Executive Summary / Key Takeaways

• AI-Driven Core: Qfin Holdings, Inc. (QFIN) is a leading AI-empowered credit-tech platform in China, leveraging advanced artificial intelligence and large language models (LLMs) across its operations to enhance credit decisioning, risk management, user acquisition, and B2B technology solutions.
• Robust Financial Performance: The company demonstrated strong financial results in Q2 2025, with total loan facilitation and origination volume increasing by 16% year-over-year to RMB 84.6 billion and non-GAAP net income rising 30.8% year-over-year to RMB 1.85 billion.
• Strategic Expansion & Shareholder Returns: QFIN is executing a "One Core, Two Wings" strategy, expanding its embedded finance and technology solutions businesses while cautiously pursuing international growth. Aggressive share repurchases and consistent dividends underscore management's confidence and commitment to shareholder value.
• Competitive Edge in a Consolidating Market: Amidst evolving regulatory landscapes in China, QFIN's technological prowess and prudent risk management position it to consolidate market share as smaller, less capable players exit, fostering a healthier competitive environment.
• Attractive Valuation: Despite strong operational performance and strategic initiatives, QFIN's shares appear significantly undervalued, trading at a forward P/E ratio below 5x and 2.6x its cash flows, suggesting a compelling investment opportunity.

The AI-Powered Ascent in China's Credit-Tech Landscape

Qfin Holdings, Inc., formerly known as Qifu Technology, Inc. until its name change in July 2025, stands as a prominent AI-driven credit-tech platform in the People's Republic of China. Founded in 2016, the company has strategically evolved from a single loan service provider to a comprehensive platform, empowering financial institutions, consumers, and small and micro-enterprises with a suite of credit-driven and platform services. This transformation is encapsulated in its "One Core, Two Wings" strategy, where its domestic credit business forms the core, complemented by a burgeoning Technology Solutions segment and a nascent international expansion as its two wings.

The broader industry landscape in China is undergoing significant supply-side reforms under regulatory guidance, aiming to foster inclusive and innovative consumer credit solutions. Recent directives from China's National Financial Regulatory Administration, particularly the April notice on Internet loan facilitation, are viewed by QFIN's management as a positive catalyst for the sector's long-term health and sustainability. These regulations are expected to lead to a more organized market, with less capable smaller players gradually exiting, thereby allowing technologically stronger entities like QFIN to capture a larger market share. This consolidation dynamic is a critical driver for QFIN's future competitive positioning.

QFIN's foundational strength and a key differentiator in this evolving market is its deep integration of artificial intelligence across its entire value chain. The company's AI-powered credit decision engine and asset distribution platform currently serve 165 financial institutions and over 60 million cumulative users. This technological backbone provides a significant competitive moat, enabling more accurate risk assessment and differentiated product offerings compared to broader tech conglomerates like Tencent , JD.com , and Baidu , which, while possessing vast ecosystems, may lack QFIN's specialized credit-tech focus.

Technological Leadership: The AI Engine Driving Efficiency and Risk Control

QFIN's commitment to AI is not merely a buzzword; it is deeply embedded in its operational DNA, driving tangible benefits across its business. The company has developed a sophisticated risk decisioning AI agent that leverages large language models (LLM) technology. This agent integrates an impressive 670 models, 7,129 strategy modules, and over 100 million historical decisions into its foundation model, establishing an end-to-end risk management solution. The efficacy of this system is evident in its performance: the leading risk indicator, First Payment Default (FPD) over 7 days for new loans facilitated in June 2025, decreased by approximately 5% compared to May, while the C2M2 metric (delinquency rates after 30-day collection) remained stable. This demonstrates the AI's ability to refine risk standards and improve loan quality.

Further enhancing its capabilities, QFIN employs a user profile enhancement AI agent that utilizes LLM to activate knowledge association and identify underlying logic in data. This agent enriches user profiles for over 20% of the core user base, refining and cross-validating key labels like industry, income, and occupation to optimize credit offers. An intelligent algorithm agent operates continuously, training and fine-tuning models and automatically generating core risk model chains. This has led to measurable improvements, with two core behavior scorecard models improving KS scores—a metric for separating risk levels—by 89 and 93 basis points, respectively.

