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Should You Exit From This NYSE–Listed Consumer Finance Major – LU

Mar 05, 2022 | Team Kalkine
Should You Exit From This NYSE–Listed Consumer Finance Major – LU


Lufax Holding Ltd.

Lufax Holding Ltd. (NYSE: LU) is a China-based technology-driven personal financial services platform. LU's customer-centric product offerings and offline-to-online channels are primarily used to provide retail credit facilitation services to Chinese small business owners and salaried workers. It also provides tailored wealth management solutions to China's rapidly increasing middle class. LU has 4.92 billion American Depository Shares (ADS) listed and outstanding (every two ADS represent one ordinary share).

Why should Investors make an Exit?

  • Fall-in Cash Flow from Operating Activities: The company reported a 40.87% drop in cash earned from operating activities to RMB 5.62 billion during 9MFY21 (ended September 30, 2021) from RMB 9.50 billion during 9MFY20.
  • Decline in Margins and ROE: LU reported a significant drop in operating margins from 42.7% in the three months ended June 30, 2021, to 38.4% in the three months ended September 30, 2021, indicating a rise in operating expenditure. The company's return on equity (ROE) fell to 4.6% in Q3FY21 from 5.4% in Q2FY21, meaning that it is becoming less efficient at generating profits and enhancing shareholder value.
  • Political and Regulatory Risk: The Chinese authorities' crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent the company's operations. This is after the passage of a bill in the US, which could lead to the delisting of some Chinese companies from the country's exchanges (in case the US authorities cannot satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

LU's share price has remained on a bearish trend, fallen 64.49% in the past twelve months and is currently leaning close to the lower end of its 52-week range of USD 4.19 to USD 15.94. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 5.14.

Considering the continuous fall in share price, a decline in cash from operating activities, margin stress, current valuation, and other geopolitical risks, we recommend a "Sell" rating on the stock at the closing price of USD 5.54, down 4.65%, as of March 03, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing.

Three-Year Technical Price Chart (as of March 03, 2022). Source: REFINITIV, Analysis by Kalkine Group

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.