FinVolution Q4 2023: Striking A Balance Between Growth And Shareholder Returns

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Established in China in 2007, FinVolution Group has successfully transitioned from a P2P lending platform to a loan facilitation model, serving as an intermediary between borrowers and collaborated ...

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By the conclusion of 2023, approximately 17% of the total revenue will be derived from these international operations.The commitment of FINV to enhancing shareholder value is noteworthy, as evidenced by its consistent capital return program encompassing dividends and share repurchases.Their strategic approach focuses on achieving balanced growth across markets while concurrently maximizing shareholder returns.Editor's note: Seeking Alpha is proud to welcome Bullish Insights as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »    Khanchit Khirisutchalual Investment Thesis In today's dynamic market landscape, one company stands out as a compelling investment opportunity to me, FinVolution Group (NYSE:FINV). With a proven track record of growth, robust financial performance after listing, and a strategic vision poised for \"Local Focus, Global Outlook\", FINV represents a solid buy opportunity. Join me in exploring the potential of FINV as we delve into a detailed analysis of why this stock could drive significant value for investors in the long run. Company Overview FINV, established in China in 2007, is a pioneer in China's P2P industry. In 2017, they were listed on the NYSE after a decade of operation. However, shortly after their listing, they faced regulatory pressure due to the so-called No. 141 regulation on cash loans in China, which prohibited direct lending from China P2P players to borrowers. In my opinion, tightened regulation benefited FINV. During this process, numerous small-to-medium players ceased the game, and FINV together with the other 3 players survived and became the major players in the consumer finance industry, namely Qifu Technology (QFIN) and LexinFintech (LX), while Lufax (LU) is focusing on the SME lending business. From 2018 to 2019, FINV underwent a transition from its P2P model to a loan facilitation model. Instead of directly lending money to borrowers, FINV now acts as an intermediary between borrowers and close to 100 financial institutions that collaborate with FINV. They provide essential services to their collaborated financial institutions such as customer acquisition, risk assessment, customer service, and post-loan collection, then financial institutions provide financing to correspondent borrowers. Consequently, both FINV and financial institutions share interests based on the risk preferences of financial institutions, so-called funding costs by FINV. Local Focus, Global Outlook Strategy It is worth noting that despite facing regulatory pressure and the challenges posed by COVID-19 afterward, I think FINV has demonstrated remarkable resilience in terms of transaction volume growth trajectory during these challenging periods. Their proven know-how and capabilities in the online consumer finance sector have enabled them to navigate through different economic cycles. In addition to its expanding presence in the more and more mature China market, FINV entered Indonesia in 2018 followed by entry into the Philippines in 2020. According to their disclosure material, by the end of 2023, international revenue contribution accounts for approximately 17% of total revenue with a YoY increase of 7%. I think this is a good move to mitigate regulatory risks and achieve sustained growth on the group level. Company History (FINV 4Q23 Investor Presentation) In response to the interest rate cut trajectory, FINV has implemented measures to control credit costs, mitigate rate cut impact, and maintain ultimate profitability. To enhance credit performance, FINV has shifted towards higher quality borrowers, categorizing them from Level I (highest quality) to Level VII (poorest). As of 4Q23, approximately 91%-92% of the transaction volume is attributed to Level I-III borrowers, compared to just about 40% in 2018. Customer Cohort (FINV 4Q23 Investor Presentation) In terms of its unit economics in China, the current interest rate is capped at 24%, and FINV maintains an interest rate of 22.2%, which has stabilized in recent quarters. The take rate is primarily calculated by deducting funding costs, as mentioned earlier, along with credit costs, generated from loan delinquency. Other costs such as prepayment and value-added tax have minimal impact on the take rate. As of Q4 2023, the volume-based take rate decreased to 2.9% from 3.1% in Q3, I believe this decline is mainly due to lingering asset quality pressure in China