Dave Zhong
Elevator Pitch
I have a Hold rating for LexinFintech Holdings Ltd.’s (NASDAQ:LX) stock, which remains unchanged from my prior article for LX published on August 30, 2022.
I lowered my investment rating for LexinFintech from a Buy to a Hold with my earlier end-August write-up highlighting the “mixed prospects” for the company. Since then, LX’s shares have fallen by -25.5%, as compared to a marginal -1.2% decline for the S&P 500 over the same period. My attention turns to LexinFintech’s upcoming Q3 2022 earnings announcement in the middle of this week with the current update.
I take the view that LX’s third quarter bottom line might fall short of investors’ expectations. However, the risk of weaker-than-expected financial performance for LX is probably already baked into its stock price and valuations based on a peer valuation comparison. After taking into account both the positive and negative factors for the stock, I continue to assign a Hold rating to LX.
Q3 2022 Earnings Preview
LexinFintech previously announced on November 10, 2022 that the company will release its earnings for the third quarter of this year on November 16, 2022 after the market closes.
I hold the view that LX’s actual Q3 2022 financial results might potentially disappoint the market.
The company had previously guided at its second quarter results briefing in the middle of August that it expects its loan originations to increase by +7.9% from RMB49.1 billion for Q2 2022 to at least RMB53.0 billion in Q3 2022.
In my opinion, LX’s expectations of positive QoQ growth in loan originations for Q3 2022 are reasonable, taking into account the fact that Mainland China experienced the worst pandemic-related lockdowns in the second quarter of the current year.
However, the management’s guidance of a high-single digit percentage increase in LexinFintech’s loan originations in QoQ terms for the upcoming quarter seems to be too optimistic.
Media publication Retail in Asia referred to the performance of the Chinese retail market in the third quarter of 2022 as “a shaky comeback”, highlighting the -2.7%, +5.4%, -2.5% retail sales growth rates for China in July, August, and September, respectively. As such, my prediction is that LX’s actual loan originations growth for Q3 2022 will be in the mid-single digit percentage range, which will be lower than the management’s earlier guidance.
Separately, LX also commented at its Q2 2022 earnings call that it thinks that its “profit will continue to follow an upward trend in the second half of this year.”
While I agree with management that LexinFintech should continue to deliver positive bottom line expansion in Q3 2022 and Q4 2022, I think the degree of earnings growth could be much more modest than what investors will be hoping for.
Taking into the difficult economic environment and rising credit risks, I believe that LX will adopt a more cautious stance relating to provisioning. Therefore, I don’t expect a substantial reduction in provision expenses for LexinFintech in the upcoming quarter, which would have provided a significant boost to LX’s Q3 2022 earnings.
In conclusion, there are downside risks for LexinFintech’s upcoming third quarter earnings, and I see a high probability of an earnings miss for Q3 2022.
Valuations
Although there is a risk of LX generating below-expectations earnings for the third quarter of this year as discussed in the prior section, it is possible to make a case that this is already factored into LexinFintech’s stock price and valuations.
LX has witnessed a -74.5% drop in its share price for the past year, and its current valuations are cheap on an absolute and relative basis.
Peer Valuation Comparison For LexinFintech
| Stock | Historical Trailing P/B Valuation Multiple | Consensus Forward Next Twelve Months’ Normalized P/E Multiple |
| LexinFintech | 0.22 | 1.8 |
| Lufax Holding (LU) | 0.29 | 2.5 |
| VCREDIT Holdings [2003:HK] | 0.32 | 1.8 |
| FinVolution Group (FINV) | 0.80 | 3.9 |
| 360 DigiTech (QFIN) | 0.89 | 3.5 |
Source: S&P Capital IQ
As highlighted in the peer valuation comparison table above, the market only values LexinFintech at below a quarter of its book value and less than 2 times consensus forward next twelve months’ normalized P/E. LX also trades at a significant discount to its Chinese online lending peers.
Potential Re-rating Catalysts For US-listed Chinese Companies
LexinFintech’s shares did very well last Friday, November 11, 2022, with its stock price rising by +8.6% to close at $1.52. I believe that this is largely attributable to a positive change in investor sentiment towards Chinese companies listed in the US driven by recent news flow.
On November 4, 2022, Reuters reported that the “U.S. audit inspection of Chinese companies in Hong Kong” has been completed. A week later on November 11, 2022, Bloomberg noted that “China’s move to ease some rules related to quarantine and flight bans supercharged a rally” for Asian listed companies.
Looking forward, a lower risk of delisting for US-listed Chinese companies and the relaxation of pandemic restrictions for Mainland China will be the key catalysts that could spark a re-rating of Chinese companies (including LX) as a whole.
Closing Thoughts
I continue to award a Hold rating to LexinFintech’s shares. I do acknowledge LX’s undervaluation and the presence of potential catalysts for US-listed Chinese names as a group. But there are also downside risks relating to LX’s near-term financial performance. Therefore, I choose to retain a Hold rating for LX.
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