Be a part of me on this rocket ship named QFIN.
I’ve ventured out of my traditional territory in my hunt for an unique rocket ship-shaped banana, and I’ve obtained excellent news for all ape-kind: I’ve discovered one. Right here’s my DD (no matter meaning).
Ticker: QFIN, AKA “360 Digitech”. They’re a Chinese language Fintech firm. At present buying and selling round $31.50. Market Cap is round 4.8 Billion. Only a few individuals in America have heard of them. PE is lower than 10, progress is insane, loads of money on the steadiness sheet, low leverage, and so forth. From a fundamentals or cashflow evaluation, this can be a banana mine.
This is their enterprise mannequin:
First, they use their on-line presence to promote loans to the rapidly-growing Chinese language center class.
Second, they use their proprietary risk-assessment instruments to investigate the credit-worthiness of the candidates. Additionally they have proprietary identification instruments to assist forestall fraud and concurrently velocity up the mortgage course of (this can be a greater deal than it seems like because of the sturdy want for comfort in lending)
Third, they companion with banks to provide the capital for the loans.
Fourth, they service the loans and cope with restoration in case of defaults.
The enterprise mannequin is essential as a result of in an effort to perceive why that is a tremendous purchase you additionally want to grasp the place their income comes from. It is not simply mortgage curiosity as you’ll count on.
However first, let’s speak numbers. 2017 Income: 175 million 2018 Income: 3.75 Billion 2019 Income: 6.99 Billion TTM: 9.19 Billion (TTM means trailing twelve months)
Clearly that’s insane progress. Most apes can’t even rely that prime.
And but, regardless of that progress, their P/E ratio is a measly 9.4! (P/E is a measure of how excessive up tree us apes should climb to achieve banana, decrease quantity = banana extra quickly) That’s lower than half the P/E of the S&P 500 (P/E: 27.5), regardless of having considerably extra progress.
To grasp why the inventory continues to be so low-cost, let’s speak about why dumb apes may NOT need to purchase it.
Firstly, I assume most of you haven’t purchased it but as a result of you have got by no means heard of it. Do a seek for QFIN on reddit – it’s subsequent to unattainable to search out point out of it right here. Moreover, the buying and selling quantity is extraordinarily low…. And many of the possession is institutional. A couple of hedge funds, positive, however largely ETFs, which is strictly what’s brought about this nice shopping for alternative. As most Chinese language Fintech inventory costs have struggled recently with rules (except this week), QFIN is comparatively immune from the modifications. QFIN has solely gone down as a result of many of the possession is thru the sector ETFs, which have been dragging QFIN down with them. Solely just lately did it buck the pattern and transfer away from its sector’s efficiency, largely as a result of individuals are simply now beginning to discover it.
This can be a misunderstood firm with apparent worth. The play right here isn’t that there’s additional worth – the worth is clear to everybody – the play is that the “issues” are being considerably exaggerated and misunderstood… so fairly than inform you the place the deep worth is, I’ll as an alternative give attention to why the doubters are flawed and why QFIN is uniquely positioned in its sector.
First Purpose for Doubt – Winnie the Pooh. The Chinese language Fintech trade has just lately been slapped with some additional rules that I needed to get my mandarin-speaking spouse to translate for me.
One regulation is that for microlending transactions involving banks and companions, the companions (on this case, QFIN) should contribute at the least 25% of the capital. Right here’s a breakdown of the principles: https://www.bloomberg.com/information/articles/2021-02-20/china-imposes-further-caps-on-online-lending-amid-clampdown. The inventory tanked 30% when this occurred.
Why it doesn’t matter: In keeping with QFIN’s CEO, Wu “Cock Slapper” Haisheng, “At present, the excellent steadiness of the excellent loans issued by means of our micro lending subsidiary, accounts for lower than 1% of the entire mortgage steadiness, and joint lending accounts for round 0.01%. Subsequently, primarily based on our private analysis, the brand new guidelines can have little affect on our mortgage origination enterprise.”
One other new regulation is that on-line lending can solely be achieved with banks which might be established in the identical province because the applicant. That is no drawback – QFIN has a large number of companions in every area. There are different new rules coming down the pipeline (capital necessities, and so forth) however QFIN is effectively capitalized and able to overcoming all of the recognized points.
Second Purpose for Doubt – Default Danger. There’s concern that the mortgage default charge will likely be excessive, particularly if China’s financial system crashes, and that this can destroy the worth of the corporate equally to what occurred to US banks with dangerous mortgages in 2008.
Why it doesn’t matter: To start with, sack up.
