360 Finance, Inc. (NASDAQ: QFIN) has carved a niche for itself in financial services by using a unique business model to cater to the credit requirements of underserved customers. By maintaining the two operating segments of Credit Driven Services and Platform Services, the China-based fintech firm reduces credit risk and loan-related guarantee liabilities.
The operating model gives it a competitive advantage over traditional loan facilitators with limited digital presence. In the fourth quarter, loan origination volumes rose 61%, even as the number of registered users surged to 135 million.
‘Capital-Light’ Push
Of late, the management has been focused on what it calls the ‘capital-light’ model, which helped the company transition from a traditional lender to a technology enabler for loan origination. In the most recent quarter, capital-light accounted for about 22% of total loans.
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“Our risk management capabilities have always been our strong suite and will help us sail through the COVID-19 outbreak. Throughout the outbreak, we managed to promptly implement a series of response measures, including full work force resume remotely by the end of February, all of which ensured a faster recovery of core business metrics,” stated CEO Haisheng Wu in the earnings report.
Buy QFIN?
Morgan Stanley recently initiated coverage of 360 Finance, with overweight rating and a price target of $12.40. Others following the company recommend buying the stock, citing the significant growth potential an relatively low valuation. When the coronavirus pandemic battered Wall Street a few weeks ago, 360 Finance was not spared and the stock slipped to an all-time low last month. However, it regained strength since then and traded slightly below $10 on Friday.
“I understand everyone’s concerned about the impact of the COVID-19 outbreak on our operations and what measures we have undertaken with funds. I would like to state with full confidence that, taking into account our 2020 year-to-date operational performance, our loan volume and the risk management has already fully recovered after a short challenging period.”
Haisheng Wu, CEO of 360 Finance
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The use of cutting-edge technology helps 360 Finance manage risk effectively and offer a unique customer experience. The platform has evolved into a reliable destination for customers looking for supplemental credit solutions. Underscoring the effectiveness of the system, delinquent loan collection rate came in at an impressive 90% last year, even after adjusting certain collection methods as stipulated by regulators.
Effective Model
The strategy of matching borrowers’ demand with supply from funding partners, while also using own funds to serve customers, has worked well so far. The management plans to indefinitely reinvest income generated by the business units in China – a strategy that is expected to eliminate withholding tax.
The company has been generating profit pretty consistently since its Wall Street debut more than a years ago. In the fourth quarter ended December 2019, broad-based revenue growth drove up the top-line by 53% to RMB2.4 billion. Earnings, meanwhile, dropped to RMB1.43 per share, reflecting elevated operating expenses that more than doubled year-over-year.
Headwinds
It goes without saying that the company might find it difficult to maintain the growth rate in the current quarter due to the pandemic-related disruptions. During his interaction with analysts at the post-earnings conference call, Wu said funding costs remained high throughout last year and warned that the trend might continue this year. Going forward, attracting new customers and effectively managing risk will hold the key to sustaining the growth momentum.
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360 Finance started trading on the Nasdaq stock exchange in December 2018, after raising $43.3 million in proceeds from the initial public offering. Since this type of business is yet to witness credit cycle, it is difficult to predict the long-term future. Meanwhile, several new players and entering the market, which calls for strategies to deal with competition. In that respect, the ongoing efforts to enhance data analytics capabilities and incorporate advanced technologies like AI bode well for 360 Finance.