Fintech Lufax seeks dual listing as pandemic hits profits

Ping An-backed Lufax has applied to list its shares in Hong Kong as well as in the US, following in the footsteps of dual-listed fintech firms OneConnect and 360 DigiTech.

In October 2020, two Chinese fintech stars were ready for blockbuster IPOs. Ant Group’s share sale was canceled at the last minute, but the competitor managed to go public in New York as planned, just days before Chinese regulators launched a crackdown on online lenders.

Online loan facilitator Lufax Holding Ltd.(NYSE:LU), a subsidiary of Ping An Insurance (OTCPK:PNGAY; 2318.HK; 601318.SH), is now seeking to list shares in Hong Kong as well as the US on a dual-primary basis, while an IPO by Ant Group, the finance arm of The Alibaba Group (BABA; 9988.HK), is still being processed.

Lufax is 41% owned by Ping An and draws on credit guarantees from the insurance group for loans to small businesses, which have suffered during the pandemic. Although regulatory action did not derail the listing in the US, the financial platform remained under intense scrutiny along with other online financial firms over the past two years.

In January, China’s central bank confirmed that 14 major platform companies, including Lufax, Ant Group and 360 DigiTech (QFIN;3660.HK), had completed a necessary restructuring process. Lufax wasted little time in applying on February 1 for a dual primary listing In Hong Kong by way of introduction, a process of placing already issued shares that do not provide any additional funds.

Lufax was the second largest provider of non-traditional financial services in China as of the middle of last year, with nearly 18% of the market for outstanding loans to small and micro enterprises, according to a report cited in Lufax. preliminary prospectus. The top five players together had around 68% of the relatively concentrated market.

Revenues have been affected by the Covid pandemic. Lufax reported revenue of 52 billion yuan ($7.67 billion) in 2020, rising to 61.8 billion yuan a year later and falling to 45.8 billion yuan in the first nine months of last year. The profit came in at 12.3 billion yuan in 2020 and 16.7 billion yuan in 2021, while the first three quarters of last year saw a profit of 9.58 billion yuan. Nine-month revenue was down 0.4% on the same period last year, while profits fell almost 31% as the Covid-19 outbreak disrupted business across China. The company has forecast a net loss for the fourth quarter.

Pandemic problems

Small and micro enterprises have always been a crucial engine for China’s economic growth. By the end of 2021, China had around 140 million such enterprises generating more than 60% of GDP. Meanwhile, Lufax had 6.6 million small and micro business customers as of the end of September last year, with their total credit value of 63.65 billion yuan.

But growth was hard pressed during the pandemic, as many small businesses could not operate remotely, instead relying on customers visiting their premises. Strict pandemic controls took a toll on business activity, reducing companies’ willingness to borrow and their ability to service their debt. As a result, providing relief to these companies is a priority for the post-Covid recovery phase.

According to Lufax, 85% of new credit in the first nine months of last year, excluding consumer financing, went to small and micro-enterprises. Results came under pressure as more customers fell behind on payments, while losses from credit write-offs piled up and credit costs rose.

During the nine-month period, the company’s total additional lending fell 15.9% year-on-year to 417.6 billion yuan. Small and micro enterprises reported more defaults and credit impairment losses grew to 10.29 billion yuan, 150% higher than the same period last year and equivalent to 22.5% of revenue in the period.

In order to reduce the risk exposure on the lending portfolio, Lufax made less of its own capital available for lending. But the business faces regulatory and political uncertainty as Chinese authorities seek to limit risk in the online microloan sector.

Lufax said in the prospectus that it had suspended loan financing for three microloan subsidiaries since Chinese regulators issued a consultation document last year on rules for online microloans. It shut down its micro-loan operations in the southern city of Shenzhen and in Hunan province. It also switched to offline micro-lending at its operations in the western city of Chongqing.

Currently, Lufax works with commercial banks and trust funds under a co-financing model, with credit insurance from Ping An Property & Casualty Insurance and its subsidiary Ping An Puhui Enterprises Management on co-financed loans to meet the risk management requirements of its capital providers. Ping An Property & Casualty Insurance provided insurance or guarantees on about 71% of outstanding loans managed by Ping An Puhui by the end of September last year. Data on the Tianyancha business information website show that Ping An Puhui has subsidiaries in 29 Chinese provinces and is a key source of credit enhancement for Lufax’s loans.

Facing political risks

However, a central bank decision in 2021 could hinder Ping An Puhui’s efforts to provide financing guarantees across provincial borders through a network of subsidiaries. The central bank said six types of financial institutions, including financial guarantee companies, should be considered local institutions, meaning they are in principle not allowed to conduct interprovincial business. Businesses operating across provincial borders will have to follow transition plans developed by financial regulators.

Lufax said it was unclear when the rules would take effect and that financing guarantee companies may be required to obtain additional licenses or approvals.

In addition, companies that use data sharing to investigate personal credit are required by law to obtain licenses. That’s why Lufax and 360 DigiTech have been work hard to be certified. Lufax said regulations affecting the credit investigation sector are constantly evolving and open to interpretation. If the business of enabling private credit falls within the scope of credit investigations, the company will have to change its business model, incurring costs that would damage the economy.

Regulatory policy poses the biggest risk for Lufax, followed by exposure to the overall economy, as is the case with other financial platforms. With a current valuation of $6.5 billion and an optimistic estimate of zero earnings for the fourth quarter, the company would have a price-to-earnings (P/E) ratio of 4.6 times, close to 4.8 times for 360 DigiTech with a smaller but similarly structured portfolio. When the stock debuts in Hong Kong, the market will be looking to see if investors are willing to increase its value.

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Editor’s note: The summary points for this article were selected by the Seeking Alpha editors.