By:
Robby Metcalf III, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Lexinfintech Holdings Ltd. (NASDAQ:LX) is a leading consumer online
finance platform that addresses customers' credit needs and provides online
direct sales with installment payment terms, installment purchase loans and
personal installment loans allowing customers to use their credit lines to
finance purchases from the e-commerce channel.
• Lexin’s “Lehua Card” product
offers enhanced customer solutions through virtual credit card functionality
and links users' credit lines to their WeChat/ Alipay accounts. Lending through
this product has contributed to 20-30% of Lexin’s new loan origination recently
and now has over 2.6 million active card users.
• In the past two years
since their IPO in 2017, total loan origination has increased by 164% from $2
billion to $5.3 billion while continuing to diversify and create more scalable
funding sources.
• Lexin has maintained
their solid credit reputation as their charge off rate has decreased to 1.0%
compared to 2.0% two years ago in addition to maintaining a low 90 days+
delinquency ratio of 1.4%.
• Lexin’s P/E NTM of 5.0x
is currently trading below their 1-year average of 5.75x and its P/TBV LTM of
1.8x is almost trading one standard deviation lower than its 1-year average of
2.2x.
Key
points:
Loan facilitation and servicing fees increased by 238%
from $80 million in the third quarter of 2018 to $270 million in the third
quarter of 2019. This increase was primarily due to significant increase in
off-balance sheet loans originated as a result of the continuing growth of
their business and the expansion of partnerships with institutional funding
partners. This is shown in the growth of their institutional funding
outstanding balance as it has grown from $88 million to $5.6 billion in the
past two years since their IPO, representing growth of 539%. Institutional
funding now represents 93.5% of total loan originations which has allowed Lexin
management to raise their loan origination guidance for the year to between
$16.3 billion and 17.8 billion, from the $16.3 billion previously expected. In
their Q3 results, Lexin’s CFO Yan Zeng, said “Our efforts to continuously stay
ahead of the regulatory curve and maintain our strong growth in spite of
changing regulatory conditions are now paying off.”
Lexin’s new “consumption-focused
strategy” helps unlock the consumption potential of hundreds of thousands of
educated young Chinese consumers, they have been able to capitalize on the
unique opportunities in the market. Through Lexin's accumulation of AI, big
data and technological capabilities since its inception in 2013, they now have
the ability to completely meet and service the consumption needs of hundreds of
millions of users and fully handle the hundreds of billions of transactions they
expect through the next phase of their development.
What
has the stock done lately?
Over the past three
months, LX has appreciated 4.31% due to solid earnings and positive initiatives
proving successfully for the company. The stock declined heavily in September
from $11.30 to $9.00 due to the announcement of $300 million private placement
convertible notes with PAG. The stock began to rebound on October 9th
following Credit Suisse’s initiating coverage on the stock with an initial
rating of outperform and a $17.00 price target and since, rose to $13.50 before
receiving pullback to its current price of $11.87.
Past
Year Performance:
In the past twelve months, the stock has
risen 46.7% with a 52 week range from $6.48 to $14.66. Lexin’s P/E NTM of 5.0x
is currently trading below their 1-year average of 5.75x and its P/TBV LTM of
1.8x is almost trading one standard deviation lower than its 1-year average of
2.2x. The stock is beating the benchmark significantly and consensus expects
this trend to continue going forward.
Source:
FactSet
My
Takeaway
The most important
factors to analyze for Chinese credit services companies with P2P platforms trying
to transform to institutional funding are the company’s asset quality,
institutional funding as a % of loan origination and their ability to
successfully acquire new customers. Lexin continues to display their
competitive advantage over others as they maintain a low delinquency ratio of
1.4% while creating a sustainable funding model of 93.5% coming from institutional
funding sources. Furthermore, Lexin’s diversified customer acquisition strategy
has proven successful as the number of active users who used Lexin’s loan
products in the third quarter of 2019 reached 6.1 million, an increase of 118%
from a year ago.
Source:
FactSet
