baona
Elevator pitch
I value Lufax Holding Ltd (NYSE:LU) [6623:HK] shares as a Holding.
I previously reviewed LU’s results for the second quarter of the current year with me Writing of August 24, 2023. In this latest update, I draw attention to Lufax’s financial performance below Q3 2023 expectations.
I continue to have a neutral view of Lufax. On the one hand, I am encouraged by LU’s latest diversification move regarding the planned acquisition of a virtual bank in Hong Kong. On the other hand, I fear that LU’s fourth quarter results may again fail to meet analysts’ expectations.
LU’s top line and Q3 bottom line were below consensus estimates
Lufax published its third quarter 2023 financial results on Monday November 13 after trading hours. Investors don’t seem to be happy with the company’s recent quarterly performance, as LU’s share price fell a significant -4.9% (source: Looking for Alpha price data) during after-hours trading on Monday. LU’s share price weakness following the post-earnings announcement is likely attributable to third-quarter results below its expectations.
Lufax’s current Q3 2023 top line, also referred to as total revenue by the company in its announcements, was RMB 8,050 million, which was less than the market consensus estimate of RMB 8,799 million (source: S&P Capital IQ) by -8%. This means that the total revenue of LU had fallen by -39% annually and -13% in the third quarter of this year.
LU’s third-quarter top line miss was caused by both tough economic conditions for mainland Chinese businesses and the company’s cautious approach to credit easing. In the company Third quarter results press release, Lufax noted that “demand for high-quality loans from SBOs (small business owners) remained weak.” LU also added in the latest quarterly announcement that it is “emphasizing prudent decision-making” as reflected in its focus on “asset quality over quantity.”
Net profit for Lufax fell by -90% year-on-year from RMB 1,355 million in the third quarter of last year to RMB 131 million for the third quarter of the current year. LU recorded a significant earnings miss of -34% in Q3 2023, as the sell-side consensus net income forecast was much higher at RMB 200 billion based on S&P Capital IQ data.
Negative operating leverage led to a larger -34% bottom line loss for LU, compared to Lufax’s -8% top line loss.
Lufax cited “cost optimization efforts” in its third-quarter results release, but some of its expenses fell to a lesser extent than the contraction in its top line for the most recent quarter. LU’s total revenue decreased by -39% YoY in Q3 2023, but the company’s operating and servicing expenses and general and administrative expenses fell by only -8% and -16%, respectively, in Q3 2023. of the third year for the third quarter. This suggests that some of the general and administrative costs and operating and servicing costs are fixed or semi-variable in nature.
Eyes on Virtual Bank’s M&A deal and Fourth Quarter Forecast
Following the announcement of LU’s Q3 2023 results, I expect the Lufax virtual bank acquisition and its outlook for Q4 2023 to be in the spotlight.
On the same day (November 13) of the publication of the results of the third quarter, LU also announced that it had proposed to buy a virtual bank for HK$933 million ($120 million). As detailed in this announcement, the virtual bank is known as “Ping An OneConnect Bank (Hong Kong) Limited,” which is “the first virtual bank to provide flexible and efficient banking services with a focus on small and medium-sized enterprises in Hong Kong.” .
Lufax’s latest move to acquire a virtual bank is in line with the company’s plans to diversify away from its core SBO segment, which has been hurt by the challenging operating environment for Chinese businesses.
LU’s consumer finance business saw new loan sales volume grow by +49% YoY (source: quarterly earnings release) in Q3 2023. Lufax also noted in third quarter earnings call that consumer finance represents 40% and 11% of 3Q 2023 and 9M 2023 new loan sales, respectively. This suggests that the company’s continued diversification efforts in areas such as consumer finance are starting to pay off.
Looking ahead, the addition of Ping An OneConnect Bank to LU’s business portfolio will further reduce Lufax’s dependence on both the SBO segment and the mainland China market. According to management commentary at the company’s third quarter 2023 results conference, Ping An OneConnect Bank is the third largest virtual bank in Hong Kong in terms of asset size.
On the other hand, there is a real risk that LU will disappoint the market again with its Q4 2023 results, which are expected to be announced in mid-March next year (source: S&P Capital IQ).
Mainland Chinese intermediary Chinese Renaissance Papers published a research report (not publicly available) titled “China Online Lending Expert Calls” on October 31, 2023, which shared insights from a presentation by a professional working in a Chinese online bank. In that Chinese Renaissance Papers The report, the expert from an internet bank operating in China underlined his expectation that “new loan volume 4Q23 (for the Chinese online lending industry is likely) to lower QoQ as lenders seek to ensure the quality of loan given the lower credit quality of new borrowers.” The expert estimated the “30-day delinquency rate of new borrowers obtained from online lending platforms” in making this weak fourth quarter forecast.
Given that Lufax had suffered a third-quarter top-line loss due to an emphasis on asset quality rather than loan volume growth, it is reasonable to be concerned that LU’s fourth-quarter top-line performance it could also be a negative surprise for the market.
Separately, there may be less leeway for LU to increase its future profitability by reducing the number of sales personnel going forward. In the company’s third-quarter results call, Lufax acknowledged that “we do not have any further optimization plans for (our) sales team.”
Closing thoughts
I have a positive opinion of Lufax’s recently announced plans to acquire through a virtual bank, but I am concerned that LU’s fourth quarter results will not meet market expectations. As such, my decision is to maintain my Hold rating on Lufax.