Lujin Holdings: Can the combination of excellent texture and "repurchase + dividend" help the stock price turn over?

Recently, Lujin Holdings (LU.US, hereinafter referred to as "Lu Holdings") disclosed the third quarter report of this year, and the US stock market closed up more than 11% that night, and it seems that the market is looking forward to this financial report. Since the beginning of this year, the mood of the US stock Jinke plate has picked up significantly, Jinglin, Da Mo and other institutions have also entered the game, and the operation and trend differentiation of each company has intensified significantly, and since the listing of the giant beast Land Control, it has continuously handed over a good answer, but the stock price has begun to fall all the way after a brief surge, and the sharp rise after this performance is the starting point for ushering in the repair of the market? What valuable clues are hidden in this earnings report? In the context of the company's strategic focus shift, how should it be viewed?

First, with "quality" as the axis, how is the Q3 financial report?

Lu jin holdings are currently driven by retail credit and wealth management, of which retail credit has outstanding performance and contributes most of its revenue.

1) Retail credit growth is stable, asset quality is stable, the base of small and micro customers is expanding and the cost of customer acquisition is declining

The retail credit products controlled by Lujin focus on the medium and large financing credit needs of small and micro business owners. During the reporting period, the scale of managed loans increased steadily, and the asset quality stabilized, maintaining the industry's leading level. According to the data, as of September 30, 2021, the balance of retail credit business loans increased by 20.4% year-on-year to 645.1 billion yuan, of which new loans in the third quarter increased by 16.2% year-on-year to 171.7 billion yuan, and the take rate was 9.7%, flat month-on-month, up 30 basis points year-on-year.

Meanwhile, as at the end of the reporting period, the M1+ and M3+ overdue rates were 1.9% and 1.1%, respectively, flat sequentially. Another important indicator of changes in asset quality, the migration rate, has also remained stable. The data showed that the combined migration rate was 0.4%, flat month-on-month. Among them, the migration rates of unsecured loans and mortgages were 0.5% and 0.1%, respectively, which were stable month-on-month.

The number of new borrowers in the third quarter reached 700,000, a record high in the quarter after the listing, and the cumulative number of borrowers at the end of the period increased by 15.6% year-on-year to 16.2 million. Among the new loans in the quarter, if the consumption of gold is excluded, 80.5% flows to small and micro business owners, an increase of 4.8 percentage points year-on-year, reflecting the increase in support for small and micro business owners held by Lujin.

While steadily expanding the coverage of small and micro customers, Lujin Holdings is also actively and proactively reducing the comprehensive cost of borrowing. According to the data, the customer acquisition fee of the retail credit business during the period decreased by 8.5% year-on-year to 2.553 billion yuan. The company attributes this mainly to the increase in sales productivity and the reduction in sales commissions. Reflected in the front end, the decline in the comprehensive rate of borrowers, the comprehensive rate of managed loan balances has dropped to 23.1% since the third quarter, down 3.5 percentage points from the same period last year.

In terms of business model, the retail credit business controlled by Lujin is not simply a loan, but shares risks with institutions through the guarantee model, and the risk sharing ratio is gradually increasing. Among the new loans in the quarter, the loan risk-borne ratio increased significantly to 19.6%, an increase of 12.3 percentage points over the same period last year. Correspondingly, guaranteed revenue surged 639% year-on-year to MOP1,293 million.

According to the analysis of industry institutions, the current unique credit matching business model based on guarantee licenses held by Lujin Is in line with the current regulations. According to the Guidelines on Business Cooperation between Banking Financial Institutions and Financing Guarantee Companies, banks and guarantee companies can recommend customers to each other and share information. Lujin Holdings holds a financing guarantee license, has capital as a guarantee, substantively participates in the loan business, and has clear policy supervision norms in all aspects.

The industry is generally concerned about the issue of personal credit reporting business, and the rectification guidance period for relevant institutions is the end of 2022. Until then, regulators may adjust requirements for various models. In this regard, Lujin Holdings has been actively and orderly exploring standby plans, including that if there are relevant requirements in the future, Lujin Holdings will plan to be ready to access third-party licensed credit information by March next year.

2) The asset scale of wealth management customers has increased steadily, P2P products have been completely cleared, and the user base and stickiness have doubled

The wealth management business controlled by Lujin mainly focuses on the financial needs of middle and high-net-worth customers, which is also one of the main lines of development of the future large financial industry, but at this stage, compared with the retail credit business that has been cultivated for many years, the proportion of wealth management business in the overall revenue is not high, but its share in the non-traditional wealth management platform camp has been relatively leading, and there is a strong Ping An financial ecology, and the future potential cannot be underestimated.

Overall, the growth of wealth management assets in the third quarter was also stable, and the historical stock of non-standard products has been completely cleared.