market, aligning with industry peers' explanations. Fortunately, the upside potential lies in steadily improving funding costs, which have improved by 30 bps QoQ and 100 bps YoY, attributed to the preferable law of supply and demand between assets and money in China. Looking ahead, FINV's stable borrowing rates combined with better-than-industry delinquency rates (vintage delinquency at 2.5% for the most recent 3 months) and enhanced funding costs enable it to achieve higher take rates and ROA (around 3.6%, net profit RMB2.4bn divided by outstanding loan balance: RMB67.4bn) compared to its competitors in China. Unit Economics (FINV 4Q23 Investor Presentation) In my opinion, the growth of FINV in China and international markets appears robust. Notably, China market is experiencing progressive growth, while international markets are exhibiting accelerated development during the early stages of the P2P industry. The China and international markets represent two stages of market development for online consumer finance: one characterized by the maturity stage, and another marked by the introduction & growth stage. As a result, in the China market, approximately 85% of transaction volumes are driven by repeat borrowers (calculated by transaction volume from repeat borrowers RMB42.8bn/total transaction volume in China market RMB50.1bn). In international markets, FINV is focusing on new customer acquisition to improve market penetration rates, its transaction volume in 2023 increased to RMB7.85 billion, representing an 84.7% YoY growth, while revenues rose to RMB2.1 billion, showing an 85.9% YoY increase and contributing 17.0% to total net revenues. China Market (FINV 4Q23 Investor Presentation) The Indonesian market is currently undergoing its 2nd round of interest rate adjustment from a daily rate of 0.4% to 0.3%, following a previous adjustment from 0.8% to 0.4% in 2021. This has resulted in FINV transitioning towards better quality borrowers, aligning with the trajectory implemented in the Chinese market. As mentioned during the earnings call, FINV expects the take rate after the pricing adjustment in Indonesia's market to be around 10%, down from 13% prior to the adjustment, I think it is still much more profitable than the China market (4Q23 take rate: 2.9%). Notably, the interest rate adjustment has led to a 20% improvement in their credit cost and customer acquisition costs have decreased by 8%, thanks to market consolidation, some small and medium-sized players have been unable to sustain profitability during the transition period. In the Philippines market, the transaction volume and outstanding loan balance are expanding at a YoY growth rate of over 200%. Considering the stable regulatory environment and robust development in the consumer finance sector in the Philippines, I think FINV's Philippine vehicle is expected to contribute a larger portion of transaction volume and revenue to the international sector going forward. International Markets (FINV 4Q23 Investor Presentation) Notably, among major players in the Chinese market, FINV stands out as the sole company committed to delivering a 5%-10% year-on-year transaction volume growth, while other competitors are projecting zero or perhaps negative growth by 2024 (QFIN was providing 1Q24 net profit guidance rather than transaction volume guidance; and LexinFintech was providing a GMV guidance, which accounted for 2.1% of transaction volume). I think it is a good sign of its capability to deliver sustained growth during economic cycles. Financial Performance Furthermore, according to the disclosed earnings releases from 2020 to 2023, I made a CAGR comparison among key operational and financial figures, FINV's transaction volume has been expanding at a CAGR of over 40% and its outstanding loan balance was close to 40% CAGR, surpassing its competitors. Its revenue has been consistently increasing with a CAGR of nearly 20% from 2020 to 2023, where its major competitors are below 10%, including QFIN, LX, and Lufax. The only weaker indicator is non-GAAP net profit. I think it is mainly due to ongoing investments in overseas markets, potential licenses, and customer acquisition efforts in various countries, along with periodic asset quality pressures in China. The bottom-line performance is yet to be fully released – the net profit margin of FINV remained consistent at approximately 20% with slight fluctuations, but still surpassing that of the majority of other sectors. Comparison with Peers (Earnings Releases during 2020-2023) Looking ahead, it is anticipated that FINV's Indonesian market will achieve profitability for the entire year in 2024 by the company. Similarly, profitability is expected for their Philippines business during the second half of 2024. In China's market