FinVolution’s low-key overseas expansion pays dividends

The fintech lender’s overseas revenue surged in the first quarter, outshining mediocre results for its core China-based business

Key Takeaways:

• FinVolution’s revenue from its overseas businesses surged 165.8% in the first quarter to account for 14.7% of its total revenue, up from 10% for all 2022
• The company began its overseas journey at the end of 2018 in the Philippines, and has since expanded into Indonesia

By Warren Yang

When FinVolution Group (FINV.US) started looking to expand overseas nearly five years ago, it meant business. That strategic shift is paying off quite nicely now as life at home isn’t getting any easier for private Chinese lenders.

FinVolution first dipped its toe outside China in late 2018, a miserable time for peer-to-peer (P2P) lenders in the country in the early years of a regulatory crackdown that forced the company to transform into a loan facilitator from a direct lender and drove many of its peers out of business. Few investors probably took the overseas move too seriously back then, since such forays are relatively common among Chinese companies and often don’t pan out as planned.

But FinVolution’s multiyear efforts to build international operations are finally bringing tangible results. Revenue from its overseas businesses surged 165.8% year-on-year to 448 million yuan ($65 million) in the first quarter to account for 14.7% of its total revenue, up from 10% for all of last year, according to the company’s latest quarterly results released last Wednesday.

FinVolution’s overseas transaction volume grew more than 80% year-on-year in the first quarter, while its outstanding loan balance outside China at the end of March ballooned 164%. The company’s performance in its home market was much more subdued, with transactions up just 7.7%. Its outstanding loan balance in China actually shrank from the end of last year, thought the figure increased about 15% from the year-ago period.

Overseas loans still make up a small share of FinVolution’s overall business. The company’s first-quarter loan transactions outside China accounted for less than 4% of its total in value terms during the period, while the share for its overseas outstanding loans is even smaller, at 1.5%.

But the fact that international transactions contributed nearly 15% of the company’s total revenue in the first quarter, far larger than their proportional size in value terms, indicates that each loan generates much higher revenue in its overseas markets than in China.

FinVolution’s booming overseas operations helped its overall revenue grow by 24.7% in the first quarter from a year earlier, while its net profit rose by an even bigger 29%. By comparison, the company’s more domestic-focused peers aren’t faring so well. Qifu Technology (QFIN.US; 3660.HK) last Thursday reported both its revenue and net profit fell during the quarter.

The underwhelming performances at home for both FinVolution and Qifu highlight difficulties that many lenders are facing in China right now. Even though the country has reopened after lifting Covid-19 restrictions starting at the end of last year, many consumers and small businesses, the primary target customer group for FinVolution and other private credit providers, remain risky bets for lenders due to their weakened financial conditions.

And even though China’s economy is recovering from the pandemic, which should reduce default risks of borrowers, the ratio of soured loans in FinVolution’s total credit actually increased to 1.72% at the end of March from 1.64% a year earlier. Accordingly, provisions the company sets aside to pay its lending partners for loan losses increased, cutting into its bottom line.

Unpredictable regulation

The potential for more regulatory clampdowns always exists in China, creating a major overhang for FinVolution and its peers. Although the worst of the regulatory storm has passed for fintech lenders, it’s hard to predict what could happen next.

“Due to the lack of a comprehensive and effective regulatory framework and clear and unambiguous application and interpretation of relevant laws and regulations, our cooperation with institutional funding partners has exposed us to regulatory uncertainties,” FinVolution said in its latest annual report issued in late April.

In a recent extreme case, the China Securities Regulatory Commission (CSRC) said at the end of last year that online stock brokers UP Fintech Holding Ltd. (TIGR.US) and Futu Holdings Ltd. (FUTU.US) violated domestic laws by allowing their Chinese customers to make cross-border trades without a required brokerage license. The pair were ordered to stop accepting new clients in China.

Both brokers have also been aggressively expanding outside the Chinese mainland to better shield themselves from unpredictable regulation in China. 

FinVolution is unlikely to completely shed its Chinese roots, but instead is probably trying to become more diversified by beefing up its international operations. Its current focus is on Southeast Asia, a popular starting point for many Chinese companies due to its proximity and similarities to their home market. The company’s international journey started at the end of 2018 in the Philippines, and a year later it expanded into Indonesia.

Although FinVolution entered Indonesia later, that market appears to have become the driving force behind its overseas expansion. In Indonesia, FinVolution has completed a transition to focus on higher-quality borrowers, something it has done in China as well, to reduce risks, said Jimmy Tan, head of investor relations, on the company’s earnings conference call.

FinVolution’s base of funding partners in Indonesia is growing too. It added a significant partner in January after signing a deal with PT Bank Permata Tbk, one of the top 10 banks in the country. Now the company is trying to replicate its Indonesian growth model in the Philippines.

Southeast Asia generally offers a lot of growth potential. Countries in the region are growing in terms of population, even as China starts to shrink. And their demographics are young, including many who are tech savvy but don’t necessarily use banks. That combination could prove fertile ground for a company like FinVolution.

But risks are also high when operating in such unfamiliar markets, making it crucial for FinVolution to build capabilities to screen out potentially bad borrowers. So, the company’s focus on the quality of growth in Indonesia looks prudent.

Like many other fintech startups in China, FinVolution has gone through many changes over the years, which shows in its share price. The company’s stock has lost almost 70% of its value since its New York IPO in 2017. FinVolution’s price-to-earnings (P/E) ratio is also quite modest at 3, lower than 4 for Qifu’s New York-listed shares and 3.7 for LexinFintech (LX.US).

Yet if FinVolution can continue to deliver turbo-charged growth outside China, investors might give it another look.

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