By now, most investors have heard about Ant Group, the Chinese fintech backed by Alibaba whose IPO was abruptly canceled this week. Investors did not see that coming and were left frustrated. Still, they can consider other listed companies to catch on to the fintech boom in China. Lexinfintech (NASDAQ:LX) is one of them.
Riding China’s fintech boom, at a low valuation
Lexin, an online lending platform focusing on young Chinese professionals, generates income mainly by matching lenders and young borrowers — those who do not have a credit record and cannot access banks’ credit facilities — in exchange for a fee. The young fintech applies advanced data analysis to a wide range of data — such as social media data and online shopping data — to assess customers’ credit risks, allowing it to offer credit services to underserved young adults.
Perhaps more importantly, Lexin is trading at around 4 times trailing earnings, a low price tag thanks to the regulatory uncertainties in China (more on this later). In comparison, the S&P 500 is currently trading in excess of 30 times earnings.
Acing the COVID-19 test
COVID-19 has become a sort of unofficial stress test for companies. As the economy weakens and people lose their jobs, they might default on their loans, increasing the risk of additional bad debts for lenders like Lexin. Even those who still have their job may choose to reduce their spending (and borrowing), which would negatively impact the lenders’ income.
Lexin’s second-quarter result shows that it is passing this test with flying colors. Active users (people who used Lexin’s loan products in the quarter) surged 66% to 6.8 million. The total loaned to customers jumped 58% year on year to RMB 41 billion. The company also posted a net profit of $59 million — a marked improvement from Q1, when Lexin reported a net loss of $96 million, dragged mainly by one-off provisions related to COVID-19.
Still, investors need to keep a close eye on pandemic-related developments. While COVID-19 seems under control in China, cases are still rising in other parts of the world and a resurgence of COVID-19 in China would drag down credit consumption, impacting Lexin and its peers.
So far, Lexin has reiterated its 2020 loan origination target of between RMB 170 billion and RMB 180 billion, up over 30% from last year. That points to a profitable Q3, assuming no additional COVID-19 provision is needed. Also, in its latest business update released on Sept. 14, the company announced that credit performance had improved significantly as compared to the first and second quarters of 2020, which was even better than that of the same period last year. In other words, borrowers have been paying back their loans.
Brighter days lie ahead
Lexin shares are down more than 50% from a 12-month high amid worries about regulatory uncertainties. A nationwide crackdown on peer-to-peer (P2P) lending platforms is ongoing in China, and the collapse of several high-profile players is still fresh in investors’ minds. So while Lexin is not a P2P platform, investors have taken the easy route by avoiding the whole fintech industry, presumably until there is more clarity on regulation.
But there might be light at the end of this tunnel. In July, the China Banking and Insurance Regulatory Commission officially recognized the role that fintech companies like Lexin play in widening access to credit for the underbanked population. Could that be a blessing from China’s powerful regulators? It’s certainly a breakthrough that can’t be ignored.
With the potentially improving regulatory environment, the Chinese online lending industry is ripe for growth. According to Lexin’s quarterly presentation, online consumer financing in China is expected to grow at a 27% compound annual growth rate (CAGR) from 2017 to 2022. Topping it off, Lexin’s focus on lending to China’s educated young adults — a market that’s grown at a CAGR of 64% over the past four years — puts it in a favorable spot for sustained growth.
Lexin could be a good investment
Lexin is an unusual company. Not only is it young (founded in 2013) and growing quickly — revenue grew more than fourfold between 2015 and 2019 — but it’s been profitable for the past three years.
What’s more, Mr. Market is pessimistic about the Chinese fintech industry, which has given Lexin’s stock a low valuation. At current levels, investors are getting a good bargain.