LU - Lufax: Both Results And Outlook Were Disappointing

2023-08-24 10:30:00 ET

Summary

• The Q2 2023 top line and EBIT for LU came in below the market's consensus estimates.
• Lufax's near-term outlook is poor, considering the management's expectations of a significant contraction in new loans for 2H 2023.
• Lufax's shares are still rated as a Hold, rather than a Sell, as LU's valuations are inexpensive.

Elevator Pitch

My rating for Lufax Holding Ltd (LU) [6623:HK] shares stays as a Hold. My earlier update for Lufax written on April 27 this year was focused on the lack of specific fiscal 2023 guidance (in quantitative terms following its Q4 2022 results release) and the stock's downside risks.

For the current article, I analyze LU's most recent Q2 2023 financial performance and the company's full-year outlook. Both Lufax's results and outlook were poor, but the company has already suffered from a pull-back in its share price and a de-rating of its P/E multiple. Therefore, I deem Lufax to be worthy of a Hold rating.

Lufax's Q2 Top Line And EBIT Missed Expectations

Lufax announced the company's recent second quarter results on Monday, August 21, 2023 after the market closed.

Top line for LU decreased by -39.4% YoY from RMB15.3 billion in the second quarter of 2022 to RMB9.3 billion for the most recent quarter. Lufax's actual Q2 2023 top line fell short of the analysts' consensus quarterly forecast of RMB10.1 million by -8.5% (source: S&P Capital IQ ). The company reported an EBIT of RMB4,317 million for Q2 2023, which represented a -51.9% drop as compared to its Q2 2022 EBIT of RMB8,966 million. LU's EBIT for Q2 2023 turned out to be -15.8% lower than the sell-side's consensus projection of RMB5,127 million as per S&P Capital IQ data.

Lufax mentioned at the company's Q2 2023 results briefing that "reduced new loans enabled and continued pricing pressure from our credit insurance partners" were the major negatives that led to its poor financial performance in the recent quarter.

On a sequential or QoQ comparison, Lufax's key operating metrics weren't encouraging. Lufax's loans outstanding contracted by -13.1% from RMB495.2 billion as of end-March 2023 to RMB426.4 billion at the end of the second quarter this year. The company's new loans also declined by -6.1% from RMB57.0 billion for Q1 2023 to RMB53.5 billion in Q2 2023.

Separately, LU's take rate decreased by -1.6% and -0.3% to around 7.0% in the second quarter of the current year. At its second quarter earnings call, LU revealed that its "credit insurance partners continue to charge elevated premiums despite improved asset quality of new loans." This explains why Lufax's take rate continued to decline for the second quarter of 2023.

The market penalized Lufax for its weaker-than-expected financial results, and this led to LU's shares correcting by -4.6% to close at $1.25 on August 22, the next day following its Q2 earnings release. On the same day, Lufax registered a new 52-week low stock price of $1.16 during intra-day trading.

Lufax is now valued by the market at 4.1 times consensus forward next twelve months' normalized P/E as per S&P Capital IQ's valuation data, which is merely +5% above the stock's 2023 year-to-date P/E trough of 3.9 times.

Full-Year New Loans Outlook Implies That Near-Term Share Price Recovery Is Unlikely

LU's current share price and valuations are at significant lows, but it would be too optimistic to expect a quick rebound in Lufax's stock price considering the company's outlook.

Lufax has guided for the company to deliver new loans amounting to RMB200 billion for FY 2023 as per the mid-point of the company's full-year financial outlook. As a comparison, LU's new loans amounted to RMB110.5 billion in 1H 2023, and the company's 2H 2022 new loans were roughly RMB201.6 billion. In other words, Lufax is anticipating that its new loans might potentially fall by -19% HoH and -56% YoY to RMB89.5 billion in the second half of this year.

At its recent second quarter results call, LU noted that weak "loan demand from SBOs (Small Business Owners) as well as our continued emphasis on operational prudence" were the main factors that played key roles in determining the company's FY 2023 new loans guidance.

Seeking Alpha News reported on August 21, 2023, that "China lowered its one-year loan prime rate by 10 basis points" to "a record low of 3.45%" which was part of efforts "supporting the struggling Chinese economy." It is natural to assume that small-to-medium sized enterprises in China won't be keen on increasing investments in challenging times like these, and this will likely translate into a lower quantum of new loans for LU as per its guidance. Also, Lufax will also want to be stricter with its criteria for new loans to minimize credit risks and avoid having a big chunk of bad loans, which is another reason for LU's lackluster outlook.

As such, I don't think that Lufax has been particularly conservative with the company's new loans guidance for FY 2023. This also means that there is a small chance of LU delivering positive surprises with the company's actual financial performance for the third and fourth quarters of this year.

Concluding Thoughts

Lufax's shares are cheap as seen with its stock price and valuation metrics. However, this is largely justified on the basis that LU's Q2 2023 financial numbers and full-year FY 2023 outlook have left investors disappointed. This is why I have chosen to maintain a Hold rating for Lufax.

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