Lufax Holding Ltd.

LU Details

Lufax Holding Ltd. (NYSE: LU) is the operator of a technology-driven personal financial services platform in China. The company primarily provides retail credit facilitation services to small business owners and salaried workers through its customer-centric product offerings via offline-to-online channels. LU also provides customized wealth management solutions to China's rapidly expanding middle class. The company was listed on NYSE on October 30, 2020. As of July 09, 2021, LU’s market capitalization stood at USD 22.16 billion, with 2.46 billion American Depository Shares (ADS) listed and outstanding (two ADS representing one ordinary share).

Launch of AI-enabled Smart Loan Solutions: LU stated on June 16, 2021, that its retail credit platform business, Ping An Puhui (Puhui), has released Xingyun, a smart loan solution driven by artificial intelligence (AI). It uses AI to speed up the loan application process for small and micro consumers, reducing the average time spent on a loan application by 44% and increasing customer’s access to finance.

Q1FY21 Results: In Q1FY21 (ended March 31, 2021), the company reported a 16.90% increase in total income to RMB 15.25 billion, up from RMB 13.05 billion in Q1FY20. Net profit for Q1FY21 was RMB 4.97 billion, vs RMB 4.19 billion reported in Q1FY20. The cumulative number of borrowers during Q1FY21 increased by 17.1% to 15.1 million from 12.9 million in Q1FY20.

Key Risks: LU primarily works in China, where the fintech business has seen a lot of growth. The Chinese authorities' recent crackdown on its US-listed Tech businesses and the consequential possibility of tougher rules could dent the company's operations. This is after the passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.

Further, LU also has a long-standing business relationship with the Ping An Group, for which it administers loan accounts, facilitates wealth management products, and provides technical assistance services. The loss of this partnership due to any cause might hurt the company’s financial performance.

Outlook: For Q2FY21, LU expects its total income to be in the range of RMB 14.9 - 15.1 billion, and net profit to grow 20-26% YoY to RMB 3.7 - 3.9 billion. For H1FY21, estimates for total income range between RMB 30.2 - 30.4 billion, and for net profit between RMB 8.7 - 8.9 billion.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

LU Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: LU's share price has declined by 34.68% in the past three months and is currently trading in the lower band of the 52-week range of USD 8.70 to USD 20.17. The stock is currently trading below its 50 DMA levels, and its RSI Index is 26.06. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 11.37. On the technical chart, the next support level is USD 8.70. Considering the significant correction in the stock price in the past 3 months, decent balance sheet, current valuation, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 9.55, up by 6.11% as of July 09, 2021.

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

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level. 

DouYu International Holdings Limited

DOYU Details

DouYu International Holdings Limited (NASDAQ: DOYU) is a pioneer in the eSports value chain and provides a game-centric live streaming platform in China. The platform provides users with immersive and interactive games and entertainment live streaming on both PC and mobile apps, as well as access to a wide selection of premium eSports content through partnerships with key stakeholders in the eSports value chain. As of July 09, 2021, DOYU’s market capitalization stood at USD 1.79 billion, with 324.41 million American Depository Shares (ADS) listed and outstanding (10 ADS representing one ordinary share).

China Watchdog Blocks Merger: Chinese antitrust regulator has blocked the company’s sale to Huya Inc., another provider of live game streaming services in China. The merger deal was proposed by Tencent Holdings Limited, the largest shareholder in both firms, on October 12, 2020. Tencent was unable to come up with enough remedies to timely satisfy the State Administration of Market Regulation's (SAMR) standards for relinquishing exclusive rights. After the antitrust agency indicated it couldn't finish the review on the deal within 180 days of its initial filing, Tencent withdrew the merger application.

Q1FY21 Results: The company reported a 5.50% drop in net revenue in Q1FY21 (ended March 31, 2021) to RMB 2.15 billion, compared to RMB 2.28 billion in Q1FY20, owing to paying users' consumption reverting to pre-pandemic levels. Net loss for Q1FY21 was RMB 101.83 million vs net income of RMB 254.53 million reported in Q1FY20. Average Monthly Average Users (MAUs) in Q1FY21 increased 21.3% to 191.9 million from 158.1 million in Q1FY20. 

Key Risks: DOYU works mostly in China, where much of the growth in the gaming industry has occurred. The Chinese authorities' recent crackdown on its US-listed Tech businesses and the consequential possibility of tougher rules could dent the company's operations. This is after the passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.

Further, DOYU's user traffic is largely derived from eSports games. The company's user and streamer base may shrink dramatically if it fails to attract users through live streaming of popular eSports games or if game developers/publishers fail to sustain the operation of their online games, thus impacting its results of operations.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

DOYU Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: DOYU's share price declined by 61.07% in the past nine months and is currently leaning towards the extreme lower end of the 52-week range of USD 5.30 to USD 20.54. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is 24.75. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 6.83. Considering the significant correction in the stock price in the past nine months, increasing demand for online gaming platforms, a consistent increase in MAUs, China’s crackdown, and other associated risks, we recommend a "Speculative Buy” rating on the stock at the closing price of USD 5.45, down by 1.45% as of July 09, 2021.

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

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.