Global Expansion And Tech Investments Will Strengthen Future Position In Consumer Finance

Key Takeaways

• Strategic international expansion and partnerships drive revenue growth and enhance market penetration, with a focus on technological innovation improving efficiency and margins.
  
• Leadership and capital return initiatives, such as share repurchases, boost investor confidence, attracting investment and potentially increasing earnings per share.
  
• Rising execution risks in international expansion, coupled with regulatory challenges and economic pressures, could impact profitability and transparency, affecting investor confidence.

Catalysts

Operates in the online consumer finance industry.

• FinVolution Group's strategic focus on international market growth, aiming for 50% revenue from international sources by 2030, with rapid expansion in countries like Indonesia and the Philippines, is expected to significantly boost revenue.
  
• The recent leadership addition of Dr. Sun Xiaodong, with expertise from major financial institutions, is anticipated to accelerate the company's international business expansion, positively impacting earnings.
  
• Continued investment in R&D and technological innovations, such as solutions for combating fraud, which enhances operational efficiency and can improve net margins.
  
• Strong partnerships with financial institutions and tech platforms like TikTok in international markets deepen market penetration and enhance customer acquisition, driving up revenues and potentially improving net margins through economies of scale.
  
• FinVolution's commitment to a robust capital return program, including a substantial share repurchase initiative, can increase EPS, attracting more investors and reducing perceived undervaluation of the stock.

FinVolution Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FinVolution Group's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.3% today to 19.8% in 3 years time.
• Analysts expect earnings to reach CN¥3.2 billion (and earnings per share of CN¥12.48) by about December 2027, up from CN¥2.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 0.7x on those 2027 earnings, down from 5.8x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

FinVolution Group Future Earnings Per Share Growth

Risks

• FinVolution Group's reliance on non-GAAP financial measures and the potential discrepancies with GAAP measures, pose a risk to investor confidence and transparency, possibly impacting earnings reliability.
  
• The Chinese market's slow economic growth and reliance on economic stimulus measures could affect revenue and net margins, given the firm's significant operations in China.
  
• The company's ambition to increase its international revenue contribution to 50% by 2030 involves high execution risk, particularly in adapting to diverse regulatory environments and acquiring high-quality borrowers, which might impact future revenue growth.
  
• Increasing sales and marketing expenses in international markets, despite growth in new borrowers, may not quickly translate into profitability, impacting net margins and earnings in the near term.
  
• Potential regulatory challenges and interest rate changes in markets like Indonesia could affect the company's pricing strategies and profit margins if new regulations are implemented, impacting overall financial performance.

Valuation

• The analysts have a consensus price target of CN¥7.38 for FinVolution Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥8.4, and the most bearish reporting a price target of just CN¥6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥16.2 billion, earnings will come to CN¥3.2 billion, and it would be trading on a PE ratio of 0.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of CN¥6.82, the analyst's price target of CN¥7.38 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.