Financials Author:Qing Lan Editor:Luke Sheehan Jan 08, 2021 01:02 PM (GMT+8)

The strategies are expected to fuel the company's future.

Maarten van den Heuvel

Image credit“Public access”

This article is Chapter 5 of EqualOcean's comprehensive analysis of Lufax Holding. Explore all the chapters of the report:

Chapter 1: Industry evolution

Chapter 2: COVID-19: Unexpected stimulus

Chapter 3: The race between China's fintech trio: Lufax, Ant Group, JD Digits

Chapter 4: Huge growth potential in markets

Chapter 5: Operation strategy: Capital-light model and unique client segment

Chapter 6: Lufax and Ping An

Chapter 7: Diverse client acquisition channels

Chapter 8: Risks


Chapter 5: Operation strategy of capital-light model and unique client segment

Once the largest (by the transaction volume) peer-to-peer (P2P) lending provider in China, Lufax's credit services can be traced back to 2006, when Ping An Group just started to explore the field. 

In 2011, a company named Lufax was established by Ping An in order to better deploy in the wealth management market. 

In 2014, it restructured the credit business together, marking the official launch of the independent personal finance platform. At the time, Lufax aimed to become a comprehensive exchange place for retail investors investing and financing using P2P products. 

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At the time, the Chinese P2P industry was prosperous but operated disorderly, often becoming the cradle of financial crime. The state requires to reduce the outstanding loan balance, the employees and the offline marketing stores, with clean fund resources and controlled non-performing loan amounts. The requirements destroyed quite a few P2P platforms, foretelling the industry's end. With the stricter regulations from the state on P2P business in the ensuing years, Lufax started its transformation and stripped the P2P sector down in 2016 before the final bust. 

The P2P and B2C products stop financing for the wealth management sector, the company moved the emphasis to agent sales. As a reflection, the technology platform-based income is taking up an increasing percentage since 2017, from 61.88% to 83.40% in the first half of 2020, and the net interest income decreased from 26.8% to 11.7% from 2017 to 1H 2020. The balance of P2P and B2C products dropped from CNY 337 billion in 2017 to CNY 48 billion by the end of June 30 of 2020 with the percentage that takes up in the wealth management balance from 72.9% to 12.8%.

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Unique client segment: competitive landscape 

Lufax is similar to Ant Group and JD Digits that generate profit through the large traffic. Different from the latter two, Lufax doesn't purely depend on the quantity, but also the quality of every customer. Without 2B business, which is one of the priorities for other fintech platforms, Lufax provides deeper and more specialized services only to affluent individuals. All the strategic aspects, like client acquisition, operation, risk management and products, are designed based on the unique target client segment.

For retail credit business, the main borrowers are the high-quality small business owners who have difficulties in seeking relatively larger financing size.Over 70% of borrowers have no unsecured bank loans in the past five years, therefore making it hard to apply for loans from traditional FIs. Also, from the internal finance providers, around CNY 10,000 on average and CNY 30,000 on maximum can be issued, which only meets 10% of their demands. Lufax, on the other hand, is willing and able to provide a larger amount of loans to these people. Thus, the company is facing a relatively large but uncompetitive market in the credit business.  

On the other perspective, the larger-ticket-loan strategy is expected to provide continuous profitability. As of June 30, 2020, Lufax had an average ticket size of CNY 146,513 for unsecured loans, and CNY 422,398 for secured loans. In China's retail credit market, large tickets took up 24% of the market but contributed 50% of the profit, and large to medium loans generated 77% profit, by the end of 2019. 

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Also, with the increase in the average ticket size in the future, the client acquisition costs will decrease accordingly as well. 

In wealth management, Lufax serves salaried clients with 47% of the AUM comes from clients with over CNY 1 million invested. With the increase in the discretionary income in China and the expansion of the middle-class population, more diverse and personalized investment demands evolved. Also, wealthier clients are increasingly investing in the platform with stable growth, which is likely to be continued in the future. 

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However, the wealth management needs among these affluent populations are underserved, as they don‘t meet the minimum requirements of private banking services in traditional FIs and are not targeted by other fintech platforms that strategize on a traffic-generating model. Also, other players in the non-traditional financial services market mostly offer smaller tickets that fit better with their e-commerce platforms. Lufax provides suitable investment solutions with long-term technology-based products to meet these previously neglected demands.

Next Chapter we will continue to discuss the growth drivers for Lufax generated by the special relationship with the Ping An Group.