Lufax Holding Ltd (NYSE:LU) is a number one Chinese language monetary companies supplier specializing in offering small enterprise house owners with entry to a number of mortgage merchandise.

They supply numerous monetary merchandise beneath completely different entities. As an example, Puhui is Lufax’s core model for enabling retail credit score, primarily specializing in unsecured and secured loans for small companies. LujinTong, alternatively, is a referral service for connecting debtors with banks. The fastest-growing enterprise for Lufax most not too long ago has been shopper finance, the place it lends cash to debtors seeking to make discretionary purchases or meet money circulate wants.

Its efficiency has been disappointing since its debut on the NYSE in 2020. Upon elevating round $2.36 billion, The inventory fell about 14.3% on debut day. Since then, the inventory has been testing new lows yearly. As of at this time, Lufax’s all-time worth return is -95%. The share worth has gone from $51 per share on debut day to the $2.5 worth stage at this time.

I provoke my protection with a purchase ranking and a 1-year worth goal of $4.1, a possible upside of 60% from at this time’s stage. Whereas the danger of a protracted macro slowdown in China might stay, I imagine that Lufax’s worth stage presents a sexy buy-and-hold alternative for buyers.

Catalyst

As a begin, I take into account Lufax’s present worth stage engaging, which presents a catalyst driving a buy-and-hold upside. Regardless of the macro weak point in China, Lufax continues to be one of many main fintech corporations within the nation with a robust steadiness sheet and a stable place to seize alternatives post-recovery – Lufax at this time has over $5 billion of money and big monetary conglomerate Ping An as a serious shareholder.

Moreover, I view the takeover of PAOB and the shift of focus in direction of asset high quality as medium to long-term catalysts.

My view is that the weak demand surroundings in China presents an absence of visibility for buyers, suggesting that diversifying enterprise alternatives and bettering fundamentals pushed by enhancing asset qualities ought to develop into a smart high precedence for Lufax.

The PAOB acquisition, within the meantime, might current an attention-grabbing catalyst to observe because of its probably sturdy synergies with Lufax’s fast-growing shopper finance enterprise.

volume of new loans — quantity of recent loans (20-F)

Since current years, shopper finance has been Lufax’s fastest-growing enterprise by way of new mortgage quantity, even through the weak demand interval at this time. New mortgage quantity for shopper finance grew by 9x between 2020 and 2022, and as of Q3 2023, had grown by over 48% YoY and 15% QoQ.

On the identical time, I imagine that Lufax’s give attention to sustainable development in current occasions means that it’s going to proceed to discover higher methods to enhance its mortgage economics whereas holding them aggressive, resembling via accessing decrease funding prices. As per the CEO’s remark within the Q3 earnings name, optimizing funding prices is crucial to attaining good mortgage economics:

Our funding prices, via the Puhui assure mannequin, once we accomplice with banks and different belief corporations, it is nonetheless rising round 5.5%, on common, however once you have a look at the buyer finance enterprise, that funding price is about 3.5%, 3.6%. After which if you happen to have a look at the brand new enterprise combine within the third quarter, the place our shopper finance made up above 40%, of all new enterprise, you may see as that change within the mixture of the enterprise happens, it creates an total decrease funding prices as properly. So there’s nonetheless extra room we imagine, within the present rate of interest surroundings, right here in China, to optimize funding prices on the assure mannequin. And we’ll be working via that with our financial institution companions.

Supply: Q3 earnings call.

In my view, that is the place the combination with PAOB can unlock worth. Via PAOB, I count on Lufax to have the ability to entry decrease price of funding from PAOB prospects’ deposits for its loans, successfully rising web curiosity margin regularly. Ultimately, as shopper finance continues gaining the next share within the income combine, I count on Lufax to profit from top-line development acceleration and margin expansions.

Aside from the fast-growing shopper finance mortgage merchandise, Lufax seems to have been making an attempt to draw debtors by regularly providing decrease APRs throughout its mortgage merchandise in current occasions. Due to this fact, I imagine that decrease funding prices ought to give Lufax an choice to make its shopper finance APRs much more aggressive and drive increased top-line development with out pressuring unit economics.

One other solution to unlock top-line development could be via channel growth. For instance, Lufax could make its shopper finance merchandise accessible inside PAOB’s app or on-line advertising channel. Up to now, these have already been the important thing buyer acquisition channels for the buyer finance enterprise.

Threat

Although the present share worth appears engaging, I view extended weak mortgage demand in China as a key danger issue. Whereas I discover it unlikely for the inventory to most likely commerce considerably decrease from the present stage, I’d count on increased volatility and depressed worth ranges for the following 6 – 12 months not less than. As such, I’d most likely solely advocate the inventory for affected person development buyers preferring a buy-and-hold technique.

One other factor I recommend buyers to observe carefully could be the function of the buyer finance enterprise in Lufax’s total portfolio, particularly given its development and rising share within the new mortgage quantity. As an example, whereas shopper finance supplies a welcome hedge throughout China’s financial slowdown at this time, its development prospect post-recovery might stay unsure, for my part. Furthermore, the unanticipated weak point in Lufax’s core mortgage enterprise on the time of weak macro at this time additionally highlights the necessity to monitor how the administration positions shopper finance inside their product combine.

Valuation/Pricing

My 1-year goal worth for Lufax is pushed by the next assumptions for the bull vs. bear situations:

Bull situation (50% likelihood) assumptions – Lufax to ship FY 2023 EPS of $0.64, a YoY decline of -71.6%, based mostly on analysts’ low-end estimate. I additionally mission QUIK to ship FY 2024 EPS of $1.42, realizing a YoY development of 122%, implying a big enchancment in revenue margin, probably because of the funding price catalyst from PAOB synergies. I assume a P/E growth to 10x to account for not solely enchancment in top-line development, but in addition earnings high quality from an rising share of better-quality short-term shopper finance loans throughout the product combine. I view my selection of P/E as reasonably conservative nonetheless. Lufax final traded at 10x P/E in direction of the top of 2023, a month after the Q3 earnings name the place the administration signaled the anticipation of bettering mortgage high quality but sustained macro weak point.
Bear situation (50% likelihood) assumptions – Lufax to ship FY 2023 EPS of $0.3, on the lowest finish of the analysts’ estimates. I additionally mission Lufax to see just about the identical outlook in FY 2024. Accordingly, I additionally count on P/E to remain on the present stage of 6x, adopted by extended macro weak point.

price target forecast — worth goal forecast (personal evaluation)

Consolidating all the data above into my mannequin, I arrived at an FY 2024 weighted goal worth of $4.1 per share, suggesting a 60% potential upside from the present worth stage of $2.5.

I give the inventory a purchase ranking. As I mentioned briefly within the prior part of this evaluation, the present worth stage presents a sexy purchase alternative. In the course of the bear market in China at this time, Lufax’s steadiness sheet stays sturdy, successfully positioning it properly for restoration. Moreover, the administration has additionally been taking an lively stance to enhance the shorter-term outlook.

Conclusion

Lufax dominates China’s small enterprise monetary scene, providing loans and companies via manufacturers like Puhui and Lujintong. Nonetheless, regardless of this management, their inventory plummeted 95% since its debut, hovering at $2.5 at this time. Whereas dangers stay, the presence of some catalysts might drive long-term upside. I imagine Lufax’s present worth presents a sexy buy-and-hold alternative. I price the inventory a purchase with a goal worth of $4.1, projecting a 60% upside from the present stage.