Financials Author: Qing Lan Editor: Luke Sheehan Dec 20, 2020 11:08 PM (GMT+8)

The company is a value creator in the Chinese credit market.

Mathieu Stern

● It is dominating the high-end segment.

● The diverse and well-balanced client acquisition strategy provides sustainable growth.

● We set the price target at USD 22.9 per ADS, 61.8% higher than USD 14.15 on December 9, 2020.

Lufax (LU:NYSE), founded in Shanghai in 2011, is a fintech affiliate of Ping An Group that provides personal financial services as an agency and dealmaker to help financial institutions (FIs) connect to retail clients. Lufax launched its New York Stock Exchange public offering on October 30, 2020, raising USD 2.36 billion.

Here, we discuss the company's business model and strategies, focusing on its internal capabilities and market positioning, also presenting our financial projections and valuation model.

Background

Once the largest (by the transaction volume) peer-to-peer (P2P) lending provider in China, Lufax started to strip off P2P business in 2016 and entirely abandoned it in 2019, transforming into a capital-light financial service agency. Profits in the credit sector are generated by matching loanees and fund providers at a relatively low risk exposure rate – the company only bears 2.8% credit risk exposure, per its prospectus.

The credit segment of Lufax’s revenue has achieved a CAGR of 26.60% from 2017 to 2019. Meanwhile, the wealth management sector suffered a contraction due to the shrinkage of P2P and B2C businesses and the decrease in own-capital lending. Overall, the income of the company has been showing robust growth in the past four years.

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Competitive landscape: unique segmentation approach

While many other fintech platforms in China are moving towards serving corporate clients, Lufax targets affluent individuals to provide them with deeper and more specialized services.

For the firm’s retail credit business, the main borrowers are the small business owners with high credit ratings. Over 70% of the borrowers have had no unsecured bank loans in the past five years, which makes it hard to apply for loans from traditional FIs. Besides, they normally can borrow around CNY 10,000 on average from the alternative loan providers, which only meets 10% of their demands. Lufax thereby is facing a relatively large but uncompetitive market, as it is willing and able to provide larger amounts. This large-ticket-loan strategy protects the company’s continuous profitability in the burgeoning Chinese market.

In the wealth management segment, Lufax serves salaried customers with 47% of its AUM coming from clients with over CNY 1 million invested. Driven by the expansion of China’s middle class, the demand in this sector is constantly growing. At the same time, neither private banks, nor non-traditional financial service providers can meet this demand. Lufax is filling the void with its diversified products, nominally monopolizing the emerging domain. Having developed an arsenal of technical and business capabilities (we go over them below), the company is likely to benefit from the recent uptrend in China’s fintech market.

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Diversified client acquisition channels

Very different from most fintech platforms that largely depend on the Internet, Lufax acquires clients through multiple channels.

79% of its manpower is involved in sales and marketing, with a large offline sales team that includes over 56,000 full-time employees based in over 270 cities countrywide. This magnitude allows the company to source the most qualified customers. By comparison, Ant Group and JD Digits – China’s largest fintech companies – have only 14% and 19% of employees focusing on marketing.

Apart from that, Lufax leverages its parent firm's (Ping An Group holds 42% of the fintech) ample financial database and 210-million customer pool to source high-quality clients. Over the past years, the Ping An ecosystem has been providing a significant portion of Lufax’s new clients – from 33% and 23% in 2017 to 45% and 37% in 2020, for the credit and wealth management sectors respectively. The two firms’ synergies reinforce the customer stickiness.

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Financials forecasts and valuation

● In the credit sector, we believe that the loan amount will grow at a high speed along with the market expansion; the loan size and transaction numbers will increase steadily. The loan take rates for all products are expected to decrease due to the regulation-related issues.

● In the wealth management sector, we expect the total client assets to grow significantly, with both the investment per customer and the number of active investors gradually increasing.

A five-year revenue CAGR of 16% from 2020 to 2025 has been projected, which is mainly contributed by the expanding outstanding loan balance and increasing AUM. The net profit is expected  to grow rapidly, with a five-year CAGR of 25%.

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We adopt both the P/E multiple valuation and the discounted FCF valuation to estimate Lufax's target share price. For P/E-based valuation, we apply a 70%/30%/10% weights on the average P/E ratios ofChinese Internet companies/global public credit agencies (excluding banks)/global asset management firms. The result – 20.4x  – is the target level for 2022, leading toa price target of USD 22.6 per ADS. For DCF valuation, we address a long-term growth rate of 5% and a beta of 1.20, resulting in the per-ADS price of USD 23.7. The market capitalization of Lufax is expected to reach USD 55.96 billion and USD 58.97 billion, respectively.

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By giving the two results 70% and 30% weights, we derive the twelve-month target price of USD 22.9 per ADS, 61.8% higher than USD 14.15 on December 9. 

Lufax is a buy.