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Listed in December 2018, 360 Finance Inc (NASDAQ: QFIN) has seen its share price decline by 35% from its IPO price of US$16.50.
The general sentiment towards the company is negative, rendering its stock to trade at an undemanding valuation of below six times price-to-earnings (PE).
What it does
360 Finance is a digital consumer finance platform in China focusing on lending to underserved borrowers.
It acts as the middleman to connect borrowers and lenders (mainly institutional partners like banks). From its inception in 2016 to 31 December 2019, it had facilitated over RMB 326.1 billion (US$46 billion) in loans to 15.9 million borrowers.
In terms of financials, 360 Finance has grown revenue to RMB 9.2 billion in less than four years since its inception in 2016.
Moreover, it has been profitable over the last three years, with net profit growing more than fifteen-fold in the last three years to RMB 2.5 billion in 2019.
Why is it hated?
Despite its positive financial performance, 360 Finance is not a favourite among investors. There are a few reasons for this.
Firstly, the online consumer finance industry is new and rapidly evolving, making it difficult for investors to assess its prospects.
Moreover, the unclear regulation around this industry, as well as the intense competition, resulted in investors having a wait-and-see attitude towards companies like 360 Finance.
Secondly, investors are concerned about the impact of Covid-19 on the consumer financing industry, both in terms of potential bad debts and future growth.
To this end, 360 Finance has reported some mixed signals in its latest results for the quarter ended 31 March, 2020.
On the one hand, the 90-day delinquency rate deteriorated from 1.31% in the previous quarter to 2.17% this quarter. Still, the online lender reported a profit on the back of higher revenue (which increased 58% year-on-year) for the quarter.
Despite the short-term challenges mentioned above, 360 Finance is well-positioned to sustain its strong growth.
There are many ways the company can achieve this. One way is that it can continue to acquire registered users, and concurrently, convert its existing registered users (141.63 million) into borrowers (16.81 million).
Furthermore, it can increase the average loan balance for its loyal (and credit-worthy) borrowers, which is a useful way to grow its business at relatively low risk.
Going forward, 360 Finance expects total loan origination volume for the fiscal year 2020 to be in the range of RMB 200-220 billion, up from RMB 199 billion in 2019.
I think this is a reasonable target considering that we are in an economic slowdown stemming from the Covid-19 outbreak.
Stock to consider for the long term
In all, Mr. Market is currently quite pessimistic about 360 Finance (which is likely to be temporary), even though the company has delivered some strong performance in the last few years.
Long-term investors, therefore, might want to take this opportunity to consider the stock now considering its good prospects and low valuation.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.