context, as the economic recovery continues and potential alleviation of asset quality pressures emerges, I believe that an improvement above a take rate of 3% can be anticipated. Revenue and Profit (FINV 4Q23 Investor Presentation) Capital Return Program Lastly, driven by the sustained growth in both domestic and international markets, FINV has been enhancing shareholder value through its capital return program, which includes annual dividends and share repurchases. According to the earnings release, in 2023, FINV deployed close to US$100 million to repurchase our shares and US$62 million for dividend distribution, representing 49% of net income for 2023 and a combined yield of 11%. If you look at the table above, on a five-year average, dividend increases of more than 10% combined with consistently growing profits represent a decent prospect for growing returns. Capital Return (FINV 4Q23 Investor Presentation) I think that capital returns have been an ad-hoc topic this year, and we've seen numerous Internet giants start emphasizing shareholder returns and huge dividend distributions or share repurchase programs over highlighting growth, as the traditional growth story is fading. In my opinion, the difference for FINV is that they are trying to balance growth in both China and international markets with enhancing shareholder returns at a payout ratio, in 2023, their total payout ratio expanded to nearly 50%. During the earnings call, management stated that they are confident in maintaining a track record (6 years of capital return) and continuing to deliver a consistent increase in dividends for shareholders (average of 10% YoY growth in the past 5 years). Valuation I also seek other sources to prove my opinion on FINV's growth momentum and capability, based on my investigations of its strategies, and operational and financial fundamentals. According to Seeking Alpha consensus, their revenue is expected to further expand to over US$2.13B in 2025 vs US$1.77B in 2023, representing a 20% growth. And its EPS is expected to grow at above 10%-15% YoY.   Revenue Estimates (Seeking Alpha)  Earnings Estimates (Seeking Alpha) If you look at FINV's cash and cash equivalent + short-term investments as of 4Q23, which is approximately US$1.12B, almost equivalent to its market cap as of 31 March 2024 (US$1.41B), and its P/B stands at 0.70, while P/E at 4.28, far behind its US competitors, I believe it is mainly due to geographical and political issues as China ADR, but its fundamentals look healthy and sustainable.   Valuation (Seeking Alpha) Risks To My Thesis In my opinion, the key downside risks for this bullish opportunity include but are not limited to: Tightened regulations in China, where I think a 24% annualized cap is at a low level worldwide and there is minimal room for further downward adjustment to non-mortgage cash loans; Tightened regulations in Indonesia, according to OJK regulation, they do have a plan to steadily adjust the daily interest rate to 0.3% in 2024, 0.2% in 2025, and 0.1% in 2026, where this might squeeze FINV's profitability in this market, but as I mentioned above, as Top 3 player in the market, FINV benefits from market consolidation, optimized marketing cost and better credit performance, which may offset the side effect of rate adjustments; Tightened regulations in the Philippines, this is a potential risk while I think there is no sign of regulatory pressure in the Philippines market; Sharp fluctuations in asset quality/delinquency rate, for an online lending company, the core business risk lies in asset quality. There is no historical track record showing that FINV failed to manage its risk metrics and asset quality, I think future uncertainty lies in changing management style, macroenvironment headwinds, slow recovery in China's economy, etc.; Shortage in funding resources, I think this risk due to overseas expansion is resource-consuming, even though FINV's current balance sheet looks healthy, it may face deficiency if it enters into several new countries at one time and without good allocation of resources; Fiercer competition in the countries where they operate, this happens in the mature China market, where their Sales and Marketing expenses continue expanding from RMB1.6B in 2021 to RMB1.9B in 2023. Conclusion  In a nutshell, in my opinion, FINV's current strategy of \"Local Focus, Global Outlook\" looks effective in dispensing regulatory risks and achieving sustained growth benefiting from the early stage of P2P development in these emerging markets. As long as they continue excellent management of asset quality, I believe the compelling growth trajectory will be sustained and hence reflect a stronger capital return to shareholders.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2424764849"}