LexinFintech Holdings Ltd. (NASDAQ:LX) stock is still assigned a Hold rating. LX’s Q2 loan origination was weaker than the company’s prior guidance, and the chances of a meaningful improvement in LexinFintech’s near-term financial performance are low. On the flip side, there are positives pertaining to LX’s long-term outlook. The company is deriving a growing proportion of its top line and loans from asset-light businesses and non-China operations, respectively, as per its Q2 2024 disclosures.

In this article, the spotlight is on LexinFintech’s most recent second quarter results. Earlier, I looked at LX’s Q1 2024 key metrics with my previous May 28, 2024, update.

LX’s Q2 2024 Loan Origination Fell Short Of Management Guidance

LexinFintech reported a disappointing set of results for the latest quarter as per its Q2 2024 earnings press release issued last week.

LX’s loan origination fell by -20% YoY from RMB 63.9 billion in Q2 2023 to RMB 51.1 billion in Q2 2024. This was 5%-7% lower than the company’s earlier second quarter new loan volume guidance in the RMB 54-55 billion range. Considering the substantial drop in the company’s loan origination, it was no surprise that LexinFintech’s normalized EPS also decreased significantly by -32% YoY to RMB 1.49 in the recent quarter.

The company revealed at its Q2 2024 earnings call that it “tightened credit standards,” as China’s “macroeconomic recovery remained sluggish” and “consumer confidence continued to be at historical lows.” According to a July 15, 2024, Seeking Alpha News article, China’s GDP growth decelerated from 5.3% in the first quarter of this year to 4.7% for the second quarter, which was a -40 basis points miss. As such, it is easy to understand why LexinFintech’s Q2 2024 loan origination declined meaningfully and missed the company’s prior guidance.

A quick turnaround for LexinFintech’s business operations appears to be unlikely.

LX guided for its Q3 “total loan issuance and profit” to be “at similar levels” as that for Q2, given its expectations of sticking to a “prudent operating principle” as per its second quarter results briefing commentary. In other words, LexinFintech isn’t anticipating a sequential or QoQ improvement in its financial performance for the third quarter. UBS (UBS) recently lowered its full-year 2024 GDP growth forecast for China from 4.9% in April to 4.6% in late August. Therefore, it is reasonable to think that LX won’t be aggressive in expanding its loan portfolio in China when the country’s economic outlook has become less favorable.

In the absence of short-term catalysts relating to financial performance improvement, LexinFintech isn’t deserving of a Buy rating.

But LexinFintech’s Business Mix Has Gotten Better

A Sell rating for LX is unwarranted, as the optimization of the company’s business mix could boost LexinFintech’s intermediate-to-long term prospects. LX’s business mix has become more favorable, with its asset-light businesses and international operations outside Mainland China representing a growing part of the company.

The top line contributed by LexinFintech’s asset-light tech-empowerment service and installment e-commerce platform service income streams as a percentage of LX’s total revenue grew from 18.3% in Q1 2024 to 26.7% in Q2 2024. LX derived the company’s other revenues from its asset-heavy credit facilitation service or business. The company’s revenue break-down was taken from its second quarter results presentation slides.

Growing LX’s asset-light tech-empowerment and installment e-commerce platform services or businesses will most likely translate into a higher overall ROA (Return on Assets) for LexinFintech in time to come. This will in turn justify more demanding P/B and P/E valuations for the stock. According to S&P Capital IQ’s data, LX is currently valued by the market at a trailing P/B ratio of 0.21 times and a consensus next twelve months’ normalized P/E multiple of 2.0 times, with a forecasted FY 2024 ROA of 5.4%.

Separately, LX’s international business operations are growing rapidly, albeit from a low base.

LexinFintech acknowledged in its Q2 2024 earnings announcement that “the current scale of our overseas business is still small” without disclosing the specific contribution from domestic and international operations.

But LX revealed at the company’s recent quarterly analyst call that its international business’ loan balance and loan origination jumped by +77% and +61%, respectively on a sequential basis in Q2 2024. More importantly, LexinFintech stressed at its Q2 analyst briefing that “we plan to step up our investment in overseas markets and accelerate the expansion.”

As highlighted in the preceding section, a challenging Chinese economy has hurt LexinFintech’s loan origination. If the company can diversify its geographical mix by growing its international operations, it is likely that its future financial performance will be more stable and resilient in the long term.

In summary, LX’s business mix in terms of exposure to international markets and asset-light businesses has improved. This is a positive signal for the company regarding its prospects for the long run.

Concluding Thoughts

LexinFintech Holdings Ltd. stock is now trading at a low-single digit forward P/E and less than a quarter of book value as mentioned above. But the stock is cheap for good reasons, as the company’s short-term outlook is unfavorable. In that respect, it is fair to have a Neutral view or a Hold rating for LexinFintech.