Lufax Holding Ltd
(NYSE:LU), a leading Chinese personal financial services platform, reported its third-quarter earnings for 2024 on October 26, amid a challenging macroeconomic landscape. The company’s total new loan sales remained flat year-over-year at RMB 50.5 billion, with a significant increase in consumer finance loans by 27.8%. Despite a stable asset quality and a decrease in finance costs, Lufax experienced a net loss of RMB 725 million for the quarter. The company’s outlook remains cautious yet optimistic, with unchanged loan volume guidance and an emphasis on maintaining asset quality.
Key Takeaways
- Total new loan sales for Lufax in Q3 2024 were RMB 50.5 billion, consistent with the previous year, but marked an 11.7% increase from the prior quarter.
- Consumer finance loans grew by 27.8% year-over-year, now representing 52% of total new loans.
- The company reported a net loss of RMB 725 million, with total income down by 31.1% due to a decline in outstanding loan balances.
- Asset quality remained stable, with the non-performing loan ratio for consumer finance improving to 1.2%.
- Lufax maintained loan volume guidance between RMB 190 billion and RMB 220 billion and expects loan balances to range from RMB 200 billion to RMB 230 billion.
- The mandatory general offer from Ping An Group aims to maintain Lufax’s independence as a publicly listed company.
Company Outlook
- Guidance for loan volume remains at RMB 190 billion to RMB 220 billion for the near future.
- Loan balances are projected to be between RMB 200 billion and RMB 230 billion.
- The company plans to leverage its consumer finance and small lending licenses for growth while prioritizing asset quality.
Bearish Highlights
- Total income decreased significantly by 31.1% to RMB 5.5 billion.
- A net loss of RMB 725 million was reported for the quarter.
- The profitability is under pressure due to the adoption of a 100% guarantee model.
Bullish Highlights
- Consumer finance sector showed robust growth, with new loans increasing by 27.8%.
- Asset quality indicators were stable, with improvements in the consumer finance NPL ratio.
- Finance costs decreased by 48.9% to RMB 59 million.
Misses
- Despite a stable asset quality, the company faced a net loss this quarter.
- Total income declined due to a decrease in outstanding loan balances.
Q&A Highlights
- Management has no immediate plans for a special dividend but focuses on enhancing long-term shareholder returns.
- Credit impairment losses increased due to conservative provisions under the 100% guarantee model.
- Funding costs are expected to decrease further, benefiting from favorable monetary policies and a diversified license strategy.
Lufax Holding continues to navigate through economic uncertainties with a strategic focus on asset quality and cost management.
InvestingPro Insights
Lufax Holding Ltd’s (LU) recent financial performance aligns with several key insights from InvestingPro. The company’s Q3 2024 results reflect the challenges highlighted by InvestingPro Tips, which indicate that analysts anticipate a sales decline and a drop in net income for the current year. This is evident in the reported 31.1% decrease in total income and the net loss of RMB 725 million for the quarter.
InvestingPro Data shows that Lufax’s revenue growth over the last twelve months as of Q3 2024 was -35.28%, corroborating the company’s reported decline in total income. This trend underscores the difficult operating environment Lufax is navigating.
Despite these challenges, InvestingPro Tips also point out that Lufax is trading at a low Price / Book multiple, which is confirmed by the InvestingPro Data showing a Price / Book ratio of 0.22 as of the last twelve months ending Q3 2024. This low valuation could be of interest to value investors, especially considering the company’s position as a prominent player in the Consumer Finance industry.
The company’s focus on maintaining asset quality and its growth in consumer finance loans aligns with its strategy to leverage its consumer finance and small lending licenses. This approach may help address the InvestingPro Tip suggesting that analysts do not anticipate the company will be profitable this year.
Interestingly, InvestingPro Data reveals a strong return over the last month, with a 1 Month Price Total Return of 33.48%. This recent positive momentum, coupled with a 50.4% return over the last six months, suggests that market sentiment towards Lufax may be improving despite the current financial challenges.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Lufax, providing a deeper understanding of the company’s financial health and market position.
Full transcript – Lufax Holding Ltd (LU) Q3 2024:
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Third Quarter 2024 Earnings Call. [Operator Instructions] After the management’s prepared remarks, we will have a Q&A session. Please note this event is being recorded. Now I’d like to hand the conference over to your speaker host today, Ms. Liu Xinyan the company’s Head of Board Office and Capital Markets. Please go ahead, ma’am.
