AI Banking Integration And Embedded Finance Will Drive Significant Long Term Upside Potential

Catalysts

About Qfin Holdings

Qfin Holdings operates a leading AI driven credit technology platform that connects consumers and small businesses with financial institutions in China and selected overseas markets.

What are the underlying business or industry changes driving this perspective?

• Rapid scaling of the Technology Solutions and AI plus banking business, including more than 200 percent sequential loan volume growth and expanding bank partnerships, positions Qfin to capture a growing, higher quality fee pool and structurally lift platform service revenue and earnings over time.
• Deep integration of proprietary AI agents such as the AI Credit Officer and AI Loan Officer into core bank workflows, supported by trillion level risk decision data sets, should meaningfully improve approval efficiency and asset quality for partners, enhancing Qfin take rates, net margins and long term profit visibility.
• Industry wide regulatory tightening and consolidation are likely to eliminate weaker high price competitors. This may enable Qfin, with its strong funding access and leading risk management, to gain market share at lower customer acquisition cost, potentially supporting sustainable loan growth and higher unit economics driven earnings.
• Expansion of embedded finance across short form video, e commerce, mobility, food delivery and financial platforms, combined with AI led user targeting, is increasing high quality user acquisition and engagement. This may translate into higher lifetime value per user, improved revenue resilience and better operating leverage.
• Stable, historically low funding costs supported by diversified bank and ABS financing, along with a flexible mix between capital light and capital heavy models, provide a durable cost advantage that can offset pricing compression and support both net interest margins and absolute net income growth.

Assumptions

This narrative explores a more optimistic perspective on Qfin Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Qfin Holdings's revenue will grow by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 35.1% today to 31.7% in 3 years time.
• The bullish analysts expect earnings to reach CN¥7.1 billion (and earnings per share of CN¥49.82) by about December 2028, up from CN¥6.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥4.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, up from 2.6x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.2x.
• The bullish analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent macroeconomic weakness in China, evidenced by a declining short term consumer loan balance for three consecutive quarters and management commentary that unexpected China events may continue to pressure operations, could constrain borrower demand and repayment capacity, putting sustained pressure on loan growth and elevating credit losses, which would weigh on revenue and net income.
• Regulatory tightening, including new loan facilitation rules and potential caps that push average APRs below around 20 percent, is already driving take rate compression and management guided Q4 net income down to CNY 1 billion to CNY 1.2 billion. This suggests that further policy changes could structurally reduce pricing power and unit economics, negatively impacting revenue and net margins.
• Rising portfolio risk, reflected in higher 90 day and Day 1 delinquency rates, a lower 30 day collection rate and provision booking ratios at historical highs despite lower risk bearing loan volume, indicates a deteriorating credit environment that may persist for several quarters. This could force Qfin to keep provisions and funding buffers elevated, which would depress earnings and return on equity.
• A heavier tilt toward the capital heavy model to offset pressures in the capital light and ICE businesses, combined with leverage at 3 times shareholders equity near the low end of historical range but rising, increases balance sheet risk in a volatile environment. This could expose Qfin to sharper swings in funding liquidity and regulatory capital requirements, pressuring net margins and future earnings stability.
• Execution risk in scaling Technology Solutions and AI plus banking, where recent 218 percent sequential loan volume growth and early AI agent pilots are promising but unproven at industry wide scale, could emerge if bank adoption slows or expected efficiency gains fail to materialize. This would limit the anticipated high quality fee pool and diversification benefits, which would constrain long term revenue growth and profit expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Qfin Holdings is $43.22, which represents up to two standard deviations above the consensus price target of $32.9. This valuation is based on what can be assumed as the expectations of Qfin Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.22, and the most bearish reporting a price target of just $21.12.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥22.4 billion, earnings will come to CN¥7.1 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $19.63, the analyst price target of $43.22 is 54.6% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.