On August 28th, LexinFintech (LX.O) announced its second quarter performance in 2024. Q2 revenue was 3.64 billion yuan, an increase of 12.3% compared to the previous quarter; net profit was 0.23 billion yuan, an increase of 12.4% compared to the previous quarter. The transaction volume was 51.1 billion yuan, with management credit balance at 115.2 billion yuan.
From the perspective of external market environment, the credit demand is still insufficient, and the high-quality credit demand has not been fully restored. The business performance of enterprises has weakened, which is the main reason for the overall valuation pressure in the industry during the recent period. In the current market environment, LexinFintech's Q2 financial report shows continuous improvement in revenue and profit, which is worthy of recognition.
The risk management capability at the underlying level is solid, and revenue and profit continue to improve.
The internet finance industry has entered the second half of the stock competition phase, facing multiple pressures such as saturated traffic, intensified customer acquisition challenges, and increased industry competition. Solid basic skills and continuous strengthening of underlying capabilities have become the key to maintaining a neutral position in intense competition. Since the end of last year, LexinFintech has started a comprehensive upgrade of the risk team and risk system, with a significant improvement in risk control capabilities and an increasing ability to systematically resist risk cycles.
From the results, the forward-looking indicators monitored on a daily basis have improved significantly. In the second quarter, the added asset FPD7 decreased by about 14% compared to the first quarter; the entry-to-collection rate of the entire asset decreased by about 7% compared to the beginning of the quarter, and the collection recovery rate has gradually improved. The 30-day recovery rate increased by about 1.5% compared to the beginning of the quarter (absolute value).
The only shortcoming is that the 90-day+ delinquency rate, a lagging risk indicator, has slightly increased compared to the first quarter as of the end of June. However, this can also be understood: on the one hand, the 90-day+ delinquency rate is a relatively lagging monitoring indicator, mainly reflecting last year's asset level; on the other hand, due to the active control of scale and the overall decrease in balance size in the second quarter, the decrease in the denominator has led to an increase in the 90-day delinquency rate. During the conference call, the CRO of LexinFintech stated, 'It is recommended to focus more on the forward-looking risk indicators of daily monitoring of asset quality.'
In terms of process, LexinFintech continues to deepen its construction of risk control and other underlying capabilities. For new assets, LexinFintech implemented the Low&Grow strategy in Q2, strictly controlled the quality of new assets, and increased the proportion of high-quality users; for tail-end existing assets, it continued to reduce and clear them through transaction control, credit limit reduction, and negative treatment by robot refunding; at the underlying level, LexinFintech further deepened the upgrade of the risk system from dimensions such as data, models, analysis and monitoring, and strategy.
In addition, LexinFintech attaches great importance to technological innovation and research and development investment. The financial report shows that LexinFintech's R&D investment in the second quarter was 0.143 billion yuan, an increase of 6% compared to the previous quarter. Long-term technological accumulation has not only significantly improved the risk control capabilities of the company, but also driven the business to develop towards refinement and intelligence.
For example, in the second quarter, Lexin self-developed 'Singularity' AI big model further applied, in the real-time intent recognition, code assistance, and other areas deeply implemented, greatly improving business operation efficiency and precision. It can be foreseen that Lexin's innovation and upgrade of the risk control system will continue to release dividends, solidifying the underlying risk control capabilities, bringing profit growth space, and becoming a new anchor point for Lexin's value growth.
Overseas business enters a growth period, building a new moat for future development.
From a global perspective, the pursuit of high-quality assets by the capital markets is becoming increasingly urgent. With Lexin's continuous repair of domestic business and the overseas business entering a growth period, Lexin clearly has the potential for high growth and high-quality assets.
Financial report data shows that Lexin's overseas business achieved rapid growth in Q2, with the loan scale in the Mexican market increasing by 61% month-on-month in Q2, and revenue increasing by 113% month-on-month.
Building on the initial success in the Mexican market, during the conference call, Lexin's management expressed that they will take the overseas business as an important strategic direction, driving the accelerated development of overseas business, and finding a 'high-growth' path for the company's future growth. The performance growth and financial returns brought by Chinese companies going global do not need much explanation. Once the logic of Lexin's overseas expansion is verified, the company's development space will be significantly expanded, and the company will be revalued.
From the perspective of policy tools, after rapid development, the internet consumer finance industry has formed a relatively stable business model and entered a phase of normalized regulation. The 'Guiding Opinions on Promoting the Healthy Development of Internet Finance' issued by ten departments on July 18 further confirms and regulates the management of internet finance.
As the regulatory attitude and mindset towards internet platforms participating in credit business become clearer, the transparency and predictability of regulatory policies have significantly increased, reducing industry uncertainty. Undoubtedly, this provides a solid underlying guarantee for Lexin's future development.
Continuous high dividends may lead to Lexin's value reevaluation.
For a long time, undervalued stock with excellent performance has always been an important investment opportunity. The reason for the naiveness and hardness is that investment returns usually come from performance growth, valuation increase, and dividends, and the three are closely related. Undervalued stocks with excellent performance correspond to expectations in these three areas, and investment value is particularly significant.
The performance growth has been demonstrated above. From the perspective of valuation improvement, Lexinfintech's closing price on August 28 was $1.68, with a P/B ratio of only 0.19 times, indicating that the market value is severely underestimated and providing investors with a sufficient margin of safety.
From the perspective of continuous dividends and shareholder returns, Lexinfintech's continuous dividend strategy is sincere. It shares the company's growth with investors twice a year. This time, cash dividends will be distributed in an amount of approximately $0.072 per ADS, which is about 20% of the net income for the first half of 2024. It is expected to be distributed on October 18, 2024, and applicable to shareholders registered as of September 16.
If calculated based on Lexinfintech's closing price of $1.77 on August 28, even if it is assumed that the dividend for the second half of the year remains the same as the first half, the annual dividend yield for investing in Lexinfintech stocks is nearly 10%, far exceeding the returns of mainstream financial products in the market. It can be seen that Lexinfintech is in a 'value trap' with sufficient cost-effectiveness.
It is not difficult to speculate that with the continuous improvement in risk resilience and the continuous increase in profits, Lexinfintech has a strong potential for dividends and is expected to maintain an attractive dividend payout ratio in the long term, continuously rewarding shareholders and enhancing intrinsic value.
Summary:
To sum up, Lexinfintech meets the characteristics of being oversold with improved performance, and has the potential of an 'oversold quality stock'. In addition, taking active action in dividends reflects the company's focus on corporate governance and shareholder returns, which provides a solid guarantee for realizing long-term investment value. Currently, Lexinfintech's valuation is attractive and has built a thick investment safety cushion, which can give investors higher expectations.