X Financial (XYF)

Executive Summary / Key Takeaways

• X Financial is rapidly establishing itself as a leading AI-driven online personal finance platform in China, demonstrating robust growth in loan originations and revenue, underpinned by a strategic pivot towards prime borrowers and disciplined risk management.
• The company's significant investment in artificial intelligence, including a multi-model AI risk management system with over 95% accuracy, is a core differentiator, enhancing operational efficiency, asset quality, and customer engagement while reducing costs.
• Strong financial performance in Q2 2025, with a 71.4% year-over-year increase in loan originations and 65.6% revenue growth, highlights effective execution and expanding market opportunities, translating into a robust 27.9% return on equity.
• Management's commitment to shareholder value is evident through an active share repurchase program, with a new $100 million authorization, and a semi-annual dividend policy, signaling confidence in the company's undervalued stock.
• While navigating China's evolving regulatory environment and macroeconomic uncertainties, X Financial's focus on compliance, asset quality, and technological innovation positions it for sustained profitable growth, with a full-year 2025 loan volume increase projected at approximately 30%.

The Ascent of a Fintech Innovator in China's Dynamic Market

X Financial, founded in 2014 and headquartered in Shenzhen, China, has evolved into a prominent online personal finance platform, offering a suite of products including Xiaoying credit loans and secured Xiaoying housing loans. The company's journey saw a pivotal transformation in 2020, shifting its focus from the P2P crisis to target prime borrowers, a strategic move that has since underpinned its consistent revenue and loan growth. This disciplined approach, coupled with an emphasis on expanding market opportunities through new and existing partnerships, forms the bedrock of its operational strategy.

The broader macroeconomic landscape in China provides a fertile ground for X Financial's growth. Government stimulus measures implemented in the second half of 2024, aimed at stabilizing key economic sectors and boosting consumption, have fostered healthy borrower demand and contributed to lower funding costs within the personal finance market. This supportive environment, combined with a regulatory framework that emphasizes responsible lending and financial stability, creates a conducive setting for X Financial's continued expansion.

In this dynamic environment, X Financial carves out a competitive niche. While facing formidable rivals like Ant Group, Lufax (LU), and WeBank, which benefit from vast ecosystems and deep integrations, X Financial differentiates itself through agility and a specialized focus on loan facilitation. Its operational efficiency in loan processing and direct borrower-investor connections allow it to compete effectively, particularly in underserved segments. Although it may not match the sheer scale or technological depth of the largest players, X Financial's targeted approach and robust risk management capabilities provide a distinct advantage.

Technological Edge: The AI-Powered Foundation

At the heart of X Financial's competitive strategy lies its profound investment in artificial intelligence, a critical differentiator that permeates its entire operational framework. The company leverages cutting-edge AI models, including DeepSeek, Alibaba's Tongyi Qianwen, and ByteDance's Doubao, to power various functions. This integration is not merely incremental; it is foundational to its operational effectiveness and asset quality.

X Financial's multi-model AI risk management system stands out, delivering over 95% accuracy in identifying early indicators of credit risk through sophisticated contextual analysis and advanced image recognition technologies. This precision in underwriting is a tangible benefit, directly contributing to the significant improvements in asset quality observed across its loan portfolio. Furthermore, AI is extensively utilized in client management, powering advanced customer service robots and intelligent agent assistance, which has led to the replacement of some live agents, thereby reducing future costs and enhancing efficiency. AI also drives targeted marketing campaigns, including AI-generated short videos for platforms like TikTok, optimizing customer acquisition. In software development, AI-driven auto coding tools such as Cursor accelerate development cycles and system optimization.

For investors, this technological prowess translates into a robust competitive moat. The AI-driven efficiencies reduce operational expenses, improve loan performance by minimizing defaults, and enable scalable growth without a proportional increase in human capital. This strategic commitment to AI not only strengthens X Financial's market positioning but also directly contributes to its financial performance and long-term growth strategy by fostering a more resilient and profitable business model.

Financial Momentum: A Story of Disciplined Growth and Profitability

X Financial's recent financial performance underscores the effectiveness of its strategic pivot and technological investments. In the second quarter of 2025, the company facilitated RMB 38.99 billion in loans, marking a substantial 10.9% sequential increase and an impressive 71.4% year-over-year growth. This robust origination volume fueled a total revenue of RMB 2.27 billion, up 17.3% sequentially and 65.6% year-over-year, reflecting disciplined execution and expanding platform capabilities.

Profitability metrics further highlight the company's strong operational leverage. Income from operations increased meaningfully to RMB 675.1 million in Q2 2025, a 45.8% rise year-over-year. Non-GAAP adjusted net income reached RMB 593.2 million, demonstrating robust year-over-year growth of 58.3% while maintaining operating margins near 30%, even with increased borrower acquisition spending. The company's implied return on equity expanded significantly to approximately 27.9% in Q2 2025, affirming the strength and efficiency of its earnings model and its ability to generate high returns on capital.