Beyond risk management, AI permeates user acquisition and operational efficiency. QFIN utilizes AIGC (AI-Generated Content) technology for marketing, with 74% of its graphics and 27% of its videos now AI-generated. This has resulted in a 25.1% improvement in user outreach efficiency and an approximately 10% reduction in the average cost per credit line user. Furthermore, 40% of its ad placements are automated, yielding a 9% improvement in ROI compared to manual placements. In post-lending processes, an AI copilot system for loan collection boasts a recall rate of 96.3% and an an accuracy rate of 98.8% in key information extraction, leading to a doubling of its average daily use by the collection team. The Qifu report interpretation system, integrating QFIN's LLM with traditional natural language processing, provides deeper insights into SME borrowers' products and tracks operational changes for 30% of these borrowers.

For financial institutions, QFIN is advancing its "AI+ bank" strategy, upgrading its FocusPRO credit tech solution into a next-generation super AI credit agent. This initiative aims to strengthen B2B services, with AI agent products already attracting strong interest from banks and securing commercial orders for launch in Q3 2025. A strategic partnership with an AI hardware provider to develop a customized all-in-one AI machine further underscores QFIN's commitment to enhancing its AI product competitiveness across user acquisition, risk management, and day-to-day operations. These technological advancements collectively form a robust competitive moat, driving operational efficiency, superior risk control, and opening new revenue streams, thereby directly contributing to QFIN's financial performance and market positioning.

Financial Resilience and Strategic Capital Allocation

QFIN's financial performance in the second quarter of 2025 demonstrates significant resilience and growth despite a challenging macroeconomic backdrop. Total loan facilitation and origination volume on its platform increased by approximately 16% year-over-year, reaching RMB 84.6 billion. This growth was accompanied by improved operational efficiency, with the take rate for the quarter reaching 5.4%, an increase of almost 1 percentage point year-over-year. Non-GAAP net income surged by 30.8% year-over-year to RMB 1.85 billion, and non-GAAP EPADS on a fully diluted basis rose by 48.8% to RMB 13.63.

Total net revenue for Q2 2025 was CNY 5.22 billion, up from CNY 4.69 billion in Q1 2025 and CNY 4.16 billion a year ago. Revenue from credit-driven services (capital-heavy) reached CNY 3.57 billion, with sequential growth driven by increases in on-balance sheet loans. Platform services (capital-light) generated CNY 1.65 billion in revenue, with year-on-year growth primarily from strong contributions from ICE and other value-added services. Platform services accounted for roughly 51% of the quarter-ending loan balance, reflecting the company's strategic shift towards a more capital-light model. The average IRR of loans originated and/or facilitated remained stable at 21.4% in Q2 2025.

The company's liquidity position remains robust, with approximately CNY 2.62 billion in cash generated from operations in Q2 2025 and total cash and cash equivalents and short-term investments amounting to CNY 13.34 billion.

QFIN has also demonstrated strength in the ABS market, issuing approximately RMB 7.8 billion in Q2, a 70% year-over-year increase. Total ABS issuance in the first half of 2025 nearly matched the full year total in 2024, with issuance costs declining to a record low. This has contributed to a sequential decrease of 10 basis points in overall funding costs.

QFIN maintains a conservative approach to risk management, with new provisions for risk-bearing loans in Q2 2025 at approximately CNY 2.5 billion, representing about 5% of new risk-bearing loans, well above historical vintage loss rates. The provision coverage ratio reached a near historical high of 662% in Q2 2025, providing ample cushion against potential risks. The company's leverage ratio, defined as risk-bearing loan balance divided by shareholders' equity, stood at 2.8x in Q2 2025, remaining near the low end of its historical range.

Shareholder returns are a key priority for QFIN. As of August 14, 2025, the company had repurchased approximately 7.1 million ADSs for a total of approximately CNY 277 million under its CNY 450 million share repurchase plan. Year-to-date, total repurchases amount to 12.2 million ADSs, reducing the share count by about 9% since the beginning of the year. The Board also approved a dividend of USD 0.76 per ADS for the first half of 2025. Management's commitment to a payout ratio of over 70% for the next few years, prioritizing buybacks, signals strong confidence in the company's future and a belief that its shares are undervalued.

Strategic Expansion and Future Trajectory

QFIN's "One Core, Two Wings" strategy is driving diversified growth. The embedded finance business is a significant growth engine, having deepened its presence across various internet scenarios such as short-form videos, e-commerce, mobility, and food delivery. In Q2 2025, QFIN added four new strategic channels, nearing full coverage across leading Internet platforms. New credit line users from embedded finance channels surged by 103% year-over-year, with loan volumes increasing by roughly 155%, while the ROA of this segment remained stable. This expansion provides a convenient and seamless borrowing experience for users while broadening QFIN's brand visibility and market reach.

