360 Finance: Management Stock Purchase Plan Shows Strong Confidence

Dec. 12, 2019 3:30 PM ET360 DigiTech, Inc. (QFIN)2 Comments2 Likes
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Summary

  • 360 Finance released the investment plan of up to $60 MM from the management and FountainVest Partners.
  • Two consecutive investments from FountainVest Partners in a short period of time show strong confidence and commitment.
  • The investment will largely help to release the pressure from liquidation of early investors.
  • Without any change to the fundamentals, we are more optimistic about the company.

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Investment Thesis

360 Finance, Inc. (NASDAQ: NASDAQ:QFIN) released the investment plan of up to $60 MM from the management and FountainVest Partners in the next 12 months. We believe this is a strong signal that the management and other significant shareholders are confident about the company. Two consecutive investments from FountainVest Partners in a short period of time lead us to believe that they are fully committed to QFIN. Without any change to the fundamentals, we are more optimistic about the company.

Stock Purchase Plan from Management

On December 11th, 360 Finance (the company) announced an investment plan by Significant Shareholder and Certain Management Members. More specifically,

  • Mr. Hongyi Zhou and certain management of the company, have reached an agreement with FountainVest Partners, on pursuant to which they plan to jointly invest up to US$60 million to purchase QFIN shares in the next twelve months.

As we have discussed in our previous article, FountainVest Partners just became a significant shareholder of the company, as released along with the Q3 results, through acquiring an aggregate of 11,521,266 ADSs of QFIN from certain shareholders of the company.

Mr. Hongyi Zhou, together with other executives of the company, held over 20% of the company's Class A and B shares, as shown in the IPO prospectus:

Source: QFIN's F1

This investment plan, with an amount of up to $60 MM (equivalent to about 6 MM shares based on current share price), delivers an important message to the market, that the management and long-term shareholders are strongly confident about the company.

Strong Confidence from Management

Hongyi Zhou, founder of 360 Group (parent company of QFIN), is now serving as the chairman of the board of directors for QFIN. As he stated in the announcement:

This (investment plan) reflects our confidence in the Company's business prospects and our long-term commitment to the Company's strategy. I'm proud of the achievements the Company has made over the past few years in serving inclusive finance.

Performance wise, QFIN's share price has suffered from certain level of pressure since its lock-up period expired in June. But the strong earnings results in Q2 and Q3 have helped the company to hold up the sell pressure from early investors, as well as the negative impact from regulation and economic slowdown:

Source: Yahoo Finance

FountainVest Partners

The strategic investor QFIN brought on-board, FountainVest Partners, is a private equity investment firm that focuses primarily on Chinese opportunities, including healthcare, media, consumption, etc. Their famous exit cases include Meituan-Dianping (MEIT), a group buying website for locally found food delivery services, consumer products and retail services, who now is one of the top Chinese internet giants that was listed in Hong Kong.

Source: FountainVest Website

Together with the initial investment in QFIN, FountainVest Partners has now committed up to $150 MM in the company. This is a significant amount when we look at the recent investment cases from the firm, especially when taken into consideration that FountainVest is the only investor:

Source: Crunchbase

More to Come?

The investment from FountainVest and the management will largely help to release the pressure from liquidation of early investors. Although we won't be able to know exactly how much selling pressure the company has to digest, one thing we know for sure is that the management is determined and capable of keeping up the share price. Two significant investments within such a short period of time from FountainVest indicate that it is committed to long-term growth of the company, so we wouldn't be surprised to see more capital injection again in the future.

Conclusion

Overall, we think QFIN presents a good entry point now. The signal delivered by the management and strategic investors shows that the company is most likely being undervalued by the market. Without any change to the fundamentals, we are more optimistic about the company.

This article was written by

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As an independent research firm, we focus on China Opportunities, from either US-listed Chinese Companies, or US companies' operation in China. Our mission is to help bridge the huge information gap between China and global investors.
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Disclosure: I am/we are long QFIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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