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360 DigiTech: An overlooked Chinese company?

Opdateret: 3. maj


Chinese stocks have been very volatile this year due to several factors that I will mention later in this analysis. Most stocks are still beaten down despite the tailwinds in the last week. 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.


Before I start with the analysis, I should mention that I do not currently own shares in 360 DigiTech. It isn't a company I have researched in depth until it got mentioned to me on eToro. 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 smaller companies in Hello Group (MOMO) and Zepp, which are both trading below the book value currently, while I also have a small position in Nio. I'm bullish on Chinese equities due to the valuations but also because the Chinese economy is growing faster than other large economies. Hence, DigiTech could be another add to my portfolio depending on this analysis.


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. As their fiscal year ends on December 31, we got the numbers for the whole year of 2021. Revenue continues to grow but naturally not as the same pace as previously. The gross profit margin is high and steady of the three financial years, which is nice to see. However, we saw the operating margin in 2021 being higher than the previous two years, which is very encouraging. Furthermore, an operating margin of 41,4 % is fantastic! EPS is also growing nicely. I must admit that I'm very intrigued seeing numbers like these. You don't find many companies with an operating margin of 41,4 %.



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 360 DigiTech in their latest conference call said: "we expect to see a much clearer regulatory framework for the entire industry in 2022", 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 currently only listed in the U.S. and while they are looking into a Hong Kong listing, a delisting would hurt the company. Luckily, we have seen Chinese authorities being supportive of the VIE structure and overseas listing as of late. However, we still have the risk from the U.S. and the Holding Foreign Companies Accountable Act. SEC has just identified the first five companies that do not comply with the Holding Foreign Companies Accountable Act, and since no Chinese companies currently comply with the act, 360 DigiTech included, we will need U.S. and Chinese regulators to come to an agreement on the audit obstacle. 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 53,5 % 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 last year, and it already account for 13 % 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. The management believes that the total addressable market is RMB 28,5 Trillion, so there are plenty of room to grow over time. Chinese equities are currently cheap due to outside factors. Most Chinese companies are currently cheap due to outside factors such as delisting and geopolitics. It is difficult to predict politics but logically China has little to win by choosing to support Russia, as Russia last year only accounted for 2 % of Chinese trade. Furthermore, the alliance between the two countries is often overstated by western media. Sure, the relationship between Russia and China has got better during Xi's tenure but traditionally the two countries do not have a good relation. China is also much more dependent on the West than Russia is. And finally, in a conversation with Biden yesterday, Xi said "relations between nations shouldn't resort to arms, and conflicts and confrontations are not in anyone's interest". In my opinion, it doesn't seem like China will support Russia in any way. Delisting could happen. In short, the problem with the Holding Foreign Companies Accountable Act is that the SEC will need to access audit papers, and it is illegal for Chinese companies to share this with foreign states. We have had several statements from CSRC about them working on a solution with SEC. Last week, we also had the news from "Accounting Today" that the Public Company Accounting Oversight Board is reportedly making progress in talk with Chinese authorities on enabling access to audit papers. If China doesn't support Russia and U.S. and Chinese regulations can come to an agreement on audit papers, you might wonder how long Chinese companies will trade as such as big discount. Is 360 DigiTech also trading at a discount? In the next paragraph I will share my calculations.



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 2021 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 5 % 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 a higher option due to the business 360 Digitech operates in. 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 6 % EBIT growth a year. It is very lower than the historic EBIT growth but in line with the forecast at Finbox with is made by various analysts. I believe it is fine to be very conservative. I calculated with a growth in Depreciation & Amortization of 10 % a year. It is lower than the historic numbers but higher than last year. Finally, I decided to use the average net working capital over the last five years, and no grow it at all. 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 $27.


Having investigated 360 DigiTech, I found the financials very compelling. Especially the operating high margin that has been growing. There are some unknowns about the management, as I haven't been able to get much information about them. However, looking at the track record, I feel comfortable. All Chinese stocks are trading at a discount, and you need to be aware of that and able to stomach some volatility, if you invest in China. If you think that there will be a solution to all outside problems, 360 DigiTech seems to be a very compelling company to be invested in. I used very conservative EBIT growth in my calculations, and one could argue that 360 DigiTech should be valued even higher. Furthermore, they also pay a dividend of 15% to 20 % of their quarterly net income after tax. In this quarter it means a dividend of $0,26 per share. I'm fully invested now but if I get some free cash, I will probably open a position in 360 DigiTech as long as it trades at these levels.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.


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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