China fintech: 6 listed firms giving access to Asia's most vibrant ecosystem

  • China’s tech giants are now household names, but the country is also home to a large, sophisticated fintech sector
  • We highlight 6 listed Chinese fintechs that are driving innovation across lending, insurance, brokerage and real estate
  • These firms are increasingly venturing outside their home market, which generates an additional structural growth driver
China fintech: 6 listed firms giving access to Asia's most vibrant ecosystem

China represents one of the largest and most vibrant fintech ecosystems on the planet. Leading firms such as Ant Group and WeChat Pay (part of Tencent) dwarf most global peers, with valuations to match. But an increasingly uncertain regulatory environment may encourage investors to switch their focus from dominant players to the next generation of upstarts. Together with EqualOcean – a specialist in research on Chinese corporates and one of the Channels on the Tellimer platform – we highlight six innovative players operating across a broad swathe of the fintech landscape. Together, they give exposure to digital business models in lending, insurance, investment, financial infrastructure and real estate.

KE Holdings (Beike)

KE Holdings, the operator of Beike, is an integrated online and offline platform for housing transactions and services in China.

Lufax

Lufax, a Ping An Group-backed company, is a personal financial service provider that targets small business owners and affluent individuals in China.

Futu Holdings

Futu Holdings Limited, the operator of Futubull, is an investech company offering a fully digitized brokerage and wealth management platform.

Zhong An

Zhong An Online P&C Insurance is an online-only insurance company in China, providing insurance in five main areas: health, lifestyle consumption, consumer finance, auto and travel.

Linklogis

Linklogis is a supply-chain finance platform. It helps link lenders and small business borrowers by digitalising the entire supply chain.

OneConnect

OneConnect, a Ping An Group affiliate, is a ‘Technology-as-a-Service’ platform. The company has a variety of tech-based solutions for both large financial institutions and small businesses.

A quick tour of China’s fintech ecosystem

Due to its large population, strong infrastructure, and consumers’ openness to new technologies, China’s fintech ecosystem is one of the largest and most profitable globally. The best companies in the sector score favourably against global peers.

Relative to other emerging markets, China’s fintech scene is more diverse, with a lower weighting of payments and lending-focused companies than in other markets. Key areas of relative strength include blockchain and Software as a Service.

Fintech product mix: China versus EM

The large size of the home market and the breadth of offerings (meaning companies can focus on their respective core niches) may explain why the fintech sector’s profitability is higher than other emerging markets.

Fintech profitability

China leads in terms of global fintech unicorns, according to the Hurun Institute; as of April 2021, it had 18 unicorns (29% of the global total), with a combined valuation of US$240bn (60% of the global total). China is also home to three of the top 5 fintech unicorns by valuation, Ant Group, Lufax, WeBank.

Global distribution of fintech unicorns: China leads by value

Fintech investors have few large-cap listed investment opportunities

Investors have bought into China’s technological prowess in a big way; the top 6 listed ‘new-tech’ firms have a combined market capitalisation of US$1.9tn. Kuaishou is the latest entrant to this list, following its IPO on 5 February 2021.

China's top 'new-tech' firms

However, for investors looking at the listed fintech space, the choice is still limited, particularly after the failed Ant Group IPO. The six names we consider in this report have a combined market capitalisation of around US$125bn.

Featured Chinese fintech firms

KE Holdings (Beike)

KE Holdings, founded in 2001, is an integrated online and offline platform for housing transactions and services in China. It launched its online platform, Beike, in 2018 to cover the broad residential real estate ecosystem and provide information, services and solutions to its customers. KE Holdings also owns and operates Lianjia – since 2001 this has grown to become China’s leading real estate brokerage brand and strongly complements the Beike platform.

Beike has reinvented the way service providers and housing customers navigate and complete housing transactions, which range from existing and new home sales, home rentals, home renovation and other services, as shown in the following diagram.

Source: KE Holdings, Tellimer Research

Since 2017, the proportion of revenues from existing home transaction services (which represent fees from Lianjia, fees from other brokerage firms using the Beike platform, and other services such as transaction closing, field work assistance and agent recruiting/ training services) has fallen from 72% to 43% of the total (despite growth at 18% pa over this period). KE Holdings is the market leader in this space, with around a quarter of the market. This market leadership helps generate a high level of profitability.

The proportion of new home transaction services (essentially sales commissions from real estate developers) has more than doubled from 25% of total revenues to 54%. The profitability of this segment could improve in the future as the company leverages off its large customer base, advanced platform and business partnerships. Emerging and other services, which include financial services and home renovation services, are 3% of the revenue pie.

Total revenues have grown at 40% pa since 2017. The company first achieved a full-year profit in 2020.

KE Holdings revenue and contribution mix

Looking ahead, management has four key areas of focus:

  • Strengthening platform infrastructure

  • Enhancing service quality and productivity

  • Expanding the product suite

  • Pursuing investments and acquisitions

Source: KE Holdings, Tellimer Research

Lufax

Lufax, founded in 2011 by Ping An Group and headquartered in Shanghai, is a personal financial service provider that targets small business owners and affluent individuals in China. Lufax listed on the New York Stock Exchange in October 2020.

