- According to SAIC data we obtained, QFIN has astronomically overstated its profit compared to the net income it disclosed in the SEC filings. Virtually all of QFIN’s reported profits might be fake. We urge regulators to investigate the company’s internal data because we suspect fraudulent activities.
- Given the significant overstatement of profits, we have serious concerns about the long-term sustainability of QFIN’s announced dividend and stock buyback program.
- QFIN’s controlling shareholder, Hongyi Zhou, has a track record of delivering terrible investment returns for other companies that he controls, both in Hong Kong and China A share stock markets, and has previously faced fraud allegations.
- Media reports in China corroborate our view that Hongyi Zhou is using QFIN as a piggy bank for other projects. Another example of questionable self-dealing is QFIN guaranteeing loans worth over 5 billion RMB for a related party, with unclear benefits for QFIN shareholders.
- We have identified a related party to QFIN, which Hongyi Zhou controls, that we suspect helps QFIN doctor its financials as it acted as if it was QFIN but kept off QFIN’s balance sheet.
- QFIN’s delinquency rates are skyrocketing while the company keeps reducing its loan provisions. We suspect the mounting receivables are largely made up to justify the missing cash while profits are supposedly at record highs.
- QFIN guarantees a large number of loans it carries outside its balance sheet, elevating the credit risk drastically. The media report in China corroborates our view that QFIN is likely responsible for the performance of a substantial, if not the majority, of its off-balance sheet loans. We believe QFIN is secretly overleveraged.
- Based on customer complaints, media reports, and our own due diligence, we believe that QFIN consistently issues loans at an annual rate that exceeds the legal limit. This, coupled with the challenges of guaranteeing performance amidst rising delinquency rates, could lead to increased regulatory intervention in China. We anticipate that it’s only a matter of time before the regulator in China takes action against QFIN.
- QFIN’s auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP, also audited infamous frauds such as GOTU (previous ticker: GSX). Its previous auditing partner seems to audit China Hustle stocks that incinerate investor capital exclusively.
Introduction
Qifu Technology, Inc. (NASDAQ: QFIN) is a major player in the credit-driven services sector, connecting borrowers with financial institutions in China and offering various types of loans. The company, previously known as 360 Jietiao, recently rebranded to Qifu Jietiao. Furthermore, the company changed its corporate identity from 360 DigiTech, Inc. to Qifu Technology, Inc. in March 2023. Since its establishment in 2016, the company has been headquartered in Shanghai, the People’s Republic of China.
After months of research, we believe the company has reported fraudulent financials to the SEC and U.S. investors. In addition, we believe that QFIN is controlled by bad actors who use accounting games and related parties to doctor financials. It is also in active violation of the law in China, which will soon lead to a crackdown on its business operations.
SAIC Files Suggest Astronomical Profit Exaggeration, Financial Fraud, Untrustworthy Long-Term Dividend and Stock Buyback Plan
The State Administration for Industry and Commerce is the Chinese government body responsible for the supervision of business administration in China. Discrepancies between SEC and SAIC financial data have often been a key indicator for fraud – especially when the discrepancies are significant.
We obtained the SAIC financial data of the 6 subsidiaries QIFU disclosed in its SEC filing, and compared the consolidated numbers to the financials the company disclosed in its SEC filings. The comparison suggests that the company has exaggerated over 1,000 times its net income in both 2022 and 2023, albeit with understated revenues in both years.
Different accounting treatments cannot explain the delta in the financials filed with the SEC and SAIC. Let’s call the kid by name: We allege that QFIN has been falsifying its SEC financials to portray the business as vastly more profitable than it is. Our belief that QFIN fraudulently falsified its SEC financials is strengthened by several factors, such as a range of other lies and misrepresentations that our research uncovers and a key man behind QFIN that we believe to be dishonest and untrustworthy.
Falsified profits have many implications. We believe investors are too optimistic about the company’s dividend and stock buyback program. QFIN is paying a semi-annual dividend of $0.60 per ADS ($1.20 per ADS annualized). However, considering the overstated profits, we believe the company’s dividend and stock purchase program are not sustainable in the long run. Shareholders buying the stock based on its current dividend and stock buyback program could face a nasty surprise when these programs do not materialize or are adjusted downward in the future.
