Executive Summary / Key Takeaways

• LexinFintech has successfully completed a two-year transformation, pivoting to a data analytics, risk management, and refined operations model, which has driven a significant and sustained recovery in profitability, with net profit reaching a 14-quarter high of RMB 511 million in Q2 2025.
• The company's proprietary AI large models, including Singularity AI and DeepSeek R1, are deeply integrated across its operations and risk management, enhancing efficiency, improving risk identification accuracy by 15%, and boosting coding efficiency by approximately 35%, forming a critical competitive moat.
• Lexin's diversified ecosystem, encompassing online consumer finance, a rapidly growing installment e-commerce business (Q2 2025 GMV up 117% YoY), offline inclusive finance, and tech empowerment (ICP), provides operational resilience and multiple avenues for high-quality asset growth.
• Despite macroeconomic uncertainties and evolving regulations, Lexin maintains a prudent risk-first approach, evidenced by a 90-day delinquency ratio declining to 3.1% in Q2 2025 and a robust provision coverage ratio of 270%, positioning it for sustained asset quality improvement.
• Management projects significant year-over-year profit growth for the full year 2025, supported by continued net profit take rate expansion and a commitment to shareholder returns through an increased dividend payout ratio (30% from H2 2025) and a $60 million share repurchase program.

LexinFintech: Forging a New Path in China's Digital Finance Landscape

LexinFintech Holdings Ltd. ($LX), founded in 2013 in Shenzhen, China, has established itself as a technology-empowered personal financial service enabler. Its journey began with platforms like Fenqile, offering installment purchases and personal installment loans, and the Lehua Card for scenario-based lending. This foundational history in consumer finance and e-commerce integration has profoundly shaped its current strategic direction. The company's overarching strategy centers on a robust, data-driven ecosystem, emphasizing risk management, refined operations, and technological innovation to capture opportunities within China's dynamic digital finance sector.

The broader industry landscape is characterized by increasing demand for digital financial services, driven by a tech-savvy population. However, it is also marked by evolving regulatory frameworks and intense competition. Lexin's strategic pivot over the past two years, culminating in a successful transformation by Q1 2025, has focused on building a model driven by data analytics, risk management, and refined operations. This transformation is not merely an operational shift but a fundamental enhancement of its core capabilities, designed to drive sustained value creation and position the company for high-quality development.

The AI-Powered Moat: Lexin's Technological Edge

At the heart of LexinFintech's competitive advantage lies its profound investment in artificial intelligence and data analytics. The company has completed the localized deployment of leading large AI models, including DeepSeek R1, and has developed its proprietary financial large model, Singularity AI. This advanced technological infrastructure is deeply embedded across its daily operations, providing tangible and quantifiable benefits.

In risk management, Lexin's multimodal fusion model, integrating textual, time series, numerical, and graph features, has improved risk identification capabilities by 10%. The company's risk identification accuracy improved by 15% in Q4 2024, with model stability increasing by 10%. Furthermore, its intelligent anti-fraud model more effectively detects and intercepts potential fraud. In post-loan management, the intelligent data-driven platform achieves full process end-to-end AI support, ranging from case allocation and collection operations to customer operation and repayment strategies, effectively improving the post-loan collection rate. Lexin's self-developed AI agents, with 50 roles currently deployed in key business areas such as operational strategy generation, credit strategy review, and automated monitoring, significantly enhance operational efficiency. The company's credit line robot and pricing robot, leveraging AI large models, have improved the efficiency and effectiveness of credit line decisions and significantly boosted volume growth from pricing reductions by dynamically optimizing pricing strategies.

The impact of AI extends to its research and development, where the Singularity model assists in generating code 860,000 times monthly and offered 210,000 quality improvement suggestions in 2024, boosting coding efficiency by approximately 35%. This technological differentiation translates directly into a stronger competitive moat, enabling Lexin to maintain lower costs, better margins, and a superior market position through more accurate risk pricing and enhanced operational refinement. The ability to deploy private large models with lower computational costs further opens new avenues for applications across its business.

Navigating the Competitive Currents: Lexin's Strategic Positioning

LexinFintech operates within a highly competitive Chinese fintech landscape, contending with both specialized online lenders and broader financial service providers. Key direct competitors include Lufax Holding Ltd. , Qudian Inc. , and FinVolution Group . While precise market share figures for all niche competitors are not publicly detailed, Lexin's strategic positioning emphasizes its integrated e-commerce and consumer finance ecosystem.

Compared to Lufax (LU), which offers a more diversified suite of services including wealth management, Lexin's focus on technology-driven risk management and efficiency in targeted consumer finance solutions provides a distinct value proposition. Lexin's installment e-commerce business, notably the first of its kind in China, offers a unique channel for customer acquisition and engagement, with approximately 97% of its e-commerce customers utilizing installment services. This integration allows for greater efficiency in customer acquisition and potentially stronger customer loyalty than more straightforward lending platforms like Qudian (QD).

However, Lexin's 90-day delinquency ratio of 3.3% as of March 2025, while improving, still lags behind the overall Chinese banking sector (below 2%) and direct competitors like FinVolution and Qifu Technology (QFIN), which reported figures around 2%. This indicates that while Lexin's risk management initiatives are yielding results, there remains a gap to close in overall portfolio quality, particularly due to legacy loans. FinVolution (FINV), for instance, is recognized for its advanced AI-driven risk assessment, an area where Lexin is rapidly advancing but may still be catching up in terms of overall sophistication.

