A Success Tunnel For 360 DigiTech: Business Transformation

China's outstanding loan balance reached a fresh record of CNY 172.75 trillion in 2020 and keeps growing, spurred by the increasing digitalization and booming e-commerce market.

Fintech subsidiary

In China, 2020 was a milestone year for fintech. The year saw heightened regulatory scrutiny, intensified competition and business patterns were altered by the COVID-19 outbreak, both in the corporate and consumer sectors. The Matthew effect in the industry has been further exacerbated under such circumstances, where small-sized companies with less capital or poor-risk resistance ability will be forced to quit the stage.

Although 360 DigiTech, Inc. (QFIN:Nasdaq) is a late starter, it is one of those niche players able to stand up to this fierce competition, mainly due to the reputation of its parent company – 360 Security Technology, Inc. (601360:SH) which brings significant brand visibility to the table.

Strong performance with low valuation

This USD 6.57 billion company is currently outperforming what the market expects. On May 27, 360 DigiTech released its unaudited financial results for the first quarter of 2021. The total net revenue increased by 13.1% to CNY 3.6 billion (USD 0.55 billion) from CNY 3.2 billion in the same period of 2020, while the non-GAAP net income reached CNY 1.41 billion (USD 0.2 billion) with an astonishing increase of 452.8%. The operating income along with the account under the non-GAAP measure achieved a growth of 745.7% and 533.0%, respectively.

However, given this relatively strong financial performance, 360 DigiTech's P/E ratio appears to have been lower than that of its peers for a long time, although it is currently ranked the highest among the top four. Lexin (LX:Nasdaq), a leading online consumption and consumer finance platform, is also using technologies to encompass risk management and loan facilitation systems, just as QFIN does, but its P/E ratio is far higher than that of QFIN. For example, in the third quarter of 2020, Lexin's P/E ratio was more than 5 times that of 360 DigiTech; by Q2 2021, Lexin was lower than 360 DigiTech for the first time, at the level of 8.1. Along with the progressively upward stock price, the necessity of re-assessing 360 DigiTech is becoming more obvious.

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