LexinFintech Holdings Ltd. Q1 FY2025 earnings call

• The company completed a 2-year transformation centered on data analytics, risk management, and refined operations, with GAAP net profit reaching CNY 430 million, a record high in 13 quarters. - Online consumer finance: Enhanced customer acquisition, launched new product, optimized product matrix. - Installment e-commerce: Revamped risk management, upgraded supply chain, GMV growth. - Off-line inclusive finance: Increased penetration in lower tiers, localized ops, profit growth. - Overseas business: Product upgrades, cost reduction, profitability achieved. - Future focus: User-centric approach, ecosystem synergies, technology investment (AI). - Risk management: Improved risk identification, preventive/proactive approaches, intelligent tools deployed, asset risk decline.

For the online consumer finance business, customer acquisition capabilities were enhanced, a new product [Foreign Language] flexible loan was launched, and the product matrix was optimized. The installment e-commerce business revamped its risk management system, upgraded the e-commerce supply chain, saw a significant increase in approval rates of installment applications, and e-commerce GMV grew by 16.2%. The off-line inclusive finance business combined quantitative assessment with manual review, had lower risk and higher product competitiveness, with GMV from Tier 4, Tier 5 and lower regions accounting for over 70% of inclusive finance GMV in the first quarter and sequential profit growth. The overseas business upgraded financial products in Mexico and Indonesia, improved the risk management system, customer acquisition costs decreased by 19% quarter-over-quarter, and achieved profitability.

• Reaffirmed full year net profit growth target. - Increased dividend payout ratio, with 30% from the second half of 2025.

• Macroeconomic uncertainties. - Evolving industry landscape. - Geopolitical uncertainties. - Impact of new loan facilitation rules.

Q: So how does the company address various external challenges such as the impacts of the new rules on loan facilitation business and geopolitical uncertainties on the company's listing standards? Does the company have any plans for Hong Kong IPO?

A: Despite significant changes in the macroeconomic environment and industry landscape this year, the company has delivered outstanding results by adhering to its strategy, focusing on risk management, data analytics and refined operations. Although external challenges persist, the company is well prepared to navigate through them and management remains confident in achieving its 2025 performance targets. Regarding the new rules on loan facilitation-based business, we welcome and support regulators’ efforts in standardizing the industry. While the full impact of these rules remain to be seen in the short term, they are expected to foster a more compliant, healthy and sustainable environment for the sector in the long run, a trend that particularly benefits large and compliant platforms like Lexin. For us, we have the capabilities and resilience to address the potential impact of the new rules. Therefore, we are confident in achieving our full year profit target. Regarding the geopolitical uncertainties, the company has proactively taken measures to prepare, including exploring potential listings on different exchanges, including Hong Kong Stock Exchange in order to protect the interest of all shareholders. Once any concrete plans or significant progress materialize, we will promptly disclose relevant information to the market in accordance with laws and regulations.

Q: What are the progress and development plan for your ecosystem business? And can you give us more color in terms of where we are in terms of our asset quality improvement trend and how to understand the strength of the current risk management capabilities and what's the plan for the next stage?

