FinVolution Group Is Still A Growth Play

Summary

  • Annual trends are on a strong upward path.
  • First-quarter results are back on track.
  • Valuations are still on the cheap side.

I tipped the Chinese loan company FinVolution Group to my subscribers at the turn of the year. The stock is up 165%, but there are still reasons to get involved now.

Annual trends are on a strong upward path

FinVolution Group is a Chinese fintech platform China focused on connecting underserved individual borrowers with financial institutions. Established in 2007, the Company is a pioneer in the country’s online consumer finance industry and has developed innovative technologies in the core areas of credit risk assessment, fraud detection, big data, and artificial intelligence.

Annual revenues for the group are on a strong upward trend from 1.2bn yuan in 2016 to 7.5bn in 2020.

(Source: Reuters, author)

Operating expenses are keeping pace with sales but the company is in a growth phase and is leveraging its technology and undertaking research & development efforts.

The company was affected by the pandemic as March 2020 revenues of Y2.1bn dipped to around Y1.8bn for the next three quarters; however, the Q1 numbers were back above the Y2bn level.

First-quarter results are back on track

First-quarter results for the company this year highlighted a strong improvement in total new borrowers with a 169.4% increase. New international borrowers were also up 235.7%.

(Source: FinVolution Group)

Income and credit problems from the lockdowns would have driven the new customers to FinVolution and is a welcome boost for future growth plans.

The company is still weathering the uncertain outlook with a cautious outlook for Q2 results:

The Company holds a cautiously optimistic view on its operations and anticipates steady growth in its loan origination volume in the second quarter of 2021, which is expected to be in the range of RMB29.0 billion to RMB30.0 billion.

The investment opportunity for FinVolution is to hitch a ride on the annual revenue and user growth as the company shrugs off the current climate.

Cheap valuation meets growth prospects

FinVolution also scores well on valuation with the company currently trading at a price/earnings ratio of 6.84x and a forward p/e of 5.7x. This looks even cheaper when you consider that the most recent EPS growth was 46.7% for the quarter.

Other metrics underline the valuation with a price/sales ratio of 1.88 and price/cash at 5.57. The Chinese stock market is still well below its all-time highs and is not seeing the same demand as the US indices. That would be another tailwind for the stock when the Shanghai index returns to a strong bull market.

On the growth outlook, the consumer credit market is still developing in China and lags behind the US in penetration.

(Source: FinVolution Group)

Consumer credit-to-GDP is at 13% in China versus 20% in the US, while 46% of adults have a credit score in China versus 81% in the US. These figures should support the annual revenue trajectory for FinVolution. The company is also targeting expansion in Southeast Asia with a market of 700m people, of which 60% are under 35. At present, the current number of registered users is 125.3 million as of March 31, 2021.

The company’s technology is largely automatic with 99% of funds matched automatically and 92% of customer enquiries solved by artificial intelligence. This is seeing a big improvement over the last two years alone in delinquency rates with a drop from 8% to 2%.


(Source: FinVolution Group)

The company’s CFO underlined the plans for growth in the Q1 results, saying:

Supported by a solid balance sheet with cash and short-term liquidity of RMB5.1 billion, our leverage ratio remains low at 3.7 times. FinVolution is well-positioned to explore new business models and tap into new opportunities both domestically and internationally.

(Source: FinVolution Group)

After a dip in borrowers into the start of the pandemic, the company is seeing strong growth again, particularly in the international market.

Conclusion

FinVolution Group is a growing fintech company for the consumer finance space in China and with 100 million users, there is potential for growth in the mainland. However, the Southeast Asia market is also big and the coronavirus pandemic saw a surge in international borrowers to the company.

With strong annual revenue trends and these growth markets, the upward trajectory should continue and the company is also benefiting from its technology with a drop in delinquency rates over the last two years from 8% to 2%. Down the line, the company could make further breakthroughs in its A.I. capabilities or find new partnership possibilities.

With this growth potential, the company also has the tailwind of a Chinese stock market that has fallen out of favor with international investors, but which will undoubtedly return to growth. On the valuation side, the 6.8x price/earnings ratio highlights a stock that could already be trading at higher multiples and it would be a chance to get in while the company is shrugging off uncertain conditions and planning for growth domestically and internationally.

Author: Kevin George, Seeking Alpha

You might also like