The Technology Solutions business is also gaining significant traction. Loan volumes supported by this segment increased approximately 150% year-over-year in Q2 2025. The "AI+ bank" strategy, which focuses on developing AI-powered products tailored for financial institutions, is a key pillar. The upgrade of FocusPRO into a next-generation super AI credit agent and the development of an AI agent for core credit approval processes are expected to strengthen B2B service capabilities. These AI agent products have already secured several commercial orders scheduled for launch in Q3 2025, indicating strong market interest and potential for future revenue streams.

In a cautious yet determined move, QFIN has also initiated overseas expansion, launching small-scale operations in the U.K. during Q2 2025. While still in its early stages, these operations are delivering healthy performance across key metrics. The company views the U.K.'s robust fintech infrastructure as a significant opportunity and is confident that its AI and big data capabilities can address underserved local demand. This international foray, though incremental, aligns with QFIN's long-term vision to become a globally respected fintech company.

Outlook and a Dynamic Regulatory Environment

QFIN's outlook for the third quarter of 2025 reflects a prudent approach amidst persistent economic uncertainty and fast-changing market dynamics. The company expects non-GAAP net income to be between RMB 1.6 billion and RMB 1.8 billion. This guidance anticipates a modest decline in loan volume in Q3 compared to Q2, driven by further tightening of risk management controls in response to new regulatory rules and potential market volatility. A shift in the loan mix from capital-light ICE business to capital-heavy segments is also expected, which could impact the pace of revenue recognition. Despite these adjustments, management projects only a modest upward movement in risk levels for Q3, remaining well within their controlled range, and intends to continue heavy provisioning.

Looking further ahead, QFIN expects its average IRR to fluctuate around the current 21.4% level and its leverage ratio to remain near the low end of its historical range. For the full year 2025, total ABS issuance is projected to grow by over 30%, leading to a meaningful decrease in overall funding costs compared to 2024. The take rate is expected to remain around 5% for Q3, consistent with earlier guidance, with a longer-term view that industry consolidation will be beneficial.

The regulatory environment remains a critical factor. While new guidelines for Internet loan facilitation are expected to improve the industry's overall health, they will necessitate an adjustment period. QFIN's history of successfully navigating similar adjustments positions it favorably to thrive in a healthier, more consolidated market. The company emphasizes its commitment to prudent, compliant operations and continuous optimization of products and services to address user needs effectively.

Competitive Positioning and Investment Implications

QFIN operates in a competitive landscape dominated by tech giants like Tencent , JD.com , and Baidu (BIDU), which leverage vast ecosystems and user bases. However, QFIN distinguishes itself through its specialized AI-driven credit-tech platform and strong partnerships with financial institutions. While Tencent (TCEHY) and JD.com (JD) benefit from integrated e-commerce and social platforms for customer acquisition, QFIN's deep expertise in AI-powered risk assessment and loan facilitation provides a qualitative edge in efficiency and precision, particularly for SME lending. Its leadership in ABS issuance also offers a distinct competitive advantage in funding.

The ongoing regulatory reforms are expected to be a net positive for QFIN. As smaller, less technologically capable players are phased out, the market is poised for consolidation, allowing stronger platforms like QFIN to expand their market share. This aligns with management's view that the industry will become more rational, leading to less intense competition, lower marketing and risk costs, and better user retention. QFIN's flexible asset structure, with its growing capital-light segment, also enhances its resilience during market cycles.

Despite its strong fundamentals, technological leadership, and strategic growth initiatives, QFIN's shares appear significantly undervalued. Trading at a forward P/E ratio below 5x and 2.6x its cash flows, the company presents a compelling value proposition. Its high return on equity (ROE) of 30.97% (TTM) and a robust dividend yield of 4.90% (TTM) further underscore its attractiveness to discerning investors.

Conclusion

Qfin Holdings, Inc. is a compelling investment opportunity, uniquely positioned at the intersection of China's evolving consumer credit market and the transformative power of artificial intelligence. The company's unwavering commitment to AI-driven innovation underpins its superior risk management, operational efficiency, and ability to adapt to dynamic market conditions. With robust financial performance in Q2 2025, a clear strategic roadmap for growth through embedded finance, technology solutions, and international expansion, and a proactive approach to shareholder returns, QFIN is building a resilient and profitable business. While regulatory adjustments and macroeconomic uncertainties present near-term challenges, QFIN's technological leadership and prudent operational discipline are expected to enable it to consolidate its market position and unlock significant long-term value for investors in a healthier, more rationalized industry.