- Glenn
360 DigiTech: An overlooked Chinese company?
Opdateret: 6. apr.
Chinese stocks have been very volatile for some years due to several factors that I will mention later in this analysis. Most stocks are still beaten down despite the tailwinds we have seen lately. Large Chinese companies such as Alibaba an Tencent are covered in depth, but we might see even better valuation in smaller companies. One company that isn't covered as much is 360 DigiTech 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. 360 DigiTech 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 own shares in 360 DigiTech. It is a small position at 0,53 % in my Copytrading portfolio. Besides that, I have quite a lot of exposure to Chinese companies in my portfolio, where Alibaba and Tencent (through Prosus) are my largest positions. I also own stocks in Daqo New Energy Corp, Hello Group (MOMO), Zepp, and Nio. I'm bullish on Chinese equities due to the valuations but also because the Chinese economy is growing faster than other large economies.
360 DigiTech is a Chinese company that describes themselves as a data driven, technology empowered digital platform. In short it almost like the Chinese version of Upstart that I have previously written about. They use AI to to approve customers for loans, as with Upstart, it means that approvals that wouldn't have been approved through traditional banks, while the approvals are also much faster. However, 360 DigiTech also distinguish themselves from Upstart, as they have three different segments: Capital heavy, capital light and SME lending. Capital heavy is where 360 DigiTech assumes a credit risk as the loans are facilitated through guarantees. Capital light is where they provide risk assessment to traditional banks and assumes no risk. SME lending which they just launched last year. As with Upstart, I believe that the AI model means that 360 DigiTech has a secret moat. Being the market leader based on volume and revenue, having the best risk management (based on delinquency rate) and their high margins further support them having a moat.
Their CEO is Haisheng Wu. He is also the co-founder of 360 DigiTech and became the CEO in 2019. I usually like when founders or co-founders are the CEO of a company, as they usually have a large interest in growing the business moving forward. Prior to becoming CEO, he served as the president in 360 DigiTech. Before founding 360 DigiTech, he held various positions in 360 Group and Baidu. He has a bachelor's degree in media economics from Communication University of China and a master's degree in communication studies from Peking University. It is hard to find much information about Haisheng Wu but showed his great management once their flagship app 360 Jietiao was removed from Chinese app stores July 8th, 2021, in order of the financial regulator, which was a large blow to the company. However, under Haisheng Wu's management, 360 DigiTech managed to get their app restored just one month later August 9th, as it then complied to all data protection regulations. I believe the swiftly manner that Haisheng Wu managed to get the app to comply with the regulations, and get approved by the regulations, show some great management skills. The numbers that we look at later further supports that notion. Hence, while I couldn't find much information regarding Haisheng Wu, I do feel rather confident in the management.
I believe that 360 DigiTech has a secret moat now, which will grow stronger moving forward as they get more data to build their AI model. I don't have much information about the management but feel that the CEO has showed he does well under pressure and can grow the company as we will see in the next paragraph. Later I will do a discounted cash flow model to calculate a price for Z360 DigiTech but before I do so, let us just have a look at some key financial metrics.
Down below we see some key financial metrics from 360 DigiTech. At first glance it is easy to see that 2022 was a challenging year for DigiTech due to Covid lockdowns and 2022 marks the first year where DigiTech didn't increase their revenue. Margins have also decreased from last year due to the challenges that DigiTech faces in 2022. However, delivering a gross profit margin above 70 %, an operating margin above 27 % and EBITDA and EBIT margins above 50 %, is still good and margins continue to be intriguing. As revenue and margins decreased, it isn't surprising that EPS decreased as well. Nonetheless, Covid lockdowns are over in China, which could very likely result in DigitTech increasing both revenue, margins, and profits in 2023 and onwards.

