FINV - FinVolution Group: Looks Like Momentum Is In Its Favor

Summary

• With the majority of its business in China, rolling COVID-19 lockdowns could cause uneven results in any one quarter.
• FinVolution Group's transition to higher quality borrowers is starting to pay off.
• Total transaction volume in the third quarter jumped by 19 percent year-over-year.
• Its success in Indonesia proves it can leverage its business to other markets.
• Small business transactions now account for 25 percent of total transactions.

Under challenging conditions China-based FinVolution Group ( FINV ) has been successful improving and expanding upon its business, as it attracts higher quality borrowers, boost overall transaction volume, increases the number of domestic small businesses it serves, and successful expanded its business to Indonesia, which is setting the stage for further international growth, with the Philippines likely to be its next target.

One of the few things holding it back has been the rolling COVID-19 lockdowns that can disrupt its business in any quarter which has at times generated uneven results.

As far as macro-economic challenges, so far it has navigated through them well, as evidenced by its continual growth in transactions and the value of its loan's portfolio.

In this article look at some of the numbers from its latest earnings report, the pace of its customer and transaction growth, the increase in the number of small businesses it serves in its domestic market, and why its future growth in international markets looks very promising.

Some of the numbers

Revenue in the third quarter was $417 million, up 17.7 percent year-over-year. The increase in revenue was attributed to growth in its "loan facilitation service fees, post facilitation service fees and guarantee income."

Fees from its loan facilitation service was $164.3 million, an increase of 8.7 percent from the third quarter of 2021. A boost in transaction volume was the catalyst there, with a decline in service fee rates partially offsetting it. Fees from post-facilitation services was $69.2 million in the reporting period, up 36.3 percent year-over-year. The gains there was from the increase in outstanding loans in the quarter and "the rolling impact of deferred transaction fees."

Delinquency rates in China

Revenue from guaranteed income reached $115.6 million in the third quarter. With the company pivoting to higher quality borrowers "the fair value of quality assurance commitment upon loan origination decreased due to better asset quality. "Net income in the reporting period was $46.3 million, slightly down by 0.9 percent.

Revenue from Other was $22.3 million, up 42.1 percent from the third quarter of 2021. That was attributed to an increase in customer referral fees from outside platforms.

Expenses associated with sales and marketing was $75.2 million in the third quarter of 2022, up 38.1 percent from the third quarter of 2021. The increase came from the company's decision to attract higher quality borrowers domestically and internationally. To me that's money well spent. As a result of its efforts to attract higher quality borrowers the provision for loans receivable dropped 7.9 percent to $18.5 million in the reporting period. Net profit in the third quarter of 2022 was $84.2 million, or $0.06 per diluted share. At the end of the third quarter of 2022 the company had cash and cash equivalents of $427.6 million and short-term investments of $329.7 million.

Transaction and user growth

The total transaction volume in the quarter was up 19.4 percent year-over-year. Transaction volume from repeat individual borrowers for the third quarter of 2022 was up 28.1 percent compared to the same quarter of 2021.

With the increase in transactions the total outstanding loan balance in the reporting period was up 34 percent year-over-year. The number of overall registered users at the end of the third quarter of 2022 was 154.3 million.

The total number of unique borrowers in the reporting period was 3.2 million.

The number of repeat borrowers climb to 2.5 million in the third quarter of 2022.

Small business growth

The small business segment of FINV has been growing strong, with the company serving approximately 504,000 small businesses in the third quarter, now accounting for 25 percent of the total transaction volume of the company, up 43 percent year-over-year. That will without a doubt continue to grow.

The diversity of industries and geographies in the small business mix helps mitigate risk. FINV added that about 60 percent of the small business owners it does business with have been operating for over three years, suggesting probable longevity in the small business growth trend in China. Not only is its small business segment diversified internally, but the growth also provides a level of risk mitigation from its exposure to individual consumers it does business with.

Combined with its international growth and success, it's providing higher support for a floor on its share price.

International business

The successful performance of the company in Indonesia, now accounting for 12 percent of total revenue for FINV, is important not only because of its adding to its top line performance, but because it confirms the company is able to successfully compete outside the market in China while applying the same business model.

Similar to its strategy in China, it is branding and marketing for the purpose of attracting higher quality borrowers. That is progressing as it increased borrower quality from 62 percent of Indonesian borrowers in the second quarter to 68 percent of total Indonesian borrowers in the third quarter. Combined with a stronger macro-economic environment and policies around COVID-19 being eased by the government, the number of transactions from the second quarter jumped by 22 percent, and on a year-over-year basis, by 6 percent.

Management believes it will be able to significantly grow the number of transactions by partnering with local financial institutions that will expand its reach to the type of borrowers it's seeking to do business with.

To get an idea of how quickly business in Indonesia is growing for FINV, the proportion of loans in the third quarter increased from 39 percent in the second quarter to 48 percent in the third quarter. Last year in the third quarter there was no local funding in the Indonesian market.

With this experience and success in Indonesia, I believe the company has proven it can successfully expand to international markets using its technology and business model. In the future international markets are going to become a much larger part of the percentage of revenue it generates. The next international market the company is probably going to enter is the Philippines.

Conclusion

Now that FINV has a clear plan and strategy in place that it has successfully tweaked domestically and internationally, it has the experience in place to leverage its tech and business model in other markets.

Not only is there plenty of room to grow domestically, but it has much of Asia laying before it, and I wouldn't be surprised to see it expand beyond there in the years ahead.

But in the near term there are still the effects of COVID-19 shutdowns that are more prevalent in Asia, and that will generate some uneven results in some quarters. But those are just small bumps in the road, as the long-term growth trajectory of FINV looks very compelling, and demand for its services will continue to grow long into the future.

As it increases the quality of its borrowers on an individual basis in the market it competes in and starts to market to small business in Indonesia and other international markets it the future, it's easy to see, in my opinion, that FINV is really just in the early stages of development and has a lot of opportunity and potential ahead of it.

After a triple bottom at about $3.50 from April 2022 to May 2022, the company has had its share price climb on a consistent, incremental pace, and could be poised for a breakout if it is able to crack through its 52-week high or $5.39 per share.

If it does it could be off to the races, and if it doesn't it would result in an excellent entry point for those taking a new position in the company.

The only reservation I have at this time in taking a position in FINV is the potential for it to correct before resuming its upward trajectory. After all, climbing from approximately $3.50 per share to over $5.00 per share in a relatively short period of time means a lot of its current performance could already be priced in.

Dollar-cost averaging would probably be the best way to take a position in the company in order to get an attractive cost basis in preparation for the inevitable increase in its share price in the future.

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