QFIN’s Controlling Shareholder Has a History of Destroying Shareholder Value and Fraud Allegations
Hongyi Zhou is a Chinese national and a key individual behind QFIN. He was chairman of the board until recently and resigned in August 2024 for “personal reasons”, according to the company. He is also QFIN’s biggest shareholder. He faces serious allegations in China, and his track record with public companies is horrible. Hongyi Zhou has repeatedly burned shareholder capital and faced fraud allegations.
HK3601 (360 Ludashi Holdings Limited)
HK3601 “develop a series of PC and mobile device utility software offered to users free of charge in exchange for online traffic that we monetize by online advertising and online game business,” according to the company’s description. One of the controlling shareholders is Mr. Hongyi Zhou, the biggest individual shareholder of QFIN and the A-share listed company 360 Security Technology Inc. (601360.SS). In September 2023, something very bizarre happened with HK3601 that caused an outcry in the investment community.
We have pointed out the timeline with the stock price chart to better illustrate what went on with the company HK3601.
On September 11, 2023, HK3601 announced that it might consider paying out a special dividend and wants to hold a board meeting on September 21, 2023, to discuss this matter. The company’s stock soared based on the special dividend expectation and reached almost HK$2 a share from as low as about HK$1.10 a share a few days prior. However, on September 20, 2023, the company suddenly disclosed that its substantial shareholder, True Thrive Limited, which is ultimately controlled by Mr. Hongyi Zhou, sold over 34 million shares (12.77%) of the company and one day later on September 23, 2023, the company announced that the board meeting is canceled!
This series of moves made investors who purchased at high prices of HK3601 suffer a quick and devastating loss, and it was reported that some investors were suggesting to complain to the Hong Kong stock exchange regulator and believed the company “maliciously releasing dividend information and hyping up to offload stocks.”
Hongyi Zhou seems ready and willing to take advantage of public investors.
HK3601 has been on a long-term downward trend ever since it went public in 2019.
360 Security Technology Inc. (601360.SS) (the previous ticker was QIHU before it went private)
360 is controlled by Mr. Hongyi Zhou, the chairman of QFIN’s board of directors until August 2024 and still its biggest shareholder. Its business was previously listed on the U.S. stock market and went private in late 2015 through a purchase by Mr. Zhou and other investors. After it went private, the same company went public again in the China A share market in late 2017 through a reverse merger. Although the stock initially popped due to this transaction, it endured a multi-year steady decline to its current level of ~RMB 7+ a share.
Before QIHU went private, the company was also accused by Citron Research of fraud in 2011.
In 2023, another incident involved the A share public company 360 and its controlling shareholder, Mr. Zhou. The company announced in April 2023 that Mr. Zhou and his wife got divorced, and the joint assets had been dealt with. This announcement brought much controversy at the time because some investors and media members were questioning the intention of this divorce. For example, this article gave some background on this incident. The stock price of 360 went up over 186% from February to early April 2023 because it was considered part of the ChatGPT theme in the A-share market, and the divorce announcement was right when the stock was at its peak level back then. Although the IR of 360 tried to clear the speculation that this divorce was pre-planned so that Mr. Zhou was allowed to decrease the holding of 360, there are still people from the media who don’t believe the IR’s clarification, according to this article. After this incident, it was reported that the China CSRC seemed to try to strengthen the rules around insider lock-ups, specifically addressing incidents such as a divorce, which make it harder for controlling shareholders or significant shareholders to sell off their shares under these circumstances.
We believe the long-term performance of different entities that the same person controls can be a valuable indication of that person’s business acumen and ability to reward the shareholders who believe in him. So far, 360 Security Technology Inc. (601360.SS) and HK3601 show the same pattern. With the current business model and economic condition in China, we believe it is highly likely that QFIN will undergo the same downtrend in the future.
Hongyi Zhou Seems to Abuse QFIN as His Personal Piggy Bank Based on Media Report
Recently one investigative report in China laid out multiple questions about 360 Group, the controlling shareholder Mr. Zhou, and QFIN. The report shows, QFIN seems to be providing capital to the 360 Group and its biggest shareholder, Mr. Zhou, for so-called headquarters projects:
- 360 Group and another real estate company jointly established a project company. This project company spent RMB 230 million on two industrial lands and planned to invest RMB 2 billion to build 360’s East Regional Headquarters. The project was supposed to be completed in 2021, but it was halted in 2021 and didn’t resume construction until early 2023. One of the main reasons might be that the real estate partner is in a debt crisis.
