LX - LexinFintech: Staying Bullish After Good Q1 Performance

2023-05-26 09:21:50 ET

Summary

• LexinFintech achieved an earnings beat for Q1 2023 as a result of strong loan origination volume growth and good cost management efforts.
• LX is expected to achieve loan origination volume and earnings growth on both a QoQ and a YoY basis in the second quarter.
• I keep my Buy rating for LexinFintech unchanged, after evaluating LX's Q1 performance and Q2 prospects.

Elevator Pitch

I continue to assign a Buy rating to LexinFintech Holdings Ltd.'s (LX) stock. In my prior article for LX written on March 15, 2023, I reviewed LexinFintech's financial performance for the fourth quarter of 2022.

This current write-up provides an update of my views regarding LX following the company's recent Q1 2023 financial results' announcement. My analysis leads me to the conclusion that LexinFintech's decent financial performance for the first quarter is sustainable with expectations of sustained growth in loan originations and earnings for Q2 2023. As such, I remain bullish on LX and retain a Buy rating for the stock.

LexinFintech's First Quarter Earnings Were A Positive Surprise

LX published a press release on May 23, 2023 after market close disclosing its performance for the first quarter of this year. LexinFintech's earnings per ADS (American Depositary) or EPADS rose by +336% YoY from RMB0.42 for Q1 2022 to RMB1.83 in Q1 2023. The company's actual Q1 EPADS in local currency terms was +13% higher than the sell-side's consensus bottom line projection of RMB1.62 (source: S&P Capital IQ ).

Top line for LexinFintech grew by +74% YoY to RMB2,983 million for Q1 2023, as the company's loan origination volume for the recent quarter came in above its own guidance. LX had previously guided for a loan origination volume of RMB60.0 billion for Q1 2023, and LexinFintech's actual first quarter loan origination volume was higher at RMB60.9 billion which translated into a +41% YoY growth rate.

As a result of the strong and better-than-expected loan origination volume growth, LX's loans outstanding expanded by +28% YoY to RMB107 billion as of March 31, 2023. At its Q1 2023 earnings briefing , LexinFintech credited its robust first quarter revenue growth to the "recovery of China's economy."

LexinFintech's Q1 2023 earnings beat was driven by both top line expansion and profitability improvement. Net margin for LX increased by +1.1 percentage points QoQ and +6.2 percentage points YoY to 11.0% in the most recent quarter, and this was attributable to three key factors.

Firstly, LX's cost of funding dropped to a three-year trough of 6.6% in Q1 2023, which was equivalent to a -160 basis points contraction on a YoY basis. LexinFintech has managed to leverage on its good relationships with banks and other financial institutions to secure funding on better terms. LX noted at its first quarter earnings call that "we had this (recent Annual Financial Partners) Conference with our funding partners (in April) and all of them showed the willingness to make the co-operation (with LX) deeper."

Secondly, LexinFintech's telemarketing expenses on a per-transaction base decreased by -49% YoY for the first quarter of 2023. At its most recent quarterly results call, LX revealed that "we upgraded our marketing system and segmented our users into more detailed categories" and customized "marketing strategies accordingly." The company's efforts to optimize its marketing efforts had paid off in the form of lower telemarketing costs.

Thirdly, LX enjoyed success with its operating expense management efforts. LexinFintech stressed at its Q1 2023 earnings call that "we continue to refine operations and further optimize operational efficiency." General & Administrative (G&A) costs declined by -17% YoY from RMB117 million in the first quarter of 2022 to RMB97 million for the most recent quarter.

To sum things up, LexinFintech's above-expectations first quarter earnings were attributable to loan origination volume growth and an improvement in cost efficiency.

LX's Prospects For Q2 2023 Are Good

LexinFintech's near-term financial outlook is decent. LX is expected to announce its financial results for the second quarter of 2023 in mid-August , and there shouldn't be any negative surprises emerging from its upcoming quarterly earnings release.

As part of its Q1 2023 results announcement, LX also guided for the company to deliver a loan origination volume of RMB63.25 billion in the second quarter of this year based on the mid-point of its guidance. This implies that LexinFintech's loan origination volume is projected to increase by +4% QoQ and +29% YoY in Q2 2023.

Based on Chinese state media Xinhua News Agency's May 16, 2023 news article , retail sales growth in China accelerated from +10.6% in March to +18.4% for April. Loan demand is closely linked to consumption, so China's strong retail sales growth in April provides support for LX's loan origination volume growth guidance for Q2 2023.

Separately, the market's consensus financial forecasts for LexinFintech suggest that the company is expected to report higher earnings in the upcoming quarter. Specifically, the analysts see LX's EPADS growing by +4% QoQ and +91% YoY to RMB1.68 in Q2 2023 as per S&P Capital IQ's consensus data.

While LexinFintech didn't offer specific quantitative guidance relating to its future profit margins or earnings, LX did emphasize at its Q1 2023 results briefing that it targets to "continue to increase our own profitability" for "the rest of the year." LexinFintech's management commentary indicates that the company still has cost levers (e.g. optimizing G&A costs, driving down cost of funding etc) to pull for the remaining quarters of 2023.

Bottom Line

LX's Q1 2023 earnings beat the market's expectations, and the company's outlook for Q2 2023 remains reasonably good. Despite its decent financial performance and favorable outlook, the market values LexinFintech at a low single-digit (1.87 times) consensus forward next twelve months' P/E multiple (source: S&P Capital IQ ), which I think is unjustified. Therefore, I have chosen to stick to my Buy rating for LexinFintech.

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