This momentum builds on a strong first quarter of 2025, where loans facilitated grew 63.4% year-over-year to RMB 35.15 billion, and total revenue increased over 60% year-over-year to RMB 1.94 billion. The total outstanding loan balance, excluding delinquent loans, reached RMB 58.4 billion, growing over 33% from Q1 2024. Asset quality has consistently improved, with the 31- to 60-day delinquency rate improving to 1.16% in Q2 2025 from 1.29% a year ago, and the 91- to 180-day delinquency rate substantially lower at 2.91% compared to 4.38% in Q2 2024. These improvements are a direct result of disciplined borrower screening and rigorous underwriting practices, heavily supported by the company's advanced AI risk management systems.

For the full year 2024, X Financial achieved a record total net revenue of RMB 5.9 billion and net income of RMB 1.5 billion, with total loan volumes reaching RMB 104.9 billion. The average funding cost also improved year-over-year in Q1 2025, supported by an optimized funding structure and sustained commitment from institutional partners. These financial trends collectively demonstrate X Financial's capacity for sustainable, profitable growth, driven by operational efficiency and a strong focus on asset quality.

Capital Allocation and Shareholder Value

X Financial maintains a robust liquidity position, providing the flexibility to fund strategic growth initiatives, invest in technology and borrower acquisition, and return capital to shareholders. The company has demonstrated a strong commitment to shareholder value through both semi-annual dividends and an active share repurchase program.

From January 1, 2025, through August 15, 2025, X Financial repurchased approximately 16.7 million Class A ordinary shares, including 2.3 million ADSs, for a total consideration of approximately USD 47.7 million. The company has fully utilized its previous USD 50 million repurchase authorization and now has approximately USD 68.2 million remaining under a new USD 100 million share repurchase program, effective through November 30, 2026. This ongoing repurchase activity underscores management's confidence in the company's intrinsic value. The Board of Directors further reinforced this commitment by approving a cash dividend of USD 0.28 per ADS for Q2 2025, with payments expected around October 15, 2025.

Management explicitly views the stock as significantly undervalued, despite its appreciation. The CFO noted that the company's 2024 earnings per share of US$4.83, compared to a stock price around $13, suggests a substantial discount relative to peers in the sector. This belief drives the company's preference for share repurchases, aiming to provide an "extra kick" to shareholders and enhance profitability per share, as evidenced by the approximately 14.4% year-over-year decline in the weighted average number of basic shares outstanding in Q2 2025.

Adapting to Regulatory Shifts and Charting the Future

X Financial operates within China's evolving regulatory landscape, a dynamic environment that the company views as a positive force for long-term industry development and sustainable growth. Recent guidance from the National Financial Regulatory Administration (NFRA) emphasizes responsible lending, consumer protection, and financial stability, areas where X Financial remains fully aligned. While evolving regulations may introduce incremental compliance obligations, the company is proactively engaging with authorities and expects to be fully compliant with new regulations before the October 1 deadline.

Looking ahead, X Financial anticipates continued growth, projecting a total loan volume increase of approximately 30% for the full year 2025. This outlook is supported by resilient borrower demand, disciplined execution, and a stable regulatory environment. For the third quarter of 2025, the company expects total loan originations to be in the range of RMB 32 billion to RMB 34 billion. This guidance represents a deliberate moderation from the record Q2 levels, as management prioritizes asset quality and profitability over pure volume growth, a testament to its prudent risk management philosophy.

However, the outlook is not without its uncertainties. Management acknowledges that the fourth quarter's volume remains a "wildcard" due to potential regulatory policy impacts. While the company is prepared technologically to accommodate quick changes, the exact nature of future regulations and their industry-wide "small shocks" remain factors to monitor. Despite these challenges, X Financial's strategic path, rooted in robust underwriting, prudent risk controls, and ongoing operational enhancements, positions it for sustained and profitable growth.

Conclusion

X Financial stands as a compelling investment opportunity within China's online personal finance sector, characterized by its strategic transformation, technological leadership, and unwavering commitment to shareholder value. The company's successful pivot to prime borrowers, coupled with its deep integration of AI across risk management, operations, and customer engagement, has created a powerful engine for high-quality loan facilitation and robust profitability. This is clearly reflected in its strong financial performance, including significant year-over-year growth in loan originations, revenue, and net income, alongside impressive returns on equity and consistent improvements in asset quality.

While the evolving regulatory environment and macroeconomic uncertainties in China present inherent risks, X Financial's proactive compliance efforts and disciplined approach to growth mitigate these challenges. The company's aggressive share repurchase program and consistent dividend payouts underscore management's belief in the substantial undervaluation of its stock. As X Financial continues to leverage its AI-driven competitive advantages and navigate the market with strategic agility, it is well-positioned to deliver sustained long-term value for discerning investors.