LexinFintech's AI-Powered Turnaround: A High-Margin, Global Play at 6.8x P/E

LexinFintech Holdings Ltd. (NASDAQ: LX) has emerged as a poster child for fintech's evolution from high-risk lending to AI-driven efficiency. Its Q1 2025 results—featuring an 113% year-over-year (YoY) net income surge to RMB430 million—mark a pivotal shift toward a structural transformation that could redefine its valuation. By leveraging proprietary AI tools and expanding into underserved global markets, Lexin is transitioning into a high-margin, risk-resilient growth story. Here's why investors should pay attention.

The AI-Driven Profit Engine

Lexin's turnaround hinges on its Singularity LLM and Credit Limit Robot, which are revolutionizing risk management and revenue generation. These systems:
- Optimize credit allocation: The “Credit Limit Robot” dynamically adjusts credit lines for 46.2 million users, reducing defaults while boosting utilization. The 90+ DPD rate fell to 3.3%, its lowest in years, underscoring improved asset quality.
- Cut costs and expand margins: AI-driven processes reduced overseas customer acquisition costs by 19% QoQ, while tech-empowerment services (e.g., B2B solutions) saw a 72.8% YoY revenue jump. These high-margin services now account for 30% of total income, up from 15% in 2023.

Global Expansion: Reducing China Dependency

Lexin's push into Mexico and Indonesia—markets underserved by traditional banks—is a masterstroke. By targeting 150,000 microbusinesses in these regions, Lexin avoids China's volatile credit cycles while capitalizing on untapped demand. Key metrics:
- Funding reach: Over RMB4.3 billion in loans facilitated in Q1 2025, with 70% of transactions originating from fourth-tier cities and rural areas.
- Operational discipline: A “quantitative + manual review” system balances growth and risk, ensuring scalability without overextension.

This strategy isn't just about diversification—it's about marginal improvement. Overseas operations now contribute 20% of total revenue, up from 10% a year ago, with costs falling as scale benefits materialize.

Fortress Balance Sheet and Shareholder Returns

Lexin's financial health is underappreciated. With net cash of RMB2.2 billion and a 30% dividend payout ratio (up from 25% in 2024), the company is rewarding investors while retaining ample liquidity. The dividend policy—effective H2 2025—signals confidence in sustaining net income growth, which management projects to remain strong despite macroeconomic headwinds.

Valuation: A 6.8x P/E Undervaluation

At current prices, Lexin trades at just 6.8x trailing twelve-month (TTM) net income, far below peers like Ant Group (which trades at ~12x) and Lufax (9x). This discount ignores its margin expansion and balance sheet strength. A normalized P/E of 9x would imply a 23% upside, while a 12x multiple could push shares 76% higher.

Risks and Why They're Overblown

• Macroeconomic uncertainty: Lexin's focus on microbusinesses and low-risk tech services insulates it from broad economic downturns.
• Regulatory hurdles: Its exclusion of ICP loans (where it doesn't bear principal risk) minimizes compliance exposure.

Investment Thesis

LexinFintech is undervalued and underfollowed, with its AI-driven margin expansion and global growth story yet to be fully recognized. The dividend hike and fortress balance sheet provide a safety net, while its 3.3% 90+ DPD rate and 113% YoY net income growth highlight execution quality.

Buy LX at current levels, target a 9x P/E multiple, and hold for 12–18 months. This is a rare opportunity to own a fintech leader transitioning from cyclical lender to structural growth story—all at a price that doesn't reflect its future.

However, historical data reveals that periods of extreme net income growth (over 100% YoY) have often preceded sharp corrections. In such instances, the stock fell by an average of 81.11% over the subsequent 90 trading days, with maximum drawdowns exceeding 90%—highlighting the need for disciplined risk management despite the compelling long-term narrative.