- In 2020, there were online reports that 360 Group and Putuo District of the City of Shanghai would build “Shanghai 360 Big Safety Headquarters” with a promised total investment of RMB 5 billion within 3 years. At the end of 2020, QFIN, 360 Group, and an SOE jointly established an entity, and later on, 360 Group transferred its equity interest to QFIN, resulting in QFIN holding 70% of the company as the majority shareholder. In February 2021, this joint company spent RMB 1 billion (QFIN spent RMB 700 million, and the SOE spent RMB 300 million) to acquire industrial land in the Huangpu District of the City of Shanghai.
- The report questioned how many east regional headquarters Mr. Hongyi Zhou planned to build. Although the headquarters project in Hangzhou stopped, will there be two 360’s east regional headquarters in both Putuo District and Huangpu District of the City of Shanghai?
The report shows that QFIN has always been part of the capital provider for 360 Group’s headquarters development plan. This kind of report should raise legitimate questions on whether 360 Group and Mr. Zhou use QFIN as a piggy bank for their various projects and endeavors.
We Believe QFIN is using a Related Party, Shanghai Qibutianxia, to Doctor its Financials
A common theme that we have seen with fraudulently operating companies, especially in China, is that they control off-balance-sheet entities in essentially the same business. This allows them to essentially use the private companies as “Cookie Jars” and move costs and revenue between public and private companies depending on what they want to show investors. We believe QFIN is guilty of this scheme, and we think we may have identified the entity QFIN uses to do so.
Shanghai Qibutianxia Information Technology Co., Ltd. (“Shanghai Qibutianxia”, formerly known as Beijing Qibutianxia Technology Co., Ltd.) was established on November 27, 2006. According to QFIN’s disclosure, “Shanghai Qibutianxia and its subsidiaries are related parties, as Shanghai Qibutianxia is an affiliate of Mr. Hongyi Zhou, the chairman of our board of directors.”
Source: Qichacha
On its registered website, Shanghai Qibutianxia showed two WeChat accounts named gf360DigiTech and i-360jinrong, respectively. The first account is directed to Qifu Technology’s account, which is run by Shanghai Qiyu Information Technology Co., Ltd (a subsidiary of QFIN); and the second account is directed to 360 Finance Technology run by Beijing Qibutianxia Technology Co., Ltd (Shanghai Qibutianxi’s previous name). The first account is up to date, meaning it has published articles lately. The second account hasn’t published an article since February 2018.
In the meantime, according to QFIN’s disclosure, it has transacted with Shanghai Qibutianxia and its subsidiaries in the past few years. The table below summarizes the related party transaction between QFIN and Shanghai Qibutianxia.
Source: company filings
We find it troubling that QFIN has a joint back-to-back guarantee arrangement with Shanghai Qibutianxia for such a large amount. What does Shanghai Qibutianxia do exactly? According to the introduction on Qichacha, Shanghai Qibutianxia does technology development, technical consulting, and technology promotion; computer system services; design, production, agency, and publication of advertisements; sales of communication equipment, electronic products, computer software and hardware, and auxiliary equipment.
However, this recruitment website shows the company page of Beijing Qibutianxia Technology Co., Ltd (Shanghai Qibutianxi’s previous name), where it has the logo of 360 DigiTech. QFIN changed its name from 360 DigiTech, Inc. to Qifu Technology, Inc. in March 2023.
We find it troubling that Shanghai Qibutianxia is acting as if it were QFIN, which is not consolidated on its balance sheet.
We also noticed that another recruitment website shows Shanghai Qibutianxia’s employee count over 10,000.
According to QFIN’s disclosure, it “had 2,129 employees as of December 31, 2021, 2,199 as of December 31, 2022, and 3,121 as of December 31, 2023.” However, the first recruitment website shows Shanghai Qibutianxia’s employee size is between 5,000 and 9,999, and the second recruitment website shows Shanghai Qibutianxia has over 10,000 employees.
We find this big employee count for Shanghai Qibutianxia odd because the company has no discernible business operations, online or physical presence we could identify.
We believe it is highly likely that QFIN uses Shanghai Qibutianxia to keep employee costs off its books.
