QFIN HOLDINGS INC-ADR (NASDAQ:QFIN): A Deep Dive into a Fundamentally Sound Value Stock

The search for undervalued stocks remains a cornerstone of value investing, a strategy pioneered by Benjamin Graham and later popularized by Warren Buffett. This approach focuses on identifying companies trading below their intrinsic value, providing a margin of safety for investors. One method to uncover such opportunities involves screening for stocks with strong fundamental ratings across valuation, profitability, financial health, and growth metrics. These criteria help ensure that a company is not only cheap but also fundamentally sound, reducing the risk of value traps where stocks appear inexpensive due to underlying weaknesses rather than market inefficiencies.

QFIN Holdings Inc. (NASDAQ:QFIN) emerges as a notable candidate through this lens, particularly after being identified via a "Decent Value" screen that emphasizes good valuation scores alongside respectable fundamentals. The company operates in China’s consumer finance sector, providing credit technology services that connect borrowers with financial institutions. Its business model includes both credit-driven and capital-light platform services, positioning it in a growing yet competitive industry.

A detailed analysis of QFIN’s fundamentals, as outlined in its fundamental report, reveals why it stands out:

• Valuation: With a ChartMill Valuation Rating of 9 out of 10, QFIN appears significantly undervalued relative to its peers and the broader market. Its price-to-earnings ratio of 4.18 is not only far below the industry average of 16.96 but also substantially lower than the S&P 500’s 27.03. Similarly, its forward P/E of 3.65 and enterprise value-to-EBITDA ratios suggest a bargain pricing, especially when considering the company’s profitability and growth prospects. For value investors, these metrics indicate a potential margin of safety, as the stock is priced conservatively compared to its earnings capacity.

• Profitability: QFIN performs well in profitability, scoring a 9 out of 10. Its return on equity of nearly 30% and profit margins around 39% outperform over 90% of its industry peers. High operating margins (45.98%) and consistent cash flow generation further highlight operational efficiency. Strong profitability is crucial in value investing because it indicates a company’s ability to sustain and grow its intrinsic value, reducing reliance on market sentiment for price appreciation.

• Financial Health: The company maintains a solid financial position, reflected in a Health Rating of 8. Key strengths include a healthy current ratio of 3.08, indicating ample liquidity, and a low debt-to-equity ratio of 0.27, which is better than 83% of industry competitors. Its debt-to-free-cash-flow ratio of 0.60 suggests strong solvency, meaning QFIN can easily manage its obligations. A strong balance sheet is vital for value investors, as it provides resilience during economic downturns and reduces the risk of financial distress eroding intrinsic value.

• Growth: While growth is not the primary focus in traditional value investing, sustainable growth supports the thesis of undervaluation by indicating future earnings potential. QFIN’s Growth Rating of 6 is supported by a historical EPS growth rate of nearly 20% annually and expected future EPS growth of around 18%. Revenue growth has also been steady, though moderating. These figures suggest the company is not stagnant, which aligns with the value investing principle that undervalued stocks should have the potential to realize their intrinsic value through operational progress.

Despite these strengths, investors should note certain nuances. The dividend yield of 4.7% is attractive but has recently decreased, and the company’s revenue growth is expected to slow. Additionally, operating in China’s regulatory environment entails inherent risks. However, the overall fundamental picture, cheap valuation, high profitability, sound financials, and reasonable growth, makes QFIN a noteworthy candidate for those employing a value strategy.

For investors interested in exploring similar opportunities, more results from the "Decent Value" screen can be found here.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consider their financial situation and risk tolerance before making any investment decisions.