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Qifu Technology: An overlooked Chinese company?

Opdateret: 30. okt. 2023


Chinese stocks have been highly volatile for several years due to various factors, which I will discuss later in this analysis.Most stocks are still beaten down despite the recent tailwinds we have seen. Large Chinese companies such as Alibaba and Tencent are covered in depth, but we might see 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 possible investment.


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.


This analysis will be a bit different from what you are used to read in my blog. Qifu Technology did their IPO in late 2018, meaning I don't have access to the historical numbers dating back longer than that. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to get different numbers from various companies.


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 purchaseshares or fractional shares in Qifu Technology, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.



Qifu Technology is a Chinese company that describes itself as a data-driven, technology-empowered digital platform. In short, it is almost like the Chinese version of Upstart that I have previously written about. They use AI to approve customers for loans. With Upstart, this means that customers who wouldn't have been approved through traditional banks can nowget approved. Additionally, the approval process is much faster. However, Qifu Technology also distinguishes itself from Upstart by having three different segments: capital heavy, capital light, and SME lending. Capital heavy is when Qifu Technology assumes credit risk as the loans are facilitated through guarantees. Capital Light is a company that provides risk assessment services to traditional banks without assuming any risk. SME lending, which they just launched last year. As with Upstart, I believe that the AI model implies that Qifu Technology possesses 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.


Their 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 drivingthe 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 theCommunication 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 8th, 2021, by order of the financial regulator. Thiswas a significant setback for the company. However, under the management of Haisheng Wu, Qifu Technology managed to have their app restored just one month later on August 9th, as 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 itapproved demonstrates great management skills. The numbers that we look at later further support that notion. Hence, although I couldn't find much information about Haisheng Wu, I do feel quite confident in the management.


I believe that Qifu Technology now has a moat, which will strengthen as they gather more data to enhance their AI model. I don't have much information about the management, but I believe that the CEO has demonstrated his ability to performwell under pressure and has the potential to drive the company's growth. Later, I will use a discounted cash flow model to calculate a price for Qifu Technology. But before I do that, let's take a look at some key financial metrics.


Below, we present some key financial metrics from Qifu Technology. At first glance, it is easy to see that 2022 was a challenging year for Qifu Technology due to COVID-19 lockdowns. Additionally, 2022 marks the first year in which Qifu Technology did not increase their revenue. Margins have also decreased from last year due to the challenges that Qifu Technology faced in 2022. However, achieving a gross profit margin above 70%, an operating margin above 27%, and EBITDA and EBIT margins above 50% is still impressive, and these margins continue to be intriguing. As revenue and margins decreased, it is not surprising that EPS also decreased. Nonetheless, COVID lockdowns are over in China, which could very likely result in DigitTech increasing both revenue, margins, and profits in 2023 and beyond.



Before we proceed with the discounted cash flow model, I would like to examine the risks and potential of Qifu Technology. There are various risks. Some are directly related to the business, while others are more focused on Chinese companies in general. One risk regarding the business is that the online consumer finance industry is still new in China. It means that we might see additional regulations. 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 stated their expectation ofa more defined regulatory framework for the entire industry in 2022 and beyond, it is possible that we will see additionalregulations in the future due to the industry's relative newness. Another risk related to the business is competition. The online consumer finance industry in China is highly competitive and constantly evolving. Qifu Technology is facing competition from other online platforms, major internet players, and traditional financial institutions. Hence, they will need to continuously improve their AI model to maintain their competitive advantage. There are also outside risks. One potential risk is being delisted from the U.S. stock exchange. Qifu Technology is listed in the U.S. and has also done a secondary listing in Hong Kong. A delisting from the U.S. stock exchange would fuel negative sentiment towards Chinese stocks and restrict their access to international capital markets. Delisting could occur if Chinese authorities have a change of heart regarding the VIE structure. However, it is unlikely, as Chinese officials have been supportive of the VIE structure. Delisting could also occur through the Holding Foreign Companies Accountable Act. The PCAOB has been in Hong Kong to review audits of some Chinese companies listed in the U.S., but we have not received any updates yet.Until it is settled, it will continue to be a risk. Geopolitics could also negatively impact Chinese stocks. With the devastating war in Ukraine, we have witnessed a significant decline in Russian stocks. If China were to support Russia, either financially or with military equipment, therecould be sanctions imposed on China, which would adversely affect all of their companies.


There are also potential opportunities for Qifu Technology moving forward. The capital light segment is growing. I prefer the capital light segment over the capital heavy segment because it holds no or very little credit risk. Furthermore, in the capital-light business, they are cooperating with traditional financial institutions, which could indicate that we will see fewer regulations. The capital light segment now makes up 56,1 % of loan origination, and according to management, they expect the capital light segment to become a larger portion of our business in the long run. The SME segment is also growing steadily. They just launched the product in 2021, and it already accounts for 30% of their total loan book. Furthermore, they are currently focused on industries that are less impacted by the macro economy.Hence, it is expected that this segment will continue to grow at a high pace. Management expects that the SME Credit-Tech Market in China will grow at a CAGR of 35,9% until the end of 2026. High growth in loan facilitation volume. Since 2017, Qifu Technology has experienced a 67.8% compound annual growth rate (CAGR) in their loan facilitation volume, and this growth is expected to continue. Qifu Technology anticipates thatthe Consumer Credit-Tech Market in China will grow at a CAGR of 9,2% until the end of 2026.



I have now investigated the financials, risks, and potential of Qifu Technology. I will now examine the price by utilizing a discounted cash flow model. To do so, I will need some numbers that you can see below. The numbers are the 2022 figures, which I found on Finbox, a valuable tool for obtaining financial data. However, I have determined the perpetuity growth rate and the discount rate myself. The reason I chose a 3% perpetuity growth rate is that it typically falls between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. I decided to choose the lower middle option due to the current market conditions. The chosen discount rate of 12% is because it falls within the typical range of 9-12%. I decided to go with the highest option because of the risks. Remember that all the numbers used in these calculations are in millions.



I also need to determine how much EBIT, Depreciation & Amortization, and Net Working Capital will evolve over the next couple of years. I have chosen to be quite conservative in my approach to EBIT growth and anticipate a 10% annual increase in EBIT. It is much lower than the historic EBIT growth of the last five years, which was at 76%. Nonetheless, I believe it is fine to be very conservative. I calculated a growth rate of 10% per year for Depreciation & Amortization,which is significantly lower than the average growth rate over the past 5 years. Finally, I have decided to use the average net working capital over the past five years and maintain it at that level for the next five years. I haven't found a smart way to share all my spreadsheet here, but once I did my calculations, I found that the intrinsic value of Qifu Technology to be $31,5.


Having investigated Qifu Technology, I find the company very compelling. Qifu Technology had a very challenging year in 2022, as evidenced by the numbers. At the same time, we hold a negative sentiment towards China, which contributes to keeping share prices low. Qifu Technology has tremendous growth opportunities as they expect both the SME and consumer markets to significantly grow over the next five years. At the same time, Qifu Technology is gradually expanding its capital light segment, which carries significantly lower risk. Of course, you will need to be able to stomach the volatile nature of Chinese stocks. However,Qifu Technology could be an interesting investment opportunity if it trades below its book value of $16,98.


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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.


Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the animals in Ukraine. The devastating war also hurt the animals, which are often the forgotten souls in such a conflict, Rolda is one organization that helps these animals, as they are located on Romania. If you have a little to spare, please donate to Rolda here. Even a little will make a huge difference to save these wonderful animals. Thank you.



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