(26 Pages, 22 graphs and tables)

Listen to analyst’s audio summary

l  Ping An Group’s strong offline presence, sales team, and Lufax’s data/technology advantages ensure that Lufax has more advantages in offering unsecured loans to small and medium-size enterprise owners.

l  Lufax has successfully retained most of its asset management clients after product restructuring, and we believe it will also benefit from higher penetration of the online wealth management market.

l  We estimate that Lufax’s total income/non-IFRS NI will reach RMB 63.1bn/16.9bn in 2021, representing 21%/24% YoY growth. Initiate with BUY and TP US$ 17.5. Our TP implies 15X PE/2.3X PB in 2022.

 

Credit facilitation provides unique value

The majority of Lufax borrowers are small and medium-size enterprise owners. It provides unique value to these owners by offering fast/high ticket-sized/unsecured loans, which both traditional financial institutions and online peers failed to do. Most merchant banks featured a long application process and requirement for collateral for small and medium enterprise owners.

 

Wealth management back on track

The negative impact of P2P products has ended, and there is much potential for the Lufax wealth management business: 1) Lufax has successfully retained investors despite not offering P2P products. Its AUM barely changed. (RMB 369bn in 2018 and RMB 375 bn in 2020). 2) Lufax still has a wide reputation among middle-class investors. Contribution to AUM from investors with investments of more than RMB 300k increased from 73% in 2018 to 76% in 2020. 3) Lufax will be able to trade mutual funds on behalf of clients after it acquires an investment advisor license.

 

Regulatory guidance may lead to sector consolidation

In September 2020, China Supreme Court has guided the upper limit for private lending to be 4X Loan Prime Rate (LPR), which has a positive impact for Lufax: 1) As a financial institution with a consumer finance license, Lufax’s business may not be defined as “private lending” and 4X LPR may not be applied. 2) Small loan companies typically feature a higher operating cost level than big players like Lufax. Most companies set APR as high as 24-36%.

Click to download the full report