Prospectus Summary
PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from a report commissioned by us and prepared by Oliver Wyman, an independent industry research firm, to provide information on the retail credit and wealth management industries in China.Our Business
We are a leading technology-empowered personal financial services platform in China. Our mission is to make retail borrowing and wealth management easier, safer and more efficient. We primarily address the large unmet demand for personal lending among small business owners as well as salaried workers in China, and we provide tailor-made wealth management solutions to China’s fast growing middle class and affluent population. As of June 30, 2020, our total balance of retail credit facilitated reached RMB519.4 billion (US$73.5 billion), and the total client assets generated through our online wealth management platform reached RMB374.7 billion (US$53.0 billion), ranking us number two and number three, respectively, among non-traditional financial service providers in China such as fintech companies, online-only TechFin companies and online lending platforms, according to Oliver Wyman.
China has the second largest financial system globally, both by retail credit lending volume in 2019 and by the total amount of investable assets as of December 31, 2019. The estimated demand for small business financing in China was RMB89.7 trillion (US$12.7 trillion) in 2019, of which RMB46.6 trillion (US$6.6 trillion) was unmet. In addition, the current outstanding balance of consumer loans in China is estimated to be RMB12.7 trillion (US$1.8 trillion) as of December 31, 2019. As of the same date, China’s personal investable assets reached RMB192 trillion (US$27 trillion), making it the second largest personal wealth management market globally, and only RMB49 trillion (US$7 trillion) or 26% has been placed in wealth management products. For more details, including sources, see “—Market Opportunities.”
We are well positioned to capture markets which have been underserved by traditional financial institutions and online-only TechFin platforms backed by major internet companies, such as Ant Financial, WeBank and Tencent Licaitong. Many traditional financial institutions do not have the necessary skills, data and technology to fully address these customer needs, while online-only TechFin platforms, which provide financial services but are operated by tech companies rather than financial institutions, generally lack the financial data and financial services capability to price credit risk appropriately for borrowers and provide suitable products to investors. Our business is built on:
cooperation with the Ping An ecosystem allows us early access to ongoing investment in technology innovation in financial services, including through Ping An Group’s 8 research institutes and more than 21,000 patents and patent applications.
Unique Business Model: Technology-empowered Personal Financial Services “Hub & Spoke” Platform
We have implemented a unique, capital-light, hub-and-spoke business model combining purpose-built technology applications, extensive data and financial services expertise to effectively facilitate the right products to the right customers.
Retail Credit Facilitation
Huge small business owner market with unmet needs. The unmet financing demand of small businesses in China was approximately RMB47 trillion (US$7 trillion) as of December 31, 2019. This market opportunity is huge because small business owners need larger ticket size loans and longer tenors for their personal or operating purposes, often on short notice, and they need both highly personalized services and a fast and convenient application process. Similarly, when salaried workers require larger loans for flexible use, they cannot fulfill their needs through traditional credit card and loan products either.
Current players unable to meet more complex borrower needs. Traditional banks cannot serve small business owners and certain salaried worker customers effectively because they generally find it hard to provide larger ticket size loans without collateral. They may lack sophisticated data-driven risk assessment abilities and they generally do not possess developed technology for cost-efficient online capabilities. Similarly, online-only TechFin companies tend to focus on smaller size loans at shorter tenors where pricing for risk is less important, as they rely more on social behavior data rather than financial data for credit decisioning given their lack of financial services background. Online-only TechFin companies and many traditional banks outsource their collection functions, which reduces their ability to manage risk in their portfolios, particularly at larger ticket sizes or at challenging points in the credit cycle.
Unique data and financial DNA allow us to address these needs. Our unique combination of capabilities allows us to address the needs of small business owners and salaried workers:
We target high quality borrowers with larger ticket sizes. Our target customers are high quality borrowers who have financial assets, real estate, or some access to commercial bank credit and yet are underserved by online-only TechFin companies and traditional financial institutions in China. Among the borrowers we served in the first six months of 2020, approximately 92% of them have credit cards and at least 57% of them own residential real estate, while 57% of them do not have unsecured bank loans outstanding. These customers typically need larger loans for operating or consumptions purposes. Larger ticket size loans generally offer greater economies of scale and more attractive customer lifetime value, which makes these customers an attractive segment for us. Medium to large ticket size loans generate approximately 77% of total pre-tax profit of the retail credit market. In the first six months of 2020, our average loan size was RMB146,513 (US$20,738) for general unsecured loans and RMB422,398 (US$59,787) for secured loans, compared to an estimated average ticket size of only approximately RMB5,000 (US$708) for the other top 5 lenders among non-traditional financial service providers, according to Oliver Wyman. Due to the high entry barriers surrounding the large ticket size, small business owner lending space, we enjoy market leadership, high profitability and limited direct competition.
