Recently, there is a growing sign in the stock market that institutional capital is gradually concentrated in the most growing industries, and only a few head companies are preferred, because their growth and risk resistance are much higher than those in the back row.

Both Chinese and American stock markets are signs of the strength of the strong, which undoubtedly represents the direction of investment in the future. In a word, the investment should be in the moon, not in the stars.

When it comes to future growth, financial technology is an inescapable industry, and the popularity of ant group IPO and its subsequent suspension has made more people see the value of the track. However, given that the IPO of Ant Group and JD.com Mathematical Science in A shares is still a long way off, nothing is more worthy of a look than a few leading companies such as Lexin in the US stock market.

In the context of the ongoing epidemic and regulatory policy changes, there are considerable differences in the market on how to view the investment value of Lexin. In this regard, my attitude is optimistic that the value of the company is undervalued. Let's talk about my understanding in detail for your reference.

　　01

　　The new rules focus on“Specification”

The financial technology industry is characterized by many stars but few moons. due to geographical dispersion and diverse consumption scenes, companies in the industry are scattered like plants in the primeval forest, rather than the monotonous African prairie. The network effect of the head company in the industry is not obvious, no matter from a competitive or regulatory point of view, the winner-takes-all principle is not applicable here, giving all kinds of players plenty of room for development.

According to central bank data, by the end of 2019, China's personal short-term consumer credit balance was 9.92 trillion yuan, the market is large enough, and has formed a "big eight" and "other" two camp pattern. The so-called "eight experts" are 8 enterprises of Ant Group, lufax, WeBank, JD.com Mathematical Science, 360Maxine, Lexin, du Lesser Fullness of Grain and Xinwang Bank. According to CLSA, they accounted for nearly 92% of the Internet loan market in 2019, and they still have boundaries for expansion and intensive cultivation within their own capacity circles.

The scale of the market and the pattern of competition indicate the investment value of the financial technology track. However, as the Ant Group IPO was pressed to suspend the listing of JD.com, coupled with the simultaneous introduction of new regulations on small loans, the industry immediately appeared cool and market sentiment turned pessimistic at one time.

But the real business world is complex, and simple labeling will only misread the truth and investment opportunities. In fact, Ant's suspension of listing is due to a change in the regulatory environment caused by new small loan regulations and a redefinition of the business framework, not a policy boycott of the financial technology industry.

Everyone must pay attention to the speech made by Chen Yulu, deputy governor of the Central Bank on January 15: "with regard to the issue of standardization and rectification of the Ant Group, at present, under the guidance of the financial management department, Ant Group has set up a rectification and reform working group, and is stepping up efforts to formulate a timetable for rectification and reform." at the same time, we should also maintain business continuity and normal operation of enterprises to ensure the quality of public financial services. "

This clearly shows that regulators require ants to "rectify and reform the requirements of standard supervision" and "maintain business continuity", rather than banning related businesses, let alone restricting the development of the industry. To put it bluntly, "if you know your mistakes, you will still be a good boy."

With the introduction of new rules in the industry, there is no doubt that ants will be revalued. However, under the spread of pessimism, the valuations of companies such as Lexin and Xinya Technology, which reported beautiful results in the third quarter, were also suppressed, but it was a bit of a disaster to the pond fish.

What needs to be distinguished is that, in fact, the loan aid model adopted by Lexin is very different from the joint loan model.

Under the joint lending model, credit institutions and banks jointly contribute, previously credit institutions only need to contribute 1%, after the new rules, credit institutions need to contribute 30%. Higher capital requirements will limit the growth of the co-lending business.

In fact, Lexin, lufax and 360 have all said that the impact is small.

When it comes to the loan model, an important trend is that the stronger loan platforms begin to provide risk-free pure science and technology loan services. This is also the reason for the rapid growth of technology business of leading companies such as Lexin.

Considering that the industry can be cleared under strong supervision, the customer acquisition cost of the head platform will be significantly reduced; because the risk of co-debt is greatly reduced, the bad debt rate will also come down. As more and more lending institutions access the credit system, users' willingness to repay will be greatly increased.

Financial institutions are extremely sensitive to risk, and being able to accept the lending platform does not reveal the bottom, which not only means the trust in the cooperative platform, but also means that this is the direction of regulatory encouragement. This is a fact that must be clarified when discussing the impact of the new rules on small loans.

