AsiaVision/E+ via Getty Images
Elevator Pitch
My rating for Lufax Holding Ltd’s (NYSE:LU) shares is a Sell.
I touched on LU’s “asset quality and regulatory issues” in my earlier article for the stock, written on September 6, 2022. In this latest update for Lufax, I evaluate how the company has performed in the most recent quarter. Both LU’s top line and bottom line fell short of analysts’ expectations, and the company’s full-year guidance has been reduced significantly. Therefore, I downgrade my rating for LU’s shares from a Hold to a Sell.
Headline Numbers Weren’t Encouraging
Lufax released the company’s earnings for the third quarter of this year last week on November 23, 2022 after the market closed. LU’s share price plunged by -20% from $1.75 as of November 23, 2022 to $1.40 as of November 25, 2022 (November 24, 2022, was a holiday).
The company’s poor post-results announcement stock price performance won’t be a surprise at all, if one reviews Lufax’s third quarter headline financial numbers.
LU’s top line contracted by -17.2% YoY from RMB15.9 billion in the third quarter of last year to RMB13.2 billion for the most recent quarter. Lufax had previously achieved positive top line growth rates of +21.8% YoY and +3.1% YoY for Q3 2021 and Q2 2022, respectively. Moreover, the actual Q3 2022 top line for Lufax turned out to be -6.6% lower than the sell side’s consensus projection of RMB14,127 million in local currency terms according to S&P Capital IQ data.
The company’s Q3 2022 bottom line was even more disappointing. Lufax’s net income for the third quarter of 2022 was RMB1,355 million, which was roughly half of the analysts’ consensus net profit forecast of RMB2.7 billion in domestic currency terms. The Q3 2022 net profit for LU represented a -67.1% drop as compared to the company’s Q3 2021 net income of RMB4,115 million.
In the subsequent sections, I assess the key metrics for Lufax’s two key businesses in the third quarter of this year.
Retail Credit Facilitation Business
LU’s retail credit facilitation business saw new loans facilitated decrease by -27.9% YoY and -4.4% QoQ to RMB124 billion in the third quarter of 2022.
It is apparent that the weakness in the Chinese economy had resulted in a substantial drop in loan demand. In my early-September 2022 write-up for Lufax, I had already cautioned that “small business owners”, LU’s main clients for its retail credit facilitation business, will suffer “due to a lack of scale and limited financial resources.” Indeed, Lufax’s focus on “small business owners” as its target customers was negative for the company’s Q3 2022 performance, as reflected in the lower new loans facilitation figure.
Furthermore, Lufax also witnessed a decline in the take rate for its retail credit facilitation business from 9.7% in Q3 2021 and 8.6% in Q2 2022 to 7.8% for Q3 2022. Profit before tax-to-loans ratio for LU also halved from 3.2% in the second quarter of 2022 to 1.6% for the most recent quarter.
More significantly, asset quality stays as a major worry for Lufax’s retail credit facilitation business. LU’s Days Past Due or DPD 30+ delinquency rate for total loans, general unsecured loans, and secured loans increased by +50 basis points, +60 basis points, and +20 basis points to 3.6%, 4.2%, and 1.6%, respectively as of end-Q3 2022 on a QoQ basis.
Wealth Management Business
Lufax’s wealth management business also didn’t do well in the third quarter of the year, which is likely attributable to the volatility in financial markets.
Client assets for LU declined by -2.0% QoQ from RMB425 billion as of the end of the second quarter of 2022 to RMB417 billion as of end-September this year. The wealth management segment’s take rate also decreased from 43.1 basis points for Q2 2022 to 34.7 basis points in Q3 2022.
Based on the mid-point of the management’s end-2022 client asset guidance at RMB410 billion, Lufax’s client assets for its wealth management business are expected to shrink further in the fourth quarter of the current year.
The Outlook Is Bleak
Looking forward, LU lowered the midpoint of its full-year fiscal 2022 new loans facilitation and bottom line guidance by -15% and -34% to RMB492.5 billion and RMB8.7 billion, respectively. Also, Lufax’s FY 2022 earnings guidance implies that the company will be loss-making in Q4 2022, as the company generated a net income of RMB9.6 billion for the first nine months of the year.
It is also noteworthy that LU highlighted at its Q3 2022 results briefing that approximately “2/3 of our existing (retail credit facilitation) business is in cities and regions” which it expects to be “more resilient in recovery.” In other words, Lufax is acknowledging that its retail credit facilitation business is unlikely to see a rapid and significant turnaround in a third of the cities or markets (e.g. lower-tier cities or economically weak markets) it operates in, even when the Chinese economy recovers.
Lufax also indicated at its third quarter earnings call that “a notable improvement in our bottom line performance is more likely in 2024 than in 2023.” The management’s views are now incorporated into the sell-side’s consensus financial estimates. As per S&P Capital IQ data, analysts now only expect LU’s net profit to exceed 2020 levels in two years’ time or by FY 2024.
Concluding Thoughts
I am rating Lufax’s shares as a Sell. LU’s Q3 2022 performance was a big disappointment. Also, the outlook for Lufax isn’t very promising, with a bottom line recovery only anticipated to occur in 2024 rather than 2023.
Be the first to comment