JFIN - Jiayin Group Ups Loan Activity Forecast In Challenged Chinese Economy

2023-09-20 12:25:28 ET

Summary

• Jiayin Group reported a 77.8% increase in loan origination volume in Q2 2023.
• The company operates a fintech platform for consumer loan facilitation in China.
• The Chinese economy's stresses and potential for higher delinquency rates pose risks for Jiayin's financial partners and, by extension, JFIN.
• For the near term, I'm Neutral [Hold] on JFIN.

A Quick Take On Jiayin Group

Jiayin Group ( JFIN ) reported its Q2 2023 financial results on August 21, 2023, with loan origination volume increasing 77.8% year-over-year.

The firm operates a fintech platform enabling loan facilitation from lenders to consumers in China.

Demand for consumer loans is increasing, but so are stresses in the Chinese economy, with a potential for higher delinquency rates and tighter lending standards among the company's financial partners.

I’m Neutral [Hold] on JFIN for the near term.

Jiayin Overview And Market

Established in 2011 in Shanghai, China, Jiayin aimed to bridge the gap between lenders and borrowers in the nation 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.

Focusing on facilitating consumer loans for 12 months or longer, Jiayin believes that such offerings best 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 over ten 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 problems in China indicate that the large real estate sector may be a source of financial stress due to overbuilding and malinvestment over decades.

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

Jiayin’s Recent Financial Trends

• Total revenue by quarter has increased markedly in recent quarters; Operating income by quarter has remained flat for several quarters:

• Gross profit margin by quarter has fallen in recent quarters due to newer product lines with lower margins; Selling and G&A expenses as a percentage of total revenue by quarter have trended lower more recently.

• Earnings per share (Diluted) have been variable but trending higher recently on increasing loan facilitation volume:

(All data in the above charts is GAAP)

In the past 12 months, JFIN’s stock price has risen 96.75%, as the chart shows below:

For balance sheet results, the firm ended the quarter with $39.8 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)

Sentiment Analysis

Below is a chart showing the frequency of keywords in management's most recent earnings conference call:

Analysts questioned management about the negative effects of the macroeconomic environment on the company's borrowers.

Leadership responded that the debt-to-income ratio of borrowers is rising as there is greater stress among consumers.

Management said that it has accumulated experience in the past few economic cycles and believes it has the ability to respond to market and credit conditions for its platform and its financial partners.

Commentary On Jiayin

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management highlighted the firm’s financial partner collaborations and new partner efforts.

However, company leadership noted what it called ‘some emerging and external risk factors such as illegal and disruptive financial activities have had a certain impact on the normal operation of financial institutions…’

The company has maintained a stable 61- to 90-day delinquency rate of 0.66% as of the end of Q2 2023.

Total revenue for Q2 2023 rose an impressive 45.4% year-over-year, while gross profit margin dropped by 12.1%, a negative result from the inclusion of newer revenue streams that have lower gross profit margins.

Selling and G&A expenses as a percentage of revenue increased by 2.7% YoY, and operating income fell slightly by 1.0%.

The company's financial position is reasonably strong, with ample liquidity and no debt. The firm did not publish cash flow figures for the quarter.

Looking ahead, management raised its full-year 2023 loan facilitation volume forecast from $9.8 billion to $11.9 billion, or about 21.4%, which may be a result of greater stresses on consumers amid a challenging economy in China.

Also, during the quarter, the company's Board of Directors authorized an extension of its previously authorized $10 million share repurchase program, with a remaining $4.5 million still to be purchased.

Also, just after the quarter, the company Board approved the payment of a cash dividend of $0.40 per ADS. Management did not specify whether the dividend would be recurring.

At an annual rate and a stock price of $4.84 per ADS, the dividend would represent an annual yield of around 8.5%.

In the past twelve months, the firm's EV/EBITDA valuation multiple has varied significantly, growing by a net of 16% at period end, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include positive results from Chinese financial regulators to reduce recent financial market stress.

However, as a proxy for the Chinese economy, the CNY to USD exchange rate is at a record low, indicating a dollar funding shortage for Chinese firms and a harbinger of leaner times ahead.

While this may redound to Jiayin’s benefit in terms of consumer demand, it may also result in higher delinquency rates for its financial partners, resulting in tightening of credit standards and reduced loan facilitations.

While JFIN’s recent dividend has been a bonus for investors, management’s lack of forward guidance about its dividend policy makes it difficult to know whether the dividend will continue and on what terms.

Until we learn more information about the direction of the Chinese economy and JFIN’s dividend plans, I’m Neutral [Hold] on JFIN.

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