2 Chinese Fintech stocks to Di

China has the world’s largest population with over 1.4 billion people, which is over four times that of the US. Bank rate indicating that the US has a 64% chance of entering a recession in 2023.

Therefore, while US investors may be tempted to stick with their home country bias, it may be a good idea to diversify into international ones, especially across China’s booming economy. One sector I am particularly positive about is the Chinese fintech market. The Chinese government has even announced a fintech development plan, which has set out bold goals to grow the sector through 2025. Therefore, in this article, we will take a look at two of my favorite companies in this industry that are poised to benefit of tailwind.

1. Tencent

Tencent (TCEHY, Financial) (HKSE:00700, Financial) is one of the largest technology giants in China with a wide variety of businesses under its umbrella. The company is known to be China’s largest gaming and social media player with its popular WeChat application that has over 1.2 billion monthly active users. However, many people are not aware that the company has a significant fintech business. This includes WeChat Pay, one of the most popular payment apps in China along with Alipay by rival Alibaba (BABA, Financial). WeChat Pay is a QR code payment system used for just about everything across China. The WeChat Pay and Alipay apps are used even more in Chinese cities than credit cards in the US

In addition, the company has developed a QQ wallet for its popular chat platform QQ. Other products include Tencent Blockchain, Tencent Tax Refund, Business Tenpay, Credit Card Refund and many more.

Economic review

Tencent was previously classified as a “growth company”, but in recent quarters its results have deviated from previous trends. In the fourth quarter of 2022, Tencent reported $21 billion in revenue, which was down 7.37% year over year. On the plus side, revenue rose 7% sequentially during the third quarter of 2022. Overall results were impacted by headwinds in the ad market, which was not helped by China’s Covid lockdown policy. In addition, Tencent’s domestic gaming revenue was affected by a series of curfews put in place by the Chinese government. This prohibited those under the age of 18 from playing games for more than three hours per week.

Given Tecent earns ~23% of its revenue from domestic games, the impact was felt. Additionally, the company generates ~9% of its revenue from international gaming, which was affected by the cyclical downturn in the global gaming industry after a huge boom in 2020. On the positive side, I don’t expect this to last forever, and Tencent’s fintech and business services segment contributed to 31% of the total revenues, which was solid.

In terms of earnings, Tencent reported earnings per share of 3.04 Chinese yuan ($0.45), beating analysts’ forecasts by 0.15%.

Another positive is that the company has a strong balance sheet with $42.16 billion in cash and cash equivalents against total debt of ~$52 billion. In addition, many people are not aware that Tencent has huge investments in a number of technology companies from Tesla (TSLA, Financial) to JD.com (JD, Financial) and many more. The estimated value of these investments was ~$77 billion as of Q4 2022.

Valuation

Tencent trades at a price-to-sales ratio of 5.24, which is over 89% cheaper than its five-year average.

The GF Value chart indicates a fair value of ~$69.82 per share, thus the stock is “significantly undervalued” at the time of writing.

2. FinVolusion

The other stock I want to highlight is lesser known and not a giant like Tencent. However, this company is growing its finances at a much faster rate and performing tremendously, and it is a pure-play Fintech. The name is FinVolution (FINV, Financial), and it operates five main financial products, with three in China and two internationally. The core platform is called PPDAI, a peer-to-peer lending platform that connects over 24 million Chinese borrowers with 75 banks and other financial institutions. The entire platform is powered by artificial intelligence (AI) and includes automated systems for collecting loans, underwriting and much more. This ultimately helps to reduce the cost of operations, while increasing performance and customer value.

FinVolution also operates a service for small and medium-sized enterprises (SMEs) that helps “bank the unbanked” by providing capital to this underserved demographic. China is a vibrant hub for small businesses, many of which are growing rapidly. FinVolution is ready to help enable this.

Growing economy

FinVolution generated stellar financial results for the fourth quarter of 2022. Its total transaction volume was $7 billion, which was up a solid 25% year-over-year or 7% quarter-over-quarter. This was a strong result given the zero-tolerance Covid lockdown policy that sparked protests across China and also affected consumer demand. The business also generated solid operating income of $435 million, which was up 24.6% year over year.

FinVolution is expanding its services internationally and focusing on the underserved emerging markets. Key targets currently include the Philippines, where the company has launched its JuanHand consumer loan application. In addition, the company has expanded to Indonesia and entered into partnerships with major banks including Bank Jago and Bank Permata. Collectively, these partnerships help reduce the financing costs of the loans and increase capital options. Overall, international transaction volume increased a brisk 36% year-over-year to $199 million for the quarter.

In terms of profitability, the company’s operating profit increased by 17.8% to $89.4 million.

In addition, the company has a strong balance sheet of cash and cash equivalents of $527.2 million and $497 million in short-term investments. The debt level appears to be minimal at ~$26 million.

FinVolution also has a forward yield of 5.42%, which is fantastic, especially for a technology company.

Valuation

FinVolution trades at a price-to-earnings ratio of 3.79, which is 56% cheaper than the financial sector average and 14% cheaper than the five-year average.

The GF Value chart indicates that the stock has a fair value of $5.07 and is thus “modestly undervalued.”

Final thoughts

Both Tencent and FinVolution are two amazing fintech companies. Tencent is the bigger and more diverse player, with its established social media and gaming businesses supporting the fintech business that is likely to make up the bulk of its revenue going forward due to China’s gaming restrictions. However, the company faces headwinds and slow growth in the short term. FinVolution is a fast-growing pure-play fintech that has a long growth path ahead of it. The fact that the company pays a high dividend of over 5% means it’s great for both income and growth investors.

However, investors should be aware that Chinese stocks have greater country risk for US investors due to political tensions as the US threatens to delist Chinese stocks unless certain conditions are met. Stocks like Tencent, where most of their equity is in a Chinese listing, are likely to be fine, but FinVolution only trades on US and German exchanges, so there is much more risk.