Lufax Holding Ltd. (LU) and 360 DigiTech Inc. (QFIN) are two leading consumer finance companies based in China. LU’s business segments include retail credit facilitation and wealth management. QFI provides mainly tailored online consumer finance products to prime, underserved borrowers. Most companies that provide digital financial services are thriving amid the COVID-19 pandemic thanks to their pandemic-ready business models.
Also, China recently launched its centralized digital currency nationwide, which will be managed by domestic fintech companies. So, the demand for products and services provided by fintech companies such as LU and QFIN is also expected to increase in the coming months because they play an important role in distributing and managing the digital Yuan across China and overseas.
QFIN has returned 105.6% so far this year, while LU lost 3.5%. In terms of their past three months’ performance, QFIN is a clear winner with 77.2% returns versus LU’s negative returns. But which of these two stocks is a better pick now? Let's find out.
Latest Movements
ON March 31, LU joined with world-renowned technology publication MIT Technology Review to release a comprehensive report on technology applications and trends in the fintech industry. The company also made several changes in its Board’s composition in compliance with the NYSE’s listing requirements.
Loans facilitated by QFIN’s digital platform grew 29% year-over-year in the fourth quarter. Haisheng Wu, the CEO of the company noted that “Throughout the second half of 2020, we have witnessed continued recovery in consumer demand for credit and further improvement in asset quality. Some key leading indicators of asset quality are at the best levels ever and improving. Robust risk management system and solid overall execution should enable us to further strengthen our leadership position in the industry and benefit from a more favorable macro trend.”
Recent Financial Results
LU’s total income of $2.04 billion for the fiscal 2020 fourth quarter ended December 31, 2020 represents a 5.9% year-over-year rise. The company’s net income has increased 17.4% year-over-year to $436.40 million. Also, its earnings per ADS increased 11.6% year-over-year to $0.19.
For the fiscal 2020 fourth quarter, ended December 31, 2020, QFIN’s net revenue increased 39% year-over-year to $511.49 million. Its income from operations came in at $190.25 million, up 373.4% year-over-year, and its net income increased 71% year-over-year to $184.65 million. The company’s net income per ADS increased 169.9% year-over-year to $1.18.
Past and Expected Financial Performance
LU’s revenue increased at a CAGR of 17% over the past three years. Its EBITDA and EPS also increased at CAGRs of 13.4% and 25.6%, respectively, over the same period. Analysts expect LU’s revenue to increase 16.1% in fiscal 2021 and 15.8% in fiscal 2022. Its EPS is expected to increase at a rate of 14.7% over the next two years.
In comparison, QFIN’s revenue has increased at a CAGR of 158.2% over the past three years. The company’s EBITDA and EPS increased at CAGRs of 161.7% and 139.5%, respectively, over the same period. QFIN’s revenue is expected to increase 11.6% in fiscal 2021 and 8.7% in fiscal 2022. Its EPS is expected to increase 23.5% in fiscal 2021 and 29.3% in fiscal 2022.
Profitability
LU’s trailing-12-month revenue is more than four times QFIN’s. LU is also more profitable, with a gross profit margin of 87.9% versus QFIN’s 76.4%.
However, QFIN’s ROE and ROA of 41.9% and 10.6% compare favorably with LU’s 18.7% and 8%, respectively.
Valuation
In terms of forward P/E, LU is currently trading at 13.54x, 175.8% higher than QFIN, which is currently trading at 4.91x. Also, LU is more expensive both in terms of trailing-12-month P/S (3.52x versus QFIN’s 1.74x) and trailing-12-month EV/sales (3.42x versus QFIN’s 1.46x).
In terms of trailing-12-month price/cash flow also, LU’s 30.92x is significantly higher than QFIN’s 8.64x.
So, QFIN is the more affordable stock.
POWR Ratings
LU has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. However, QFIN has an overall A rating, which represents a Strong Buy.
LU has a C grade for Value, which is consistent with its higher-than-industry forward non-GAAP price/earnings ratio of 13.54x. However, QFIN has a B grade for Value because its forward non-GAAP P/E ratio of 4.91x is 61.2% lower than the industry average 12.65x.
LU has a C grade for Growth also, which is in sync with analysts’ expectations that its EPS will increase at a modest rate. However, analysts expect that QFIN’s EPS will increase significantly in the coming quarters, which earned it a grade of B for Growth.
LU is ranked #7 of 15 stocks in the D-rated Foreign Consumer Finance industry. QFIN is ranked #4 of 49 stocks in the C-rated Consumer Financial Services industry.
In addition to the POWR Ratings grades we’ve just highlighted both LU and QFIN are also rated for Momentum, Stability, Sentiment, and Quality. Click here to see the additional ratings for LU. Also, get all QFIN ratings here.
The Winner
While both LU and QFIN are established players in the consumer financial services space, QFIN appears to be a better buy based on its higher earnings growth potential and discounted valuation.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about two top-rated stocks in the Foreign Consumer Finance industry. Also, click here to see 13 other top-rated stocks in the Consumer Financial Services industry.
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QFIN shares were unchanged in after-hours trading Thursday. Year-to-date, QFIN has gained 92.71%, versus a 11.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand.
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