Financials Author: Skye Lan Editor: Luke Sheehan, Zhiqing Chen May 31, 2021 02:21 PM (GMT+8)

Lexin's future prospects make its stock somewhat undervalued.

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● Lexin has transformed from a peer-to-peer lending provider to an independent loan facilitator.

● In a few years, Lexin's profit-sharing mode will pivot to riskless and long-term growth as part of its pioneering role in the industry.  

● As Lexin targets highly-educated young users, the company has increased incorporations with various banks and eased customer acquisition.

● Lexin will benefit from the antitrust regulations that provide extensive market opportunities for niche fintech players. 

Lexin is a New York-listed Chinese fintech company, which in recent years has expanded its initial business from consumption installment loan services to a 'to-bank'-driven platform. The company has been rapidly growing over the past few years and is expected to maintain the high growth rate as huge market space has opened up – despite the presence of the giants – under new antitrust regulations.

The company's stock is currently undervalued if compared to its industry peers. The equity market disregards Lexin's growth potential by deeming it as a traditional financial stock. Lexin's P/E ratio is under 20x, which is rather low for a rapidly growing company, and significantly below the levels of its US counterparts in the fintech space.

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Encouraging performance – nonstop transforming

Lexin was founded in 2013. At the very beginning, it leveraged investment platform Juzi Licai to generate large profits from its peer-to-peer (P2P) business. By the end of 2020, the company had removed all the P2P business in response to the regulation changes, with 100% payback to the investors. At present, Lexin is no longer a loan issuer but a loan facilitator with a to-Business (2B) transformation in progress. At the current stage, Lexin still offers guarantee services and takes credit risks for banks, accounting for over 60% of its total revenue.

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But the company's journey of transformation will not end soon. Lexin is now expected to replicate Ant Financial's path to some extent. From previous loan issuers to technology solution providers, the two companies are concurrently transforming their business models.

However, Ant Group, which still runs the co-lending model, earns profit mainly from the to-Consumer (2C) segments. Lexin, on the other hand, facilitates loans without investing its own capital. Also, Lexin is expected to fully transition into a 'profit-sharing' mode with no credit risk in three years. Its business will purely focus on technology-based client sorting and recommendation. The new model will differentiate Lexin from most of the fintech credit companies that are still using either co-lending or loan facilitation modes, and gives more freedom to Lexin on the capital and cash flow management. 

The breakthroughs for Lexin might negatively affect the income in the very short term but are going to generate sustainable developments with very limited risk exposure. During the fourth quarter of 2020, the technology-based services have taken over 50% of the new transaction amounts, ranking first in the industry. 

Thanks to its successful business transformation, Lexin has consistently met the market's expectations. The revenue of the company increased from CNY 5.58 billion in 2017, to CNY 10.6 billion in 2019, representing a CAGR of near 40%. Even though it was hit heavily by COVID-19, Lexin still posted an increasing revenue with the figure recorded as CNY 11.6 billion, a slight year-over-year growth of 9%. The transaction amount also achieved the target of CNY 176.5 billion with a growth of 40%. Haitong International forecasts that the transaction will increase by a CAGR of 37.1% to CNY 325 billion in 2022.

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Like Ant Group, Lexin is also aggressively deploying an e-commerce strategy to replace offline consumption scenarios. Ant Group and Tencent will not be the only two giants sharing the large digital life service market in China, as Lexin's self-developed installments-based e-commerce platform is expanding, with over 118 million users, marking year-over-year growth of 61%. During the year 2020, Lexin's offline consumption credit products served over 7 million merchants, with over CNY 57 billion in transactions generated in 240 million purchases.

Differentiation – special client group

Lexin is acquiring more clients that are underserved, who have a short credit history, by giants like Ant Group, due to antitrust issues. The question has been raised: why do banks still want to increase cooperation with Lexin to offer funds to users with low credit scores?

Apparently, the company has set its own market position. Lexin targets members of the new generation – people who are still college students or young professionals with a short credit history whose credit scores will grow eventually. 

Also, the young population prefers to live in urban regions. Lexin can therefore promote their products to them through connected social networks effectively. Effective user acquisition through well-targeted marketing will allow the company to optimize user acquisition costs and therefore improve the operation results.

Promising future – catching the space released by Ant

In offering client-matching services for banks and consumption installments for individuals, Lexin was not caught the eyes of the state. Under the nation's strict regulations on the online credit platforms, many low-tier clients, who cannot meet the high credit requirements by the giants, are being served by small- to medium-sized lending platforms such as Lexin. In the future, the large market space released by Ant and WeChat is going to benefit Lexin.

In August 2020, China's central government started to implement a policy that applies an interest ceiling on private lending. This regulation significantly restricts the business expansion and limits the profitability of online credit platforms that directly participate in the issuance process. Ant Group and JD Digits are two companies impacted by this regulation.

Furthermore, the state urges small loan providers to increase their capital proportion to at least 30%, marking a much lower lending scale for these platforms. The clients unqualified for this criteria will no longer be able to receive services from these online lending platforms will shift to seek possibilities from smaller companies, or third-party loan facilitators, like Lexin.

Also, Lexin has cleared all the P2P business and been shifting to be a to-B services provider. Thus, the factors mentioned above have little to no impact on this company.

The bottom line

Since it was founded, Lexin has always performed well as a mid-to-small credit lending platform. Its unique client targets and new strategy differentiates the company from other top players, contributing to a long-term and sustainable business growth mode. Under the strict lending regulations imposed by China's central government, other major players, like Ant Group and WeChat, will be adversely impacted and thus direct more traffic to other lending platforms, such as Lexin. We are therefore optimistic about the company's development.