We have delivered stable through-the-cycle results. The balance of loans we facilitated grew at a CAGR of 26.6% from 2017 to 2019, while the DPD 30+ delinquency rate remained at less than 0.7% for secured loans we facilitated and less than 1.9% for general unsecured loans we facilitated as of December 31, 2017, 2018 and 2019, demonstrating the appeal of our target customer segments and our ability to effectively price for risk. DPD stands for days past due, and we define DPD 30+ delinquency rate as the outstanding balance of loans for which any payment is 30 to 179 calendar days past due divided by the outstanding balance of loans. See “— COVID-19 Impact” below for the impact of the pandemic on delinquency rates in the first six months of 2020.
Wealth Management
Large, fast growing wealth management market. Driven by the fast growth and high savings rate of the middle class and affluent population in China and their increasing demand for personalized investment and wealth management, the assets under management for the wealth management market reached RMB49 trillion (US$7 trillion) in 2019. The wealth management market is expected to grow to RMB118 trillion by the end of 2024, representing a CAGR of 19%.
Current players are not able to meet middle class and affluent investors’ needs. With the recent introduction of the New Asset Management Guidelines, the wealth management industry is moving from being product-centric to customer-centric, creating opportunities for technology- and data-driven personalized service offerings. However, the wealth management needs of the middle class and affluent are significantly underserved because these customers generally do not qualify for more comprehensive private banking services at traditional banks. They seek an increasingly sophisticated range of options but they may have difficulty selecting suitable solutions without assistance. Commercial banks offer limited products, mainly through higher-cost offline account managers who have limited wealth management expertise and lack specialized suitability management tools. Similarly, online-only TechFin companies seldom offer much beyond the most basic wealth management products with their focus to date mostly on smaller ticket cash management products linked to their ecommerce, social and payment platforms.
We uniquely address sophisticated needs by tailoring through technology. With nearly 10 years of accumulated data and experience, we are able to provide a full suite of wealth management services tailored to address more sophisticated investor needs:
We target large, profitable segments. The middle class and affluent customer segments are increasingly seeking diversification of assets and services including dynamic adjustment of their portfolios to meet their goals. As of June 30, 2020, we served 44.7 million registered users and 12.8 million active investors, and 75.4% of our total client assets were contributed by higher value investors with client assets above RMB300,000 (US$42,462). As of June 30, 2020, our average wealth management client assets were approximately RMB29,330 (US$4,151), more than three times higher than the average client assets of the other top 5 non-traditional financial service providers which is estimated to average around RMB8,000 (US$1,132). Our target investors tend to demand sophisticated product offerings, representing additional revenue potential. These features make them an attractive target customer base.
COVID-19 Impact
The resilience and fundamental strengths of our business model have been further proven during COVID-19. Although the DPD 30+ delinquency rate for general unsecured loans increased from 1.8% as of December 31, 2019 to 3.3% as of June 30, 2020 and the DPD 30+ delinquency rate for secured loans increased from 0.6% to 1.4% as of the same dates, we swiftly resumed the operation of our business and flow rate, which is an early indicator for delinquency, began to improve. In response to nationwide lockdowns in China at the end of January 2020, we made remote working arrangements for our collections staff, extended the usage of AI collection technology, and accelerated the launch of AI underwriting robots. As a result of these measures, we have seen recovery in early delinquency indicators in the second quarter of 2020, to levels around those that prevailed for most of 2019. The 1-to-89-day general unsecured loans flow rate improved to 0.6% in May, 0.5% in June and 0.5% in July after reaching a peak of 1.0% in February 2020 and the secured loans flow rate likewise improved to 0.2% in May, 0.2% in June and 0.1% in July after reaching a peak of 0.7% in February 2020. See “Business—Retail Credit Facilitation—Risk Management for Retail Credit—COVID-19 Impact” for the flow rate charts. Since we take limited credit risk under our capital-light business model, the increase in delinquencies had less impact on our financial results than those of our peers who bear higher credit risk than we do.
