Improving quality and increasing profits have shown results, and the scale of loans may stabilize

Qifu Technology is the leading consumer credit platform in China. The 2Q24 loan balance reached RMB157.8bn, and the cumulative number of registered users reached 0.25 billion. Qifu Technology mainly provides small-amount (7,500 yuan per transaction) short-term (contract period of 10 months) Internet consumer credit products. In terms of business models, the share of loans that do not bear risk (light capital business) is gradually increasing. In terms of loan quality, the first-day overdue rate of the forward-looking risk index continued to be repaired, leading to a decline in provisions and beneficial to profit performance. In terms of business scale, under a prudent management strategy, 2Q24 loan volume fell 3.8% month-on-month. As loan quality picks up, we expect the contraction pressure on loan volume to decrease in the second half of the year. The company values shareholder returns. The USD350mn repurchase amount has already used USD211mn, and the 2H24E dividend rate/dividend ratio is 29/ 5.4% (2023 dividend rate: 29%).

Considering the improvement in loan quality and possible stabilization of loan volume, we expect net profit of 5.41/6.58/7.18 billion to the mother for 2024/25/26, covering the initial target price of HK$114.3, and “buy” based on the average target price of PE (2024E PE6.5x) and DCF (forecast period of 50 years, cost of equity 22.6%).

2H24 loan volume is likely to stabilize

Since 2023, demand for high-quality consumer credit has been weak under macroeconomic fluctuations. The company switched from pursuing scale to focusing on quality. The loan volume and loan balance continued to shrink. In 2Q24, the loan volume was RMB95.4bn (-3.8%), and the loan balance was RMB157.8bn (month-on-month: -7.1%). With its own risk control capabilities and the trust of financial institutions, Qifu Technology gradually developed into a platform. The 2Q24 light capital loan volume was RMB61.9bn, accounting for 65% (1Q24:61%). The company's prudent business strategy has paid off, and the quality of loans has gradually improved. We expect 2H24 to maintain prudent management, but loan investment will be slightly more active, and loan volume may be flat or slightly higher than 1H24. On the one hand, improving loan quality is expected to open up room for improvement in approval rates and credit lines. Furthermore, improvements in customer acquisition efficiency and customer acquisition quality are expected to enable Qifu Technology not only to maintain stable loan quality, but also to be relatively active in loan investment.

Improved loan quality and increased share of capital-light businesses are beneficial to profits

Qifu Technology's strategy to improve quality and increase profits had an obvious effect in 2Q24. After the loan quality improved, the increase in payback led to a decline in provisions, which was beneficial to the net profit take-rate (net profit to mother/loan balance at the beginning and end of the period). The first-day overdue rate for 2Q24 leading indicators fell slightly to 4.8% (1Q 24:4.9%), and the 30-day payment rate rose to about 86.3% (1Q 24:85.1%). Improved loan quality led to 0.48 billion in provision rebates, which is an important reason for the increase in net profit take-back rate. Since capital light businesses do not require accrual provisions, and the pace of revenue recognition is faster than that of heavy capital businesses, the increase in the share of light capital businesses also contributed to an increase in profits in 2Q24. 2Q24 capital costs were reduced by 56 bps month-on-month, mainly due to sufficient capital supply and the newly issued 4.6 billion ABS. The 2q24 net profit take rate (calculated by Huatai Research) rose to 3.4% (1Q24:2.6%). The company's net profit guideline for 3q24 was RMB1.5-1.6bn, up 9-16% month-on-month, which is a strong level. We anticipate that the company is expected to meet the 3Q24 profit guidelines, and the 2H24 net take-rate is expected to increase, mainly due to improved loan quality, increased share of light capital, reduced capital costs, and optimization of operating efficiency.

Risk warning: macroeconomic risks, lower loan pricing, regulatory risks.