LexinFintech Holdings Ltd-ADR (LX -0.69%), a leading fintech company in China, reported a mixed result for its first quarter ended March 31, 2019. Revenue jumped 41% (in constant currency) while net income plunged to a net loss owing to the adoption of new accounting policy and the impact of COVID-19. Here are three major takeaways that investors should note from its earnings report.
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Overall performance
One of the major concerns that investors have about Lexinfintech is how the COVID-19 outbreak will affect its business. Lexinfintech’s latest result offers some clues.
Net profit plunged from RMB 424 million in the corresponding period last year to a net loss of RMB 678 million this quarter thanks to the provision of around RMB 900 million -- stemming from the change in accounting policy and impact from COVID-19--, as well as the voluntary reduction in customers’ fees of RMB 340 million . Excluding these one-off events, net income would have improved for the quarter.
Despite reporting a net-loss, Lexinfintech continued to grow its business -- with loan originations improved by 70% year-on-year to RMB 34 billion -- even as it faced significant disruption caused by the lockdown in China. It also grew its active users to 6.4 million in the quarter-- up 99% for a year ago -- on the back of higher registered users -- up 100% to 84.2 million.
Prospect for the rest of the year
After digesting the latest earnings numbers above, investors might wonder what’s in store for Lexinfintech in the coming quarters as China has fully reopened its economy. Management, in the latest earnings call, offered some insights on the business performance over the recent months.
To begin with, business metrics have gradually recovered from the lows in the first quarter. For example, offline transactions have increased over the last two months, up 12.7% month-on-month in April and 17.8% month-on-month in May. Similarly, asset quality has improved as the seven-day delinquency rate fell from 3.7% in the first quarter to 2.8% as of late.
Furthermore, the company expected its institutional funding cost to trend lower over the near future -- down by 50 basis point or mor e to about 7% -- as it grew its funding partners -- mainly banks and financial institutions. Management also shared that the RMB 900 million provisions (mentioned above) would be sufficient to cover all losses stemming from the COVID-19 outbreak, and they don’t foresee any extra provision needed.
In other words, investors should expect Lexinfintech to swing back into profitability in the next quarter -- Jay Xiao, the chief executive officer (CEO), has confirmed this -- assuming there’s no material deterioration in China’s economy going forward.
“Delisting” of China companies
Last month, the US Senate passed new legislation that could stop many Chinese companies from listing on US stock exchanges. The bill, which still needs to pass the House of Representatives before becoming law, requires foreign companies to prove that “they are not owned or controlled by a foreign government”. It also demands foreign companies to submit audits -- for three consecutive years-- for inspection by the Public Company Accounting Oversight Board (PCAOB). Failure to do so may result in the delisting of a company’s shares.
Though covering all foreign companies, the bill aims at improving the transparency of Chinese companies, especially after the recent fraud committed by executives of Luckin Coffee Inc - ADR (LKNC.Y -2.44%). If enacted, it will put many Chinese companies in a difficult situation, since complying with these rules means that these companies may end up breaking regulations in China. In responding to this, China companies such as Alibaba Group Holding Ltd - ADR (BABA -0.94%), JD.Com Inc (JD -0.74%), and NetEase Inc (NTES 2.85%) have sought a secondary listing in Hong Kong, with more companies expected to follow suit.
Questioned on this topic in the recent analyst call, Jay Xiao assured investors that he would consider all options available and take necessary steps to protect investor’s interest. This includes a listing in Hong Kong, if necessary. Referencing an unnamed article, he added that Lexinfintech is one of the 22 companies -- out of more than 150 China companies -- that currently meets the requirements of the bill.
As a shareholder, I am concerned with this situation. Still, I find it comforting that 1) the CEO --who is also the largest shareholder with about 27% of Lexinfintech’s stock s -- had openly addressed the issue and reassured investors and 2) there are early signs that Lexinfintech could meet the requirements of the bill.
Long term trend intact
The recent COVID-19 outbreak has disrupted the operation of most companies in China, including Lexinfintech. Nevertheless, the company has kept its full-year loan issuance target of RMB170 billion to RMB180 billion unchanged (up more than 35% from 2019) despite the weaker economy.
In the longer term, the company is well-positioned to grow thanks to the growth in private consumption and the low penetration of consumer loan--the per capita outstanding consumer finance loan in China in 2016 is less than 10% of that in the United States.
Hence, investors may want to hold on to Lexinfintech’s stock as it weathers through this challenging period
