LexinFintech Holdings (NASDAQ:LX), a number one fintech in China, reported a blended end result for the third quarter of fiscal 2020 (ended Sept. 30, 2020). Income for the quarter rose 6% (in fixed forex) whereas web revenue plunged 52% owing to larger processing and servicing prices and provisions.
However there’s extra to the headline numbers above for this on-line client monetary companies firm. Listed here are my two largest takeaways from the most recent earnings end result.
Enterprise remained resilient amid the COVID-19 pandemic
As an investor in LexinFintech, certainly one of my largest considerations for the corporate is the way it has been faring amid the COVID-19 outbreak. And fortunately, its newest end result alleviates a few of my worries.
First, the fintech delivered 347 million yuan in revenue for the third quarter of 2020, bringing the year-to-date web revenue to 85 million yuan. That is vastly constructive for the corporate, particularly if we take into account that it reported a web lack of 678 million yuan within the first quarter of 2020.
Operations-wise, LexinFintech issued a report 48 billion yuan in loans to clients, up 31% 12 months over 12 months. Nonetheless, a report loan issuance is ineffective except the corporate can recuperate its loans (with curiosity). Luckily, credit score high quality has been enhancing as in comparison with the primary and second quarters of this 12 months. For perspective, the 30 days+ delinquency ratio — debtors who’re not less than one month late of their repayments — has declined from 6.02% within the first quarter of 2020 to 4.74% this quarter. In different phrases, Lexin has been enhancing its loan assortment from debtors.
Amid the constructive enterprise developments mentioned above, LexinFintech maintained its 2020 loan origination goal — given earlier than the COVID-19 outbreak — of between 170 billion yuan and 180 billion yuan, up 30% from 2019. I believe it is admirable that it may obtain its development goal regardless of the disruptions attributable to the pandemic, which demonstrates the robustness of its enterprise model.
LexinFintech is shifting towards a capital-light enterprise model
As a loan facilitation platform, LexinFintech matches debtors to lenders (similar to banks) in return for a payment. It additionally places up 5% to 10% of the loan issued as a part of its loan assure service — these funds will cowl lenders’ lack of curiosity and capital.
These days, LexinFintech is shifting towards a capital-light model — accounting for 39% of whole loans issued within the quarter — which doesn’t embrace loan assure service. Underneath this model, it would turn out to be extra of a know-how associate to the lenders to assist the latter enhance on areas similar to buyer acquisition, threat administration, operational effectivity, and others. The lenders will bear all of the monetary threat, and LexinFintech will earn a pure know-how service payment with out risking any capital.
The principle driver for the change is to be compliant with the most recent regulatory necessities, which make fintech firms focus primarily on offering technology-related companies. Nonetheless, there are clear advantages to this transformation.
First, this new model will unencumber vital capital, which will be reinvested into rising the enterprise. Subsequent, it improves the standard of revenue, since LexinFintech won’t be accountable for losses for a loan issued below this association. However maybe an important factor to acknowledge is that Chinese language regulators have formally acknowledged the position of fintech firms in China, which removes an enormous roadblock for the trade.
The draw back to the brand new model is a decrease take charge for LexinFintech. Although the administration has not supplied any particular numbers on take charge, it guided that as a substitute of the standard 60-40 revenue sharing model — Lexin takes 60% of the entire revenue from debtors whereas the lenders take the remaining 40% — the brand new model will reverse that ratio to 40-60. Although undesirable, the decrease take charge is suitable if one considers all the advantages that may accrue to the corporate over the long run.
What it means for buyers
General, Lexin’s enterprise demonstrated a robust resilience throughout this disaster, evident by its enhancing metrics for the quarter.
Although it’s not fully out of the woods but — web revenue remains to be decrease than the earlier 12 months and credit score metrics are nonetheless recovering — there are indicators that the enterprise high quality has improved in 2020. Therefore, it would doubtless finish the monetary 12 months within the black.
Final however not least, the stock is buying and selling at a depressed degree of 4 occasions trailing earnings, which is a big cut price for a corporation that has simply grown its enterprise (by way of loans issued) by 31%.