QFIN’s 2Q20 non-GAAP net profit rose 270% QoQ / 36% YoY to RMB942mn, 12.3% above our forecast. Better-than-estimated earnings was mainly driven by robust loan origination (+22% YoY) and lower provisions for contingent liabilities, thanks to well-controlled asset quality. We expect business trend to stay solid with continued recovery from the COVID-19 shock. Decent profitability ensures ample room to absorb regulatory pressure on APR. QFIN remains our sector top pick.
- Loan growth on track to meet full-year guidance. 2Q20 loan volume was up 13.8% QoQ / 21.8% YoY to RMB 58.9bn. Total origination in 1H20 amounted to RMB 110.7bn, 50.3% of the upper bound of RMB 200-220bn full-year target. With Chinese government calling for rising policy support to boost consumption, QFIN’s FY20 loan growth is likely to top management’s guidance.
- Steady expansion of user base. Total no. of registered users/ approved users/ borrowers grew 5.2%/6.1%/5.7% QoQ, respectively. Acquisition cost of new approved user stayed low at RMB 168 (-36% YoY). With above-peers registered user base of 149mn and greater room to lift borrower conversion, QFIN sees little pressure in acquiring new users thus could better control marketing expense and borrower quality.
- Fast asset quality recovery. Despite a rise in M3+ delinquency rate to 2.82%, leading indicators improved notably in 2Q20. D1 delinquency fell 108bp QoQ to 6.2%, even lower than pre-pandemic level, and M1 collection rate climbed 2.2ppt QoQ to 88%. Management kept 2.5-3.5% full-year vintage loss forecast and expected the ratio to fall below 3% in 2H20. As such, we anticipate a sequential decrease of provisions in coming quarters.
- Decent take rate and ROE create buffer for lower APR. QFIN’s 2Q20 IRR stood at 27.2%, equivalent to 15.4% nominal APR. Funding cost dropped 50bp QoQ to 7.2%, lowest in the sector. Annualized net revenue take rate and ROE picked up to 9.3% and 53.6% based on our estimate, leaving solid buffer for potential interest decline to cope with regulatory change. Management indicated current breakeven IRR at 16%, without considering the effect of associated volume increase due to lower pricing.
- Maintain BUY and US$20.3 TP. We keep earnings forecast unchanged. Our TP of US$20.3 is based on 1.7x target P/B and FY21E BVPADS of RMB83.7. Near-term catalysts include accelerating loan origination and further retreat in funding cost, as financial institutions tend to cooperate with industry leaders amid regulatory uncertainties.