Xinyan Liu: Thank you very much. Hello, everyone, and welcome to our third quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business. Our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and the business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. With that, I’m now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.
Yong Suk Cho: Thank you for joining us today for our third quarter 2024 earnings call. During the third quarter, while Puhui loan demand remained weak as small business owners continue to face a complex macro environment, we saw ongoing growth in our consumer finance business. We are hopeful that policy stimulus measures introduced by the Chinese government in late September will help improve the macro environment and have a positive impact on our business performance in the long run. Meanwhile, we plan to stay vigilant and prudent in the execution of our business strategies in light of the increased risk exposure on the 100% guarantee business model. Before we discuss the business details, let me share some updates on the macro environment. In the third quarter, the macro environment remains challenging for small business owners. The SME development index declined by 0.3 points quarter-over-quarter to 88.7 in September. The Business Conditions Index published by the Cheung Kong Graduate School of Business also declined from 49.3 in June to 46 in September, suggesting persistent challenges faced by small business sector. On the other hand, we are encouraged by signs of mild recovery in the consumption sector during the third quarter as the CPI showed improvement from 0.2% in June to 0.4% in September. In late September, we are glad to see that the Chinese government announced a number of new stimulus policies, including measures to help to the recovery of the real estate sector and increase liquidity, such as the cut to reserve requirement ratio and the lowering of existing mortgage rates. Local governments also launched a series of stimulus initiatives relating to real estate and consumption to boost consumer confidence and strengthen the economy. We believe all of these efforts will have a positive impact on SBOs in China. Meanwhile, we recognize it will take time for SBOs to benefit from these measures and improve performance, so we remain prudent as we execute our business strategies in the short term. Furthermore, we also put more emphasis on our non-SBO customers and continue to grow our consumer finance business. This should help us take full advantage of gradual effects of consumption recovery, and we’ll be in a solid position for our future growth. Now let’s turn to our operating results. First, let’s take a look at our loan volume. Total new loans sales in the third quarter were RMB 50.5 billion, flattish year-over-year and improving by 11.7% from last quarter. The quarter-on-quarter growth despite the macro challenges, was mainly attributable to the continued growth of our consumer finance business, which offset the ongoing weakness in Puhui loan demand from high-quality SBOs. New consumer finance loans increased by 27.8% year-over-year and accounted for 52% of our total new loans sales in the third quarter as a result of our continued efforts to roll out smaller tickets and revolving product structures. Balance-wise, our total loan balance stood at RMB 213.1 billion as of the end of third quarter, of which consumer finance loans took up 22%. Turning to asset quality. Our tightened risk control policies and enhanced risk assessment systems have helped maintain stable asset quality. The C-M3 flow rate of Puhui loans remained at 0.9% during the third quarter despite a decrease of total balance as compared to the second quarter. The asset quality of our consumer finance loans also stayed strong, with NPL ratio further decreasing to 1.2% from 1.4% in the second quarter. As loans enabled under the 100% guarantee model kept increasing as a percentage of total loans, our balance take rate rose by 1.9 percentage points year-over-year to 9.7% during the third quarter of 2024. Cost of funds continued to decrease driven by both monetary policy stimulus and our diversified license strategy. As mentioned during our last earnings call, we acquired a nationwide small lending license in July. We started to provide new loans under this newly acquired nationwide small lending license in August. As of the end of third quarter, we have provided more than RMB 1 billion in new loans under this new license. We believe our small lending license has a potential to further reduce our funding costs, diversify our product portfolio and improve our capital management efficiency. Finally, I want to provide an update on Ping An Group’s mandatory general offer. On September 27, Ping An Group dispatched offer document and commenced the offer period. If there are no additional requirements from regulators, the offer period will end on October 28. As stated in the offer document, Ping An Group is making the offer solely to comply with applicable rules and has no intention to privatize Lufax. The intention is that Lufax will continue to remain an independent entity listed on the New York Stock Exchange and Hong Kong Exchange. Looking ahead, we seek to continue to deepen our synergies with Ping An Group, leveraging its brand, reputation, technological resources and extensive network to strengthen our market position. I will now turn the call over to Peiqing, who will provide more details on our financial performance and business operations.