To put it simply, for a rigid demand industry that has existed for thousands of years, regulation needs regulation rather than compression, and compression is also a super giant with a large amount of compression. Therefore, the head company represented by Lexin will benefit both at the policy level and at the market level. As the industry moves from barbaric growth to orderly growth, market concerns about the industry will disappear, and a further rise in valuations is a high probability event.

Another point worth noting is that on December 29, 2020, the Supreme Court approved the Guangdong High Court on the scope of application of the new judicial interpretation of private lending. it is clear that there are seven types of local financial organizations, including micro-loan companies, financing guarantee companies, regional equity markets, pawnshops, financial leasing companies, commercial factoring companies and local asset management companies, which are supervised by local financial regulatory departments. It belongs to a financial institution established with the approval of the financial regulatory department, and the disputes caused by engaging in related financial business shall not apply to the new judicial interpretation of private lending. Other issues have been clarified in the revised judicial interpretation. The approval shall enter into force as of January 1, 2021.

From this point of view, policy uncertainty has been gradually eliminated, and there is no doubt that there will be better room for growth for platforms that are well deployed in terms of compliance (risk-free lending model rather than highly leveraged joint lending model). It is believed that the market will give more matching valuations such as Lexin.

　　02

　　Financial data continue to be eye-catching

The investment is to choose the track first, and then choose the head company in the track. After making it clear that there is no policy risk in the financial technology industry, let's focus on Lexin.

2020 is a turbulent year for the financial technology industry, first the impact of the epidemic, and then the strong supervision of the industry. However, due to the consistent steady style, the third-quarter results show that the company leads the industry in a number of core indicators, such as business structure, business scale growth, R & D investment, To B technology revenue share and so on. A more important change is that Lexin has quickly shifted from a capital-guaranteed risk-based lending model to a risk-free technology lending model. Under this model, Lexin provides efficient operation services for financial institutions through technology, giving full play to the scientific and technological capabilities of customer acquisition, system building, operation and management, so as to enhance business stability and make growth expectations clearer.

In the third quarter, Lexin platform services and technology revenue reached 1.13 billion yuan, accounting for 36% of the revenue. Of this total, risk-free To B technology revenue was 614 million, a year-on-year increase of 159%. Among the new transaction volume, the proportion of the risk-free, pure technology service model has expanded to 40%, and since October, it has accounted for more than 50%, indicating that the quality of growth is getting better and better. New businesses such as Leca and Lehuaca have opened up new growth space. The number of paid member users such as Leca has exceeded 2.7 million, and the opening volume of Lehua card has exceeded 11.38 million, driving the total number of Lexin users to increase by 69.6% year-on-year to 106 million, and the number of active trading users has reached 7.4 million, an increase of 21.3% over the same period last year.

　　03

　　Transform into a hardcore technology company

Lexin's 2B business is to export its credit business experience and technological capabilities to financial institutions to provide them with end-to-end credit business solutions from customer acquisition to post-loan management. Through a number of innovative technology platforms to provide partners with support in customer acquisition, risk control, operations, and system construction, To B technology services revenue increased by 159% to 614 million, achieving more quality growth.

-- provide customer support. In view of the difficulties faced by financial institutions in obtaining customers, Lexin has developed a customized customer acquisition service system based on the RTA model, which can customize user portraits according to the needs of financial institutions, select effective users and jointly market. Based on this system, the user registration conversion rate of cooperative financial institutions is 10-30% higher than before, and the credit conversion rate is 20-50% higher than before.

-- output risk control ability. Risk control is the pain point and difficulty of financial business. Lexin serves new consumers for a long time, accumulates rich user behavior data and has mature risk control experience, which can help financial institutions to carry out risk management more efficiently. Lexin's "Letu" risk portrait products can deeply integrate and process the data inside and outside the Lexin system, and generalize the risk differentiation ability of Lexin precipitation to various risk control scenarios by using the modeling concept of transfer learning. and can effectively identify the high-quality part of the credit rejection flow, helping financial partners to increase the credit pass rate by 20% and reduce the risk by more than 50%. As the carrier of To B risk operation service, the "negative entropy" risk operation platform provides financial institutions with core risk control capabilities such as anti-fraud deployment, decision flow configuration, federal learning and risk pricing, and serves more than 100 licensed financial institutions, including banks, gold elimination and small loans.

