Chinese Fintech Tightening Will Shrink Margins And Raise Risks

Key Takeaways

• Regulatory tightening and rising compliance costs threaten margins, operational flexibility, and long-term profitability in an increasingly challenging fintech environment.
  
• Demographic shifts, slowing economic growth, and intense competition are likely to reduce demand and limit sustainable market expansion for LexinFintech.
  
• Diversified revenue streams, advanced risk management, and flexible business models enhance resilience, operational efficiency, and shareholder value amid evolving digitalization and regulatory landscapes.

Catalysts

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

• New, more stringent regulations in China's fintech sector are expected to tighten funding supply and impose additional operational restrictions, driving up funding costs and hindering revenue growth even as loan facilitation rules are implemented, resulting in potential margin compression as compliance investments and provisioning needs rise.
  
• Slowing macroeconomic growth and demographic changes, including an aging population and a shrinking base of young consumers in China, threaten to diminish long-term demand for consumer loans, which could directly reduce LexinFintech's addressable market and limit sustainable revenue and earnings growth.
  
• Increased reliance on high-risk capital-heavy lending, combined with industry-wide funding constraints, may lead to deteriorating borrower quality and elevated default rates over time, forcing the company to maintain high provisions and ultimately pressuring net interest margins and profitability.
  
• Heightening competition from large incumbent banks and major technology-driven financial players with superior resources may erode LexinFintech's market share, weaken pricing power, and stall the company's ability to grow its core lending and e-commerce businesses, resulting in stagnant or declining net revenues.
  
• The need for ongoing, large-scale investment in advanced risk management and compliance-partly due to intensifying regulatory and cybersecurity requirements-will likely drive operating expenses higher and reduce operational leverage, making it increasingly difficult for LexinFintech to sustain profitability improvements over the long-term.

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 7.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.5% today to 24.2% in 3 years time.
• The bearish analysts expect earnings to reach CN¥4.2 billion (and earnings per share of CN¥24.46) by about August 2028, up from CN¥1.6 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 2.0x on those 2028 earnings, down from 4.8x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.4x.
• Analysts expect the number of shares outstanding to grow by 2.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.95%, as per the Simply Wall St company report.

LexinFintech Holdings Future Earnings Per Share Growth

Risks

• Accelerated adoption of AI-enhanced risk management and personalized product offerings has led to continuous improvements in asset quality and a consistently decreasing trend in key delinquency metrics, which could support lower credit losses and stronger net margins over the long term.
  
• The company's agile and diversified ecosystem-including rapid growth in installment e-commerce, expanding partnerships in inclusive finance, and robust overseas business momentum-broadens revenue sources and reduces reliance on core lending, potentially sustaining top-line growth and mitigating volatility.
  
• Continuous enhancements in tech empowerment services and partnerships with banks leverage big data and standardized risk systems, positioning the company to benefit from ongoing digitalization trends, which could further boost revenue and operational efficiency.
  
• The ability to flexibly shift between capital-heavy and capital-light business models in response to funding cost changes demonstrates operational resilience that can help sustain or improve net income even amid regulatory or macroeconomic shifts.
  
• Significant shareholder-friendly actions, including a raised dividend payout ratio and substantial share repurchase plans, signal strong balance sheet health and management confidence in future profitability, which could provide downside support for earnings per share 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¥17.5 billion, earnings will come to CN¥4.2 billion, and it would be trading on a PE ratio of 2.0x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $6.41, the bearish analyst price target of $4.79 is 33.7% 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.