FINV - Why I'm Adding FinVolution Group To My Longterm Value Watchlist

2023-03-13 08:18:45 ET

Summary

• FINV is growing and sports excellent valuation metrics.
• However, because it operates in the banking sector, and that sector is currently in turmoil, I'm waiting patiently for an entry point.
• I give a broad overview of the company and its key metrics below.

Today I'd like to introduce another candidate for my long term value portfolio. But given the current turmoil in the banking sector, I haven't yet taken a position as I'm hoping that we'll see an irrational drop in its stock price over the next few days or weeks to provide a stellar buying opportunity.

The Company

FinVolution ( FINV ) is a Chinese fintech that has recently begun operating in additional international markets primarily in South East Asia (for reference, Bamboo Works has a good article on this expansion). Fintech is a fancy word meaning that new technology, such as software, mobile apps, and AI are being used to modernize standard banking functions. Examples of fintech products are peer-to-peer payment services, mobile banking, and automated portfolio managers. Here is a slide (from the most recent company presentation ), that shows FINV's product offerings and value proposition.

PPDAI is a peer to peer lending platform that uses AI to evaluate credit risks, etc. We'll see the effect of this later in this article.

The stock trades on the NYSE as an ADR (American Depositary Receipt) with a ratio of 1 ADR for every 5 Chinese regular shares.

The company has generally been growing revenues and except for a big hit during Covid, it's been generating positive cash from operations. Note that Ycharts doesn't seem to have the latest quarterly data available, but that can be found here , including that the most recent quarter's unaudited revenues and cash flows from operations are $417.7M US and $45.8M US respectively.

Use Of AI

One of the big innovations that FINV brings to the table is the use of artificial intelligence in evaluating the risk (and proper pricing) of any loans it's contemplating making. Not only is AI a very trendy feature these days, but the results have been nothing short of remarkable.

Consider these two examples. First look at the improvement in credit scores of loan recipients over the last 5 years. In 2018 fewer than 15% of borrowers were of level 1 or level 2 Magic Mirror credit scores (a Dun & Bradstreet credit measure). But by 2022 almost 70% have these two best credit ratings.

Second, the delinquency rates of loans at any given maturity have fallen from as high as 6% in 2019 to about 2% more recently. See slide below for details.

Moreover, the user experience has been good as evidenced in particular by the growing number of repeat borrowers.

Assets, Liabilities and Cash on Hand

The company had $427M of cash and cash equivalents on hand as of September 30, 2022. With 282.5M ADS outstanding, that's $1.51 per share in cash on hand. If one were to also include restricted cash and short term investments then the sum would be about $4.68 per ADS which is quite close to the current share price.

Total liabilities are $1.2B versus total assets of $2.9B. This gives a measure of safety in today's uncertain world of banking.

Valuation

FINV valuation is excellent across the board, whether it be P/E, EV/EBITDA or price to book. See this handy Seeking Alpha summary . Note also that Price to tangible book is on the order of $5.87 which again gives an extra measure of safety to shareholders.

Shares Outstanding and Share Buybacks

With its positive cash flow, the company has embarked on a share buyback program which was extended and enlarged as announced in the most recent earnings release (with my emphasis):

On August 21, 2022, the board of directors of the Company approved the expansion of the Company’s existing share repurchase program from up to US$60 million to up to US$140 million and the extension for another twelve months from January 1, 2023, through December 31, 2023, which allows the Company to repurchase its own Class A ordinary shares in the form of ADSs with an aggregate value of up to US$140 million until December 31, 2023.As of October 31, 2022, in combination with the Company’s historical and existing share repurchase programs, the Company had cumulatively repurchased its own Class A ordinary shares in the form of ADSs with a total aggregate value of approximately US$171.0 million.

The result of this can be seen in the company's shares outstanding over time.

Quant Ratings

FINV has stellar quant ratings and factor grades as shown below. Particularly germane to my value portfolio are the A+ and B grades on valuation and profitability, respectively.

Options

FINV trades options but they currently are illiquid. Nonetheless, if or when I take a position, I might write covered calls against a portion of my holdings.

Risks

FINV has two salient risk factors.

First the company operates in the banking sector, and, as we've seen over the past few days, runs on the bank can happen. Given that the company has a tangible book value higher than its share price, I think the long term risk to shareholders is low (for example, even in the event of a liquidation, eventually shareholders should come out ok).

Second, the company operates in China through a VIE. Technically shareholders don't actually own the company and its assets. This is true of all Chinese companies, including large players (e.g. BABA). And while this may be somewhat academic, I believe the risk must be considered when establishing position size and when constructing a portfolio (e.g. you have to limit the cumulative size of your Chinese holdings if you want to mitigate this risk).

Summary

FINV is a growing fintech trading at enticing valuations. However, given the current sentiment in the banking sector, I'm waiting to take a position in stock, in case we get an emotional drop in the stock price which would provide a very opportunistic time to take a full sized position in the stock.

For further details see: