Cost Pressures May Affect Margins, But Risk Upgrades Could Improve Future Earnings

Key Takeaways

• LexinFintech's flat loan origination and rising operational costs could challenge future revenue growth and net margins.
  
• Significant tech and R&D investments may boost long-term prospects but could pressure short-term earnings.
  
• LexinFintech's effective risk management, strategic partnerships, and innovative technology drive enhanced profitability and sustainable revenue growth through low-cost initiatives.

Catalysts

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

• Concerns about LexinFintech's future revenue growth may arise from the flat loan origination volume expected in Q4, despite potential improvements in asset quality and customer acquisition strategies.
  
• There are expectations that net margins could face pressure despite current profitability improvements, due to potential increases in risk management and operational costs associated with upgrading their risk identification and customer acquisition strategies.
  
• The company's large investment in technology and R&D, while potentially beneficial long-term, could temporarily elevate costs and weigh on short-term earnings.
  
• LexinFintech's funding cost reached a historic low, and further reductions may be limited, posing a risk to future attempts to enhance net margins and profitability.
  
• The transition to the Intelligent Credit Platform, being in its early stages, might not substantially contribute to revenue in the near term and could take time to positively impact earnings, adding uncertainty to growth expectations.

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 February 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 2.7x on those 2028 earnings, down from 13.8x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.42%, as per the Simply Wall St company report.

LexinFintech Holdings Future Earnings Per Share Growth

Risks

• LexinFintech has successfully implemented a risk management upgrade, reducing the risk of new loans and improving asset quality, which could enhance future earnings and revenue stability.
  
• The company achieved a record low in funding costs through strong partnerships with financial institutions, enhancing net profit margins by reducing borrowing expenses.
  
• LexinFintech's innovative use of technology, such as the Intelligent Credit Platform, allows for sustainable revenue growth through a low-risk, capital-light profit-sharing model that could positively impact earnings.
  
• The company’s strategic focus on reactivating dormant customers from its large user base has proven effective and low-cost, potentially driving revenue growth due to increased customer drawdowns and loan volumes.
  
• LexinFintech's strong emphasis on expanding high-quality new loans and maintaining a diverse funding mix underpins a steady improvement in profitability and net margins.

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 2.7x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $8.63, the analyst price target of $6.32 is 36.6% 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.