According to the data, as of September 30, 2021, the assets of existing product customers increased by 22.9% year-on-year to 425.1 billion yuan.

Further, the user base has expanded across the board, stickiness has risen, and the proportion of high-net-worth customers has also increased.

At the end of the reporting period, the number of registered users increased by 7.98% year-on-year to 48.7 million, and the number of active investors increased by 15.91% year-on-year to 15.3 million. At the same time, the 12-month retention rate of investors reached 95.9%, a slight increase of 0.7 percentage points year-on-year. In addition, it is worth mentioning that the proportion of customer assets with an investment amount of more than 300,000 yuan in the same period reached 80.8%, an increase of 3.3 percentage points over the same period last year.

3) Revenue and profit increased steadily, the overall expense rate was controllable, and technology investment continued to be increased

Thanks to the steady growth of the two core businesses, the revenue and profit of Lujin Holdings have risen simultaneously. According to the data, the total revenue increased by 21.8% year-on-year to 15.924 billion yuan, and the adjusted net profit (excluding one-time expenses arising from the C series restructuring) increased by 18.1% year-on-year to 4.115 billion yuan.

While the scale of the business continues to expand, the overall expense ratio level is still properly controlled. During the reporting period, the company's comprehensive expense ratio (including sales, management, operation and research and development) was 48.5%, down 5 percentage points year-on-year and slightly increased by 0.6 percentage points from the previous month, and the overall situation remained stable.

In terms of split, selling expenses increased by 7.0% year-on-year to RMB4.609 billion, mainly due to wealth management marketing investment (yoy+10.1%) and increased general marketing activity expenses (yoy+39.2%, compared with a lower base due to the epidemic factor in the same period last year).

Management expenses increased by 46.0% year-on-year to $937 million, mainly due to the increase in accrued bonuses and a lower base for the same period last year due to the improvement in performance, coupled with the increase in staffing during the reporting period to support the expansion of new businesses (including consumer business).

At the same time, the company also continued to increase investment in the technical side. During the Reporting Period, technical and analytical expenses increased by 8.7% year-on-year to $524 million. In addition, operating expenses increased by 6.3%, mainly due to higher management expenses for trust plans.

It can be seen that the basic disk controlled by Lujin is as stable as ever, and as the scale of business continues to expand, the asset quality and user quality are also stable and rising, indicating that its high-quality growth strategy focusing on "quality" is steadily implementing.

In addition, Lujin Holdings also released some additional surprises in the third quarterly report.

First, the dividend policy was disclosed for the first time, according to the company's policy, from 2022, the proportion of 20-40% of the net profit of the previous year will be used to publicize the regular cash dividend; the second is the progress of the repurchase. Following the $300 million repurchase program announced in May, it added $700 million to its second quarterly report, bringing the total to $1 billion. Of these, a $300 million repurchase program was completed during the reporting period, and under the framework of the $700 million repurchase program, the company has repurchased nearly 37 million ADS shares at a cost of nearly $298 million. In addition, in terms of cash flow, as of the end of the reporting period, the company's cash on the balance sheet reached 30.6 billion yuan (contract 4.9 billion US dollars), an increase of nearly 6.4 billion yuan from the previous month, and the company's senior management also stressed at the performance meeting that its "stable profitability, excellent operating cash flow, rich capital reserves and a series of measures to respond to the company's supervision" made the company full of confidence and "will continue to give back to shareholders through repurchases, dividends and other means".

The author believes that on the one hand, the company generously "sugars" to the market, which further reflects the "quality" of the company's operation, and hopes to attract more value investors and help the company accelerate the discovery of value. On the other hand, the additional repurchase is equivalent to the "clear card" telling the market that the company is currently undervalued, and also showing the strong confidence of the management in the company's future development.

Second, the future growth space and advantages of the two core businesses are discussed

Judging from the growth space and logic of the company's two core businesses, as well as the unique position and financial genes of Land Control itself, the future development is still optimistic, and the specific discussion and analysis are as follows:

1) The small and micro financing service market is far from peaking, the online is significant, and the advantages of Land Control in the small and micro market segment are prominent

The number of small and micro enterprises at the domestic level of tens of millions and nearly 100 million individual industrial and commercial households determine the imagination space of the small and micro credit market, and according to the mainstream view, in addition to the bank, there are still 2/3 of the retail credit needs of small and micro enterprises that have not yet been met, coupled with the significant trend of online, the future market size is expected to reach at least more than 10 trillion levels. Therefore, this provides a huge market opportunity for non-traditional financial service providers like Land Control. According to Oliver Wayman data, retail credit has grown at a compound growth rate of 90.4% over the past 5 years (2015-2020).