A: Lexin has always had very diverse business [indiscernible] and not only having online business but also offline, and we have unique competitive edge in our own ecosystem business. More specifically, as I mentioned in my remarks, for our online consumer finance business, we continue to improve the risk management capabilities and operational refinement and have witnessed a substantial enhancement in the capability and efficiency of customer acquisition. Going forward, we’ll focus on providing tailored product offers to match customers with varying risk profiles, enriching our product portfolio to enhance customer offer competitiveness and expanding customer acquisition channels. Meanwhile, we will further explore collaboration with huge traffic platform, which has already exhibited good momentum this year and expanding our business model to achieve sustainable volume growth. For our installment e-commerce business, we have revamped our risk management system, upgraded merchandise supply chain and expanded the business boundaries. By tailoring installment services to users based on their risk profile, we better address diverse customer demand. Going forward, we will fully leverage our e-commerce business to better engage existing customers and attract new ones, making it a key lever for us to adapt to [Technical Difficulty] changes and enhance the company’s operational resilience. For our off-line inclusive finance business, which is quite a unique feature of our business deployment, we have strengthened our in-house channel development and optimized the risk management model to ensure the differentiated competitiveness of our products and also secured sequential increase of profit. Going forward, we will continue to increase the penetration of micro business owners in lower-tier cities, enhance localized business development and improve operational efficiency. For our overseas business, we further optimized the business model and capabilities at various fronts. By far, our overseas business have achieved profit overall. Going forward, for overseas business, we will adopt a prudent approach in terms of investment and expansion. Over the past year, we have comprehensively upgraded our risk management system across multiple fronts, including risk identification, differentiated risk strategy, differentiated risk pricing, risk-bearing models, risk monitoring and early warning and risk management tool, et cetera. This has led to a significant improvement in our risk management strength and our ability to handle risk volatility. Thanks to our efforts and upgrades in the past year, we have established a mature, robust quantitative-driven risk management system. As a result, risk levels of both new and overall assets have exhibited a sustained decline over the past year. In light of the persistently challenging external environment and ongoing industry uncertainties, we remain committed to our risk-centric strategy and prudent operational approach. We will further strengthen our risk management capability. We’re actively exploring the application of large models to enhance the accuracy and efficiency of our risk management system. This will ensure asset risk maintain the current downward trajectory.

Q: In this quarter, I've noticed that the revenue structure experienced some material changes. And I was wondering what are the main reasons to drive this change? And second, what is the company's plan in shareholders' returns going forward?

A: Okay. I will take the first question and ask Jay to talk about the second. So the first question, first of all, as I mentioned in my previous script, it is important to bear in mind that despite the different factors contributing to the quarter-over-quarter revenue variance analysis, we should always take a holistic view to look at the total revenue and the credit cost together to get the big picture. The big picture is that from the unit economics perspective, our revenue take rate increased from 6.22% to 6.69% quarter-over-quarter. And the net take rate after offsetting the operational cost increased from 1.31% to 1.58% quarter-over-quarter. So in terms of the specific revenue variance analysis, basically, the quarter-over-quarter variance in total revenue was primarily due to lower credit facilitation service income driven by the reduced pricing, higher early repayments and the shift in GMV towards the capital-light model. While the tech empowerment service line income saw some increase driven by the capital-light GMV volume migration, here, the net-based accounting recognition is used where the revenue is net of related credit costs instead of recognizing revenue and the credit costs in 2 separate lines. So related to this, the total credit cost declined at the same time, partially due to the same reason. Additionally, despite the sequential GMV growth of 16.2% quarter-over-quarter, the installment e-commerce platform revenue decreased similarly as a result of the revenue recognition difference due to the volume mix shift between the third-party sellers and the company direct sourcing. For third-party sellers, only platform service commission is recognized as a revenue rather than the entire transaction amount under the direct sourcing model. The sales volume from the third-party seller account for 56% of the total e-commerce GMV in the first quarter, up from the 36% in the last quarter. So in conclusion, the revenue structural variance really reflected our ongoing risk-centric business transformation and our operational refinement. While the accounting treatment across different business models may cause some top line variances, however, our profit and profit margin continue to improve, really firmly tracking our plan. The company has always attached great importance on shareholders’ return and is committed to delivering value to shareholders through various means. Since November 2024, the company has increased its cash dividend payout ratio twice within 6 months, demonstrating its emphasis on shareholders’ return. This not only testifies the company’s stable and reliable profitability, but also reflects the management’s confidence in achieving stable and sustainable growth in the future. The company will continue to create value for shareholders. We understand investors’ expectations regarding shareholders’ return and we will work to align our dividend policy with shareholders’ expectations by considering the company’s resources, its business development and capital market conditions while striving to enhance returns appropriately.