LEXINFINTECH HOLDINGS(LX.US)：FUNDAMENTALS IMPROVING QOQ;WATCH OUTLOOK OF NEW CONSUMPTION BUSINESS

　　2Q22 results missing our expectation
　　LexinFintech’s (Lexin) announced 2Q22 results: Revenue equaled Rmb2.41bn (-26% YoY and +41% QoQ), and non-GAAP net profit totaled Rmb208mn (-76% YoY and +61% QoQ), missing our expectation. Non-GAAP net margin was 8.6%. We attribute the firm’s results to high provisions and a large change in fair value of financial guarantee derivatives.
　　Loan origination volume: Lexin’s 2Q22 loan origination volume was Rmb49.1bn (-19% YoY and +14% QoQ) due to a recovery in user activeness (number of active borrowers and new active borrowers up 7% and 29% QoQ). Along with easing COVID-19 conditions, the firm fine-tuned operating strategy in June and improved the management of existing users, driving a recovery in new loan origination to about Rmb18.4bn in June. Thus, the firm guided 3Q22 loan origination at about Rmb53bn. Revenue: Lexin’s 2Q22 revenue totaled Rmb2.41bn (-26% YoY and +41% QoQ). Specifically, revenue of credit-driven platform services equaled Rmb1.44bn (-35% YoY and +60% QoQ), with the YoY declines caused by falling loan origination volume. The revenue of new consumption-driven, location-based services rose 32% YoY and 69% QoQ to Rmb538mn thanks to rapid gross merchandise volume (GMV) growth for new consumption business. Revenue of technology-driven platform services fell 33% YoY and 12% QoQ to Rmb436mn, due to falling loan origination volume of the firm’s light-asset model. Profit: Lexin maintained high provisions in 2Q22, while expenses increased along with business volume. In addition, the change in fair value of financial guarantee derivatives contributed to a gain of Rmb305mn (+16% QoQ). Non-GAAP net profit equaled Rmb208mn (-76% YoY and +61% QoQ), and non-GAAP net profit margin was 8.6%.
　　Trends to watch
　　Fine-tuning operating strategies to cope with challenges amid COVID-19 conditions. 1) Lexin continued its prudent development strategy in 2Q22 with proactive control of business scale and effective control over the fluctuation in asset quality. 2) For client acquisition, the firm focused on high-quality clients such as urban white-collar workers to further improve client quality. For risk management, the firm leveraged more high-quality data sources to avoid loan fraud. In addition, Lexin fine-tuned its regional operating strategies according to local COVID-19 conditions to effectively cope with potential challenges. 3) The firm optimized the management of existing high-quality clients, and better utilized the credit investigation model of the People’s Bank of China to build a new model to screen high-quality clients more effectively. We expect this to enhance the efficiency and reduce the cost of client acquisition.
　　Watch the growth potential of new consumption scenario services. In addition to its advantages in consumer electronics, Fenqile (the firm’s online consumer finance and e-commerce channel) further expanded its product categories and launched Maiya to offer buy-now-pay-later (BNPL) services for its clients. Thanks to expanding product portfolio, the firm’s scenario-based GMV increased 35% YoY and 65% QoQ to Rmb1.11bn in 2Q22. We think that new-consumption business will likely become a new growth driver along with increasingly clear business model and merchants’ improving interest for paid services. In addition, we expect high-frequency new consumption scenarios with high user stickiness to attract high-quality users for the firm’s loan facilitation business, thus boosting credit business growth.
　　Regulatory framework increasingly clear; rectifications on track. 1) Rectification of credit investigation: We note that the firm has started cooperating with two licensed credit investigation agencies, and has reached preliminary cooperation plan with one of them. We think the cooperation model with credit investigation institutions and financial institutions will gradually become clear in 2H22 or early-2023. 2) Pricing adjustment: Pricing fell below 24% for over 80% of the new loans in 2Q22, but still exceeded 24% for some incremental and existing assets. We expect the firm to gradually reduce its existing assets with high interest rates, and meet regulatory objectives in 2H22. 3) The China Banking and Insurance Regulatory Commission (CBIRC) tightened the regulation on internet loans: On July 15, the CBIRC issued a Notice on Strengthening the Administration of Internet Loans of Commercial Banks to Enhance Quality and Efficiency of Financial Services (the Notice) . The Notice sets a new transition period (from the date of issuance to June 30, 2023) for the rectification of internet lending. We believe that loan facilitation institutions provided effective technological services in the past during their cooperation with financial institutions. Therefore, we think the regulator’s decision to extend the transition period for new regulations is intended to urge relevant parties to rectify their practices in an orderly manner and regulate the long-term development of the industry. We expect the firm to gradually complete the rectification and grow steadily as a leading loan facilitation institution.
　　Financials and valuation
　　We lower our 2022-2023 earnings forecast 53% to Rmb905mn and 33% to Rmb1.6bn, considering lower-than-expected business volume growth in 1H22 and elevated provisions during COVID-19. The stock is trading at 3.0x and 1.7x 2022-2023e P/E. Considering earnings forecast adjustments and long-term business growth outlook, we trim TP 22% to US$2.7 (4.0x and 2.7x 2022-2023e P/E with 37% upside). We maintain an OUTPERFORM rating.
　　Risks
　　Uncertainty in regulatory environment; competition fiercer than expected; sharp fluctuation in asset quality.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。