China Fintech Will Endure Regulatory Tightening And Market Erosion

Key Takeaways

• Intensifying regulation, demographic shifts, and reliance on higher-risk borrowers threaten LexinFintech's profitability, market size, and stability.
  
• Heightened competition and geopolitical uncertainty increase funding risks and could result in shareholder dilution and squeezed margins.
  
• Strategic focus on AI-powered risk management, capital-light lending, and ecosystem expansion is driving higher profitability, operational resilience, and enhanced shareholder value.

Catalysts

Offers online direct sales and online consumer finance services in the People’s Republic of China.

• The long-term risk of intensifying regulatory scrutiny and potential policy tightening in China's fintech sector threatens to impose caps on interest rates and service fees, increase capital requirements, and restrict data usage, all of which could reduce industry profitability and directly erode net margins at LexinFintech.
  
• An aging demographic profile and weak population growth among younger consumers in China is set to shrink the core addressable market, undermining loan origination volumes and reducing LexinFintech's long-term revenue prospects even as the company pursues deeper penetration in lower-tier markets.
  
• The company's heavy reliance on subprime and near-prime borrowers exposes it to elevated credit risk, making earnings particularly vulnerable if macroeconomic conditions deteriorate or if there is a shift towards societal deleveraging, resulting in higher defaults, larger loan-loss provisions, and persistent margin pressure.
  
• Despite the short-term improvement in asset quality and net take rate, increased competition from both traditional banks accelerating digital offerings and new fintech entrants is likely to put sustained downward pressure on LexinFintech's net interest margins and increase customer acquisition costs, squeezing future profitability.
  
• Ongoing geopolitical uncertainties and the risk of diminished access to foreign capital markets-including potential delisting or capital controls-could restrict access to growth capital, forcing the company to rely on repeated equity issuances, which would dilute earnings per share and ultimately undermine returns to shareholders.

LexinFintech Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LexinFintech Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LexinFintech Holdings's revenue will grow by 6.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.4% today to 24.8% in 3 years time.
• The bearish analysts expect earnings to reach CN¥4.2 billion (and earnings per share of CN¥24.63) by about July 2028, up from CN¥1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.9x on those 2028 earnings, down from 6.6x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.9x.
• Analysts expect the number of shares outstanding to grow by 2.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

LexinFintech Holdings Future Earnings Per Share Growth

Risks

• LexinFintech's rigorous investment in AI-driven risk management, smart risk tools and data analytics has resulted in sustained declines in key delinquency metrics and enhanced asset quality, which supports lower credit losses and bolsters net margins over time.
  
• Its successful business model transformation towards refined operations, a higher share of capital-light lending, and diversified product offerings is improving user stickiness, expanding addressable markets and driving growth in recurring revenues and earnings.
  
• Strategic expansion of its ecosystem-including fintech, e-commerce, offline micro-business lending and overseas markets-alongside proven operational resilience, has allowed Lexin to achieve record-high quarterly profits and propels long-term revenue and earnings opportunities.
  
• Enhanced funding cost structure, with further reductions supported by strong risk controls and diversified funding partners, provides Lexin a sustainable cost advantage that supports higher long-term profitability and competitive pricing in the consumer finance market.
  
• Management's confidence, reflected in increased dividend payout ratios and reaffirmed guidance for substantial profit growth, highlights improving free cash flow and potential for stable or growing shareholder returns, positively impacting equity value and share price.

Valuation

• The assumed bearish price target for LexinFintech Holdings is $4.79, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LexinFintech Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.2, and the most bearish reporting a price target of just $4.79.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥17.0 billion, earnings will come to CN¥4.2 billion, and it would be trading on a PE ratio of 1.9x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $7.24, the bearish analyst price target of $4.79 is 51.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.