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Elevator Pitch
I have a Hold investment rating for LexinFintech Holdings Ltd. (NASDAQ:LX) shares. My prior write-up published on January 31, 2024 was focused on the preview of LX’s Q4 2023 financial results.
The current update analyzes LexinFintech’s latest metrics and disclosures. The improvement in asset quality was a bright spot for LX in the first quarter of 2024. But the company’s guidance points to a significant contraction in loan origination for Q2 2024. I have made the decision to leave my Hold rating for LexinFintech unchanged after considering LX’s asset quality enhancement and weak financial prospects.
Asset Quality And Dividends Are Key Positives
LX issued the company’s Q1 2024 earnings release on Thursday, May 24, after the market closed.
LexinFintech’s stock price rose by +2.2% on the following day, May 25, even though the company’s normalized net profit attributable to shareholders fell by -38.6% YoY in Q1. It is likely that the market has chosen to look past LX’s first quarter earnings contraction and focus on positives relating to asset quality and dividends.
In its Q1 results release, LexinFintech highlighted the company’s “sustained focus on risk management enhancement and asset quality improvement” which were reflected in its key metrics for the latest quarter.
LX’s “90 day+ delinquency ratio” rose by a modest +0.1 percentage points QoQ to 3.0% in the first quarter of the current year, as per the company’s earnings release. LexinFintech revealed at its Q1 2024 earnings call that the company’s Q1 2024 first payment default rate (7 day+) metric “for new customer loans decreased by around 20% compared to Q4” 2023. At the company’s most recent quarterly results briefing, LX also disclosed that its “proportion of super price and prime segment customers” increased from 24% in the first month of this year to 40% for March 2024.
Taking into account the metrics presented above, it is fair to say that LX’s asset quality has improved in a meaningful way.
Separately, LX is an attractive yield play.
The company distributed semi-annual dividends per ADS (American Depositary Share) of $0.116 and $0.066 on October 13, 2023 and May 17, 2024, respectively. This translates into an enticing trailing twelve months’ dividend yield of 9.7% for LexinFintech.
LX’s consensus forward FY 2024 dividend yield is 10.2%. This assumes a slight +4% increase in the company’s full-year dividend per ADS from $0.182 for FY 2023 to $0.190 in FY 2024. At the company’s earlier Q4 2023 earnings briefing in late-March this year, LexinFintech stressed that “we will continue our recurring cash dividend program” and committed that it will “either maintain or increase the dividend payout ratio.” LX’s full-year FY 2023 dividend payout ratio was a modest 16%, so there is room for the company to distribute a larger percentage of its earnings as dividends in the future.
In summary, the key positives for LexinFintech are its enhanced asset quality and its appealing dividend yield.
But Financial Outlook Is Poor
LexinFintech’s financial prospects are unfavorable, notwithstanding the improvement in its asset quality and its positive dividend outlook outlined in the preceding section.
LX is anticipating a loan origination amounting to RMB54.5 billion (source: Q1 2024 earnings call) for the second quarter of 2024. This implies that the company’s Q2 2024 loan origination is expected to drop by -14.7% YoY. In contrast, LexinFintech’s loan origination decreased by a relatively less substantial -4.2% YoY to RMB58.0 million in Q1 2024.
The company’s weak Q2 2024 loan origination guidance is largely aligned with the sell side analysts’ expectations regarding its top-line performance for the current year. Specifically, the market sees LexinFintech’s revenue in local currency or RMB terms contracting by -1.1% in full-year FY 2024 as per S&P Capital IQ consensus data. LX had done much better last year, considering its actual FY 2023 revenue growth of +32.3%.
At its first quarter analyst call, LX noted its observations that “credit demand” has been “slowing down” in “April and May” this year due to “internal and external factors” which is “below our expectation.”
Internally, there is a price to pay for LexinFintech’s emphasis on asset quality enhancement. It is natural that LX’s loan origination and revenue growth will likely moderate going forward, as the company becomes more discerning with regards to new loans.
Externally, consumer demand in China is sluggish. Retail sales growth for the Chinese market slowed from +3.1% YoY in March 2024 to +2.3% YoY for April 2024 and fell short of the consensus projection by -1.5 percentage points, according to a May 17 Seeking Alpha News article.
With respect to LexinFintech’s bottom line outlook, the sell side forecasts that LX’s normalized net profit in RMB terms will decrease by -19.1% (source: S&P Capital IQ) for full-year FY 2024 as compared to a +40.4% normalized net income growth last year.
Apart from negative operating leverage effects, the company’s plans to expand outside of its home market Mainland China could also affect its future profitability. LexinFintech mentioned at its most recent quarterly analyst briefing that “we will continue to increase our investments overseas (my emphasis) to expand and strengthen the business development.”
In a nutshell, the financial outlook for LX is negative.
Final Thoughts
There were both positive and negative takeaways from LX’s recent disclosures. I have a favorable opinion of LexinFintech’s asset quality improvement and its commitment to shareholder capital return. On the flip side, LX’s Q2 2024 loan origination outlook suggests that the company’s financial performance might remain weak for a prolonged period of time.
LX currently trades at a consensus next twelve months’ normalized P/E metric of just 2 times (source: S&P Capital IQ data), but this is justified by the company’s lackluster financial outlook. As a reference, the consensus FY 2023-2026 normalized net profit CAGR estimate is +0.5% as per S&P Capital IQ data. As such, the market is right in penalizing LexinFintech’s shares with a depressed P/E multiple for the absence of earnings growth. In other words, I am of the view that LX is fairly valued.