Before we continue to the discounted cashflow model, I would like to investigate the risks and potential of 360 DigiTech. There are various risks. Some are related directly to the business, while others are more directed at Chinese companies in general. One risk regarding the business is that online consumer finance industry is still new in China. It means that we might see further regulations. We already saw that China's Supreme People's Court slash private lending rate cap, and while management of 360 DigiTech have previously said that they expect to see a much clearer regulatory framework for the entire industry in 2022 and onwards, we might see further regulations moving forward due to the sector being as new as it is. Another risk related to the business is competition. The online consumer finance industry in China is highly competitive and evolving. 360 DigiTech is facing competition from other online platforms, major internet players and traditional finance institutions. Hence, they will need to continuously improve their AI model to keep their secret moat. There are also outside risks. One outside risk is delisting from the U.S. stock exchange. 360 DigiTech is listed in the U.S. and have done a secondary listing in Hong Kong. A delisting from the U.S. stock exchange would fuel negative sentiment towards Chinese stocks and limit their access to capital markets. Delisting could happen through Chinese authorities getting a change of heart regarding the VIE structure. However, it is unlikely as Chinese officials have been supporting regarding the VIE structure. Delisting could also happen through the Holding Foreign Companies Accountable Act. PCAOB has been in Hong Kong to review audits of some U.S. listed Chinese companies, but we still haven't heard anything yet. Until it is settled, it will continue to be a risk. Geopolitics could also hurt Chinese stocks. With the devastating war in Ukraine, we have seen Russian stocks drop like rocks. If China for some reason should support Russia, either financially or with military equipment, we could see sanctions towards China, which would hurt all their companies.
There are also potential for 360 DigiTech moving forward. Capital light segment is growing. I prefer the capital light segment over the capital heavy segment, as they it holds no or very little credit risk. Furthermore, in the capital light business they are cooperating with traditional financial institutions, which could indicate we will see fewer regulations. The capital light segment now makes up 56,1 % of loan origination, and according to management in the last conference call, they expect the capital light segment "to become a larger portion of our business in the long run". The SME segment is also growing nicely. They just launched the product in 2021, and it already account for 30 % of their total loan book. Furthermore, they are currently focused on industries that are less impacted by macro economy such as manufacturing and retails. Hence, it is expected that this segment will continue to grow at a high pace. Management expects that SME Credit-Tech Market in China will grow by a 35,9 % CAGR until the end of 2026. High growth in loan facilitation volume. Since 2017 Digitech has grown their loan facilitation volume by a 67,8 % CAGR until 2022, and it is expected to continue to grow, as Digitech expects the Consumer Credit-Tech Market in China to grow by a 9,2 % CAGR until the end of 2026.
I have now investigated the financials, risks, and potential of 360 Digitech. I will now look at the price by doing a discounted cash flow model. To do so I will need some numbers that you can see below. The numbers are the 2022 numbers, which I could find at Finbox, which is a great tool to get numbers. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 3 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. I decided to go with the lower middle option because of the current market conditions. The chosen discount rate of 12% is because it is usually between 9-12%. I decided to go with the highest one because of the risks. Remember that all the numbers made 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 decided to be very conservative when it comes to EBIT growth and expect a 10 % EBIT growth a year. It is muchlower than the historic EBIT growth the last five years at 76 %. Nonetheless, I believe it is fine to be very conservative. I calculated with a growth in Depreciation & Amortization of 10 % a year, which is much lower than the average growth in the last 5 years. Finally, I decided to use the average net working capital over the last five years and keep it at that through 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 360 DigiTech to be $31,5.
Having investigated 360 DigiTech, I found the company very compelling. 360 DigiTech had a very challenging year in 2022, which can be seen at the numbers. At the same time, we have a negative sentiment towards China that keeps share prices low. One example is that 360 DigiTech's book value per share is $16,98, which is just around its current trading price. 360 Digitech has tremendous growth opportunities as they expected both the SME and Consumer market to significantly grow over the next five years. At the same time 360 DigiTech is slowly increasing their capital light segment, which is much lower risk. Of course, you will need to be able to stomach the volatile nature of Chinese stocks but looking at my conservative calculations, 360 Digitech looks cheap now. I may add to my position if 360 DigiTech falls below their book value at $16,98.
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