DigiTech Is Valued Like A Bank But Should Be Valued Like A Fintech Platform

We’ve been taking a position in 360 DigiTech for our SHU growth portfolio for a while now and think we’ve just gotten a head start in this business.

360 DigiTech is a Chinese fintech company that is almost insanely profitable, generating a net profit of almost 40%. We, therefore, hope they will forgive us for not worrying too much about the slight loss of sales in the first quarter, especially as the outlook for 2011 has remained unchanged.

We find stocks interesting with P/E ratios around the middle digits. It is considered a bank, but quickly deviates from this story and becomes a complete fintech platform.

Competitive advantage

The core of the business is the Argus engine:

Our Argus Engine integrates a large user database, AI-driven data processing, and expert experience based on machine learning into a comprehensive model. By leveraging its three main anti-fraud, credit, and risk functions, Argus Engine has profiled more than 160 million current and potential creditors and successfully avoided the potential loss of assets in excess of RMB 10 million per day.

Another advantage is the collaboration with Grupo 360, which also offers large data sets related to risk management. They also partner with external data providers.

Partnerships with KCB Bank are also very helpful in several ways:

• Extend the scope of the design to capital letters.

• By leveraging their new RM (Risk Management) SaaS product and expanding their reach, they work with excellent platforms and can attract other RM customers.

• Provide data for loans to SMEs.

• Serves as a showcase for other financial institutions and it is easier to discover new products with KCB because of the close relationship.

Former parent company Qihoo 360 acquired a 30% stake in KCB Bank last year.

The data for the first quarter is not even in the table above, but it illustrates how this business is growing and especially how profitable it is.

With regard to the latter, net profit in the first quarter (year-on-year) grew by 635%. While this number is easy to compare, the impact of the pandemic in China has diminished significantly in the first quarter of 2020, but no reduction is insight. These are the main growth factors:

• Economic recovery

• Customer acquisition

• Virtual credit card

• Loans for SMEs

• Integrated solutions

• Fuzhou microcredit (1% of the loans taken out)

• New products

• Evaluation costs

• Interest

The company started to lend to itself (heavy capital, as it handles outstanding loans with capital requirements), but becomes an intermediary in its dealings with financial institutions (now 105 institutions in total).

In the latest light capital model, they offer services based on big data analysis through their Argus engine.

Of these loans taken out by financial institutions, RMB 37245 million fell in the capital-light model and other technology solutions, representing 50.2% of the total, more than half of the first time (all 55% after the first quarter) and an increase of 211.9% y / y and 58% q / q.

It was much better than their internal goal, and it shows how quickly they are moving towards the light capital model. The heavy capital model is indeed shrinking.

Working capital income on a credit basis was RMB 2.45 million, compared to RMB 2.56 billion in the fourth quarter and RMB 2.81 billion a year ago. The consecutive and annual declines were partly due to facility expansion and change in the mix as the major contribution to logging decreased significantly.

One of these services is the ICE or Intelligence Credit Engine products, which are offered in various ways to more than 100 financial institutions depending on their risk management.

Those with strong risk management are already using the intelligent customer procurement service, which offers a lower acceptance rate (Q1CC):

we actually look at the financing needs of financial partners. For example, if your financial partner needs our complete product, we offer lightweight products. If the financial partner is very strong in risk management, we only offer a smart marketing product.

A recent addition was the SaaS RM (Risk Management) product and it is doing well: it signed contracts with 19 institutions and RMB supported $ 16.7 billion in transaction volume in the fourth quarter, with ten institutions in the first quarter and more with nine. pipeline for the first quarter.

Moving to the light capital model improves margins and makes the company less responsible for regulatory changes.

KCB is your most important financial partner. In April, KCB became the largest partner in terms of cumulative financing volume of RMB 18 billion, with a loan balance of RMB 13.3 billion in the first quarter.

With integrated solutions, the company integrates customer acquisition and risk management solutions on customers’ Internet platforms so that they can make their user base more efficient.

They partner with 17 leading platforms, such as JD, China Telecom, and China Unicom (which were already 20 in the first quarter) and potentially have 5.3 million potential customers, accounting for more than 35% of the acquisition of new customers.

The company’s virtual credit card added more than 620,000 new merchants in the fourth quarter, processing 4 million transactions per month and 1.14 million new merchants and a monthly transaction volume of RMB 1.5 million in the first quarter.

SME financing was launched only last year but has already started well, with approved credit lines of RMB 5.8 billion, an increase of 67% in a row, and the company is partnering with 28 credit partners.

There are two segments here:

• One that can be seen as an extension of the personal loan business for small businesses.

• One focuses on financing the small business itself, which has greater market potential and a better return on the unit’s economy. The ticket size is RMB210K with a withdrawal rate of around 8%, almost twice as much as consumer credit.

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