LX’s 2Q20 non-GAAP net profit declined by 32.5% YoY to RMB453mn, largely in line with our forecast. Despite strong loan origination in 2Q20 (+58% YoY), earnings growth was softened by lower net revenue take rate of 8.8% (-4.3ppt YoY), given still heavy provisions and shifting towards profit-sharing model. We remain upbeat on its loan growth and asset quality outlook, but acknowledge that regulatory uncertainty on APR cap could be a near-term overhang. Maintain BUY and trim TP to US$11.8 on lower APR assumption.
- Management guided for >RMB48bn loan origination in 3Q20, implying 17% QoQ and 30% YoY increase, after the beat of RMB41bn in 2Q20 (vs RMB38bn previous estimate). We raised FY20/21 loan origination forecasts by 3.7%/5.3% to RMB183bn/RMB224bn, given favorable policies for domestic consumption and LX’s solid track record in meeting guidance.
- User base continued to expand. Thanks to LX’s consumption-focused strategy, total registered and approved users grew 13.2% and 9.7% QoQ to 95.3mn and 22.7mn, respectively. However, management expected lower sales and marketing expense this year. The Company is keeping tight control for online advertising budget and aims to acquire more customers through offline channels, which is usually cheaper and better quality.
- Asset quality risk is manageable. M3+ delinquency rate rose 42bp QoQ to 2.99%, but it mainly reflected loans originated in 1Q20. As a timelier leading indicator, D7 delinquency rate declined to 2.32%, similar to the level in 3Q19. Management saw vintage loss came down to 4% from 4.5% in 1Q20 peak, and expected it to further retreat in 3Q20.
- Profit-sharing model contains take rate but unlocks scale limit. Funding partners usually asked for bigger share of interest at early stage, but recently the take rate gap vs guaranteed loan facilitation tended to narrow (1.0-1.5ppt for LX at the moment). Key positive of the model is no risk-taking or leverage limit required, thus faster business expansion. 30% of LX’s loan origination was under profit-sharing model in 2Q20, and it is expected to reach 50% by year-end.
- APR on the downtrend. LX’s weighted average APR fell to 26.5% in 2Q20, from 27.1% in 1Q20. Capping APR (IRR-based) at 24% would pare revenue by 10%, based on the Company’s own sensitivity analysis.
- Maintain BUY and lower TP to US$11.80. We cut our FY20/21 earnings forecast by 28.5%/24.5%, to factor in assumptions for 2-4ppt lower APR, higher credit cost, but faster loan origination. As such, we trimmed TP by 5.6% to US$11.8, which is based on 1.71x target P/B and FY21E BVPADS of RMB48.1.
