LU - Jiayin Group Increases Scale And Grows Internationally

2023-12-21 14:19:31 ET

Summary

• Jiayin Group Inc. operates a fintech platform connecting lenders and borrowers in China and overseas.
• The company continues to grow volume and scale profitably despite macroeconomic headwinds in the Chinese economy.
• While I remain Neutral [Hold] for now, Jiayin Group is worth putting on a watch list for potential investment as the Chinese economy improves.

A Quick Take On Jiayin

Jiayin Group Inc. (JFIN) operates a fintech platform enabling loan facilitation from lenders to consumers and small businesses in China and overseas.

I previously wrote about JFIN with a Hold rating due to the potential for higher delinquency rates and tightening lending standards as the Chinese economy struggles.

While Jiayin Group Inc. continues to grow volume and scale profitably despite macroeconomic headwinds, I remain Neutral [Hold] for now.

However, JFIN is a stock worth putting on a watchlist for continued consideration of the potential for an improving Chinese economy.

Jiayin Overview And Market

Shanghai-based Jiayin aims to connect lenders and borrowers in China and internationally via an online lending platform, utilizing the company's unique risk assessment system.

The founder, director, and CEO, Dinggui Yan, previously held the position of CEO at Niwodai Internet.

Jiayin believes that by focusing on facilitating consumer loans with a duration of 12 months or longer, such offerings can better cater to the financial requirements of borrowers while also benefiting investors.

The firm's risk management framework relies on generated user and transaction data, in addition to multiple layers of background and behavioral information from multiple third-party sources.

A 2022 market research article featured in China Banking News cites a McKinsey report, estimating that China's consumer finance market will potentially hit $4.2 trillion by 2025.

This projected growth may be a result of ongoing government backing promoting domestic consumption.

The report does highlight, however, that fintech companies may face declining profits and an increasingly competitive landscape.

Also, current financial system challenges in China indicate that the real estate sector may be a source of financial stress due to overbuilding and malinvestment over decades.

The firm has expanded its offerings to other countries, including Indonesia and Nigeria and is also starting to work with Tier 1 banks.

Other key players in this industry include QFIN, Ant Financial, Qudian, Yiren Digital, New Oriental Credit, CreditEase, FinanceMe, PPdai, and LuFax.

Jiayin’s Recent Financial Trends

Total revenue by quarter (blue columns) has grown impressively due to continued consumer demand for loans; Operating income by quarter (red line) has remained flat because of the offsetting effects of reduced gross margin but also reduced SG&A expense ratio:

Gross profit margin by quarter (green line) has trended lower as a result of the services mix; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have fallen due to an increase in scalability and resulting volume growth for a relatively fixed expense base.

Earnings per share (Diluted) have been somewhat volatile, but have remained strongly positive:

(All data in the above charts is GAAP.)

In the past 12 months, JFIN’s stock price has risen by 148.8% versus a drop of 64.95% for competitor Lufax Holding Ltd (LU):

For balance sheet results, the firm ended the quarter with $24.7 million in cash and equivalents and no debt.

Valuation And Other Metrics For Jiayin

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Commentary On Jiayin

In its most recent earnings call (Source - Seeking Alpha ), management’s prepared remarks highlighted strong growth in its loan origination volume.

However, in Q3, China experienced slow growth due to monetary and other policies, but management sees the economy as "undergoing a slow recovery process."

In response, the company has focused intently on lending standards and risk management to minimize delinquencies or charge-offs.

The firm added more financial institution partners, reaching 73 at the end of the quarter, and the company is also in talks with numerous others, including Tier 1 banks.

JFIN has a number of initiatives underway to further integrate its knowledge base and customer-facing resources using AI LLM technologies.

Analysts questioned the leadership about its financial performance, risk management and operating efficiency efforts.

Management said that loan volume growth was a result of increasing scale but also other revenue from sources such as financing guarantee services, referral services and overseas sources.

On risk management, leadership replied that the firm focuses on the overall income-to-debt ratio of its borrower groups and is accelerating its monitoring processes.

Management said that operating cost reductions were due to an increase in the scalability of its volume of loan facilitation, and indicated it intends to increase investment in R&D technologies in the periods ahead.

For the quarter’s results, total revenue rose by 59.7% year-over-year, while gross profit margin fell by 20.5%.

Selling and G&A expenses as a percentage of revenue fell by 10.5% YoY, and operating income grew by 10.5% to $52.3 million.

The company's financial position is good, with ample liquidity and no debt.

For the dividend, the current expectation is to pay out no less than 15% of after-tax net income to shareholders in the form of a dividend, likely on a twice-per-year basis but subject to the Board’s discretion.

Assuming a $0.40 annual dividend and a share price of around $5.20, that would equal an estimated annual dividend yield of 7.69%.

Larger Chinese financial services companies are starting to differentiate themselves, in part, by issuing dividends to shareholders, not only as a return but as a confidence-building measure.

While the firm is still subject to ongoing unpredictability in the Chinese regulatory environment, its diversification into other countries, such as Indonesia and Nigeria, indicates a strategy to develop revenue sources from other locations with the potential for scale.

JFIN is likely undervalued due to a discount placed on Chinese firms from recent regulatory actions that have interfered with market structure and conditions, but I view larger firms such as JFIN as ultimately the beneficiary of increasing compliance costs that smaller firms won’t be able to absorb efficiently.

While I’m not ready to issue a "Buy" rating and remain Neutral [Hold] on JFIN for now due to uncertain economic conditions in China, the stock is worth putting on a watch list for if and when the Chinese economy regains its growth trendline.

For further details see: