareholders of record as of April 6, 2022.

Risks

Being part of an emerging segment of the financial services industry, Chinese fintech companies are constantly scrutinized by the country’s regulators. They face crackdowns, though the environment has become more friendly and most players find the new rules favorable. It is important for companies to keep track of changes in guidelines and stay up-to-date, which is probably the biggest challenge facing them.

Online lending companies are required to adopt effective measures to ensure low delinquency rates without affecting business growth because the technology that powers their systems are still evolving. Another concern is the security of user data which is highly sensitive in nature. Also, the sector is susceptible to volatile credit cycles and macroeconomic fluctuations.

Outlook

360 DigiTech’s executives currently expect total loan facilitation and origination volumes to be between RMB410 billion and RMB450 billion in fiscal 2022, which represents a year-on-year growth of 15% to 26%. The strong guidance shows the positive momentum seen throughout last year has extended into the current fiscal year. Growth will continue to be driven by the capital-light segment, supported by stable demand and continuing technology adoption.

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Bank earnings give mixed cues amid rate hike concerns and inflationary pressures

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The Stock

360 DigiTech’s stock has been on a losing streak for about a year, with the recent market selloff adding to the weakness. It traded mostly below the long-term average and often underperformed the market. The current valuation is far below the record highs seen around one year ago. The company’s market value remained slightly below $2 billion so far this year.

Conclusion

360 DigiTech has remained largely unaffected by the pandemic, rather it benefitted from the widespread adoption of digital technologies during the crisis. The company looks well-positioned to tap into emerging opportunities in the fintech market, thanks to continued innovation. However, the changing regulatory environment both at home and in the U.S. could be a concern for the management in the near future.