LX - LexinFintech: Reiterating Buy On Dividend Initiation

2023-08-31 10:33:54 ET

Summary

• LexinFintech Holdings' Q2 2023 loan originations surpassed expectations and represented a +31% growth in YoY terms.
• LexinFintech Holdings has introduced a new dividend policy, which will see the company distributing 15%-30% of its net income on a semi-annual basis in the future.
• I have a bullish view of LexinFintech, as I view the company's dividend initiation as a positive re-rating catalyst for the stock.

Elevator Pitch

LexinFintech Holdings Ltd. ( LX ) shares are still worthy of a Buy investment rating.

My earlier May 26, 2023 update for LexinFintech was focused on analyzing the company's key financial metrics for the first quarter of the current year. I touch on how LX performed in Q2 2023 and its dividend initiation with the latest article.

LexinFintech delivered strong topline and earnings growth in the recent quarter. Furthermore, LX has decided to initiate dividend payments going forward with its 1H 2023 interim dividend implying a half-yearly yield of 4.8%. Therefore, I keep my existing Buy rating for LexinFintech intact.

LX's Q2 2023 Loan Originations Exceeded Expectations

LexinFintech published a media release disclosing the company's recent second quarter financial results on Tuesday, August 29, 2023 after the market closed.

Loan originations for LX increased by +31% YoY to RMB63.9 billion in Q2 2023. It is worth noting that LexinFintech had previously guided for the company's loan originations to be between RMB63.0 billion and RMB63.5 billion for the second quarter of this year, when it released its Q1 2023 financial results in late May. In other words, LexinFintech's actual second quarter loan originations were above expectations.

Higher than expected loan originations helped to drive a +27% YoY growth in LX's topline from RMB2,413 million in Q2 2022 to RMB3,056 million for Q2 2023. At the company's recent second quarter earnings briefing , LexinFintech mentioned that it had "better quality customers" due to its "customer base upgrading" which led to "larger ticket size loans." This explains why LX was able to achieve strong loan originations and revenue expansion in Q2 2023.

The company's normalized net profit attributable to shareholders jumped by +97% YoY to RMB409 million in the most recent quarter. LexinFintech specifically highlighted the company's "substantial improvements in operational efficiency and profitability" at the most recent quarterly results call, which were reflected in its numbers. LX's telemarketing expenses fell by -39% QoQ in Q2 2023 as the company optimized its marketing efforts. Also, LexinFintech's operating costs-to-loans ratio contracted by -0.42 percentage points YoY from 1.43% for Q2 2022 to 1.01% in Q2 2023.

The market had a positive opinion of LexinFintech's second quarter financial performance, as LX's share price rose significantly by +8% to close at $2.42 as of August 30, 2023, a day after its Q2 results announcement.

Dividend Initiation Should Be Viewed Favorably By Investors

LX announced the initiation of dividend payouts in tandem with the company's Q2 2023 earnings release. In specific terms, LexinFintech intends to distribute dividends representing 15%-30% of its earnings twice every year going forward. Previously, the company has never paid out any dividends since its public listing in December 2017 .

LexinFintech emphasized at its Q2 2023 results briefing that the company had made the decision to initiate dividend payments to "improve return to our shareholders and express our full confidence in the business prospects in the long run."

For the first half of the year, LX has proposed to pay out a dividend per ADS of $0.116, which translates into a 20% dividend payout ratio. More significantly, LexinFintech's interim dividend for 1H 2023 is already equivalent to an attractive yield of 4.8% based on the company's last done stock price of $2.42 at the end of the August 30 trading day.

The company's actual 1H 2023 adjusted core net profit attributable to shareholders was RMB785 million, or about half of the current fiscal 2023 consensus bottom line forecast of RMB1,557 million (source: S&P Capital IQ ). This means that if LexinFintech's 2H 2023 normalized earnings are roughly at the same level as its 1H 2023 bottom line and the company sticks to a 20% dividend payout ratio for 2H, LX's full-year FY 2023 dividend yield might be potentially as high as 9.2% based on its last traded share price.

LexinFintech's Valuation Re-Rating Potential

LX is now trading at just 2.0 times consensus forward the next twelve months' normalized P/E as per S&P Capital IQ data, despite witnessing a meaningful post-results share price surge.

LexinFintech's above-expectations loan originations and robust net income growth imply that the company has done an excellent job in controlling costs and optimizing its client base. Although China's economy is struggling , I think that LX has levers on its own to drive topline and bottom line growth.

On the other hand, LX's dividend initiation is likely to widen the company's shareholder base, as the stock becomes more appealing in the eyes of yield-focused investors. Even for investors who are less focused on dividend income, they will most probably rate LexinFintech well on the basis that it has become more shareholder-friendly with respect to its shareholder capital return initiatives.

In a nutshell, I am of the view that LexinFintech should be valued by the market at a higher P/E multiple, taking into account its good set of results for Q2 2023 and its dividend initiation.

Closing Thoughts

I still award a Buy rating to LX. LexinFintech's Q2 2023 results were good, and I am particularly impressed with LX's move to initiate dividend payouts. The stock's valuations are way too depressed, and I think that a positive valuation re-rating is on the cards.

For further details see: