Financial technology companies, or fintechs, are transforming all corners of the financial sector, from banking to insurance to payments. Some of these companies lean more on either the "financial" or "tech" side of the term, but all of them automate, streamline, or otherwise improve how financial services are delivered.
And however you categorize them, they represent some of the top-performing stocks over the past few years. Two of the biggest and most successful are Square and PayPal, but there are many others that fly under the radar. One of them is called LexinFintech Holdings (NASDAQ:LX). You don't hear a lot about this Chinese company, but you should get to know it.
What is LexinFintech?
LexinFintech is an online consumer finance company that doubles as an e-commerce business. It offers its customers a line of credit that they can then use to buy merchandise on the company's e-commerce platform, Fenquile, which includes merchants that offer electronics, fashion, home furnishings, and all other types of merchandise. Customers can also make purchases outside the Fenquile platform as they are able to link the credit line to other payment providers, like Alibaba's Alipay.
Fenquile is targeted to the younger demographic in China, those between the ages of 18 and 36. This is an age group that typically doesn't have credit history or earnings power, but it does have higher consumption needs. The service not only allows them to establish a credit history, it also helps them meet their consumption needs. And eventually, as these young adults do earn more, the hope is they will continue to use the services. "We believe that the educated young professionals in China will mature to become the primary group of consumers of what we term as the new consumption," the company explains on its website.
The funding for the credit lines comes from its up to 100 different banking partners, although LexinFintech puts up about 5% to 10% as part of its loan guarantee service. LexinFintech charges a fee for matching its customers to the lenders. It also earns a transaction fee every time something is purchased on the e-commerce site. In addition, it has a membership/loyalty program called Le Card, where it offers savings and other benefits to its users. So, it's an asset-light business model with fee-based income.
Consistent user growth
Since it launched, LexinFintech's number of active users has grown exponentially, even through a difficult 2020. At the end of 2020, it had 12.9 million active users who took loans, up 31% from 9.9 million at the end of 2019 and more than triple the total at the end of 2017.
The total amount of loan originations was up 40% in 2020, but due to the pandemic, the gross merchandise volume (GMV) -- the total value of merchandise sold -- was down 35% compared to 2019. Less money spent means that loan balances were higher at the end of the year, up 26%.
Overall, 2020 was a rough year, with operating revenue down 9% and net income down 74% year over year, the latter due mainly to higher provision for credit losses earlier in the year. By the fourth quarter, however, net income was only down 1.6% year over year. This led to a stock price that plummeted about 52% in 2020.
This year, LexinFintech's stock price is up around 37% at Thursday's prices, trading at $9.20 per share. While the first-quarter numbers aren't out yet, the company is seeing promising signs of growth. Chairman and CEO Jay Wenjie Xiao said in the fourth-quarter earnings release that the company expects RMB240 billion to RMB250 billion in loan originations (roughly $37 billion to $38.6 billion at Thursday's rates), up from RMB177 billion in 2019 (about $27.3 billion today). It has seen excellent growth from its new "buy now, pay later" service, Maiya, which it expects to significantly expand its customer base. Xiao said the Maiya product was expected to do RMB50 million in GMV (or about $7.7 million) in March alone.
With the economy storming back and higher customer balances, there should be a lot of pent-up demand for LexinFintech's products and services. The growth in users has been steady, even through the pandemic, so it shows that the company has tapped into a niche that should start to take off. At this low valuation -- a forward price-to-earnings ratio under 5 -- LexinFintech is a fintech you should get to know.