LexinFintech Makes Progress On Turnaround But Macro Clouds Remain (NASDAQ:LX)

A Quick Take On LexinFintech

LexinFintech Holdings Ltd. (NASDAQ:LX) reported its Q2 2023 financial results on August 30, 2023, with revenue beating the high end of the firm’s previous guidance.

The firm operates online financial services Fenqile and Juzi Licai to make loans directly to consumers. It runs an online marketplace to connect third-party lenders with consumers seeking credit.

LexinFintech Holdings Ltd. has produced growing revenue and operating profits, but macroeconomic conditions in China may be slowing, resulting in potential loan quality issues ahead.

I’m therefore Neutral [Hold] on LX in the near term.

LexinFintech Overview And Market

Shenzhen, China-based LexinFintech Holdings Ltd. has created AI-based credit assessment systems with thousands of rules and data variables for use in making credit decisions.

Management is headed by founder; Chairman and CEO Jay Wenjie Xiao, who was previously a product manager at Tenpay, an online payment platform owned by Tencent (OTCPK:TCEHY).

The company offers the following services:

• Personal installment loans which are available to borrowers with good credit and can be used for various purposes, such as consolidating debt, paying for medical expenses, or making home improvements.

• Installment purchase loans used to finance the purchase of goods or services, i.e., electronics or appliances. The borrower repays the loan over a specified period of time.

• Other loan products, such as payday loans and credit card loans.

• Members can earn points to be redeemed for discounts, cashback, and other incentive loyalty rewards.

According to a 2022 market research article in China Banking News quoting a McKinsey report, the Chinese market for consumer finance is estimated to reach $4.2 trillion by 2025.

If reached, it will be due, in part, to continued government support for an increase in domestic consumption.

However, the report suggests there will be ‘downwards pressure on profits, [and] a broad environment of intensifying competition.’

Major competitive or other industry participants include:

• Ant Financial

• Qudian

• Yiren Digital

• New Oriental Credit

• CreditEase

• FinanceMe

• PPdai

• LuFax.

LexinFintech’s Recent Financial Trends

• Total revenue by quarter has begun growing again after reaching a bottom in Q1 2022; Operating income by quarter has remained positive in recent quarters.

• G&A expenses as a percentage of total revenue by quarter have also declined in recent quarters, a positive signal indicating increasing operational efficiencies.

• Earnings per share (Diluted) have also continued to improve in recent quarters, after a bottom in Q2 2022, as the chart shows here:

(All data in the above charts is GAAP.)

In the past 12 months, LX’s stock price has risen approximately 24% vs. that of Yiren Digital’s (YRD) growth of 143.12%:

For balance sheet results, the firm ended the quarter with $362.2 million in cash and equivalents and $1.15 billion in total debt, of which $799.0 million was categorized as the current portion or short-term borrowing.

Valuation And Other Metrics For LexinFintech

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	0.9
Enterprise Value / EBITDA	12.4
Price / Sales	0.2
Revenue Growth Rate	9.7%
Net Income Margin	9.6%
EBITDA %	7.5%
Market Capitalization	$365,180,000
Enterprise Value	$1,500,000,000
Operating Cash Flow	$14,330,000
Earnings Per Share (Fully Diluted)	$1.01

Click to enlarge

(Source – Seeking Alpha.)

A potential public comparable to LX would be Yiren Digital; below is a comparison of their major metrics:

Metric [TTM]	Yiren Digital	LexinFintech	Variance
Price / Sales	0.4	0.2	-41.0%
Revenue Growth Rate	12.8%	9.7%	-23.9%
Net Income Margin	40.3%	9.6%	-76.2%
Operating Cash Flow	$265,050,000	$14,330,000	-94.6%

Click to enlarge

Sentiment Analysis

I’ve created a word count summary of major word categories for the recent management earnings call:

The chart shows significant mentions of the words “Uncertain,” “Macro” and a few mentions of the words “Challenge’ and ‘Headwind.”

The frequency of these mentions confirms the company is facing significant macroeconomic uncertainties as management seeks to turn its fortunes around.

Commentary On LexinFintech

In its last earnings call (Source – Seeking Alpha), covering Q2 2023’s results, management highlighted its upgraded user risk identification capabilities as well as an increase in loan volumes, exceeding its previous guidance.

Leadership has been changing its focus toward more high-quality credit risks, resulting in a drop of its day-one delinquency rate by 20%.

Customer acquisition costs remained stable but marketing efficiency increased by 16%.

The company saw notably strong growth in its e-commerce financing business, up 34.5% YoY.

Total revenue for Q2 2023 increased by an impressive 17% year-over-year and gross profit margin also increased by 5.1%.

Selling and G&A expenses as a percentage of revenue dropped 6.5% YoY, indicating increasing efficiency. Operating income remained well in positive territory, a strong result when compared to the first half of 2022.

The company’s financial position is of some concern, with a large portion of its debt due within 12 months, likely resulting in increased interest expense.

However, the company announced a dividend of $0.116 per ADS to be paid in Q3 for the first half of 2023’s results and plans to distribute a dividend of “approximately 15% to 30% of the company’s net profit in the previous six months period or as otherwise authorized by the Board.”

While it will fluctuate, the current dividend yield would be approximately 9.67% at the current share price of $2.40.

Looking ahead, consensus 2023 revenue growth estimates suggest a 19.3% growth rate.

If achieved, this would represent a swing to a fairly strong revenue growth rate versus 2022’s decline rate of 17.67% against 2021’s results.

Combined with expected lowered funding costs from partner financial institutions, LX looks to be an interesting company to watch in the Chinese finance sector.

The current concern, however, is the overall health of the Chinese economy and large financial entities.

According to The Conference Board, leading economic indicators have been declining in China since April 2023, suggesting negative trends ahead for the world’s second-largest economy:

While negative economic growth trends may feed into greater loan demand from consumers in China, they may result in lower loan quality and higher delinquency rates.

While LexinFintech Holdings Ltd. is worth putting on a watch list for future consideration as it continues its turnaround efforts, I’m Neutral [Hold] on the stock in the near term.