FINV - FinVolution: Mixed Read-Throughs From Recent Results

2023-11-23 06:23:05 ET

Summary

• FINV's actual 9M 2023 top line and bottom line were less than 75% of their respective full-year consensus forecasts, as the Chinese economy remained weak.
• But Indonesia was a bright spot for FinVolution in the most recent quarter, and there is the potential for FINV to grab a larger share of the Indonesian P2P market.
• I leave my Hold rating for FINV unchanged, as I have a mixed view of the insights drawn from the company's latest set of results.

Elevator Pitch

My rating for FinVolution Group ( FINV ) shares is a Hold.

I previously published an initiation article on FINV in mid-September this year touching on how the company allocates capital and expands overseas outside of Mainland China.

The read-throughs from FinVolution Group's latest Q3 2023 performance are mixed, which justifies a Hold rating for the stock. On one hand, FINV's 9M 2023 results fell short of expectations because of the slower-than-expected recovery of China's economy. On the other hand, the company is finding success in Indonesia as evidenced by recent operating metrics, and there are opportunities for FinVolution Group's Indonesian P2P business to gain market share.

FINV's Recent Financial Performance Was Below Expectations Due To Weak Chinese Economy

FinVolution Group issued a press release disclosing its financial results for the third quarter of this year on Monday, November 20, 2023 after trading hours. Investors had a negative opinion of FINV's latest quarterly financial performance, as evidenced by the fact that FinVolution Group's stock price declined by -5.3% from $5.14 as of November 20 to $4.87 as of November 21.

There are no quarterly consensus financial estimates available for FinVolution Group according to S&P Capital IQ data. But it is possible to evaluate FINV's performance by doing a comparison of its 9M 2023 results with the full-year consensus forecasts.

FINV's actual 9M 2023 top line of RMB9,324 million represented 73%, or less than three-quarters of the sell-side analysts' consensus revenue projection at RMB12,774 million (source: S&P Capital IQ) . Similarly, the 9M 2023 normalized net income attributable to shareholders of RMB1,783 million only accounted for 72% (or less than 75%) of the market's consensus non-GAAP adjusted bottom line estimate of RMB2,486 million.

The company's recent financial performance failed to meet expectations, as both its revenue and normalized earnings for 9M 2023 were below 75% of the sell side's full-year forecasts as detailed above. Also, FinVolution Group's non-GAAP adjusted net profit attributable to shareholders decreased by -4% YoY from RMB622 million for Q3 2022 to RMB596 million in Q3 2023.

FinVolution Group acknowledged at the company's Q3 2023 earnings call on November 20 that the "economy in China" is "recovering very slowly", which has been a drag on its business performance. The company's management comments are aligned with recent data for Mainland China. A November 9, 2023 Seeking Alpha News article noted that China is witnessing "sluggish retail spending and a worsening manufacturing slump" as evidenced by -2.6% and -0.2% declines in "producer prices" and "consumer prices", respectively in October this year.

As an illustration of the lackluster performance for FINV's Mainland Chinese operations, the company's outstanding loans for its China business increased slightly by +1% from RMB63.8 billion at the end of last year to RMB64.6 billion as of end-Q3 2023. During this same time frame, outstanding loans for FinVolution Group's international or overseas business segment jumped by +61% as indicated in the company's November 2023 corporate presentation .

But FinVolution Group derived 82% of its Q3 2023 revenue from its Mainland Chinese business, so the difficult economic conditions in China still have an outsized impact on the company's overall results.

Indonesian Business Has Done Well In Recent Quarter With Market Share Gain Opportunity

FINV's recent disclosures as part of its third quarter earnings announcement suggest that the company is making good headway in penetrating its key foreign market, Indonesia.

In its most recent quarterly results release, FinVolution Group highlighted that the "proportion of transaction volume in the Indonesia market funded by the local financial institutions" rose substantially from 54.9% in Q3 2022 to 74.0% for Q3 2023.

FINV also shared at its Q3 results briefing that the borrower base for its Indonesia and the Philippines businesses combined grew by +18% QoQ and +27% YoY in the most recent quarter.

It is also worth noting that the company's Indonesian business has already grown to become the third largest player in the country's peer-to-peer or P2P loan market boasting a 6% share as per management commentary at the latest third quarter earnings call. There is room for FinVolution Group to gain market share at the expense of other competitors in the near term.

Asian technology news portal Tech In Asia reported earlier in late October this year that "Indonesian fintech major Akulaku has been prohibited by the country’s Financial Services Authority (or OJK) from continuing to offer its buy now, pay later services", because it has "allegedly violated the (OJK's) supervisory obligations". In response to a question on the latest regulatory developments in Indonesia at the Q3 2023 results call, FINV outlined its view that the Indonesian P2P market is likely to "consolidate" and benefit the "better quality players", as "entry barrier will increase when regulations tighten."

In other words, FINV is in a very good position to expand its market share in the P2P industry in Indonesia. An increase in regulatory scrutiny of this market will favor the existing market leaders with greater resources and financial strength to comply with new regulatory requirements like FinVolution Group.

Concluding Thoughts

It is a tale of two markets for FinVolution Group. FINV's home market, Mainland China, is underperforming based on a review of its 9M 2023 metrics and consensus estimates. But the company is performing very well in its major foreign market, Indonesia with the potential to increase its market share in the P2P segment.

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