QFIN’s 3Q20 non-GAAP net profit rose 36.7% QoQ/ 70.4% YoY to RMB 1.29bn, 28% above our forecast. Key results highlights were decent loan growth, improving asset quality, and resilient take rate. We believe QFIN’s strategic positioning underpins a stable earnings outlook and should enable it to navigate through regulatory uncertainties.
- Volume beat, full-year guidance revised up. On the back of robust consumption amid macro recovery, QFIN’s loan origination was up 12% QoQ to RMB 66bn. Management lifted FY20’s full-year lending target to RMB 242-244bn (vs previous RMB 200-220bn). That said, loan growth will likely stay flat in 4Q20, given possible resurgence of COVID-19 and rising competition for user traffic by e-commerce platforms at year-end.
- Asset quality continued to improve. Thanks to prudent customer acquisition and risk control during the pandemic, QFIN reported sequential recovery in asset quality indicators. D1 delinquency dropped to historical low of 5.3% (from 6.2% in 2Q20), and M1 collection rate climbed to 90%. M3+ delinquency retreated 86bp QoQ to 1.96%, the lowest among online lenders under our coverage. Credit cost fell 52bp QoQ to 6.9%, partly due to RMB570mn provision write-back.
- Lower funding and credit costs to uphold margin. QFIN’s average loan yield slid 1.3ppt QoQ to 25.9% (IRR) in 3Q20, as it proactively reduced pricing after Supreme Court’s cap on lending rate. On the flip side, funding cost fell to 7.0-7.1% (from 7.2% in 2Q20) and may further decline on strong demand by funding partners. As loan rate adjustment has largely finished and asset quality noise will abate, we expect limited downside in take rate ahead.
- Regulator aims at orderly development, rather than fully clampdown. We see little impact to loan facilitators from recent policy tightening. The new micro-lending rules, which target to prevent excess leverage and systematic risks, may force business scale-back of some dominant Fintech players, thereby creating opportunities for QFIN to grab additional market share. Moreover, with the help from KCB’s partnership and offline sales force, the Company is exploring business potential in SME lending.
- Maintain BUY and trim TP to US$19.2. We lower FY21-22 earnings forecast by 6.2% and 11.3%, to factor in assumption for modest decline in take rate. Our revised TP of US$19.2 is based on 1.6x target P/B and FY21E BVPADS of RMB 83.9.
