Chinese stocks have been highly volatile for several years due to various factors. Despite the recent tailwinds, most Chinese stocks are still undervalued. Large Chinese companies like Alibaba and Tencent are extensively covered, but there is potential for even better valuations in smaller companies. One company that isn't covered as much is Qifu Technology, with the ticker code QFIN. In this analysis, I will investigate the company to determine if it is a viable investment opportunity.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should mention that I no longer own shares in Qifu Technology, but I have in the past. The reason I closed the position is that I want a more concentrated portfolio that focuses on compounders. If you want to see the stocks I have in my portfolio or if you want to copy it, you can find instructions on how to do so here. If you want to purchase shares or fractional shares in Qifu Technology, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Qifu Technology was founded in 2016 in Shanghai, China. Qifu Technology operates a credit-tech platform under the 360 Jietiao brand in China. The company provides credit-driven services that match borrowers with financial institutions for customer acquisition, initial credit screening, advanced risk assessment, credit evaluation, fund matching, and other post-facilitation services. Additionally, the company offers platform services, including loan facilitation and post-facilitation services to financial institution partners through an intelligent credit engine, referral services, and risk management software-as-a-service. It offers e-commerce loans, enterprise loans, and invoice loans to small and medium-sized enterprise (SME) owners. It serves financial institutions, consumers, and small- and micro-enterprises. The company was formerly known as 360 DigiTech, Inc. and changed its name to Qifu Technology in March 2023. Qifu Technology offers capital-light and capital-heavy loans. In the capital light, Qifu Technology facilitates transactions between prospective borrowers and its financial institution partners through a comprehensive suite of technology-enabled services spanning the loan lifecycle. These services range from borrower acquisition and technology-empowered credit assessment to post-facilitation services like loan performance monitoring and loan collection. For loans facilitated under the capital-light model, Qifu Technology generates income through service fees charged to financial institution partners according to pre-negotiated terms. Capital heavy is when Qifu Technology assumes credit risk because the loans are facilitated through guarantees. The capital-heavy model boasts a higher average take rate compared to the capital-light model, but it also requires Qifu Technology to bear credit risks. Qifu Technology utilizes AI to approve customers for loans, enabling individuals who may struggle to get approved through traditional banks to now secure loans at a faster rate. I believe that Qifu Technology's AI model suggests that the company has a moat. Being the market leader in terms of volume and revenue, having the best risk management (as evidenced by their low delinquency rate), and enjoying high margins all contribute to their strong competitive advantage.

Management

The CEO is Haisheng Wu. He is also the co-founder of Qifu Technology and became the CEO in 2019. I usually prefer it when founders or co-founders serve as the CEO of a company, as they typically have a strong vested interest in driving the business's growth. Prior to becoming CEO, he served as the president of Qifu Technology. Before founding Qifu Technology, he held various positions at 360 Group and Baidu. He has a bachelor's degree in Media Economics from the Communication University of China and a master's degree in Communication Studies from Peking University. It is difficult to find much information about Haisheng Wu, but he demonstrated his exceptional management skills when their flagship app, 360 Jietiao, was removed from Chinese app stores on July 8, 2021, by order of the financial regulator. This was a significant setback for the company. Under the management of Haisheng Wu, Qifu Technology managed to have their app restored just one month later on August 9th because it had then complied with all data protection regulations. I believe the swift manner in which Haisheng Wu managed to make the app comply with the regulations and get it approved demonstrates great management skills. The numbers that we will examine later provide additional support for that idea. Hence, although I couldn't find much information about Haisheng Wu, I do feel quite confident in the management.

The Numbers

The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. Qifu Technology made its IPO in late 2018, so we only have data from 2019 onwards. Qifu Technology has consistently achieved a high Return on Invested Capital (ROIC) since its initial public offering (IPO), with figures exceeding 10% in all five years for which we have data. It is a little concerning that ROIC has decreased over the past two years and reached its lowest level in 2023. The decrease was due to macroeconomic factors, which hopefully will improve and result in an increase in ROIC. However, looking at the bigger picture, it is not a concern when a company manages to deliver a Return on Invested Capital (ROIC) of nearly 20% in its worst year. Nonetheless, it is worth monitoring moving forward as you would like to see ROIC increasing.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These numbers are encouraging as Qifu Technology has managed to increase its equity every year since its IPO, even during 2022 and 2023, which have been challenging years for Qifu Technology. With only five years of data available, Qifu Technology stands out as a textbook example of desirable equity growth, increasing by more than 10% annually.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Qifu Technology has managed to deliver a positive free cash flow every year since its IPO, which is very encouraging. Another positive indicator is that the free cash flow has increased every year, reaching its peak in 2023. The levered free cash flow margin has consistently been high. Although it has not increased every year, it reached its peak in 2023, which is another positive indicator. The free cash flow yield indicates that the stocks are trading at a very low valuation, but we will revisit that later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. However, it is not possible to calculate the financial ratios for Qifu Technology as the company has no debt. In fact, Qifu Technology has never had any debt since its initial public offering (IPO), which is another positive sign.

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Risks

Based on my findings so far, I believe that Qifu Technology is an intriguing company. However, no investment is without risk, and Qifu Technology also has its fair share of risks. One risk is macroeconomics. Management has mentioned that the consumer credit industry entered the post-pandemic era in 2023. As China navigated a bumpy journey towards economic recovery, consumers within the high-quality segment were becoming increasingly cautious about borrowing. Simultaneously, certain user segments began to experience difficulties with repayments due to high youth unemployment rates. The deceleration in the overall consumer credit market's momentum also led to a decline in the marginal efficiency of incremental growth of Qifu Technology. Management has also mentioned that the macroeconomic recovery has progressed slower than they had hoped, and consumer sentiment remained muted. Thus, they believe that the macroeconomic uncertainties will persist in 2024.

