Investors should buy Lufax as the China-based lending company pivots, according to Sanford C. Bernstein. Analyst Tianjiao Yu initiated coverage of the financial technology stock at outperform. The firm’s $2.50 price target for U.S.-listed shares implies 59% upside from where the shares closed Wednesday. “Lufax stock tells what happened in China in the past 3 years — macro weakness, Covid downturn, geopolitics uncertainty, and regulatory tightening on the fintech industry — a fatal blow to profitability in 2023E,” Yu said in a note to clients Thursday. “The stock has thus slumped from its IPO prime. We are now turning positive as the company shifts from a ‘risk-free’ facilitator to a ‘risk-taking’ co-lender.” Lending for small and medium-sized enterprises has become a “sweet spot” for growth, Yu said, and Lufax has carved out a growing niche in the area with limited competition at its scale. Small- and medium-sized business lending has outpaced the GDP growth in China by three to four times, the analyst wrote. And despite the recent economic slowdown, Yu said new loans should resume at a compound annual growth rate of about 15% between 2024 and 2027. Competition is more crowded in consumer lending, and banks are not competitors, but rather “hand-holding partners” in the small- and medium-sized enterprise space as they rely on Lufax for customer acquisition and data, Yu noted. Yu said Lufax could see “take rates” move to 3% at the end of 2027 from 1.3% at the end of 2023 under its full-guarantee model with incremental guarantee income. That would represent a “U”-shaped recovery, with earnings per share bottoming out before growing at a compound annual rate of 20% between 2024 and 2027, Bernstein said. She said risk related to annual percentage rates, which calculates the yearly cost of borrowing over the term of a loan, is largely in the past and should settle between 19% and 20%. Lufax previously moved APR from 27% in 2019 to 21% in 2022, which Yu said is below the regulatory set of 24%. Pulling back an APR can pressure a net interest margin, reduce loan growth and intensify competition, she noted. After taking more risk exposure, the company’s impairment losses are expected to grow at a compound annual rate of 15%. But she said that’s manageable, while noting Lufax has a better credit quality record than many other lending companies and banks. Shares have dropped more than 20% since the start of 2023, after sliding 66% in 2022. LU ALL mountain Lufax’s all-time chart — CNBC’s Michael Bloom contributed to this report.
