Forget about growth. Qifu shows it’s all about giving back to shareholders

In reporting its earnings for the fourth quarter of 2023, the online loan facilitator unveiled a plan to sharply ramp up its share buyback program

Key Takeaways:

• Qifu’s revenue grew 13% year-on-year in the fourth quarter, and its net profit rose by more than 20%
• The company announced plans to repurchase up to $350 million worth of its shares, far more than the $132 million in repurchased from last June to March this year

By Warren Yang

Qifu Technology Inc. (QFIN.US; 3660.HK) is checking all the right boxes to entice investors.

For starters, the online loan facilitator delivered solid profit growth in the final quarter of last year, which is impressive in the China’s tough economic environment these days. But perhaps more importantly, Qifu unveiled plans to spend more of its large cash reserves on its shareholders. That’s often music to investor ears, especially in tough economic times when plowing profits back into the business may not produce strong growth.

Qifu’s revenue increased a respectable 13% year-on-year to 4.5 billion yuan ($633 million) in the fourth quarter of last year, according to the company’s latest earnings report released last week, handily beat an S&P Capital IQ consensus. The company’s bottom line performance was even better, with its net profit up 21.5% to 1.1 billion yuan, driven partly by cost controls.

The quarterly performance was markedly better than Qifu’s results for all of 2023, when its revenue slipped 1.6% to 16.3 billion yuan, while its profit grew 6.6%. The company indicated the strong results will continue into the first quarter as well, projecting that its non-GAAP net profit, which excludes share-based compensation expenses, will grow 17% to 22% year-on-year in the three-month period, CFO Alex Xu said on a conference call with analysts. On that adjusted basis, Qifu’s fourth-quarter net profit increased by nearly a third.

By comparison, FinVolution Group (FINV.US), one of Qifu’s biggest rivals, on Monday reported an uninspired 6% year-on-year revenue gain and 5% profit decrease for the fourth quarter, reflecting the challenges in China’s weak economy. FinVolution did better overseas, reporting its revenue jumped more than 50% for that part of the business to account for nearly 19% of its total as it tries to diversify beyond its home market.

While Qifu’s double-digit revenue and profit growth look strong in the current environment, the company’s biggest attraction to investors in its latest report may have been its announcement of plans to sharply step up its current share buy-back program.

Qifu bought back $132 million of its American depository shares (ADS) between last June and this month. But it could ramp up the pace under a newly announced scheme to repurchase as much as $350 million of its shares. The company said it will also continue to pay out 20% to 30% of its GAAP-based net profit in dividends.

Investors cheered Qifu’s growing focus on returning money to them, bidding up the company’s shares by more than 10% following the release of its latest results. The stock continued to rally the next day and is now up more than 20% from pre-announcement levels.

Payment guarantees

A breakdown of the company’s fourth-quarter earnings shows that it’s trying to maintain a difficult balance between growing its business and managing risks.

Qifu’s revenue from its “capital-light” loan facilitation, which accounts for a substantial part of its business, actually dropped quite sharply in the fourth quarter. Under this model, Qifu simply acts as a middleman between banks and borrowers, providing no or only partial guarantees against loan defaults for its lending partners.

Such services are obviously good for the company because it can earn fees while taking on little credit risk. But they may be losing their appeal for Qifu’s lending partners as default risks climb in the current climate.

That changing preference of its lending partners showed up in a big rise of Qifu’s loan facilitation business that includes guarantees against defaults. Revenue from those services increased by a third year-on-year in the fourth quarter. Income from loans funded by Qifu’s trusts or its other units, which essentially makes Qifu the lender and thus also involves greater risk, increased nearly 50%.

Qifu’s bad-debt ratio is relatively high. Its loans delinquent for 90 days or longer, the standard definition of non-performing loans for banks, amounted to 2.35% of the company’s total loans at the end of 2023. That’s far higher than the 1.93% for FinVolution and 1.62% for the banking sector. This means Qifu may have to make larger provisions for bad loans than its peers, undermining its profits.

But at least in the fourth quarter, Qifu made up for its greater exposure to potential loan defaults with a nearly fivefold jump in revenue from its referral services. Those services typically see Qifu match borrowers with lenders using data on its platform. Such referral fees have typically been a very small part of Qifu’s business, but they played an important role in elevating its revenue in the fourth quarter.

As its profit grew in the fourth quarter, Qifu’s cash holdings increased a bit to about 3.38 billion yuan by the end of last year. It’s encouraging to see that the company is generating cash from its operations. And while investors seemed to like the company’s plans to share some of that cash with them, that use of its cash could also raise some longer-term concerns that the company is facing limited options for growth through investment.

At least for now, Qifu management seems focused on boosting the company’s share price.

“We are convinced that our company’s shares are significantly undervalued and the current market valuation does not reflect the company’s intrinsic value,” Qifu CEO Wu Haisheng said on the earnings conference call.

Qifu shares now trade at a price-to-earnings (P/E) ratio of 5, ahead of the 4 for FinVolution. But such valuations may seem too low for this kind of technology company, especially when you consider that global peer LendingClub (LC.US) currently trades at a P/E ratio of 21. Some of the discount may owe to China’s slowing economy and heavier regulation in the market. But many may argue the discount is still too high.

At the end of the day, the company’s performance in the final months of last year looks quite respectable, especially in the current environment, so it’s understandable that Qifu’s leadership is trying to raise the company’s value through aggressive share buybacks. But such a strategy can only go so far, since investors may also see such an approach as reflecting dwindling growth opportunities for the company over the long term.

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