LexinFintech Holdings (NASDAQ: LX) would probably like to forget 2020. The COVID-19 pandemic wreaked havoc on the global economy, and there was simply no escape for gamers the financial sector, including this fintech that meets the financial needs of young professionals in China.
In the first quarter of 2020, LexinFintech bad debt provisions had increased. The company slipped into the red and investors got nervous. As a result, LexinFintech stock fell almost 60% from 52 week highs. The stock has since made up for a lot of lost ground, but it is still trading 25% below pre-COVID levels.
But there are new signs that fintech is in full recovery mode. LexinFintech latest income report, released late last week, offers new evidence that things are getting better.
LexinFintech made the most of a brutal 2020
There is no doubt that 2020 has been brutal for LexinFintech, which generates income primarily by matching lenders and young borrowers – those who have no credit history and cannot access bank credit facilities – by exchange of fees. Net profit for the year fell 74% due to global economic issues that required increased loan provisions as well as a change in accounting rules.
Still, LexinFintech’s performance throughout 2020 shows a steady recovery. It reported a net loss of 678 million yuan (about $ 103.6 million at current conversion rates) in the first quarter of 2020, but it reported net profit in the second and the third trimesters.
In the fourth quarter, revenue from credit-focused services – the fees that LexinFintech generates from lending activities – increased 3% year-over-year to 1.8 billion yuan (275 million yuan). dollars). Net profit was 510 million yuan ($ 78 million), down from a year ago, but only 2% lower. In other words, business has fundamentally returned to pre-coronavirus levels.
Credit quality has also stabilized. For example, the 30-day-plus late payment rate – which tracks borrowers who are at least a month late in their repayments – has fallen to pre-pandemic levels of 3.4%. This is a big improvement from 6% in the first quarter of 2020.
There were also positive developments for the year. For example, LexinFintech was successful in meeting its loan origination goals for 2020. More importantly, the company has accelerated its transition to a technology-driven, low-capital business model which emphasizes zero financial risk. In this model, LexinFintech is not responsible for loan losses, improve the quality of its income. In the last quarter, LexinFintech issued more than 50% of its loans using this model.
Things are looking up for LexinFintech
LexinFintech managed to accelerate its growth in 2020, proving just how resilient its business model is. And as the economic recovery gains momentum, consumers will start spending more. This should further boost its fintech activity.
LexinFintech is also ideally positioned to capture market share from Chinese technology titans, including Group of ants and Tencent, which dominate everything from social media to finance. These companies have become too important for Chinese regulators, who consider efforts to contain them. It is therefore not surprising that LexinFintech has raised its loan issuance forecast for 2021 by 20 billion yuan ($ 3 billion). He now expects the total amount of the initial loans to be between 240 billion yuan and 250 billion yuan ($ 37-38 million).
LexinFintech is also taking a big step forward in digital retail, which could unlock a new engine of growth. For example, he recently launched Maiya – one of the first Chinese “buy now, pay later” suppliers. With Maiya, LexinFintech is betting that it can replicate the success of To affirm and Klarna in the United States and Europe. Maiya is on track to reach 50 million yuan ($ 8 million) in gross merchandise value in its first month of operation, indicating strong market demand.
Of LexinFintech’s 118 million registered customers as of December 2020, only 27.7 million had lines of credit through its existing financial products. LexinFintech could leverage Maiya to convert inactive users to active users, with minimal acquisition costs. In addition, Maiya also gives LexinFintech a way to harness the growing purchasing power of young Chinese consumers. This is a much bigger opportunity than LexinFintech’s existing fintech market – and could boost its future growth.
What’s next for LexinFintech
LexinFintech has made the most of a brutal 2020. With earnings returning to pre-COVID levels and continued improvements in credit quality over the past three quarters, investors can expect better financial performance this year.
In addition, LexinFintech does not stand still. Its evolution from a fintech pure-play into a platform for young people to shop and spend their money using Maiya is likely to trigger a new phase of growth.
Investors just need to be vigilant and watch the money roll in.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.