LexinFintech Holdings (LX) runs an online shopping mall that captures a growing trend among young Chinese consumers — buy now, pay later.
LexinFintech is in a sweet spot for Chinese consumer trends. A still-booming economy and an ever-larger middle class with rising incomes is driving online sales. Meanwhile, young Chinese adults are eager to adopt credit-fueled consumer spending. That's where Shenzhen-based LexinFintech steps in.
"Younger Chinese who come to the U.S. to study have grown used to credit cards," said Brendan Ahern, chief investment officer of KraneShares. "There's a migration to using credit that was never seen a decade ago. China was pure cash-based."
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Older adults in China remember the country before the boom years and still abhor the use of credit, Ahern said. But younger adults have only ever known a rapidly growing China, and have few qualms about credit. In fact, they see installment plans as a helpful means to pay more for the brands and products they like, LexinFintech says.
Chinese online sales giant JD.com (JD) is a significant investor in LexinFintech. Many of the online lender's management team, including founder and CEO Jay Wenjie Xiao, worked earlier for Chinese titan Tencent Holdings (TCEHY) or its online payment unit Tenpay. Tencent is JD.com's top shareholder as the duo boast a strategic alliance.
Online lender LexinFintech surged in its stock market debut on Dec. 21, closing up 19% at 10.73 from its IPO price of 9.
Shares shot up 19.3% to 19.09 in heavy volume in Friday's stock market trading, clearing an 18.39 buy point in an IPO base.
LexinFintech already is profitable, with huge growth seen. Total operating revenue from Jan. 1-Sept. 30 of 2017 rose 35% to 3.99 billion renminbi ($599 million). It earned a net 140 million renminbi ($21 million) for the period, reversing from a net loss a year earlier.
Analysts expect LexinFintech to earn 91 cents per share in 2018, vaulting to $8.69 a share in 2019, according to Zacks Investment Research.
During LexinFintech's IPO roadshow, investors fretted about China's regulatory climate. Shares of industry peers and fellow IPOs Qudian (QD), Jianpu Technology (JT) and PPDAI Group (PPDF) got whacked around that time as Beijing cracked down on online and microcredit lending.
"China is trying to put the brakes on the blistering yet haphazard growth of the country's online micro-lenders," Reuters reported at that time.
However, LexinFintech said it welcomed the new rules, saying they would make it harder for newcomers to enter the industry.
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The company had 3.3 million active customers in the first nine months of 2017, up 34% from the year-earlier period. More than 90% of its customers were young, educated adults age 18 to 36, a group it calls "underserved" by traditional financial institutions in China.
It has grown this client base by leveraging technologies such as Big Data and artificial intelligence both to assess credit risks and to pair users with diverse funding sources. Loan partners include commercial banks, consumer finance companies, other licensed institutions and individual investors.
From its start in 2013 through Sept. 30, 2017, LexinFintech originated 60.1 billion renminbi ($9 billion) in loans. Loan originations grew 124% in the first nine months of 2017 vs. the same period a year earlier.
Customer loan balances are getting bigger. The average balance was 8,996 renminbi ($1,418) in Q3, according to LexinFintech's IPO prospectus, up from 5,977 RMB a year earlier and 3,181 in Q3 2015.
Investors should pay attention to delinquency rates, especially for a small, foreign upstart with rapid-fire growth in rapidly evolving marketplace. But LexinFintech, in its prospectus, said just 1.3% of its outstanding balance was 30 days delinquent in Q3 2017. That's down from 1.7% in Q2 and 2.2% two years earlier.
According to LexinFintech, installment payments in China should keep rising as consumers start to use them more regularly for smaller-ticket purchases, such as shoes and cosmetics.
Usage is also spreading from large coastal cities to China's interior regions, and from low- to high-income earners, it says.
Qudian and another Chinese lender, Yirendai (YRD), will report earnings next week.
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