Qifu Technology: Still Positive Considering Favorable Guidance And Metrics
Contributor since 2012 / 12039 Followers
Summary:
- QFIN is expecting a reasonably good high-single digit percentage expansion in its bottom line for Q2 2024, while the stock trades at a low-to-mid digit forward P/E multiple.
- I have a positive view of Qifu Technology’s Q1 2024 metrics pertaining to take rate, share repurchases, and asset quality.
- A Buy rating for the stock is maintained after an evaluation of the company’s guidance and metrics.
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Elevator Pitch
My rating for Qifu Technology, Inc. (NASDAQ:QFIN) is a Buy.
The company’s Q4 2023 top line performance and new $350 million share repurchase program were the focus of the prior March 15, 2024 update. With the latest write-up, I take a look at QFIN’s Q2 2024 bottom line guidance and key operating metrics.
There are favorable takeaways from Qifu Technology’s metrics relating to its capital-light model transition, take rate, asset quality, and buybacks. My opinion is that QFIN is undervalued based on a comparison of its low-to-mid single digit forward P/E with the high single-digit percentage bottom line growth guidance for Q2. As such, my Buy rating for Qifu Technology is maintained.
Second Quarter Earnings Guidance
Qifu Technology anticipates that it can register a normalized net profit of RMB1,250 million in the second quarter of 2024 as per the mid-point of its guidance outlined in its Q1 results release. This translates into expectations of a decent +9% bottom line expansion for QFIN in Q2 2024. Separately, the consensus full-year FY 2024 non-GAAP net income growth projection is +7% as per S&P Capital IQ data.
In comparison, the market is now valuing QFIN at a consensus next twelve normalized P/E of 4.55 (Source: S&P Capital IQ). Assuming a fair valuation for Qifu Technology is a Price-to-Earnings Growth or PEG multiple of 1x (valuation rule of thumb), the company’s expected earnings expansion CAGR for the future is estimated to be +4%. If QFIN does deliver a bottom line growth rate at the high-single digit percentage level for Q2 2024 and full-year FY 2024, it is reasonable to think that the stock should witness a positive valuation re-rating.
QFIN stressed at its Q1 2024 earnings call in late May that the company “adopted a more prudent marketing strategy” to “further optimize customer acquisition channels.” Specifically, Qifu Technology’s “acquisition cost per credit line user” contracted by -12% QoQ in the first quarter of this year as per its recent analyst briefing comments. Also, QFIN’s sales and marketing expenses-to-net revenue ratio decreased from 11.7% in Q1 2023 to 10.0% in Q1 2024.
On the other hand, the company’s loan mix has become more favorable, and this affects its margins in a positive manner. At the company’s first quarter analyst briefing, Qifu Technology revealed that it “enhanced the profitability of the overall loan portfolio” by “cutting back business with lower or negative margins.”
My view is that Qifu Technology’s actual second quarter and full-year earnings will meet or surpass company guidance and analysts’ consensus numbers. This takes into account the company’s efforts relating to lowering client acquisition expenses and loan mix optimization.
Latest Quarterly Metrics
QFIN’s key metrics for the most recent quarter were good, and this has positive read-throughs for its future business and share price performance.
Firstly, the company is making meaningful progress in its pivot towards a capital-light or asset-light model.
Asset-light loans represented 61% of the company’s loan origination volume in the first quarter of 2024, and this was higher than the 57% contribution ratio for Q4 2023. In my March 2, 2023 initiation article, I noted that QFIN’s shift from “capital-heavy services” (e.g., credit risk-taking services) to capital-light offerings (e.g. credit screening and assessment)” will drive “further valuation re-rating.” As such, it is encouraging to see Qifu Technology make good progress with the transition to an asset-light or capital-light model.
Secondly, QFIN’s take rate improvement appears to be sustainable.
Qifu Technology’s net take rate increased by +30 basis points QoQ to 3.5% for Q1 2024. QFIN noted at the Q1 results briefing that its take rate should “be further optimized on the basis of 3.5% in the future.” In other words, the company sees its take rate improving to above 3.5% going forward. A key driver of the potential improvement in take rate is a decline in funding cost boosted by a higher proportion of ABS (Asset-Backed Securities) in its funding mix.
Thirdly, Qifu Technology’s key asset quality metrics were better on a sequential basis.
QFIN’s Day-1 delinquency rate improved from 5.0% for Q4 2023 to 4.9% in the first quarter of this year, while its 30-day collection rate increased from 84.9% to 85.1% in the same time frame. At its latest quarterly analyst call, Qifu Technology referred to these two metrics as “key leading risk indicators” which point to a “modest improvement in asset quality.”
Lastly, QFIN has made a good start with its new share buyback plan.
My mid-March 2024 update highlighted that “Qifu Technology has announced a new $350 million share repurchase program that will be in effect for a year beginning in April 2024.” Between April 1 and May 17 this year, close to 19% of QFIN’s new buyback plan has been completed, taking into account its actual repurchases amounting to $65 million. If Qifu Technology spends the full $350 million on share repurchases, the stock’s forward buyback yield will be approximately 11%.
Variant View
QFIN’s shares could struggle to trade higher and command more demanding valuations, if certain risk factors materialize.
As mentioned earlier in this article, Qifu Technology has made significant headway in improving its asset quality and take rate and pivoting to a capital-light model. The market might be disappointed if QFIN’s progress in these areas slows in the future.
On the other hand, QFIN will be a less attractive investment candidate assuming that the stock’s actual buyback yield turns out to be much lower than the expected 11% due to a more modest pace of repurchases going forward.
Concluding Thoughts
QFIN’s second quarter earnings guidance and its selected Q1 metrics are good in my view. I still rate Qifu Technology as a Buy, because I think that the stock deserves to be valued by the market at a high-single digit P/E ratio considering its performance and outlook.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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