Ping An Puhui, the operating entity of Lukong Holdings that serves this market, focuses on solving the large credit pain points of small and micro business owners, forming a dislocation competition with banks and other Jinke companies that mainly consume small amounts of gold, and the scale of the large-amount, long-term small business owners' loan market is significantly ahead of most of its peers; in addition, mature business models, complete customer acquisition channels and risk control systems of the whole value chain, as well as strong Ping An financial ecological support and its own financial business genes. All of them ensure the solid position of LandCon in the retail credit market for small and micro enterprises and the certainty of future growth.

In addition, in the context of the implementation of financial inclusion and the support policy for small and micro enterprises, land control, which mainly focuses on the service market of small and micro enterprises, will also achieve faster development.

2) In the era of equity allocation, the "cake" of social wealth continues to grow

Wealth management is recognized as a very sexy "golden track", not inferior to the vast credit market, at present, China's wealth management is still in its infancy, the demand is broad, another major main business of land control will be promising.

The wealth of Chinese residents has been rapidly accumulated under the impetus of the rapid economic development in the past few decades. According to the "China National Balance Sheet 2020" released by the Chinese Academy of Social Sciences, as of the end of 2019, the total assets of Chinese residents reached 574.96 trillion yuan, with a compound growth rate of 15.54% in the two decades from 2000 to 2019.

At present, the overall asset structure of residents is relatively unbalanced, mainly physical assets, and the proportion of financial assets is relatively low. In 2019, the financial assets of Urban Households in China accounted for only about 20% of total assets, far lower than the mature market represented by the United States.

The "cake" of social wealth is constantly getting bigger, and with some important macro factor changes, it is ushering in a round of profound changes. On the one hand, under the background of multiple factors such as new regulations on asset management, real estate regulation and control, and capital market system reform, residents' wealth allocation is switching from real estate and bank wealth management to equity investment; on the other hand, due to the intensification of aging, the proportion of middle-class income groups, and the superimposed common wealth policy background, the diversification trend of demand preferences in the future is expected to intensify. With the transformation of the big wealth management industry, the business model of service providers will also usher in a restructuring, which will also bring new development opportunities.

In the camp of non-traditional financial institutions, Land Control has the advantage of differentiation. First of all, it has its own unique market positioning in the wealth management track, as mentioned above, the company focuses on the middle class and the affluent masses, between high net worth and ultra-high net worth customers of private banking services and long-tail customers of Internet platform services. From the perspective of asset scale, Lukong is targeting one of the most imaginative markets (pictured below). According to the Boston Consulting Group, China is expected to be the fastest compound growth rate in the world's top 20 wealth markets in 2018-2023, with the fastest growth trend. At present, the trend of "high net worth" of the company's customer base is significant.

(Source: CITIC Securities, Compiled by Gelonghui)

In addition, Lukong's current product system is very comprehensive, covering cash management, fixed income and net worth products, coupled with the strong Ping An ecology in the product, customer acquisition, technology and other aspects of the all-round help, and the future technology application space and financial business growth space, has begun to reflect in profitability, but the valuation has not been fully expressed.

If you benchmark the world's leading one-stop wealth management leader Schewsin Wealth Management (SCHW. US), 9 years to achieve revenue and net profit have risen more than 3 times, the stock price rose 7 times, the current PE (TTM) as high as 30x, while land control 7x less, only the valuation improvement potential is not small.

Third, the texture is excellent, the value deviates, when to face the revaluation?

At present, Lukong's stock price is close to the bottom since its listing, and the valuation and performance growth expectations have seriously mismatched.

For a long time, compliance has arguably been the biggest fundamental in the financial services sector. In fact, since the beginning of this year, with the clarity of policy, the uncertainty has been basically cleared; at the micro level, after the land control completely got rid of P2P, the biggest historical burden has been lifted.

In addition, the two core business orientations of Lukong, in a nutshell, that is, "helping small and medium-sized enterprises to do a good job in business financing and helping the public to manage their finances", are fully in line with the trend of economic policy, and at the same time, in the new context of aging population, per capita GDP will step into high-income countries and the tone of common prosperity policies, wealth management and retail credit are the main lines of future development, and Lucon is expected to grasp the incremental space given by the wave of this era with its leading comprehensive advantages. In other words, policy exposure is limited and future opportunities are large.

According to the author's observation, there are still some short-term cognitive divergence areas based on stereotypes in the market: first, with the zeroing of P2P products, its old label should have been completely removed; second, there are doubts about the existence and growth space of loan demand outside banks; third, it is impossible to determine that unmet loans and financial needs can be provided and solved by Land Control. Time is perhaps the best answer to this.

At this stage, the odds advantage of Land Control has been very prominent, excellent fundamentals are laid, superimposed "repurchase + dividend" combination punch, the company ushered in value discovery may not be far away.