360 Finance (NASDAQ: QFIN) Q2 2020 Research Summary

Ticker	QFIN
Exchange	NASDAQ
Founded	2016
Headquarters	China
Industry	Financial Services
Market Cap	US$1.99 billion
Employees	1,891

Incorporated in 2016, 360 Finance Inc. (NASDAQ: QFIN) has carved a niche for itself in the field of consumer credit. The platform provides credit to underserved borrowers in collaboration with funding partners and connects more than one billion mobile devices, offering various products through a process supported by effective risk management.

The China-based financial service firm’s core product is mostly used as a supplement to credit card debt, which makes it unique in the category. The simple and transparent lending process makes the products attractive to borrowers, mostly youngsters. The company made its Wall Street debut in late 2018 and started trading at the NASDAQ stock exchange under the ticker symbol QFIN. Fuzhou Microcredit, 360 Finance’s microcredit arm, was established in March 2017.

Subsidiaries

1. HK Qirui International Technology Company – (June 2018)
2. Shanghai Qiyue Information & Technology Co. — (August 2018)
3. Shanghai Qiyu Information & Technology Co. — (July 2016)
4. Fuzhou 360 Online Microcredit Co. — (March 2017)
5. Fuzhou 360 Financing Guarantee Co. — (June 2018)
6. Shanghai 360 Financing Guarantee Co. — (May 2019)

Business Segments

An emerging area of the business is Platform Services, which includes both loan origination and referral services and operates based on the ‘capital-light’ model. In the final quarter of 2019, capital-light accounted for about 22% of total loans originated. The introduction of the capital-light model last year marked the bank’s transition into a technology enabler from a traditional loan facilitator.

The other business segment is the relatively capital-heavy Credit Driven services – the main activities include matching of borrowers with funding sources, incremental credit assessment, collection, and other services to facilitate transactions.

Industry

Consumer lending is one of the fast-evolving financial services in China, with the main players being commercial banks, licensed consumer finance companies, and Internet-based consumer finance platforms. The steady growth of digital technology in the past few years, along with favorable government policies, has been the main reason behind the expansion of the online consumer finance market to the current levels.

Strategy

The extensive use of technology has helped 360 Finance in collaborating with traditional banks in a hassle-free manner. Such tie-ups benefit from the company’s customer acquisition prowess and advanced online platform. They also provide access to important banking licenses and create a backdrop for meeting regulatory compliance.  

The customer acquisition strategy and technological innovation are supported by 360 Group, the company’s main financing partner and borrower-acquisition channel. Of late, the management has been focused on diversifying the funding sources to tackle potential regulatory revisions.

The main factors that give the company an edge over rivals are the large volume of data it holds and access to multiple sources for gathering borrower information –  a valuable asset for any online consumer lending firm. It also benefits from the proprietary risk management system and competitive pricing. Moreover, proper care is taken to protect customers’ privacy at every stage of the loan distribution process, while ensuring convenience of navigating the many external platforms that constitute the digital ecosystem created by the company.

One of the key strategies set by the management at the beginning of the fiscal year was ‘scalable expansion of the business.’ The recent acquisition of a major stake in Kincheng Bank is seen as an important step in that direction.

Competition

Since the online consumer finance market is still at the nascent stage, the related regulatory framework is yet to fully evolve, which makes it difficult to analyze the segment’s long-term prospects. With more and more players entering the digital credit marketplace, competition is increasing and 360 Finance is not immune to it.

Among peers, customer credit technology firm Qudian Inc. (NYSE: QD) operates in the domestic market through its two segments namely Instalment Credit Services that involve both cash and merchandise credit services and Transaction Services, which offers loan recommendation and referral services to financial service providers. Yirendai (NYSE: YRD), with a market cap of about $338 million, is a favorite among investors. It offers various products including express and vertical loans, mainly for home remodels, travel, and education.

Key Metrics

As of December 2019, 360 Finance facilitated more than $46.8 billion in loans to around 16 million borrowers. The commendable feat was achieved in partnership with 81 institutional funding partners comprising peer-to-peer associates and financial institutions. In the first quarter of 2020, revenues surged 58% annually to RMB3.2 billion, aided by the steady growth in both Credit Driven Services and Platform Services.

However, elevated costs weighed on margins and net profit dropped 68% to RMB255 million in the March-quarter when the markets were devastated by the pandemic-induced disruption. On the positive side, funding and user acquisition costs are on a declining trend. Since last year, there has been a three-fold growth in 360 Finance’s financial institution partners even as the number of cities covered climbed to 50 from 14 a year earlier.

Risks

In China, the primary challenge facing non-traditional financial services providers is the unpredictable regulatory environment, which often puts pressure on asset quality. When it comes to the full-year outlook, the deepening economic uncertainties, in the wake of the virus outbreak, are expected to affect the demand for credit and overall loan originations. The nature of 360 Finance’s business is such that it is often influenced by credit cycles and changes in the general economy.

[irp posts=”63069″]

Stock

After reaching a peak in early 2019, 360 Finance’s stock had traded almost flat for more than a year, before changing course and making strong gains this month. Interestingly, the stock has remained resilient to the recent market turmoil as consistent customer addition and positive top-line performance continue to make it an investor’s favorite. The impressive target price and buy rating point to a further uptick in the company’s market value, which is hovering near the US$2-billion mark.

Recent Developments

On June 5, 360 Group acquired a 30% stake in Kincheng Bank of Tianjin Co., a full-fledged financial services provider, becoming the latter’s largest stakeholder. The deal has strengthened the ongoing association between the two companies in the key areas of customer service and technology. Earlier this month, 360 Finance appointed Alex Xu as its chief financial officer, to succeed Jiang Wu.

Outlook

Currently, the company is following a technology-centric strategy, while also diversifying its funding sources to banks, consumer finance companies, and peer-to-peer lending platforms. The management is also exploring alternative funding initiatives and aims to enhance the loan origination volume of Platform Services to 35-40% from the current 20%, taking advantage of the low-risk factor.

Since credit cardholders account for about 70% of its customers, 360 Finance can count on the steady growth of the credit card market. Going forward, the main focus will be on preserving liquidity and maintaining asset quality. For the management, expansion of market share would be a priority in the post-COVID era.

Conclusion

The Chinese consumer finance market is on the threshold of a major transformation, partly driven by the shift in the government’s economic policies that puts additional stress on household consumption. The rapid adoption of internet-based banking services bodes well for online consumer finance companies. This highly regulated segment of the banking sector is going to witness major changes in the future.

[irp posts=”62932″]

_____