Speculative Bet on This US-Listed Chinese Play – FINV

Oct 08, 2021 12:00 AM PDT | Team Kalkine
Speculative Bet on This US-Listed Chinese Play – FINV

FinVolution Group

FINV Details

FinVolution Group (NYSE: FINV), previously PPDAI Group Inc., is a China-based company engaged in operating an online consumer finance platform. Loan services for borrowers, investment services for individual investors, and institutional funding partners are among the company's products and services. The majority of its earnings comes from transaction service fees. The firm had over 130.8 million registered users as of June 30, 2021.

Completion of Asset-Backed Securities: FINV stated on September 29, 2021, that it completed an RMB 200 million offering of asset-backed securities (ABS), a fifteen-month consumer loan-backed financial instrument. The ABS is titled Tian Feng - FinVolution Group Phase 1 Trust Beneficiary Right Asset Support Special Plan and has been listed on the Shenzhen Stock Exchange.

Strategic Agreement: On September 09, 2021, FINV reached strategic collaboration agreements with Ocean Engine and Yillion Bank, one of China's first four licensed internet banks. The objective of the collaborations is to help conventional financial institutions grow their businesses in various ways, including marketing, day-to-day operations, credit risk management, and ecosystem development.

H1FY21 Results: The company reported an increase of 14.81% in net revenues to RMB 4.50 billion during H1FY21 (ended June 30, 2021) compared to RMB 3.92 billion during H1FY20, primarily due to an increase in transaction volumes. As a result, it witnessed a rise in H1FY21 net income to RMB 1.21 billion from RMB 874.37 million in H1FY20. In addition, the total transaction volume during Q2FY21 reached a new high of RMB 33.4 billion, with the total number of new borrowers were 1.18 million, up 500.5% YoY.

Growth in Transaction Volumes and Loan Balance (Source: Investor Presentation, August 2021)

Key Risks: Each share of FINV's Class B common stock has 20 votes, compared to one per share for Class A common stock. Hence, Class B common shareholders have ~93.3% of the voting power (as of March 31, 2021). This concentration of voting power hampers other shareholders' capacity to influence company affairs.

Moreover, the Chinese authorities' recent crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent the company's operations. This is after the passage of a bill in the US that could lead to the delisting of some Chinese companies from the country's exchanges (in case the US authorities cannot satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.

Outlook: Considering the resurgence of COVID-19 in China and certain other countries, FINV has a cautious stance on its operations as of August 23, 2021. However, it expects a consistent increase in transaction volume in Q3FY21, projected to be around RMB 35.0 – 37.0 billion.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

FINV Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: FINV's share price fell 29.80% in the past three months and is currently leaning towards the mid-band of the 52-week range of USD 1.90 to USD 10.61. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 44.53. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 6.90. Considering the significant correction in the stock price, strategic agreements, increase in transaction volumes, steady dividend, and China's crackdown, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 5.63, up 1.62% as of October 07, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.