Peiqing Zhu: Thank you, Y.S. I will now provide a closer look into our third quarter results. Please note, all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In the third quarter of 2024, our total income decreased by 31.1% to RMB 5.5 billion from RMB 8.1 billion, mainly due to a decrease of outstanding loan balance by 41.8%, partially offset by our increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 19.2% to RMB 6.3 billion from RMB 7.7 billion, among which the total operating expenses declined by 35.9% to RMB 3 billion from RMB 4.7 billion. And credit impairment losses increased by 9% to RMB 3.3 billion from RMB 3 billion. Operating efficiency improved, with our operating expenses to income ratio decreasing from 53.8% from 57.8% in the third quarter of 2023. The increase in credit impairment losses was mainly due to increased provision related to our loan book and certain investment assets. As a result, we recorded a net loss of RMB 725 million for the third quarter. Turning to the unit economics of our loan business. Our APR by balance decreased 19.5% from 20.1%. Despite the decrease in APR, our take rate by balance increased to 9.7% from 7.8%, primarily due to the removal of negative impact from high CGI premium to our transition to the 100% guarantee model, and also thanks to the decrease in our funding costs. We expect that the take rate will further increase as the percentage of the loans enabled under the 100% guarantee model continues to increase and that funding cost will continue to decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending license. On the expense side of the unit economics, while sales and marketing expenses remained stable, credit costs and other operating expenses were a drag on our net margin. Credit costs increased primarily due to the increased risk exposure and provision for our loan book. As discussed before, while we anticipate loans under the 100% guarantee model will be lifetime profitable, it’s important to note that these loans may incur accounting losses in the first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability but is expected to lead to improved long-term financial performances as the loan portfolio matures. The increase of other operating expenses was primarily due to the contraction of our loan balance and the reduced economies of scale. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was RMB 1.6 billion, representing a decrease of 49.9%, mainly due to a decrease in retail credit service fees as a result of 41.8% decrease in outstanding loan balance. In addition, it was also negatively affected by cessation of the Lujintong business in April 2024. Our net interest income was RMB 2.7 billion. a decrease of 18.8% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was RMB 818 million, a decrease of 13.1%. In terms of revenue mix, technology platform-based income accounted for 29.5% of our total revenue, down from 40.5% in the same period of last year. Net interest income and guarantee income accounted for 48.5% and 14.7% of total revenue in the third quarter, respectively, as compared to 41.1% and 11.7% in the same period of last year. In terms of expenses, our credit impairment losses increased by 9% to RMB 3.3 billion, mainly due to increased provisions related to loans as we applied a more prudent approach in our ECL model to reflect the complex macroeconomic environment in the third quarter as well as increased provision related to certain investment assets. Our total sales and marketing expenses, which include expenses for borrower acquisition costs as well as the general sales and marketing expenses decreased by 49.9% to RMB 1.1 billion, mainly due to reduced loan-related expenses resulting from the decrease in new loan sales and outstanding loan balance as well as the elimination of expenses associated with our Lujintong business. Operation and servicing expenses decreased by 25.8% to RMB 1.1 billion as a result of our continued effort to control expenses and decreased loan balance, partially offset by increased commission associated with the improved collection performance. Our finance costs increased by 48.9% to RMB 59 million from RMB 40 million, mainly due to the decrease of interest income from bank deposits, partially offset by the decrease of interest expenses after repayment of our C-round convertible promissory notes upon the maturity on September 30, 2023. In terms of capital, as of the end of September 2024, our main operating entities remain well capitalized. Our guarantee subsidiary’s leverage ratio stood at 2.6x and our consumer finance subsidiary’s capital adequacy ratio stood at 14.9% as compared to the 10.5% regulatory requirement. As we deal with the complexity of the broader economic environment, we are now seeing encouraging signs in terms of asset quality and in the growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term sustainable future operations, and we’ll uphold the commitment to bring value to our shareholders. That concludes our prepared remarks for today. Operator, we are now ready to take questions.
Operator: [Operator Instructions] The first question today comes from Betty Li with CLSA.
Betty Li: So I have two questions. The first one, could you kindly express what will be the impact of the new policy stimulus on your business? The second is, could you share more about the business outlook for this year and beyond?
Yong Suk Cho: Thanks, Betty. About
