JFIN - Jiayin Group: Cheap Valuations Are Justified By Uninspiring Outlook

2023-12-13 11:49:48 ET

Summary

• Jiayin Group Inc.'s loan facilitation volume growth is expected to slow in Q4 2023, while its future profit margins might possibly be under pressure from an unfavorable revenue mix.
• On the flip side, Jiayin Group's valuations are undemanding, and the company has done pretty well in terms of shareholder capital return.
• I think that Jiayin Group Inc.'s depressed valuations are consistent with its unexciting financial prospects, which translates into a Hold rating for the stock.

Elevator Pitch

I rate Jiayin Group Inc. ( JFIN ) shares as a Hold. The company's financial prospects relating to loan facilitation and margins are weak. But JFIN stock is trading at depressed valuations, and the company has done well in the area of shareholder capital return.

Company Overview

In its press releases , Jiayin Group describes itself as a "fintech platform in China" which links up "underserved individual borrowers" with "financial institutions." JFIN disclosed in the company's November 2023 investor presentation that it has served in excess of 14 million borrowers and collaborated with 73 financial institutions to provide funding since its inception.

JFIN's Corporate History

Jiayin Group's Value Proposition For Borrowers And Financial Institutions

JFIN generated 64% and 36% of the company's most recent Q3 2023 top line from loan facilitation services and other revenue, respectively as revealed in its latest quarterly results release . According to its Q3 earnings release and its FY 2022 20-F filing , Jiayin Group's other revenue is derived from "financial guarantee services," "interest income," and "investor referral" services.

Loan Facilitation Volume Guidance Was Disappointing

Jiayin Group guided for a loan facilitation volume of RMB20 billion for the final quarter of the current year, as indicated in the company's Q3 2023 results press release.

I view JFIN's Q4 2023 loan facilitation volume guidance as a disappointment.

The company's actual Q2 2023 and Q3 2023 loan facilitation volumes were higher at RMB24.0 billion and RMB24.2 billion, respectively. Also, this set of guidance suggests that the YoY loan facilitation volume growth for Jiayin Group is anticipated to moderate from +62% in Q3 2023 to +6% for Q4 2023.

JFIN cited the high base effect and the company's discerning approach towards loan originations as the main reasons for the below-expectations Q4 loan facilitation volume guidance. At its Q3 2023 results briefing , Jiayin Group highlighted "the rapid development since the year of 2022, especially the quarter-over-quarter growth" for Q4 2022, and mentioned that it is "adhering to a cautious and prudent risk management style."

Looking ahead, it is realistic to assume that Jiayin Group will deliver a more modest high single-digit percentage loan facilitation volume growth in the future, similar to what it expects to achieve for Q4 2023. According to a November 2023 report published by Mainland Chinese research firm iResearch , China's Internet consumer finance industry is projected to expand at a five-year CAGR of approximately +10%.

Margin Pressure Resulting From Unfavorable Revenue Mix

JFIN has been diversifying its revenue mix, but this might come at the expense of lower profit margins for the company as a whole.

As mentioned in the preceding section, Jiayin Group's loan facilitation volume and revenue are expected to grow at a slower pace in the fourth quarter of 2023 and beyond. This means that JFIN needs to find new top line growth drivers such as financial guarantee services.

In Q3 2023 , loan facilitation revenue for JFIN increased by +18% YoY to RMB936.5 billion. In comparison, the company's other revenue surged from RMB101.4 billion in Q3 2022 to RMB529.8 billion for the most recent quarter thanks to the good performance of its financial guarantee services business.

However, the stronger growth in Jiayin Group financial guarantee services business relative to its core loan facilitation services business could lead to weaker profitability for JFIN in the future.

Jiayin Group acknowledged at the company's Q3 earnings call that "the margin of the guarantee business is relatively lower" as compared to "borrower acquisition and risk control services (core loan facilitation business)" and this "will reduce the overall operating profit margin of the listed group."

It is worthy of note that the top line contribution from other revenue (including financial guarantee services) rose from 12% for full-year FY 2022 to 36% for Q3 2023. As per S&P Capital IQ's financial data, JFIN's net margin contracted from 28% for Q3 2022 and 26% for Q2 2023 to 22% in Q3 2023.

Improvement In Shareholder Capital Return

There are worries about JFIN's loan facilitation volume growth outlook and profitability prospects as detailed in the prior sections of this article. But Jiayin Group has shown signs of improvement when it comes to the company's shareholder capital return.

In July this year , Jiayin Group declared a dividend of $0.40 per ADS (American Depositary Share), which represents the first dividend distribution for JFIN since its May 2019 IPO. JFIN has subsequently announced a second dividend distribution of $0.40 per ADS in November 2023. With respect to its dividend outlook, Jiayin Group stressed at its Q3 2023 earnings briefing that "we are very confident to give out more (dividends) to our investors in the future."

In the middle of the current year, JFIN disclosed that it extended the expiry date of its $10 million share buyback program (first initiated in June 2022) from June 12, 2023 to June 12, 2024. As revealed in its Q3 2023 earnings release, the company has already allocated around $5.5 million to share repurchases in total for the time period between June 2022 and September 2023.

In my opinion, Jiayin Group's new dividend initiation and good progress in executing on its share repurchase plan should provide some support for its stock price.

Current Valuations Are Undemanding

Jiayin Group's current valuations appear to have factored in negatives relating to the company's lackluster loan origination and profit margin outlook to some degree.

JFIN is now valued by the market at a trailing twelve months' normalized P/E multiple of 1.34 times as per S&P Capital IQ's valuation data. The stock's three-year average and all-time mean P/E ratios were higher at 3.17 times and 3.71 times, respectively.

Also, Jiayin Group is currently trading at a discount to its key Chinese fintech peers. The market is now valuing LexinFintech Holdings ( LX ), FinVolution Group ( FINV ), and Qifu Technology ( QFIN ) at trailing twelve months' normalized P/E ratios of 1.63 times, 3.91 times, and 4.35 times (source: S&P Capital IQ ), respectively.

Final Thoughts

A Hold rating for Jiayin Group Inc. is justified. Although Jiayin Group's shares are cheap, JFIN's undervaluation is warranted by its weak financial outlook.

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