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.
• 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.
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.
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.