Lexin's strategic response to this competitive environment involves leveraging its unique ecosystem synergy and technological prowess. The Intelligent Credit Platform (ICP) exemplifies this, operating as a capital-light, profit-sharing model where Lexin bears no principal loss risk. This model allows for precise customer segmentation and differentiated pricing, matching borrowers with financial institutions that have complementary risk appetites, thereby expanding its addressable market and smoothing potential risk fluctuations across credit cycles. This approach enhances Lexin's operational resilience and allows it to compete effectively by offering tailored solutions and superior user experiences.

A Trajectory of Profitability: Financial Performance and Operational Excellence

LexinFintech has demonstrated a compelling financial turnaround, marked by robust revenue growth, sustained profitability, and expanding margins. In the second quarter of 2025, the company reported total revenue of RMB 3.6 billion, a 16% quarter-over-quarter increase. Net profit reached RMB 511 million, representing a 19% quarter-over-quarter growth and a remarkable 126% year-over-year increase, marking a record high in the past 14 quarters. This performance underscores the success of its strategic transformation.

The net income take rate, a key indicator of profitability, reached 1.92% in Q2 2025, a 34-basis point improvement quarter-over-quarter. This was primarily driven by an 82-basis point increase in the revenue take rate of the credit business, which rose from 6.69% to 7.51%. This improvement reflects Lexin's business resilience and its ability to adjust its business mix. For instance, in Q2 2025, facing a reduction in funding supply for capital-light business due to new regulations, Lexin proactively shifted more loan volumes to its capital-heavy model, which accounted for 80% of GMV, up from 73% in Q1 2025. This shift, supported by enhanced risk management, allowed for optimized profitability and volume growth.

Asset quality has shown consistent improvement for four consecutive quarters. In Q2 2025, the 90-day delinquency ratio declined by 16 basis points to 3.1%, while the first payment default (FPD) over 7 days for new assets decreased by about 5%. The day 1 delinquency rate of total assets also decreased by approximately 2% quarter-over-quarter. This improvement is a direct result of Lexin's "risk-first" approach and continuous investment in risk management capabilities. Despite improving asset quality, the company maintained prudent provisioning, with total credit cost increasing by 13.6% quarter-over-quarter in Q2 2025, and a provision coverage ratio remaining ample at 270%, the highest in the last four quarters.

The installment e-commerce business is a significant growth driver, with GMV increasing by 139% year-over-year during the June 18 shopping festival in Q2 2025. E-commerce gross profit recorded RMB 97 million in Q2 2025, up 71% quarter-over-quarter. The tech empowerment service income also saw substantial growth, increasing by 33% to RMB 830 million in Q2 2025, largely due to the release of provisions and increased referral service income from the ICP model. This diversified revenue stream, coupled with improving customer acquisition efficiency (new active users grew by 23% in Q4 2024 while cost per active user decreased by 21%), underpins Lexin's financial health.

Outlook and Guidance: Sustaining the Growth Trajectory

LexinFintech's management maintains a confident outlook for the remainder of 2025, projecting significant year-over-year profit growth. This guidance is rooted in the expectation of continued asset quality improvement, further optimization of funding structures and costs, and enhanced operational efficiency driven by its technological advancements.

For the third quarter of 2025, the company anticipates maintaining a stable business scale, further reducing risks, and sustaining profit growth, with the net income take rate expected to improve at a similar pace. While the full year 2025 GMV is projected to see flat to single-digit year-on-year growth, reflecting a prudent approach to volume in favor of quality, the focus remains on profit expansion. Management expects operating expenses to increase in 2025, but at a slower pace than profitability improvement, as investments continue in user acquisition, risk control systems, talent, and AI technology.

The new regulation on loan facilitation, set to take effect in Q4 2025, is viewed by management as a catalyst for a more standardized, sustainable, and healthier industry environment, ultimately benefiting compliant platforms like Lexin. While short-term impacts like tightened funding supply and minor risk metric fluctuations were observed in Q2 2025, Lexin's proactive risk management adjustments are designed to mitigate these effects. The company also plans to explore potential listings on other exchanges, such as the Hong Kong Stock Exchange, to address geopolitical uncertainties and protect shareholder interests.

Lexin's commitment to shareholder returns is evident, with the cash dividend payout ratio increasing from 25% to 30% of net profit starting from the second half of 2025. This, combined with a $60 million share repurchase program and the CEO's personal commitment to purchase up to $10 million in shares, underscores management's confidence in the company's compelling investment value, particularly with a forward PE ratio below 4x.

Risks and Challenges

Despite the positive momentum, investors should consider several risks. Macroeconomic uncertainties in China could impact consumer spending and repayment capabilities, potentially affecting loan demand and asset quality. The evolving regulatory landscape, particularly the new loan facilitation rules, while seen as beneficial long-term, could introduce short-term operational adjustments and increased compliance costs. Lexin's performance, while improving, still faces challenges from legacy loans that continue to impact overall portfolio quality, as evidenced by the comparison of its NPL ratio to industry peers. Geopolitical tensions also present a risk, particularly for Chinese companies listed on U.S. exchanges, though Lexin is proactively exploring alternative listing options.

Conclusion

LexinFintech has undergone a significant and successful transformation, emerging as a more resilient and profitable entity driven by its advanced data analytics and AI-powered risk management capabilities. The company's diversified ecosystem, anchored by a rapidly growing e-commerce segment and innovative tech empowerment solutions, provides a strong foundation for sustainable growth. While macroeconomic headwinds and regulatory shifts present ongoing challenges, Lexin's prudent operational strategy, consistent asset quality improvement, and commitment to shareholder returns position it favorably. The continued expansion of its net profit take rate and the strategic application of AI across its business lines are critical indicators for investors, suggesting that LexinFintech is poised to deliver on its promise of significant year-over-year profit growth and enhance shareholder value in the evolving digital finance landscape.