Another risk is that the online consumer finance industry is still new in China. It means that the regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. We have already seen that China's Supreme People's Court has reduced the cap on private lending rates. Although the management of Qifu Technology has previously expressed their expectation of a more defined regulatory framework for the entire industry moving forward, it is possible that we will see additional regulations in the future due to the industry's relative newness. Furthermore, the credit-tech industry in China has not yet experienced a complete credit cycle. The market players in the industry, including Qifu Technology, may not be able to respond effectively to changes in market conditions and maintain steady business growth as the industry transitions to a new stage.

Competition. The credit technology industry in China is highly competitive and constantly evolving. Qifu Technology primarily faces competition from credit-tech platforms that target the consumer credit-tech market. However, traditional financial institutions may invest in technology and enter the consumer Credit-Tech market as well. These financial institutions have significantly more financial, technical, marketing, and other resources than Qifu Technology. They may be able to allocate greater resources to the development, promotion, sale, and support of their platforms. Competitors may implement specific procedures to reduce their fees in response to the current or potential regulations in China on interest rates and fees charged by Credit-Tech platforms. Borrowers are generally sensitive to interest rates and have less brand loyalty.

Reasons to invest

There are also numerous reasons to invest in Qifu Technology. One reason is a change in strategy. Qifu Technology shifted its operational strategy to prioritize efficiency over scale. Investors can expect better earnings growth than loan volume growth from Qifu Technology. Qifu Technology has made substantial efforts to improve its overall profitability and believes that its profit will increase in 2024. Qifu Technology has focused on reducing lower quality or less efficient assets to enhance the return on assets in their loan portfolio. Enhancing and differentiating their product offerings to increase user engagement and long-term customer value. Improving operational efficiency through the implementation of large language models has led to a decrease in unit acquisition costs by approximately 9%. Qifu Technology has recently tightened its credit standards and refined its risk strategies to enhance its risk metrics. This move is expected to boost asset allocation efficiency and profitability.

New customers. In 2023, Qifu Technology experienced a significant enhancement in its overall acquisition efficiency. While the number of total new users with approved credit lines increased by 7% compared to 2022, Qifu Technology's sales and marketing expenses decreased by 12%. Qifu Technology expects to see modestly lower customer acquisition costs in 2024 due to improving efficiency and a controlled pace. Furthermore, Qifu Technology will continue to focus on re-energizing its existing user base, as repeat borrowers historically contribute the vast majority of their business. One way to achieve this is through its recently launched loyalty program, which caters to various user needs and enhances the engagement of their existing users. By offering a wide range of value-added services, Qifu Technology improved its user retention. Going forward, Qifu Technology will continue to enrich its product offerings and implement differentiated strategies to create value for users, ultimately boosting its users' lifetime value.

Dividends and buybacks. In 2023, Qifu Technology returned significant value to its shareholders by distributing US$170 million in cash dividends for the year and repurchasing $132 million worth of shares since launching the buyback program in June 2023. In June 2023, Qifu Technology announced a share repurchase plan to buy back up to $150 million over a 12-month period. However, management had already completed the entire buyback program by the end of March 2024. Thus, the Board has approved a new share repurchase plan to buy back up to $350 million worth of its shares over a 12-month period starting in April 2024. The share repurchase plan further demonstrates the management's confidence and commitment to the future of the company and their intention to consistently use share repurchase plans to achieve additional EPS accretion in the long run. The Board also reaffirmed the current dividend policy, stating that Qifu Technology will distribute 20% to 30% of its net income as cash dividends to shareholders semiannually. Management has mentioned that returning value to shareholders is a crucial long-term strategy for the company, and they will continue to do so year after year.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first calculation is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,67, which is from the year 2023. I have selected a projected future EPS growth rate of 10%. Finbox expects EPS to grow by 17,7% in the next five years, but I'm more conservative. Additionally, I have selected a projected future P/E ratio of 20, which is double the growth rate. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $47,06. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Qifu Technology at a price of $23,53 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.003, and capital expenditures were 12. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 8,4 in our calculations. The tax provision was 142. We have 161,5 outstanding shares. Hence, the calculation will be as follows: (1.003 – 8,4 + 142) / 161,5 x 10 = $70,38 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Qifu Technology's Free Cash Flow Per Share at $6,14 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $77,24.

Conclusion

After investigating Qifu Technology, I find the company intriguing. We don't have much information about management, but I appreciate it when management are founders. Haisheng Wu demonstrated his exceptional management skills when their flagship app, 360 Jietiao, was removed from Chinese app stores. Qifu Technology faces some macroeconomic challenges in China and is cautious about borrowing. Qifu Technology operates in a new industry, and we may anticipate more regulations in the future. The Credit-Tech industry in China has yet to experience a complete credit cycle. Hence, it is uncertain whether Qifu Technology can effectively adapt to changes in market conditions and sustain consistent business growth. The credit technology industry in China is highly competitive and rapidly evolving. We may witness the entry of larger companies into the industry, intensifying competition for Qifu Technology. Furthermore, borrowers are typically sensitive to interest rates and have less brand loyalty, which means they could easily switch to a competitor. Qifu Technology has decided to change its strategy to prioritize efficiency over scale, which is expected to lead to improved overall profitability in the future. Qifu Technology is acquiring new customers at a lower cost, and its loyalty program has improved retention of its current customers. Thus, they could significantly increase their customer base moving forward. Qifu Technology is shareholder-friendly as they are aggressively buying back shares, while also committed to paying a dividend. I like Qifu Technology, but there are still some uncertainties regarding the industry. Therefore, I will not be purchasing Qifu Technology stocks at this time. However, if you are willing to take the risk, a small position in Qifu Technology may be intriguing.

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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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