Critical aspects of our business model have been reinforced during COVID-19. Although we source customers through offline-to-online channels, our ability to serve customers entirely online has allowed our businesses to benefit from changing consumer behaviors and, as a result, maintain growth in the initial COVID-19 lockdown period. In a bid to drive economic recovery, Chinese government policies have further emphasized the importance of small businesses in reigniting growth and employment. Our ability to serve small business owners in cooperation with financial institutions is squarely in line with policy priorities. Our success in controlling credit risks through the COVID-19 crisis is reinforcing long-standing relationships with our institutional funding partners. Capital market volatility accompanying COVID-19 is accelerating individual investor understanding of the need to invest in a more diversified manner, further underpinning the importance of our data-driven matching engines to guide investors to more sustainable investing. The new policy priorities, increased online customer behavior, and greater openness by traditional financial institutions to seek new forms of business collaboration resulting from the pandemic are, together, likely to reinforce our competitive advantages.
Solid Performance and Growth Trajectory
Our platform has demonstrated significant growth and profitability in the last three years. Over the three years from 2017 through 2019, our total balance of loans facilitated grew at a CAGR of 26.6%, while our total wealth management client assets, excluding legacy products, grew at a CAGR of 39.4%. Our total income increased from RMB27.8 billion to RMB47.8 billion (US$6.8 billion), representing a CAGR of 31.1%, and our net profit increased from RMB6.0 billion to RMB13.3 billion (US$1.9 billion), representing a CAGR of 48.6%, during the same period. We had total income of RMB25.7 billion (US$3.6 billion) and net profit of RMB7.3 billion (US$1.0 billion) for the first six months of 2020. As we have become increasingly capital-light, our income contribution from technology platform services grew from 61.9% in 2017 to 87.7% in 2019, while our net margin increased from 21.7% to 27.8% during the same period. For the first six months of 2020, our income contribution from technology platform services was 83.5% and our net margin was 28.3%.
Our Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:
Our Strategies
We intend to continue to achieve our goals by pursuing the following strategies:
Retail Credit Facilitation
Wealth Management
Integrated Account
Our Challenges
Our ability to execute our strategies is subject to risks and uncertainties, including those relating to:
Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.
Market Opportunities
The retail credit market in China primarily consists of small business loans and individual consumer loans. In 2019, the outstanding balance of small business loans in China reached RMB43.1 trillion (US$6.1 trillion), representing a five-year CAGR of 14.3% between 2014 and 2019, and is expected to grow to RMB76.6 trillion in 2024, at a five-year CAGR of 12.2%, according to the Oliver Wyman Report. Small businesses serve as the backbone of the Chinese economy with significant contributions to China’s GDP, employment, tax revenues and innovation. The total demand for small business loans in 2019 was estimated to be RMB89.7 trillion (US$12.7 trillion), indicating that approximately 52% of demand (or RMB46.6 trillion) remained unserved. Such unserved demand is forecast to reach RMB50.0 trillion by 2024.
The funding gap is primarily due to the enormous difficulties faced by small businesses, which typically do not have an established operating history or substantial assets to be used as collateral in obtaining sufficient credit at a reasonable cost. In addition, traditional financial institutions and large online-only TechFin companies are often less well equipped to meet small businesses’ specific needs for a streamlined online application process, face-to-face collateral evaluation consultations, large ticket size and longer-tenured operating loans, choices of both secured and unsecured loans and prompt response to urgent funding requests. In comparison, technology-enabled large fintech players with strong technology and data capabilities and effective offline-to-online models are presented with great opportunities in addressing this unserved market.
China’s wealth management market has been growing rapidly, driven by the fast growth of the middle class and affluent population and their increasing demand for personalized investment. Total assets under management of the wealth management market reached RMB49.4 trillion (US$7.0 trillion) in 2019 and are expected to grow to RMB118.0 trillion by the end of 2024, representing a five-year CAGR of 19%. In particular, wealth management players who can leverage advanced technology, offer efficient processing time and maintain low distribution costs are experiencing significant growth. The online non-traditional financial service provider wealth management market had assets under management of RMB7.6 trillion (US$1.1 trillion) in 2019, which is expected to grow at a five-year CAGR of 29% to reach RMB27.5 trillion by the end of 2024, and the online penetration rate of wealth management services in China by total assets under management was 29% in 2019, compared with 43% in the U.S., and is expected to reach 42% in 2024.
