LX - LexinFintech: Potential Revenue Miss Is A Key Risk (Rating Downgrade)

2023-11-14 12:22:16 ET

Summary

• I am unimpressed by LexinFintech's MAU growth metrics for the past few months that were sourced from third-party research.
• The market currently expects LX to grow its revenue on a sequential basis in Q3; I think that a revenue miss could be on the cards.
• I lower my rating for LX to a Hold, after considering the risk of the stock missing the consensus Q3 top line estimate.

Elevator Pitch

My rating for LexinFintech Holdings Ltd. ( LX ) shares is a Hold. I previously reviewed LX's second quarter financial results and highlighted the company's introduction of a new dividend policy in my August 31, 2023 write-up .

In the current update, I perform a preview of LexinFintech's financial performance for Q3 2023. I take the view that LX's actual third quarter revenue could possibly come in lower than what the analysts are forecasting, taking into consideration operating metrics highlighted by a third-party research firm.

A potential top line miss for Q3 2023 has prompted me to lower my rating for LexinFintech to a Hold. LX's valuations (i.e. low single-digit P/E) are attractive on an absolute basis, but the stock is justified in trading at a discount to its peers due to relatively weaker MAU growth.

Expected Date Of LexinFintech's Third Quarter Results Announcement

LX typically discloses its actual quarterly earnings release data a week before the actual announcement based on a review of the company's past disclosures .

The date for LexinFintech's Q3 financial results announcement is estimated to be Tuesday, November 14, 2023 .

But the actual third quarter financial performance disclosure might happen in the later part of November. This is because LX has yet to issue a press release disclosing the exact Q3 2023 results release date, which usually occurs one week prior to the actual quarterly earnings release.

Nevertheless, there is a high probability of LX's results being released this month as per past practice, which makes it timely to preview the company's Q3 financial performance now.

My Bet Is On Below-Expectations Top Line For LX In Q3 2023

I hold the view that the sell-side analysts are too optimistic about LexinFintech's financial prospects for the third quarter of this year. If LX's actual financial numbers fall short of expectations, LexinFintech shares might possibly witness a significant correction.

According to S&P Capital IQ's consensus data, the market is forecasting that LexinFintech's top line will increase by +2% QoQ from RMB3,055 million in the second quarter of this year to RMB3,110 million for the third quarter of 2023. This also translates into an expected +16% YoY expansion in LX's revenue in Q3 2023.

Third-party data suggests that there is a good chance of LX's actual Q3 top line missing the sell-side analysts' consensus projection. Mainland Chinese research firm China Renaissance publishes a monthly research report (not publicly available) titled "China Online Lending Platforms: Credit Data Tracker", which offers relevant insights relating to the operating performance for LexinFintech and other Chinese online lenders from month to month.

Based on China Renaissance's research, the Monthly Active Users or MAU metric for LexinFintech decreased by -4.1% Month-on-Month or MoM in July 2023, and LX's MAU increased marginally by +0.04% MoM for August this year. LexinFintech's MAU grew by a slightly better +2.6% MoM in September 2023.

A review of LX's MAU growth metrics for the months of July, August, and September indicates that it could be challenging for LexinFintech to achieve sequential top line expansion in Q4 2023 like what the market is currently expecting.

Separately, the sell-side analysts are estimating that LX's normalized net profit will increase from RMB330 million in Q3 2022 and RMB409 million in Q2 2023 to RMB415 million (source: S&P Capital IQ ) for Q3 2023. If LexinFintech suffers from a revenue miss as per the MAU data analysis, it might also be hard for the company to meet the market's consensus bottom line forecast.

Valuation Discount To Peers Is Warranted

Referring back to China Renaissance's monthly research report known as "China Online Lending Platforms: Credit Data Tracker" highlighted in the previous section, LexinFintech's operating performance hasn't been as good as its key peers.

LX's +2.6% MAU growth for the most recent month was inferior to that of the company's key peers. As a comparison, FinVolution Group's ( FINV ) and Lufax Holding Ltd's ( LU ) MAUs increased by +4.7% and +5.2%, respectively for the month of September in the current year.

This explains why the market is valuing LexinFintech at a huge discount to the company's Chinese online lending and fintech peers.

The market currently values LX at a consensus forward next twelve months' normalized P/E multiple of 1.7 times as per S&P Capital IQ valuation data. On the other hand, the market is willing to assign relatively higher consensus forward normalized P/E ratios of 3.7 times and 6.5 times to FINV and LU, respectively.

One reaches the same conclusion that LX is valued at a lower multiple than its peers using another valuation metric. LexinFintech, Lufax, and FinVolution trade at 0.20 times, 0.48 times, and 0.71 times consensus forward next twelve months' price-to-sales multiples, respectively now based on valuation data taken from S&P Capital IQ .

In conclusion, it isn't appropriate to use cheaper-than-peers valuations as a justification for selecting LexinFintech as a potential investment candidate. LX is indeed trading at more modest valuation multiples as compared to its peers, but this is fair considering the various companies' recent MAU growth performance.

Concluding Thoughts

LX's stock is now rated as a Hold, as opposed to a Buy earlier. I have made this decision to change my investment rating for LexinFintech after evaluating its Q3 2023 outlook and assessing its valuations.

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