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Lufax joins China fintech IPO race with Ant and JD Digits

Three companies together seek to raise over $40 billion from investors

Lufax's profit margins have climbed as the company has shifted focus from peer-to-peer lending to becoming a platform for the sale of financial institutions' products.   © Reuters

HONG KONG -- Three of the largest Chinese financial technology companies are set to compete for investors' attention as they together seek to raise more than $40 billion through initial public offerings from New York to Shanghai.

Lufax, the online wealth management and lending arm of Ping An Insurance Group, China's largest insurer, filed a public prospectus for an IPO in New York on Wednesday. Sources familiar with the company's plans have said previously that it wants to raise as much as $3 billion.

It joins Ant Group, controlled by billionaire Jack Ma, which is seeking $35 billion from a dual listing in Hong Kong and Shanghai and online retailer fintech affiliate Jingdong Digits Technology Holding, or JD Digits, which aims to bring in $2.9 billion from joining Shanghai's STAR Market.

Given low interest rates and flush liquidity in global markets, "We aren't concerned about investor appetite being diluted," Lorraine Tan, director of Asia equity research at Morningstar, said in a media call. "These are all well-known businesses and would not have difficulty raising capital. As long these are companies that provide consumer credit and help boost consumption in China, they will be in favor."

The companies are aiming to raise capital to expand their user base and cross-border payments as well as enhancing research and development. The companies are also hoping new funds would position them to tap unmet financing demand from small businesses and the wealth management needs of China's increasingly wealthy consumers.

Lufax in its prospectus estimated the unmet financing demand of small businesses in China at about $7 trillion and said fintech companies like it -- armed with customer data and artificial intelligence -- were plugging the gap. These companies are also helping salaried workers with needs not met by credit cards and traditional loans, it said.

Analysts said that given its scale, growth potential, profitability and asset quality, Ant would appeal most to investors, but added that Lufax and JD Digits would still drum up investor interest, given the strong support of their parent organizations.

All the companies are trying to mold themselves into virtual malls for financial services, offering everything from loans to mutual funds to insurance policies. Most of the financial products are provided by third parties who pay service fees on the sales they get through the companies' platforms.

The growth of such business has boosted the profit margins of both Ant and Lufax. Lufax's net profit margin climbed from 21.7% in 2017 to 28.3% in the six months ended June 30 while that of Ant soared nearly tenfold in the first half to 30.2%, according to the companies' prospectuses.

Ant said it had facilitated 2.1 trillion yuan in consumer and small business credit up to June 30 and brokered 4.1 trillion yuan in asset management products. It works with 100 financial institutions for lending, 170 fund managers for wealth management products and 90 partner companies for insurance companies, serving 1 billion users.

Lufax, which started as a peer-to-peer lender, transformed into a fintech platform after China clamped down on the P2P sector in 2017. It has worked with more than 50 institutions to facilitate 519 billion yuan in loans and with over 400 product providers to broker sales of 375 billion in financial assets.

JD Digits has worked with 600 financial institutions and serves over 1 million merchants and 200,000 small businesses. As of June 30 JD Digits had brought 700 billion yuan to financial institutions from individuals and small business worth and offered 1.7 trillion yuan in loans to individuals and small businesses. It made a loss in the first half of the year.

The three companies acknowledged tightening regulation in China in the past two months as a potential threat to their profitability as well as mounting tensions between Beijing and Washington as a key risk factor.

"These are good investment opportunities for investors amid rising wealth in China," said Andrew Sullivan, a director at brokerage Pearl Bridge Partners. "However, investors need to be aware it is a very competitive market."

Additional reporting by Nikkei staff writer Nikki Sun. 

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