Investment advice
We are optimistic that the company's valuation will continue to recover under steady operation and sustainable high shareholder returns.
rationales
Qifu Technology is a leading credit technology company that has gone through cycle testing and steady operation. Since its establishment, Qifu Technology has gone through three stages of rapid expansion, rectification, and steady development along with the consumer finance industry. The company's 2023 loan scale/loan balance was 4,758 (2018-2023 CAGR: 38%)/186.5 billion yuan (2018-2023 CAGR: 34%), ranking first among listed consumer credit technology companies. The company has derived 6 types of loan models based on the degree of participation in the loan process and whether it bears risk. Diversified service models can help the company dynamically balance scale, risk and profitability in different market environments, while effectively meeting the willingness of financial institutions to cooperate with various types.
The regulatory framework is clear, and the company's advantages are prominent under the industry's survival of the fittest. Since the second half of 2020, the current consumer finance supervision cycle has come to an end. Judging from the results, the main impact on credit technology companies is that their responsibilities and profit sharing ratio have declined. Looking ahead, we believe that considering the major trend of fee reduction and concessions and regulations that continue to emphasize the principal responsibility of the financial side, credit technology companies' service rates are still under downward pressure for a long time, but the company has obvious advantages in risk pricing/capital cost/risk control/marketing/operation, and is expected to rely on the optimization of the unit economic model to maintain a steady increase in service rates. Furthermore, with regard to the uncertainty of local financial license regulation, the company currently has plenty of cash, completed small loan capital increases, and there is still plenty of room for regulation of small loans/financing leverage, which is expected to guarantee its long-term business flexibility and steady development.
Under steady operation+high shareholder returns, we are optimistic about the company's long-term development and valuation increase. Looking ahead, we believe that the company's current position can be attacked and defended: the offensive attributes stem from the market's conservative profit expectations for the company in the current macro environment. If demand and asset quality are repaired at an accelerated pace, there are opportunities for both valuation and profit growth; at the same time, sustainable high shareholder returns under the company's steady operation also make the company a high-quality defense target in a volatile market. We measure the company's potential upward space through two dimensions: 1) Referring to the P/B vs. ROE valuation system of typical banks in the world, the company's current valuation discount rate is ~ 40%. Considering that the company's asset quality and business transparency are higher than most traditional financial institutions, it is expected to drive the gradual narrowing of the valuation discount (if the discount rate narrows from 40% to 20%), corresponding to the potential upward space of ~ 37%; 2) The company maintains a sustainable high shareholder return and is highly attractive, and the company's comprehensive shareholder return is 1 to 17%; we believe that the reference industry is comparable The company, even considering the subsequent rise in stock prices and the reduction in the company's investment attractiveness after the comprehensive shareholder return fell to 12%, still corresponds to a potential upward space of ~ 42%.
Profit forecasting and valuation
The company's US and Hong Kong stocks are currently trading at 4.8x/4.5x 24e/25e P/E and 0.9x/0.8x 24E/25EP/B. Keep the company's profit forecast and evaluation unchanged. Considering that the two methods used to measure the company's potential growth potential in the article were based on conservative assumptions, we kept the company's target price of US/HK$116.4 (7.1x/6.7x 24e/25e P/E) and ratings unchanged, with 48%/49% upward space for US/Hong Kong stocks.
risks
The regulatory environment is uncertain; market competition exceeds expectations; asset quality fluctuates; and demand recovery falls short of expectations.