-- Internet operation support. With years of experience in Internet operation, Lexin helps financial institutions provide product building, user operation, data services and other basic services, enhance user stickiness through joint operations, and serve users throughout the life cycle.

-- the construction of a technical system. Lexin cooperates with financial institutions to customize credit business systems, intelligent risk control systems, asset management systems, etc., to provide underlying data and basic management support for the system.

In July this year, the interim measures for the Administration of Internet loans for Commercial Banks were promulgated and implemented, affirming the role of the loan market and institutions, and encouraging commercial banks to absorb new technologies in a cooperative manner to promote reform and innovation in the credit industry. Risk-free To B technology service has become the key direction of Lexin, and has been continuously increasing its technology investment. In the third quarter, Lexin invested 118 million in R & D, continuing to take the lead in the industry.

At the end of August, Lexin AI Center won the award of "Asian Banker" and "Best AI Innovation Lab in China" for its technological innovation and mature application of To B technology services.

Based on this, it is not appropriate for the market to value it according to the logic of financial companies, but should be valued according to technology companies. This is the golden age of technology stocks, so there is a huge room for revaluation.

　　04

　　Conjecture of secondary listing in Hong Kong

Lexin also has a potential event-driven logic, which is a secondary listing in Hong Kong.

Due to the uncertainty of US policy and the massive undervaluation of US-listed stocks, Chinese-listed stocks set off a wave of return in 2020. NetEase, JD.com, Zaiding, Huazhu, Yum, Baozun and New Oriental all returned to Hong Kong to be listed for the second time one after another, and all got better valuations. For example, New Oriental became the first Hong Kong stock of 1,000 yuan.

PricewaterhouseCoopers estimates that the return of Chinese stocks to Hong Kong will continue to be active this year, with an upward trend compared with last year, from 9 last year to 10-15, with a fund-raising amount of between HK $10 and HK $15 billion. It is reported that bilibili, Baidu, Auto Home, Ctrip and other companies are all seeking a secondary listing in Hong Kong recently. There is still a great possibility that Lexin will go to Hong Kong for a second listing and seek a more reasonable valuation.

Earlier, it was reported that Lexin CEO Xiao Wenjie mentioned in response to analysts' questions during the earnings call for the first quarter of 2020 on June 4 that Lexin was one of 22 companies qualified to list in Hong Kong and was also studying the possibility of a secondary listing in Hong Kong. On June 5, 2020, in response to the news of the secondary listing of Lexin Research in Hong Kong, Lexin responded to the media: "We are also concerned that we are on the list of 22 companies that meet the secondary listing of the Hong Kong Stock Exchange. We will not reject any option that is beneficial to the company."

Judging from the past, most of the secondary listings of Chinese stocks in Hong Kong will have a positive stimulating effect on stock prices, because the valuations of the two markets tend to converge, accompanied by the rediscovery of the value of the company. Therefore, the current potential valuation depression of Lexin, is undoubtedly a cost-effective investment.

　　05

　　Neglected valuation depression

The cognitive threshold of the financial technology industry is already high, coupled with the impact of the ant incident, the market has not reached a common understanding of valuable and undervalued stocks, but the existence of "non-consensus" often means opportunities. Lexin's valuation multiple as the head company-because of its advantages in asset, capital and risk control-is at least above the market average and should actually enjoy a better valuation.

Howard Max's investment memo, a must-see for Buffett every issue, wrote in his first memo in 2021: value investors understand that the market is rarely priced at the asset value of securities, but is often out of touch with the intrinsic value of the company. That is why we have the opportunity to buy stocks or bonds at undervalued prices. This requires investors to think independently, resist the mood swings caused by the market cycle, and make investment decisions only based on value.

Haitong International recently released its first coverage report for Lexin, which pointed out that the company's transaction volume will nearly triple to 336 billion yuan in 2022 compared with 2019, and the share of To B business will rise to 80% from 40% in August 2020. it decided to give Lexin a buy rating.

As of January 22, Lexin's share price was $6.61, a very low position.

With a large enough market and a credible business model, the company has proved its risk control ability with its past performance. If there is no big change in policy, the future is bound to be the "Davis double-click" of performance growth + valuation improvement.