Recently, China International Capital Corporation organized an internal communication meeting for investors, attracting the participation of many institutions and high net worth investors, with several executives from Lexinfintech (LX.O) also attending.

For us investors, there is one key point of information about Lexinfintech worth noting: the management revealed that they are considering increasing next year's dividend payout ratio from the current 20% of net income to 25%.

This is undoubtedly a quite positive change. Specifically, what signal does Lexinfintech send by increasing the dividend payout ratio?

By further increasing the dividend payout ratio, the net income may see a significant increase.

In fact, in terms of shareholder returns, the dividend payout intensity of well-known domestic internet technology companies in recent years is no less than that of US internet companies.

Based on Lexinfintech's current stock price, a future dividend payout ratio of around 25% is equivalent to an annual dividend yield of at least around 5%.

On one hand, 5% is a threshold for many investors to determine whether a company is a high-dividend entity. After analyzing several dozen Chinese concept companies listed on the US and Hong Kong stock markets, it was found that Lexinfintech is one of the few with a dividend yield exceeding 5%. Maintaining a leading dividend yield indicates that Lexinfintech has always considered shareholder returns as a top priority.

In mature secondary markets, a healthy ecosystem company often consistently repurchases and distributes dividends, thereby continuously enhancing the equity investors hold in the company. Chinese concept companies, including Lexinfintech, are forming a trend of continuously expanding shareholder returns. Although once widely overlooked, they are gradually undergoing a qualitative change.

On the other hand, the increase in dividend payout ratio also reflects the company's good performance expectations. The policy side has always emphasized and guided listed companies to improve efficiency and return on investment. Nowadays, the expansion of dividend payouts and the increase in dividend frequency by listed companies are often based on stable operation, enhanced sustainable growth, and certainty.

The same goes for LexinFintech, the management at China International Capital Corporation expects a significant increase in profit next year during internal discussions. Looking back at the financial reports, LexinFintech's net income in Q2 this year increased by 12% compared to Q1, showing a further improvement in performance.

In terms of asset quality, looking at the risk indicators in Q2, the FPD7 of new assets decreased by about 14% compared to the first quarter. At the same time, the delinquency rate of the full amount of assets at the end of the second quarter decreased by about 7% compared to the beginning of the quarter. The recovery rate also showed a good trend of improvement, with the 30-day recovery rate increasing by an absolute value of about 1.5% compared to the beginning of the quarter.

Combining the contents of the financial report, the overall profitability of the company's assets has significantly improved, thanks to LexinFintech's enhanced risk control capabilities and continuous iteration of underlying risk control capabilities. The risk of new assets has been greatly improved, while the risk of existing assets has passed its peak.

In terms of adding new assets, the deep implementation of the Low & Grow strategy focuses on controlling the quality of new assets, increasing the proportion of high-quality users. As for the remaining existing assets, measures such as transaction control, reduction in amount, and negative disposal through robot clearing continue to reduce and clear out; on the underlying capabilities side, further deepening risk system upgrades in dimensions such as data, models, analysis monitoring, and strategies.

Together with LexinFintech's large user base (200 million registered users, 40 million credit users), and the industry-leading asset scale, this also increases our expectations for LexinFintech's profit recovery. With the improvement in risk, the replacement of existing and new assets, the net margin will continue to increase, reversing the previous lagging behind competitors, and all of these will be reflected in future financial reports, especially next year.

Judging from the three elements of investment return, LexinFintech may still be significantly undervalued.

For investors, how should LexinFintech's future intrinsic value be viewed?

From the perspective of the three elements of return, assessing value often requires looking at: shareholder return, valuation, net income, their relationship is gradually multiplied, rather than just looking at one factor. To elaborate, it includes: a culture of continuous dividends; biased cheap valuation; reasonable profit growth is needed, but not necessarily at a high rate.

According to the above logic, start with valuation, compare with the industry, Lexin's PE and pb are relatively low. Lexin's latest closing price is $3.110, with a trailing P/E ratio and pb ratio of 4.46 and 0.36 respectively, the valuation level is still below the industry average.

From a fundamental perspective, with the introduction of domestic economic stimulus policies, the future credit demand is expected to gradually recover. Based on the aforementioned, adjusting existing risks and gradually returning to the level before the 2023 risk cycle, the risk of new assets has also reached the preferred range. It can be expected that Lexin's operating scale will resume steady growth.

At the same time, unique business sectors such as e-commerce and rapidly growing overseas market business, provide very strong support for Lexin's future performance growth. More robust risk management, as well as diversified business development, Lexin's growth potential remains strong.

Therefore, from the perspective of potential return on investment, Lexin's valuation is quite attractive, representing a relatively high-quality asset. Although the stock price has risen recently, there is probably ample room for Lexin's future valuation repair.

Summary:

The internet industry bids farewell to rapid growth, leading companies, after experiencing years of stock price adjustments, are gradually evolving into 'value' stocks. As an investor, facing a slowing environment, it becomes important for the market to form an environment that emphasizes steady business operations and shareholder returns.

Optimistically, through this exchange, including Lexin, Chinese companies are taking action, actively rewarding shareholders, and setting a good example. Considerable shareholder return, lower valuation, anticipated profit growth - when combined, Lexin is expected to demonstrate outstanding long-term value.