Now that we’ve coated that main motive, the actual fact of the matter is that default threat will at all times be a factor for banks. However QFIN isn’t a financial institution. (Truly, they technically do have a banking constitution in case they need to change into one for as a consequence of new rules, however they are not at the moment utilizing it.) Keep in mind their enterprise mannequin I discussed earlier?
Now take into account this:
Keep in mind that 9.9 billion income for the trailing twelve months? Of that 9.9 billion, 2.3 billion is curiosity earnings. (600mm curiosity expense). In the meantime, they’re receiving 8 billion in service income. (supply: https://finance.yahoo.com/quote/QFIN/financials?p=QFIN) They’re bringing in far extra money from mortgage origination commissions and the SaaS charges for his or her credit score evaluation than they’re bringing in from precise curiosity earnings. In different phrases, they aren’t a financial institution. What’s much more essential is that QFIN actually does have the most effective proprietary software program, as evidenced by the default charges of their loans. Evaluate QFIN’s loans defaults to FINV’s, who shot up 90% yesterday after their earnings name. Go to slip 17: https://ir.360shuke.com/static-files/6ffd9815-c5d3-478e-81df-0f4b3eb1ad0f
When you’re too lazy to click on the hyperlink, the TL DR is that QFIN’s historic defaults for each tranche is considerably decrease.
One other aspect to contemplate is that even when their curiosity earnings does drop considerably, their working margin is powerful and, extra importantly, bettering. Regardless of their income rising considerably, “Complete working bills, excluding provisions have been roughly flat Q-on-Q however decreased 33% year-on-year. The year-on-year decline primarily displays vital enchancment in operational effectivity” – CFO Alex “Oh God Please No Not My Face” Xu
Third Purpose for Doubt – uNaUdiTeD fInAnCiALs
OK so that is the most effective criticism the bears have. It’s additionally probably the most nebulous.
A couple of issues to consider:
This can be a Chinese language firm with Chinese language client loans on their steadiness sheet. The QFIN ticker is an ADR. I’m not an accountant, however AFAIK the entire Chinese language fintech corporations with out a US presence use unaudited financials. I don’t suppose it’s that bizarre.
Talking of accounting, QFIN has a historical past of overestimating anticipated losses. In different phrases, they used pessimistic estimates that make their financials look worse than they are surely. Again in 2Q2020, Chinese language regulators slapped a cap on the rate of interest of internet-sourced loans. A few of QFIN’s loans on the time have been above that charge, which means they have been impacted. An unscrupulous CFO wouldn’t have marked down the loans in anticipation of a lower in worth because of the new, decrease curiosity they’d be receiving*. QFIN did the alternative – they devalued the loans by an excessive amount of* (largely as a result of they overestimated the default charge). “…the excessive take charge for capital-light mannequin within the third quarter, possibly partially contributed to a reversal of the cost within the second quarter.” – Ethan “Prolapse King” Wang, paraphrasing one thing the CFO took two minutes to clarify when requested why the loans have been doing higher than anticipated after being devalued.
What dangers are there nonetheless?
At the start, macroeconomic dangers. Because the Chinese language client fares, so does QFIN. I view this as factor, not a foul one, however it does represent a threat. Further regulation from Winnie-The-Pooh represents a threat too, however it seems to be like, for now, that storm has largely handed. My take is that the Chinese language regulators appeared to have a tough on for fucking up Ant Group – a derivative of Alibaba. Jack “Precise Vampire” Ma had mouthed off publicly about rules and so the CCP went after him with much more rules after disappearing the man for a month. Ant Group focuses extra on microlending, however QFIN’s inventory, as one other Chinese language Fintech firm, obtained dragged down by the bears regardless of not likely being affected. Ant group is lastly authorised for his or her IPO, so it seems to be like Winnie’s crimson rocket for regulation is quickly retracting.
Any massive banana showers coming quickly? YES! Earnings name on 3/15! QFIN has a historical past of smashing earnings estimates. If QFIN has even half the success of FINV, who went up 90% on the day of their earnings name, then it’ll be bananas for everybody. Apes taking a rocket ship to banana planet.
When you nonetheless aren’t satisfied simply have a look at the fucking fundamentals you god rattling baboon.
TLDR: I just like the inventory.
That is clearly not monetary recommendation.
Positions: lengthy 15 QFIN 3/19 calls 35 strike, and lengthy 500 shares (value foundation $27.48)
EDIT: needed to take away my supply for the convention name quotes because it was SA and subsequently blocking posting. If you need the supply of the quotes, simply google “QFIN EARNINGS TRANSCRIPT”