Lufax Holding Ltd. (LU), which operates a personal financial services platform in China, had a rough stock market debut on October 30 last year. On its first trading day, the stock opened at $11.60 per American Depositary Share (ADS), which was lower than its IPO price of $13.50 per ADS.
However, a resilient business model has helped the stock gain 18% so far this year to close yesterday’s trading session at $16.76. But despite operating through its unique ‘Hub and Spoke’ business model, we think its future looks uncertain based on several factors.
Let’s take a closer look at the factors that could influence LU’s performance in the near term:
The company has displayed its business resilience over the long- and the short term. LU’s revenue has grown at a CAGR of 14.1% over the past three years. Its EBITDA and EPS grew at CAGR of 5.4% and 25.9%, respectively, over the same period.
For the fourth quarter ended December 31, 2020, the company’s total income increased 5.9% year-over-year to $2.04 billion. Its net profit increased 17.4% year-over-year to $436.4 million. And the company reported earnings per ADS of $0.19, which surpassed the Street’s estimate by 26.7%.
Series of Regulatory Issues
Most digital finance platforms saw increasing numbers of users amid the COVID-19 pandemic. This is because people spent more time at home and had to rely on such platforms for a variety of financial transactions, including making simple payments Even though this trend is expected to continue this year and beyond, LU is facing a number of problems amid uncertainty over China’s consumer regulations.
The company had to postpone an issue of its shares in Hong Kong that was slated for the first half of 2018 due to the aforementioned regulatory uncertainty. Moreover, LU had to do away with its peer-to-peer lending (P2P) business model because tougher regulations were introduced in 2017 that required P2P firms to record the flow of funds between various parties and accounts, provide reports on online deposits, and establish an accounting system with well-defined and standardized fund deposit clearing. In addition, lenders, borrowers and guarantors also had to be registered.
Last November, the company released a statement regarding the Interim Measures on Internet Micro Lending Loans, a consultative paper that was jointly issued by the China Banking and Insurance Regulatory Commission and the People’s Bank of China. LU does not expect the paper to have a material impact on the company’s business operations, but future regulations could require the company to re-evaluate its position.
Possible Upcoming IPO of LU’s Rival Ant Group
The Ant Group’s IPO, which would have been the biggest in history, was pulled by regulators just days before it was due to begin trading in Shanghai and Hong Kong in November 2020. However, it reportedly now has a deal with the regulators and is set to become a financial holding company. This could prove to be a threat for LU. The Ant Group is an affiliate company of the China’s Alibaba Group
Although LU is backed by one of China’s largest insurers, Ping An Insurance, Ant Group is backed by Alibaba Group Holding Ltd (BABA), which is known as the Amazon of China. So, it remains to be seen if LU can stay afloat amid stiff competition.
Our POWR Ratings are in sync with LU’s uncertain outlook
LU has an overall rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, LU has a grade of C for Value. This is consistent with the stock’s trailing-12-month p/s of 4.78x, which is slightly higher than the industry average of 3.27x.
The stock also has a grade of C for Growth given the modest earnings and revenue growth that analysts expect.
Click here to access LU’s ratings for Momentum, Stability, Sentiment and Quality.
In the C-rated, 15-stock Foreign Consumer Finance industry, LU is ranked #8.
There are 5 top-rated stocks in the same industry which are expected to fare better than LU in the near term.
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LU shares were trading at $16.93 per share on Wednesday morning, up $0.17 (+1.01%). Year-to-date, LU has gained 19.23%, versus a 4.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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