c Annual revenue was $13.1 billion, up 32% year on year; full year profit (non-GAAP EBIT) was 1.8 billion yuan, up 41.1% year over year. Lexin's transaction volume for the full year of 2023 was 249.5 billion yuan, an increase of 21.9% over the previous year; the balance of loans managed at the end of the year was 124 billion yuan, an increase of 24.5% over the previous year.
At a time when the macro environment is full of challenges, Lexin has achieved relatively steady development. What is particularly noteworthy is that the company's risk control team and risk control system have been upgraded, and the annual dividend rate has reached 9.7% — in the current economic environment, it is an investment target with steady growth, low valuation, and high dividends.
After the addition of the new CRO, risk control capabilities were greatly improved, and risk indicators were improved
Currently, the mutual fund industry has entered steady development, and it is also a stage of stock competition. In the future, for all fintech companies, accurately obtaining high-quality customers and improving LTV throughout the life cycle of existing users will become a top priority, and the core competencies behind this are risk control. Without good risk control, there is no ability to accurately identify, no ability to obtain high-quality users, and it is impossible to screen existing users and provide appropriate pricing, thus achieving steady development with low risk.
In the fourth quarter of 2023, Lexin fully upgraded its risk team and invited Qiao Zhanwen, who has worked for more than 10 years at Ant Consumer Finance, to serve as CRO to help further improve the risk framework and build a full-life cycle risk control system. Under his leadership, Lexin's risk control strategy was fully upgraded.
In 2023Q4, Lexin restructured the customer hierarchy. Through basic customer information, customer portraits, and customer risk scores, customers were divided into four categories: premium, high quality, normal, and growth. Compared with the original customer hierarchy, risk differentiation and stability were significantly improved. After the risk control systems of the main business lines were comprehensively and iteratively upgraded, the risk identification performance was improved by nearly 30%.
In terms of new customers, a Low & Grow risk growth system was built based on the hierarchy of new customers, that is, as the accuracy and understanding of user identification deepens, the quota gradually increases. In the fourth quarter, when the number of new registered users remained the same as in the third quarter, the number of new active users increased by 51.8% year on year. Early risks of new assets stabilized and entered a downward channel. The December index fell nearly 15%.
On the side of returning customers, Q4 focused on optimizing the credit, pricing, and trading strategy systems to further enhance the competitiveness of top customer groups. The transaction volume ratio of premium and premium customer groups increased 12% month-on-month, and the new risk of returning customers decreased by more than 15% month-on-month; targeted re-offers were carried out for lost or unconverted potential customers, and the conversion rate increased by more than 50%.
Through these risk control and refined operation measures, Lexin has seen a good transformation in the context of generally rising industry risks. Starting in December 2023, the company's overall risk began to stabilize. In December, it fell 6% month-on-month, and recently reached a low value. Compared with the peak value, it has been optimized by +10%. FPD7, which added assets, peaked in early Q4 in '23, and was then optimized month by month. The overall asset recovery rate began to be under pressure in the second half of '23, and has stabilized since entering '24 from a low level.
Looking ahead to 2024, the quality of new assets will continue to improve, and risk indicators for all assets will gradually improve. When talking about Lexin's risk control, on the one hand, the new CRO is honest and has room for improvement. On the other hand, it also confidently stated that the company “has confidence, ability, and methods to reduce risk from quarter to quarter”, thereby improving profit levels.
Indeed, every improvement in risk control capabilities can bring real profits. Lexin managed a loan balance of 124 billion dollars at the end of 2023. If the bad debt rate falls by 0.1% and profit increases by 124 million yuan. Last year, Lexin's adjusted profit was 1.3 billion yuan. A 0.1% decrease in risk would mean a 9.5% increase in profit.
Lexin's dividend rate of 9.7%, a high dividend asset in a low interest rate environment
Lexin continued to pay dividends and returns to shareholders. In the second half of 2023, Lexin shared 0.066 US dollars per ADS, plus 0.116 US dollars per ADS in the first half of the year, a total share of 0.182 US dollars for the whole year. Based on the March 22 stock price of 1.88 US dollars, Lexin's dividend ratio reached 9.7%.
It is worth noting that the current dividend is lower than the semi-annual report because a 224 million investment project depreciation was calculated in the fourth quarter of last year. If the annual profit of 1.29 billion yuan is added, the 20% dividend rate can reach 35.83 million US dollars divided by the total share capital, and the dividend per ADS can reach 0.22 US dollars, which corresponds to the current stock price dividend rate of 11.7%, and the investment value is still very high.
Currently, in a low interest rate environment and a period of slow economic growth, the yield on ten-year treasury bonds has rarely fallen into the 2-3% range, and high-dividend assets have become the target of many capital institutions scrambling to chase. Last year's banking and coal stock markets were all beneficiaries of the high dividend strategy. China's Shenhua Hong Kong stock rose 36% in 2023, and China Construction Bank's Hong Kong stock rose 26% in the past two years. I believe in the near future, the fintech industry will also be taken by more and more investors as a high-dividend asset. After all, Lexin's current dividend rate of 9.7% is higher than most traditional bank stocks, and the latter's dividend ratio is basically between 6-8% (as shown in the figure below).
How much room does Lexin, which is in a valuation depression, still have room for growth?
After experiencing the severe tests of regulation and market in 2022, in July last year, the four departments jointly issued “Financial Management Departments Begin and Finish the Financial Business Rectification of Platform Enterprises and Focus on Improving the Normalized Financial Supervision Level of Platform Enterprises”, which indicates that most of the problems in the financial business of Internet platforms have basically been rectified and that the future will enter the stage of normalized supervision, indicating that the industry has entered a stage of steady and standardized development, where industry uncertainty has been greatly reduced, and the predictability and stability of future company performance has greatly improved.
It is conservatively assumed that if Lexin's future performance does not grow, the 20% dividend rate will remain the same. In the future, the dividend per ADS will be 0.22 US dollars, so if you buy a share today, even if the stock price does not increase, the investment can double in less than 9 years. In other words, from a valuation perspective, even assuming that investors expect a return as high as 10%, using the zero-growth model v=d0/k (that is, the dividend growth rate is 0, 0.22 US dollars per ADS, and future dividends will be paid according to a fixed amount), the stock price will at least reach 2.2 US dollars, and there is still quite a bit of room for growth compared to the present.
Of course, the above is a very conservative forecast. If Lexin's profits continue to rise in the future, the valuation space will increase at the same time. Therefore, Lexin's two dividend moves seem normal, but in fact, the underlying valuation model has changed, and keen investors may have already recognized this change — in the fintech industry has already entered a stage of steady and standardized development, the distribution of “cash red envelopes” by listed companies clearly sends a signal: valuations are low and coming soon. As far as valuation is concerned, whether it is its price-earnings ratio or net price-earnings ratio level, Lexin's appeal among peers is unrelenting (as shown in the figure below).
epilogue
With a new CRO in place, Lexin's risk control capabilities have been greatly enhanced. For long-term investors, the company is currently in a valuation depression (dynamic PE only 2.15, PB only 0.23). As risk improves, profitability increases, and a sustainable dividend rate of around 10%, future returns are still quite imaginative.