While the Credit Portfolio is Imploding, Management’s only Answer seems to be Accounting Shenanigans
According to the company, it primarily monitors “the cumulative performance of loans facilitated by us as of a given measurement date via 90-day+ delinquency rates, and evaluate the healthiness of loans facilitated by us in each fiscal quarter through 180-day+ vintage delinquency rates.”
The table below summarizes the 90-day+ delinquency rates from 2019 to Q2 2024.
Source: company filings
The company’s delinquency rate has clearly been on an upward trend in the past few years. Rising delinquency rates are obviously an issue for QFIN, as it must guarantee the performance of these loans.
In addition, we suspect that the company has been using the provisions for the receivables to manipulate the reported earnings. The table below shows the total receivables, including accounts and contract assets, financial assets, and loan receivables. According to the company’s income statement, there were four items on provisions, which in total accounted for 54.5% and 50.4% of the total operating costs and expenses in 2022 and 2023, respectively.
Source: company filings, Grizzly analysis
The company’s total receivables increased from 25.3 billion RMB in 2022 to 33.7 billion RMB in 2023, an increase of 33.2%, yet its total provisions recorded on its income statement as costs/expenses decreased from 6.6 billion RMB in 2022 to 5.8 billion RMB in 2023, a decrease of 12.4%. To put into perspective, the total provisions as % of the total receivables were 26.0% in 2022, but this ratio decreased to 17.1% in 2023. For the first half of 2024, the total receivables increased from 30.6 billion RMB from the same period in 2023 to 33.5 billion RMB, an increase of 9.6%, yet its total provisions were 2.6 billion RMB in the first half of 2023 and 2.2 billion RMB in the first half of 2024, a 16.3% decrease year over year. The annualized total provisions as of the total receivables were 17.3% for the first half of 2023, but this ratio further decreased to 13.2% for the first half of 2024. However, in the meantime, the company’s credit quality of the total loans has kept declining, because its 90 day+ delinquency rate increased from 2.03% in 2022 to 2.35% in 2023, and further increased to 3.40% in Q2 2024. It seems unreasonable to us that the provisions are decreasing while the receivable balance is increasing and delinquency rates are rising.
Despite the reported increased operating income and net income both from 2022 to 2023 and from 1H 2023 to 1H 2024, the company’s cash and cash equivalents decreased from 10.5 billion RMB in 2022 to 8.4 billion RMB as of June 30, 2024, about 2.1 billion RMB decrease. We believe QFIN is forced to move balance sheet items around because its reported profits are fake, and it has to justify where the missing cash went.
Our Research Indicates that QFIN is Vastly More Levered than it Appears
QFIN does not only carry loans on its books. The company also has a big portion of loans that are off-balance sheet. Even though these loans are off-balance sheet, the company still needs to “guarantee the repayment either through the VIEs with financing guarantee license or third-party guarantee companies or insurance companies” for a portion of these.
The table below summaries the ratio of loans to equity if investors include off-balance loans.
Source: company filings, Grizzly analysis
The real leverage is likely much higher than suggested by the on-balance sheet portion, although the company is not transparent in how much of the off-balance sheet loans it has to guarantee. The table above assumes that the company guarantees all the off-balance sheet loans. Combined with the worsening delinquency rate, we believe the off-balance sheet loans to be a major risk for QFIN which is soon to materialize.
It was reported by the investigative article that although financial institutions lent out most loans to borrowers, QFIN still needs to provide guarantees for those loans, essentially acting as a backstop for the financial institutions’ loans.
In addition, the report also stated that when the loans both facilitated by QFIN and lent out by QFIN itself went into default, the 360 Jietiao platform would eventually handle the debt collection.
This is especially troublesome because we believe the company’s business practices are violating the rules/laws in China, as the annual rate of the loans lent out or facilitated by the company seems to be much higher than the maximum rates that the regulators require. Our research indicates that pressure on lending platforms in China is mounting.
QFIN’s Loans Have Annual Rates That Are Way Over the Regulatory Approved Rates – Why We Believe Regulators Might Crack Down on the Business
The Chinese government’s rules on private lending have been very clear: The interest rate on loans should not exceed quadruple the one-year loan prime rate.
As China’s economy continues to underperform, the central bank has been decreasing the loan prime rate along the time. The chart below shows that the current primate rate is 3.35% as of August 2024.