There have been significant changes in products offered by the wealth management industry in response to China’s new asset management regulations, giving rise to greater specialization between asset managers and distribution channels, and accelerating the transition from guaranteed and short-term products to net asset value-based and long-term products. As a result, the market has seen a heightened focus on suitability for wealth management products, the rising demand for portfolio diversification and increasing emphasis placed on technology-empowered capabilities. Successful players must have advanced data and technologies to provide individualized investment recommendations and seamless investing experiences, and a strong brand and established operating history to build credibility, and they must comply with licensing and other regulatory requirements.
Recent Developments
We have achieved solid business growth in our core business during the third quarter of 2020. As of September 30, 2020, our total balance of retail credit facilitated reached RMB535.8 billion (US$75.8 billion), compared to RMB519.4 billion as of June 30, 2020 and RMB441.2 billion as of September 30, 2019. As of September 30, 2020, the total client assets generated through our online wealth management platform reached RMB378.3 billion (US$53.5 billion), compared to RMB374.7 billion as of June 30, 2020 and RMB350.9 billion as of September 30, 2019.
The APR of all new loans applied for after September 4, 2020 was below 24%, which is equivalent to below 13.7% in annualized nominal borrowing cost. We facilitated RMB54.8 billion (US$7.8 billion) of new loans in September 2020, representing a year-on-year increase of 20.1% over the same month in 2019. The corresponding numbers for the previous two months in the same quarter before the change in APR were RMB49.7 billion in July 2020 and RMB43.3 billion in August 2020. However, we have only begun to operate under the reduced APR and we cannot assure you that our performance in September 2020 is indicative of future trends.
Our credit performance has largely recovered from the COVID-19 impact, as our DPD 30+ delinquency rate decreased to 2.5% for general unsecured loans and 0.9% for secured loans as of September 30, 2020. The 1-to-89-day general unsecured loans flow rate was stable at 0.5% in July, August, and September. See “Business—Retail Credit Facilitation—Risk Management for Retail Credit—COVID-19 Impact” for flow rate charts.
Corporate History and Structure
The history of our retail credit facilitation business dates back to August 2005, when Ping An Group launched a consumer loan business in Shenzhen, China. The history of our wealth management business dates back to September 2011, when Ping An Group established its wealth management subsidiary in Shanghai.
In 2014, we underwent a series of reorganizations to further the strategic development of our business and incorporated our company in the Cayman Islands in December 2014 as a holding company. In May 2016, we acquired our retail credit facilitation business from Ping An Group.
We currently carry out our wealth management business primarily through Weikun (Shanghai) Technology Service Co., Ltd., Lufax Holding (Shenzhen) Technology Service Co., Ltd. and our consolidated affiliated entities, including Shanghai Lujiazui International Financial Asset Exchange Co., Ltd., or Shanghai Lufax. Since 2017, we have also expanded internationally with operations in Singapore and Hong Kong.
We conduct our retail credit facilitation business primarily through Ping An Puhui Enterprises Management Co., Ltd. and its subsidiaries as well as Ping An Puhui Financing Guarantee Co., Ltd. and Chongqing Jin An Microloan Limited. These entities are collectively known as Puhui. Shenzhen Ping An Puhui Microloan Co., Ltd., Hunan Ping An Puhui Microloan Co., Ltd. and Chongqing Jin An Microloan Limited have received regulatory approvals to provide microloan services. Ping An Puhui Financing Guarantee Co., Ltd. and Ping An Financing Guarantee (Tianjin) Co., Ltd. hold licenses for providing financing guarantee services. Ping An Consumer Finance Co., Ltd. is licensed to provide consumer finance services.
We intend to acquire majority interest in an affiliated company that is licensed to distribute wealth management products such as asset management plans, mutual funds and private investment funds in China. We have cooperated with this entity by facilitating its distribution of fund products on our wealth management platform. The transaction will be subject to regulatory approvals and customary closing conditions. The income and assets of the target company are not material compared to our total income and assets.
The following diagram illustrates our corporate structure as of the date of this prospectus, including our principal subsidiaries and our principal consolidated affiliated entities:
Notes:Corporate Information
Our principal executive offices are located at No. 1333 Lujiazui Ring Road 15/F, Shanghai, People’s Republic of China. Our telephone number at this address is +86 21-38632121. Our registered office in the Cayman Islands is located at Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our agent for service of process in the United States is .