China has the world's largest population with over 1.4 billion people, which is over four times that of the U.S. Fitch has recently increased its estimates for China’s GDP growth in 2023 from 4.1% to 5%, which contrasts with the average forecast among economists surveyed by Bankrate that indicate the U.S. has a 64% chance of entering a recession in 2023.
Therefore, while U.S. investors may be tempted to stay with their home country bias, it could be a good idea to diversify into international, especially across China’s thriving economy. One sector I'm particularly positive about is the Chinese fintech market. The Chinese government has even announced a fintech development plan, which has laid out bold goals to grow the sector through 2025. Thus, in this article, we will take a look at two of my favorite companies in this industry which are poised to benefit from tailwinds.
1. Tencent
Tencent (TCEHY, Financial) (HKSE:00700, Financial) is one of the biggest technology giants in China with a wide variety of businesses under its umbrella. The company is known for being 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 aren’t aware the company has a substantial 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 uses for just about everything across China. The WeChat Pay and Alipay apps are even more commonly used in Chinese cities than credit cards are used in the U.S.
In addition, the company has developed a QQ Wallet for its popular instant chat messaging platform QQ. Other products include Tencent Blockchain, Tencent Tax Refund, Business Tenpay, credit card repayments and many more. 
Financial review
Tencent was previously classed as a “growth company” but in recent quarters the results have deviated from prior trends. In the fourth quarter of 2022, Tencent reported $21 billion in revenue, which fell by 7.37% year over year. The silver lining was revenue increased by 7% sequentially over the third quarter of 2022. Its overall results were impacted by advertising market headwinds, which wasn’t helped by China’s Covid lockdown policy. In addition, Tencent had its domestic gaming revenue impacted by a series of curfews put in place by the Chinese government. This banned those under the age of 18 from playing games for over three hours per week.
Given Tecent makes ~23% of its revenue from domestic games, the impact was felt. In addition, the company generates ~9% of its revenue from international gaming, which was impacted by the cyclical pullback in the global gaming industry after a huge boom in 2020. A positive is I don’t expect this to last forever, and Tencent’s fintech and business services segment contributed to 31% of total revenue, which was solid.
In terms of earnings, Tencent reported earnings per share of 3.04 Chinese Yuan ($0.45), which beat analyst forecasts by 0.15%.
Another positive is the company has a strong balance sheet with $42.16 billion in cash and cash equivalents versus total debt of ~$52 billion. In addition, many people aren’t aware Tencent has huge investments in a variety 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 the fourth quarter of 2022.
Valuation
Tencent trades at a price-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, and thus the stock is “significantly undervalued” at the time of writing.
2. FinVolution
The second stock I want to highlight is less well known and not a giant like Tencent. However, this company is growing its financials at a much faster rate and executing tremendously, and it's a pure-play Fintech. Its name is FinVolution (FINV, Financial), and it operates five main financial products, with three in China and two internationally. Its core platform is called PPDAI, a peer to peer lending platform which connects over 24 million Chinese borrowers with 75 banks and other financial institutions. Its whole platform is powered by artificial intelligence (AI) and includes automated systems for loan collection, underwriting and much more. This ultimately helps to reduce the cost of its operations, while also increasing performance and customer value.
FinVolution also operates a small to medium sized business (SMB) service which helps to “bank the unbanked” by providing capital to this underserved demographic. China is a vibrant hub of small businesses, many of which are growing rapidly. FinVolution is poised to help enable this.
Growing financials
FinVolution generated fantastic financial results for the fourth quarter of 2022. Its total transaction volume was $7 billion, which increased by a solid 25% year over year or 7% quarter over quarter. This was a strong result given the zero tolerance Covid lockdown policy which sparked protests across China and also impacted consumer demand. The business also generated solid operating revenue of $435 million, which rose by 24.6% year over year.
FinVolution is expanding its services internationally and focusing on the underserved emerging markets. Its prime targets currently includes the Phillippines, where the company has launched its JuanHand consumer loan application. In addition, the company has expanded into Indonesia and partnered with major banks including Bank Jago and Bank Permata. Overall these partnerships help to reduce the cost of funding for its loans and increase capital options. Overall its international transaction volume increased by a rapid 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 with cash and cash equivalents of $527.2 million and $497 million in short-term investments. Its debt level looks to be minimal at ~$26 million.
FinVolution also has a forward dividend yield of 5.42%, which is fantastic, especially for a technology company.
Valuation
FinVolution trades at a price-earnings ratio of 3.79, which is 56% cheaper than the financial services sector average and 14% cheaper than its five-year average.
The GF Value chart indicates the stock has a fair value of $5.07 and is thus "modestly undervalued."
Final thoughts
Both Tencent and FinVolution are two fantastic fintech companies. Tencent is the larger and more diverse player, with its established social media and gaming businesses supporting the fintech business that will likely make up the bulk of revenue going forward due to China's gaming restrictions. However, the company is facing headwinds and slowing growth in the near-term. FinVolution is a rapidly growing pure-play fintech which has a long growth runway ahead. The fact 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 come with greater country risk for U.S. investors due to political tensions as the U.S. is threatening to delist Chinese stocks from its exchanges unless certain conditions are met. Stocks like Tencent, where most of their equity is in a Chinese listing, will likely be fine, but FinVolution only trades on U.S. and German exchanges, so it is at a much greater risk.
