LX’s 3Q20 non-GAAP net profit fell 2.2% QoQ/ 38.0% YoY to RMB 443mn, largely in line with our forecast. The earnings decline was mainly due to rising provisions (+25.8% QoQ), as credit quality worsened for part of existing loan book. Management attributed this to lower-quality borrowers acquired in previous quarters, and risks were magnified during the pandemic’s aftershock. We expect provision overhang to last into 4Q20, deferring earnings turnaround to FY21.
- Healthy growth in loan volume and customer base. LX’s quarterly loan origination rose 17.5% QoQ to RMB48.3bn. Management kept full-year volume guidance of RMB 170-180bn unchanged, meaning potentially further pick-up in 4Q20. Thanks to the Company’s new consumption strategy, user base continued robust expansion, with new registered users/ approved users/ active borrowers +10.7mn/2.5mn/1.7mn in 3Q20.
- Better quality for new loans, but legacy issue lingers. LX’s overall asset quality has been improving, with falling M3+ delinquency rate (-39bp QoQ to 2.6%) and stable vintage loss expectation (4.5%). However, the Company charged higher credit cost (+108bp QoQ to 7.4%) in 3Q20. Management acknowledged that provision rise was mainly for existing loan book, especially loans extended to borrowers acquired through certain online platforms (e.g. TikTok) in 2H19. LX has tightened standards for new borrowers and diversified acquisition channels with the help of its flagship products – Le Card and Lehua Card.
- Optimized revenue mix despite lower take rate. LX’s proportion of revenue from platform-based service (capital light/ profit-sharing loan facilitation) was lifted to 36.7% in 3Q20, from 31.0% in 2Q20. Loan originated under this model reached 50% of total loan volume in Oct. The shift in revenue structure to pure technology-enabled service may squeeze take rate, but will effectively transfer risk-taking to financial institutions, thus reducing LX’s susceptibility to credit cycles and offering greater growth potential.
- Maintain BUY and trim TP to US$10.3. We adjust down FY21-22 earnings forecast by 6-8%, to reflect lower take rate assumption on higher revenue contribution from platform-based service. Our revised TP of US$10.3 is derived from 1.6x target P/B and FY21E BVPADS of RMB 42.5.