Source: ycharts.com
As the regulation currently only allows 4 times of LPR, then the annual rate that QFIN facilitates or lends out should be at most 13.8%.
In its Hong Kong second-time listing prospectus, QFIN stated that its effective APR was 22.6%, much higher than the 13.8%.
However, according to the reports in China, QFIN’s interest rates are in practice astronomically higher resulting in extreme cases such as a borrower knifing a QFIN employee in one of QFIN branches. One media report stated that one person complaining online has an annualized rate of 186%.
In addition, the most recent complaints suggest that QFIN is still lending much more than the legal capped rate in China. For example, the complaint below says the annualized rate is 30.8% to 30.9%.
Source: tousu.sina.com.cn
Translation: Borrowed 49,300 RMB on 360 Jietiao on May 7th, 2021, and its interest rate is higher than the country’s standard mortgage rate, it is usury, with an annualized interest rate of 30.91%, and another loan with an interest rate of 30.82%.
The company acknowledged this risk in its annual report, and we believe it is fully aware that its current business practices and interest rate exceed the quadruple LPR limit. We believe QFIN is walking a tightrope by actively violating Chinese laws and regulations. This also makes collecting interest in excess of the legal limit effectively illegal and practically more difficult.
It was reported that there are many complaints about QFIN engaging in unlawful debt collection practices, and this article listed a few examples. Our due diligence team tried to borrow money from QFIN’s lending platform 360 Jietiao mobile application (name changed to Qifu Jietiao recently).
Source: 360 Jietiao
On the platform, it shows that if a borrower wants to borrow 10,000 RMB for 24 months, the annualized interest rate is 23.54%, which is way higher than 13.8%. If the borrowing duration changes to 12 months, the annualized interest rate slightly changes to 23.41%. Either way, it can be found that QFIN is still lending or facilitating loans at an annualized interest rate that is much higher than the rule required upper limit.
We believe the regulators are aware of the high-interest loans issue and are collecting evidence. For example, in December 2023, there was an article talking about a province that has been asking all of its units or departments to gather information on high-interesting borrowing from individuals and private enterprises. Interestingly, 8% is the cut that is considered a high-interest rate loan in this case, which is much lower than the rates of QFIN’s loans.
We believe regulatory intervention is an existential risk that is underappreciated by shareholders. Based on our experience with previous regulatory interventions, for example, in the private tutoring sector, once the crackdown happens, the related companies could mark down substantially overnight as Chinese regulators are shutting down practices in disregard of losses that foreign shareholders are facing.
Auditor and Engagement Partners do not Give Confidence
The company’s auditor is Deloitte Touche Tohmatsu Certified Public Accountants LLP, who is also the auditor of the infamous fraud GOTU (previous ticker GSX). In addition, the engagement partner’s name has been Hui Zhu since 2022, and it appears QFIN is the only company Hui Zhu’s audits. The engagement partner for QFIN from 2017 to 2021 is Kai-Wen Lin who also audited:
- Ruhnn Holding Limited (previous ticker: RUHN; a Chinese KOL firm that went public in 2019 at $12.5 per share, and went private at $3.50 per share in 2021, an over 70% permanent loss for shareholders if they held shares from IPO)
- Jupai Holdings Limited (another fintech company from China, which was delisted, and the current ticker is JPPYY)
- 111, Inc (ticker: YI; IPO at $14.00 per share in 2018, currently trading at $0.6)
- Baozun Inc. (ticker: BZUN; IPO at $10.00 per share in 2015, currently trading at $2.68)
Insiders Have Been Continuous Unloading Shares Along the Way
Based on our estimation, the insiders have unloaded worth of over $230 million QFIN’s stocks since 2020. The table below summarizes the timings and sales.
Source: Refinitiv
Conclusion
QFIN is an example of what we view as a classic China Hustle. We believe the underlying business is sub-par and deteriorating, and regulatory intervention might shut down the company any day. We were not surprised to find out that QFIN is reporting different financials to Chinese regulators, but to find out that almost all of the SEC-reported profits from the last two years seem to be fabricated even shocked us. The key man behind QFIN, Hongyi Zhou, is, in our opinion, a bad actor who is taking advantage of the company to the detriment of public shareholders. The fact that QFIN shares its auditor with one of the most noteworthy China frauds, GOTU, formerly GSX, only adds to the picture that the company should not be trusted.
