Qifu Technology's 2Q24 non-standard net profit exceeded our previous expectations

Qifu Technology (formerly 360 Digital)'s 2Q24 revenue was +6% YoY/nearly flat to 4.16 billion yuan, and non-common standard net profit +23% YoY/+17% month-on-month to 14.1 yuan, exceeding our previous expectations, mainly due to improved asset quality, reduced capital costs, and optimization of customer acquisition efficiency.

Development trends

The loan strategy promotes quality and efficiency, and user activity is relatively stable. The company's 2Q24 loan scale was -23%/-4% month-on-month to 95.4 billion yuan (of which the ratio of technology-resolution loans was +3.9 ppt to 64.9% month-on-month), and the loan balance was -15%/-7% month-on-month to 157.8 billion yuan, mainly because the company focused more on improving loan quality and profitability. At the user level, the company's performance will indicate that its 2Q24 user activity remained stable, while the number of loan applications initiated by users increased month-on-month in June. Looking ahead, if asset quality improves further and user demand shows a recovery trend, we expect that the company's loan scale in the second half of the year may increase somewhat compared to the first half of the year.

Asset quality has improved, and profitability has been further improved. The company's 2Q24 revenue was +6% YoY/nearly flat at 4.16 billion yuan. The faster growth rate than loans was mainly due to the company's optimization in terms of loan quality/capital/customer acquisition. The company's 2Q24 non-generic net profit was +23% /month-on-month +17% to 14.1 yuan, mainly due to: 1) 2Q24 average capital cost -56bp, we expect the company's capital costs to remain at a similar level in the future; 2) 2Q24 forward-looking risk indicators are improving (D1 input/overrun rate -0.1ppt, 30-day recovery rate +1.2ppt). At the same time, more careful provision in the early stages brought a certain amount of profit release; 3) diversified customer acquisition channels such as information flow/embedded finance/banking APIs helped the company gain customers ROA continues to be optimized, and the company's 2Q24 sales and marketing expenses were -16% YoY/ -12%.

Under steady operation+high shareholder returns, we are optimistic about the company's valuation repair. At the dividend level, the company declared $0.6 per ADS for 1H24; at the repurchase level, the company has accumulated repurchases of 10.7 millionAds from the beginning of 2024 to August 13, 2024, with a repurchase amount of ~$0.211 billion. We believe that a sustainable high shareholder return under the steady operation of the company is expected to continue to enhance the company's long-term investment attractiveness.

Profit forecasting and valuation

Due to the optimization of the company's asset quality and the prudent release of certain profits in the early stages, we raised the company's 24e/25e non-general standard net profit forecast by 18%/16% to 5.64/5.89 billion yuan. The company's US stocks currently trade at 4.2x/4.1x 24e/25e P/E, and Hong Kong stocks currently trade at 4.1x/3.9x 24e/25e P/E.

Considering that market risk appetite may have been lowered to a certain extent after the stock price increase in the previous period, the company's target price for US/Hong Kong stocks was maintained at $30/HK$116.4 (both US/Hong Kong stocks correspond to 6.0x/5.8x 24e/25e P/E), and the US/Hong Kong stocks outperformed the industry rating. The upside for US and Hong Kong stocks was 42%/47%, respectively.

risks

The regulatory environment is uncertain; market competition exceeds expectations; asset quality fluctuates greatly.