Stock of the Week: Bank on This Growing Fintech in a Huge Market
Alpesh Patel|February 3, 2023
Fintech is a hot sector that’s showing no signs of slowing down. China, the No. 2 economy in the world, has just reopened from COVID lockdowns.
Put those two ideas together and you get this week’s Stock of the Week.
I’ve uncovered a leading Chinese fintech platform with huge growth potential. Its 153 million users represent just a small fraction of the total market in a country with over 1 billion people.
This company meets my proprietary criteria for growth, value and income, and it pays a dividend. It’s also hugely undervalued.
Trading at just 4.5 times future earnings, it’s a downright steal.
Get all the details on the stock in my latest video.
Click on the image below to watch it.
Hello, Manward family, and welcome to another Stock of the Week. Which, with the help of my hedge fund team, I’ve personally approved and selected for you.
Let me take you through this company. It’s a slightly unusual one, in that it’s very much an international company from a region very much in the news at the moment.
Although it’s listed on the New York Stock Exchange, it is actually a Chinese company.
It’s FinVolution (FINV), a leading fintech platform in China that connects underserved borrowers with financial institutions.
You can just imagine the size and scale of that market.
But is it overvalued? Is it making money?
Let’s have a look.
It was established all the way back in 2007. So we’re not talking about a startup.
The company’s a pioneer in China’s online consumer finance industry. And it’s developed innovative technologies and has accumulated in-depth experience in the areas of credit risk assessment, fraud detection – I’d be pretty scared to commit any fraud in China, I can tell you – big data and artificial intelligence.
The company’s platform is empowered by proprietary cutting-edge technologies.
It has over 153 million registered users – which is small by China’s size – and therefore has lots of room to grow.
The market cap is under a billion dollars – so on the smaller side of the kind of Stocks of the Week that I normally pick.
It does pay a dividend – nice to know in this environment. And earnings are forecast to grow.
Let’s look a little bit more deeply at some of these numbers, shall we? What do we have?
Well, on my proprietary Growth-Value-Income rating, I’ve got it as a 9.
Now, remember, this is my formula, or my algorithm, which looks at the valuation of a company measured by its share price and its profitability… and its share price to its profit growth as well, just to make sure it’s not overvalued. (We don’t want to pay too much for those profits for every share that we purchase.) It looks at dividend yields, looks at cash flow growth, looks at revenue growth… and then puts all that together by weighting each of those factors for their relative importance.
It puts that together in a score, and anything which is a 7 or higher meets my minimum threshold, which this company does.
Now, it’s got a CROCI – a cash return on capital invested – of 4.6%. That’s a little bit lower than I’d normally like.
The reason CROCI is important is this: It was invented by Deutsche Bank and is now used by Goldman Sachs Wealth Management for its wealthiest clients.
They discovered that companies in the top quartile, the top 25% of all companies by CROCI, as a basket generate 30% returns per annum. Not each stock in the basket and not every year. But on average, over the long term, 30% per annum. So some years, like during the financial crisis, nobody got that. Other years, like post-COVID, vroom! Everything went incredibly well.
So this company is slightly outside of that 25% band. It’s a little bit below that.
Obviously the ones that I have in my GVI Investor always meet that criterion, but I’ve still gone for this one because there are other factors which I really like.
The stock’s been doing well over the last six months. That’s good to see in this environment. It’s coming through – particularly, I assume, because China has opened up.
Volatility’s a bit high. Sortino ratio is a measure of the average return versus the average volatility of missing it. And because that volatility is a bit high – China has been somewhat volatile as a market – it’s brought that Sortino down. But it’s still well within the range that we’d like to see.
Alpha means outperformance of the market. And that’s there, and that’s good.
So how does this look?
Well, let’s look at valuation first.
Actually, by forecast P/E ratio – in other words, the current share price compared to the future earnings – it’s only trading at a multiple of 4.5, which is incredibly cheap.
And some of that is because people are fearful about China. But even aligned for that, that’s cheap.
The forecast growth in turnover is 17.7%.
Good number. Good number. I like that.
So two of the critical numbers that I want to see are good.
Now, of course, not every box is ticked.
Whilst dividend yields are expected to go up, forecast growth, you know, there’s some opinion that that could decline. But that’s obviously factored into the price as it stands.
Speaking of the price, let’s look at the price.
And I asked myself, can this reasonably be expected to generate in the next 12 months a 40% return for me?
And it looks like it could.
Now, it’s got that steady upward trend that it’s had for most of the last year. It’s got a high, which shareholders and investors will be aiming for it to return to.
So I like those aspects as well.
Let’s just look at some of those valuation and accounting figures again.
Well, we think on a discount cash flow basis it’s significantly undervalued, trading at about $5.40. We think this is significantly undervalued as a stock.
And you might say, “Hang on, Alpesh. Why isn’t this just one of your penny share picks?”
Well, it could have been.
Earnings are forecast to grow, as mentioned.
Also, it’s trading at a good value compared to its peers and the industry as a whole.
So a lot going for it.
I hope you’ve enjoyed this Stock of the Week.
And really, the point of the Stock of the Week is to give you some kind of insight into the kind of due diligence my hedge fund team does: how we look at companies, how we sift through them and come across ones which we think are of particular interest.
Particularly ones like FinVolution, where the turnover year-on-year has been increasing. And you might have missed that. Because why would you know that? Why would you have seen that?
And all the other factors that we look at in our due diligence.
And whilst I only explained this in some six-odd minutes, of course the amount of due diligence that goes into it is substantially greater.
Thank you very much, and I’ll see you in a week’s time.