XYF - X Financial Resumes Growth As Regulatory Risks Abate
2023-10-25 05:39:31 ET
Summary
- X Financial operates a marketplace of financing and wealth management services for consumers in China.
- The company's revenue growth has recently improved and it is profitable.
- Regulatory risks remain a concern, but the stock may be worth considering for future investment.
- I'm Neutral [Hold] on XYF for the near term.
A Quick Take On X Financial
X Financial ( XYF ) operates a marketplace of financing and wealth management services for the Chinese market.
The company's topline revenue growth has been reignited in recent months, and the firm is quite profitable.
While I remain cautious about the firm’s continued regulatory risks, interested investors may wish to put the stock on a watchlist for further consideration in the future.
I’m Neutral [Hold] on XYF for the near term.
X Financial Overview And Market
China-based X Financial offers a variety of services for the financing and investment needs of individuals in China.
The firm is led by Founder, Chairman and CEO Yue (Justin) Tang, who has previously co-founded eLong.com.
The company’s peer-to-peer platform matches borrowers' loan requests with investors' investment demands and executes loan and investment transactions to provide borrowers with prompt funding.
X Financial’s primary loan services include:
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Xiaoying Card Loan - a credit card balance transfer service
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Xiaoying Preferred Loan - a high-credit-limit unsecured loan product
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Xiaying Wealth Management - mutual funds, bonds and insurance
The firm acquires users via online marketing, partnerships, referrals and incentives, general brand awareness, and offline marketing and promotion.
According to a 2022 article in China Banking News referencing a McKinsey research report, the Chinese market for financial services to consumers is estimated to reach $4.2 trillion by 2025.
If that estimate is achieved, continued support by government entities for greater domestic consumption of goods and services may play a part.
Despite this, the report states there will be ‘downwards pressure on profits, [and] a broad environment of intensifying competition.’
Major competitive or other industry participants include:
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Ant Financial
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Qudian
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LexinFintech
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New Oriental Credit
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CreditEase
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FinanceMe
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PPdai
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LuFax
X Financial’s Recent Financial Trends
Total revenue by quarter has resumed growth. Operating income by quarter has also turned up materially in recent quarters:
Seeking Alpha
Gross profit margin by quarter has risen recently. Selling and G&A expenses as a percentage of total revenue by quarter have trended lower in recent quarters, a positive signal of increasing efficiency.
Seeking Alpha
Earnings per share (Diluted) have risen per the following chart:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, XYF’s stock price has risen by 114.2%:
For balance sheet results, the firm ended the quarter with $182.0 million in cash and equivalents and $91.3 million in total debt, all of which was categorized as the current portion due within 12 months.
Management doesn’t provide cash flow metrics on a frequent basis.
Valuation And Other Metrics For X Financial
Below is a table of relevant capitalization and valuation figures for the company:
| Measure (Trailing Twelve Months) |
| Amount |
| Enterprise Value / Sales |
| 0.2 |
| Enterprise Value / EBITDA |
| 0.5 |
| Price / Sales |
| 0.3 |
| Revenue Growth Rate |
| 16.4% |
| Net Income Margin |
| 27.9% |
| EBITDA % |
| 32.6% |
| Market Capitalization |
| $178,160,000 |
| Enterprise Value |
| $93,680,000 |
| Operating Cash Flow |
| $46,790,000 |
| Earnings Per Share (Fully Diluted) |
| $3.17 |
(Source - Seeking Alpha)
Commentary On X Financial
In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted a 55% YoY growth rate for its total loan origination and facilitation services.
The company continues to strengthen its risk management efforts, ending the quarter with a 0.96% 31 to 60 days past due delinquency rate.
Management also expects a more stable industry environment as there have recently been several settlements with large industry firms. Regulators have begun to shift ‘their focus towards regular supervision.’
Total revenue for Q2 2023 rose by 36.7% year-over-year, and gross profit margin increased by an impressive 10.1%.
Selling and G&A expenses as a percentage of revenue fell by 1.6% YoY, indicating increasing efficiencies, while operating income more than doubled to $61.3 million.
The company's financial position appears to be strong, with ample liquidity against its debt, but management did not provide cash flow figures.
Looking ahead, management believes the second half of 2023 will feature ‘sustainable growth’ and a ‘normal regulatory environment.
In the past twelve months, the firm's EV/EBITDA valuation multiple has risen from around 0x to 0.56x, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include greater demand from Chinese consumers for the firm’s loan and wealth management products.
While the company's stock performance in the past 12 months has been impressive, the firm faces continued regulatory uncertainties on several levels.
While I’m Neutral [Hold] on the stock in the near term, interested investors may wish to put the stock on a watchlist for future consideration.
For further details see:
X Financial Resumes Growth As Regulatory Risks Abate