The Vanishing Golden Era Of China’s Fintech Companies – Analysis

By Wei Hongxu*

Recently, Lufax, an internet finance marketplace headquartered in Shanghai, officially applied for listing on the Hong Kong Stock Exchange and achieved dual listing of US stocks and Hong Kong stocks by way of introduction. Judging from the reason for Lufax’s “return” to Hong Kong stocks, the market generally believes that it is to avoid the geopolitical risk of “financial decoupling” between the United States and China.

Since it landed on the Hong Kong stock market by way of introduction, Lufax’s listing on the Hong Kong stock market will not bring new financing. Some market institutions believe that the company hopes to use different market valuations to boost its market value. However, in the context of global liquidity contraction, the Hong Kong stock market environment is no longer what it used to be, and the attitude toward financial technology companies has also undergone tremendous changes. Compared with when it landed on the New York Stock Exchange in 2020, its market value has dropped from the peak of USD 48 billion to the current approximately USD 6.3 billion, a drop of more than 80%. Considering its performance in the U.S. stock market, whether Lufax can be recognized by Hong Kong stock investors does not spell much optimism.

Once the leader in the P2P industry, after the bubble burst, Lufax has now completely settled its existing P2P online loans and transformed from an internet financial platform to an inclusive financial one. It aims to become a new fintech enterprise that provides services for small and micro enterprises. However, this has also made it look less like a technological company and more like a conventional financial enterprise. As a result, it now has lesser ideas that can attract attention.

Judging from the quarterly report of the first three quarters of last year, Lufax’s performance has declined sharply. The total revenue in the first three quarters has dropped from RMB 15.924 billion in the same period in 2021 to RMB 13.193 billion, a year-on-year decrease of 17.2%; The drop reached 67.1%. The scale of its new loans also declined in 2022, reaching approximately RMB 417.6 billion in the first nine months of 2022, a year-on-year decrease of about 15.94%. The loan balance dropped from RMB 661 billion in 2021 to RMB 636.5 billion in the first nine months of 2022. Its loan delinquency rate is also rising. According to its prospectus, from 2020 to the first nine months of 2022, Lufax’s overdue rates of more than 30 days were 2.0%, 2.2%, and 3.6%, respectively, and the overdue rates of more than 90 days were 1.2%, 1.2%, and 2.1%, respectively. At the same time, the company’s credit impairment losses continue to expand. In 2020, 2021, and the first three quarters of 2022, the figure was RMB 3 billion, RMB 6.6 billion, and RMB 10.3 billion respectively, accounting for 5.8%, 10.7%, and 22.5% of the revenue during the period. Based on these indicators, Lufax’s credit business is almost the same as that of ordinary commercial banks in China. As a matter of fact, Lufax has not been able to completely break away from the resources brought by the conglomerate Ping An Group, hence its business cannot be separated from the latter. This means that it does not exhibit the full advantages and potential of technology as imagined previously.

At the same time, the proportion of revenue from technology platforms (lending service fees and wealth management service fees) as the pillar of revenue dropped from 79.2% in 2020 to 51.0% in the first nine months of 2022. During the same period, the proportion of net interest income increased from 14.9% to 31.9%, and the proportion of guarantee income increased from 1.2% to 12.5%. According to its disclosure, the main products of Lufax are divided into unsecured loans and secured loans, with the average single loan amount of these being RMB 239,100 and RMB 442,100 respectively; the average loan period is as high as 38 months, and the average annualized interest rate is 21.1 % and 15.7% respectively. This level of interest rate is almost the same as that of conventional smaller loan companies, and higher than the loan interest rate of ordinary banks for small, medium, and micro enterprises. This means that Lufax has not brought innovations that can effectively reduce the financing costs of small and micro enterprises with the help of technology. Due to various service charges and high-interest rates, Lufax has maintained a net profit margin of 20.9%. This kind of business composition makes it difficult for the capital market to give it a market valuation higher than that of the usual financial institutions.

What happens to Lufax is not an isolated phenomenon. The increasingly improved financial and anti-monopoly supervision systems for online platforms in China have made the supposedly “innovative” fintech companies separate “technology” and “finance”. Previously, Ant Group, which has undergone penalty and rectification and may restart the listing process, has lost its “traffic” advantage and is now turning back to square one by the capital market. According to the latest regulatory documents disclosed, some shareholders of Ant Group have further lowered the valuation of Ant stocks in hand. Puxin Group, which has more than USD 1 trillion in assets under management, slashed the valuation of Ant, which has already shrunk sharply, by another 28%. Puxin participated in the round of overseas financing of Ant Group with a post-investment valuation of USD 150 billion in 2018. According to the investment amount and shareholding ratio at that time, its valuation of Ant has now dropped to USD 56.8 billion, which has shrunk by 86% from the high valuation of USD 412.8 billion at the end of October 2020. Similar to Lufax, after losing the advantage of “traffic”, it is basically difficult to rely on Alipay’s payment business and conventional financial business to support the once-high valuation. Some analysts believe that although the adjustment of Ant’s valuation sees changes in regulation, market, and investor perception and sentiment, the core problem still lies within itself. These problems are not only the problems of leading companies in China such as Ant and Lufax but also the directional issue facing the future development of fintech after the ebb of the internet “traffic” economy.

In the opinion of the researchers at ANBOUND, the era of relying on online traffic to gain an upper hand in the financial field for Chinese companies has passed. While the empowerment of technology to finance improves efficiency, it is more necessary to consider solving traditional risks in financial management issues.

From a policy point of view, the rectification of China’s internet platforms has come to an end, and the policy also proposes to “support platform companies in leading development, creating jobs, and showing their talents in the international competition”. Despite the policy changes, the market still faces considerable hardship.

In the absence of performance support and the favor of the capital market, the future of these fintech companies is entering a rather challenging stage, and they need to truly consider the actual functions of technology if they want to find a way out.

Final analysis conclusion:

Although Lufax hopes to achieve a dual listing on the Hong Kong Stock Exchange and bring new development through, the market environment faced by Chinese fintech companies including Lufax itself and Ant Group is no longer what it used to be. The golden era that relied upon online traffic has now passed, and such companies will need to seek new spaces that depend on technological empowerment.

*Wei Hongxu is a researcher at ANBOUND