Once the largest P2P lending provider in China, the company has stripped the business down and transformed itself into a capital-light platform. In China, amongst non-traditional providers, it ranks second in retail credit (12% market share), second in credit to small and mid-sized businesses (32% market share) and third in wealth management 5% market share). Retail credit facilitation fees accounted for 76% of 2020 revenue, while wealth management fees were 3% of the total.

Source: Lufax, Tellimer Research

Lufax’ key attractions include:

  • The customer segments Lufax primarily targets represent less competitive markets.

  • The future of the retail credit and wealth management businesses is promising.

  • A differentiated but effective customer acquisition strategy that provides a stronger and more sustainable connection between the borrower and fund provider.

  • Ping An's technological support, and its large, multi-decade financial data pool, generates key competitive advantages.

  • The firm combines the strengths of a traditional large financial firm with an innovative fintech culture, which should benefit the firm’s long-term development.

Lufax revenue progression

Futu Holdings

Futu Holdings Limited, founded in 2007 and listed on Nasdaq in March 2019, is an investech company offering a fully digitalised brokerage and wealth management platform, Futubull. Primary fee-generating services include trade execution and margin financing, with clients able to trade a wide range of securities such as stocks, warrants and options.

Futu posted strong performance in 2020, with client activity benefiting from increased online activity during the pandemic. The firm’s trading volume reached HKD3,463bn (US$447bn) in the year, representing c300% yoy growth, as clients responded to increased market volatility.

Futu is aiming to diversify its revenue mix. Currently, brokerage commissions and fee handling charges (predominantly on equities and equity-linked derivatives) remain the company’s main revenue source, though with a gradually decreasing percentage. Interest income is primarily derived from margin financing, bank deposits, IPO financing and securities borrowing and lending services. Other income comes from a wide variety of sources such as service charges, underwriting fees, market information and data income. Concerning new business lines, margin financing and securities lending services are likely key future growth drivers.

Futu's strong revenue progression

Zhong An

Zhong An Online P&C Insurance was founded in 2013 as China’s first online-only insurance company, with a completely branchless business model. It listed on Hong Kong Stock Exchange in 2017. The company provides insurance in five main areas, namely health (40% of revenues), digital lifestyle (38%), consumer finance (13%) and automobiles (8%). In 2020, the company served 520mn customers, with RMB16.7bn gross written premiums and RMB554mn net profit. The firm is the largest online Property & Casualty insurer in China and the ninth-largest P&C insurer overall.

Zhong An business mix progression

Zhong An benefits significantly from its core shareholders, Ant Group, Tencent and Ping An, which provide key support to its business. The first two provide two high-traffic platforms and the latter is the largest insurance company in China. The cooperation among these three giants strengthens Zhong An's presence in China's online insurance marketplace.

Key recent developments include: the firm’s focus on health and digital lifestyle segments, which it views as more profitable and with strong long-term growth characteristics; RMB905mn R&D investment in 2020 to maintain the firm’s tech dominance; and expansion into other markets such as Hong Kong, Indonesia, Japan, Malaysia and Singapore. The increased scale of the business is also making itself felt in Zhong An’s improving financial performance.

Zhong An: selected insurance business KPIs

Linklogis

Linklogis, established in 2016 and 16%-owned by Tencent, is a supply-chain finance platform. It listed on the Hong Kong exchange in April 2021. Linklogis serves as a linkage between lenders and borrowers in small business financing – it facilitates financing activity by digitalising the whole supply chain. The firm’s platform provides financial institutions with a precise and well-rounded financial map and window into the credit conditions of small businesses, which significantly reduces their credit risk.

Source: Linklogis, Tellimer Research

The company also offers tech-based solutions on digital cross-border trades in areas such as anti-fraud and risk control, and several blockchain platforms centred on different financial services.

The firm has been experiencing strong volume growth; the total volume of supply chain assets processed/ financed in 2020 was over RMB170tn. Although take rates have been declining, scale economies are helping to lift the firm’s gross margin.

Linklogis transaction activity, margin and profit data

OneConnect

OneConnect was founded in 2015 and is backed by Ping An Group. It has been listed on NYSE since December 2019 and defines itself as a ‘Technology-as-a-Service’ platform. The company currently offers 14 tech-based solutions for financial institutions (such as banks, insurers and asset managers). These solutions cover areas such as marketing, risk management, product, technology and operations.

Source: OneConnect, Tellimer Research

By product, OneConnect has a diversified revenue stream. However, just two customers (Ping An and Lufax) accounted for 62% of the firm’s revenues in 2020.

OneConnect revenue mix by activity

OneConnect has also deployed its solutions internationally; it is active in 20 markets and works with over 100 customers. It is working with three leading banks in both Thailand and Malaysia, where it helps them with risk management solutions and digital/ mobile banking. It also cooperates with Hong Kong and Japan in blockchain-related services.

In 2021, management is targeting revenue growth in excess of the 42% level achieved in 2020, with a double-digit percentage improvement in the net margin. Looking further ahead, management is committed to acquiring over 1,000 premium customers (from 594 at end-20), achieving a 50% non-IFRS gross margin (47% in 2020) and achieving break-even in the medium term (2020 loss was RMB1354mn, with a net margin of -41%).

Acknowledgements: We thank Rabail Adwani for his help with this report.


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