Risk Management And AI Investment Will Boost Efficiency, But Dividend Payout May Affect Cash Flow

Key Takeaways

• Strategic investments in AI and data innovations aim to enhance efficiency and margins, stabilizing scale and improving revenue quality.
  
• A shift to capital-light models and increased dividends may influence cash flow, potentially affecting predictable income streams and short-term shareholder returns.
  
• LexinFintech's strategic moves in risk management, AI investment, and capital-light loan expansion enhance financial stability, diversify revenue streams, and support potential earnings growth.

Catalysts

Provides online consumer finance services in the People’s Republic of China.

• LexinFintech plans to enhance its risk management capabilities by improving data mining, joint modeling, and deploying customized scoring models to reduce credit costs and provisions, potentially impacting net margins positively.
  
• The company is increasing its investment in AI and large model technology to boost operational efficiency across customer service, telemarketing, and collections, which could lead to cost savings and improved net profit margins.
  
• LexinFintech is focusing on acquiring high-quality customers and optimizing their credit lines and pricing strategies, which may help stabilize scale and improve revenue quality.
  
• The strategic shift towards more capital-light models and technology empowerment services is aimed at enhancing revenue mix and generating more predictable income streams, potentially impacting revenue positively.
  
• Plans to raise the company’s cash dividend payout to 25% of net income could increase cash outflows, affecting free cash flow and potentially impacting shareholder returns in the short term if profitability targets are not met.

LexinFintech Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LexinFintech Holdings's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 23.9% in 3 years time.
• Analysts expect earnings to reach CN¥3.8 billion (and earnings per share of CN¥23.93) by about March 2028, up from CN¥749.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.6x on those 2028 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.82%, as per the Simply Wall St company report.

LexinFintech Holdings Future Earnings Per Share Growth

Risks

• LexinFintech's effective management of risk and consistent profit growth indicate the company’s capacity for financial stability, which could lead to improved earnings despite challenging market conditions.
  
• The investment in data analytics and AI technologies for risk management and business operations is enhancing efficiency and could lead to better net margins due to reduced costs and improved operational effectiveness.
  
• The expansion in the capital-light loan model through the Intelligent Credit Platform (ICP) is diversifying revenue streams, which may positively impact overall revenue stability and growth.
  
• The decrease in funding costs due to improved asset quality and strong financial partnerships may lead to improved net income and profit margins.
  
• The company’s proactive initiatives in customer acquisition and the subsequent growth in active users suggest potential for increased revenue and earnings growth as the customer base expands.

Valuation

• The analysts have a consensus price target of $6.318 for LexinFintech Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.6, and the most bearish reporting a price target of just $4.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥15.7 billion, earnings will come to CN¥3.8 billion, and it would be trading on a PE ratio of 2.6x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $10.59, the analyst price target of $6.32 is 67.6% 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.