IPO Launch: Lufax Looks To US For $2.2 Billion IPO

Goldman Sachs is the lead left underwriter. Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. …

Lufax (LU) intends to raise $2.2 billion in an IPO of its American Depositary Shares representing underlying ordinary shares, according to an F-1 registration statement.

Shanghai, China-based Lufax was founded to create the ability for consumers in China to obtain loans and wealth management services via an online portal.

Management is headed by Chief Executive Officer Mr. Gregory Dean Gibb, who has been with the firm since 2016 and is Chairman and CEO of Chong Qing Financial Assets Exchange.

Below is a brief overview video of Lufax (In Mandarin):

Source: Lufax

The company’s primary offerings include:

  • Retail credit facilitation
  • Wealth management

Lufax has received at least $2.1 billion from investors including Ping An Group and Tun Kung Company

The firm operates a ‘capital light, hub and spoke’ business model around its credit facilitation and wealth management hubs.

LU’s relationship to the Ping An Group provides access to that company’s 210 million financial services customers, some of which are small business owners and middle class and affluent investors.

The chart below shows the firm’s two-hub approach:

lufaxmarket

Sales and Marketing expenses as a percentage of total revenue have been rising as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, dropped by half in the most recent reporting period.

According to a 2018 market research report by China Daily, the consumer finance market in China is projected to reach $1.6 trillion by the end of 2020.

This represents a forecast CAGR of 18% from 2018 to 2020.

Despite the demand, only 28% of consumers in China possess credit ratings of any kind, as compared to 86% of the US.

Also, according to another market research report by the Boston Consulting Group and Lufax, China had around $2 trillion in online wealth management [OWM] in 2017 while the Chinese OWM market had reached $6 trillion with an online sales penetration rate of 34.6%, as of the end of Q1 2018.

The major factor driving market growth is the use of technology by fintech companies in OWM services.

The independent third-party internet wealth management segment has a penetration rate of only 10%, as compared to 35% in the US.

Major competitive or other industry participants include:

  • Ant Financial
  • Tencent Licaitong
  • Domestic commercial banks
  • Wealth management firms

Lufax’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing operating profit but decreasing operating margin
  • A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

lufaxpl

Source: Company registration statement

As of June 30, 2020, Lufax had $5.5 billion in cash and $19.9 billion in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was negative ($8.4 million).

Lufax intends to raise $2.2 billion in gross proceeds from an IPO of 175 million its American Depositary Shares representing underlying ordinary shares, offered at a proposed midpoint price of $12.50 per ADS..

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $26.1 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.17%.

Management says it will use the net proceeds from the IPO as follows:

We plan to use the net proceeds of this offering primarily for general corporate purposes, which may include investment in product development, sales and marketing activities, technology infrastructure, capital expenditures, global expansions and other general and administrative matters. We may also use a portion of these proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Goldman Sachs [Asia], BofA Securities, UBS Investment Bank, HSBC, China PA Securities, Morgan Stanley, CLSA, Jefferies, J.P. Morgan, BOCI, Haitong International, Stifel, China Renaissance and KeyBanc Capital Markets.

Commentary

Lufax is seeking to go public in the U.S. as industry giant Ant Financial is finalizing its monster $35 billion IPO on the Hong Kong Stock Exchange.

The company’s financials show continued topline revenue growth despite the Covid-19 pandemic, an impressive result.

However, operating cash flow has taken a hit and turned negative in the most recent reporting period.

Sales and Marketing expenses as a percentage of total revenue have also risen; its Sales and Marketing efficiency rate has been cut in half. Neither trend is positive.

The market opportunity for providing credit facilitation and wealth management services in China is in a long upswing as consumers seek online platforms to achieve better returns on their increasing discretionary income and to obtain credit.

Goldman Sachs is the lead left underwriter.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. investors would only have an interest in an offshore firm with uncertain rights to the firm’s operational results.

This is a legal gray area that brings the risk of management changing the terms of the relationship or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

As to valuation, it’s difficult to find a direct comparison for the firm’s combination of services and scale of operations.

However, much smaller 9F provides many of the same functions but has performed poorly in the current year

Given Lufax’ strategic relationship with Ping An and solid revenue growth and earnings, its proposed EV/Revenue multiple of 3.75x appears reasonable.

LU may be a company that is able to weather the remaining Covid-19 pandemic effects better than most.

My opinion on the IPO is a BUY at up to $12.50 per ADS.

tstBUY

Expected IPO Pricing Date: October 29, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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Morgan Stanley’s WhatsApp woes – How to get hired at Blackstone — Private-equity comp, revealed

The Goldman Sachs logo is seen displayed on an Android mobile phoneOmar Marques/SOPA Images/LightRocket via Getty Images. After a six-month …

Happy Saturday!

It was a busy week for Wall Street news, with fines, exits, pay cuts, and more. Here’s what you need to know:

  • 2 top Morgan Stanley commodities execs have left after the bank discovered the group was improperly using WhatsApp to communicate. A source familiar with the matter told Business Insider the two had displayed a “failure to supervise use of the communications within the commodities business.”
  • Goldman Sachs is paying billions in fines over the 1MDB scandal and cutting exec pay. Here’s what’s been going on inside the bank.
  • JPMorgan is considering hiring as many as 4,000 financial advisors in the next five to six years, wealth boss Kristin Lemkau told Business Insider. The firm has already hired large teams of experienced FAs from rivals including Merrill Lynch and UBS in recent months.
  • Wells Fargo is exploring a sale of its asset management business, Reuters first reported.
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How to ace an interview at Blackstone

Reed Alexander and Casey Sullivan chatted with Blackstone President and COO Jon Gray, industry headhunters, and Blackstone’s global head of human resources to learn what it takes to stand out and get hired at the firm. Here are some of the highlights:

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  • There were 19,000 applications for the firm’s 2020 first-year analyst class, and just 94 were hired, according to data Blackstone shared.
  • “At a place like this, we have relatively few people. And we really need people who care,” Gray said.
  • “I look for too many references to ‘I’ versus ‘we,'” Paige Ross, Blackstone’s global head of HR, told Business Insider. “Most people do things as part of a team, and I want to see candidates accurately reflect that.”
  • You can read the full story here: Blackstone insiders reveal how to land a job at the ultra-competitive private-equity giant

If you’re not yet a newsletter subscriber, you can sign up here to get your daily dose of the stories dominating banking, business, and big deals.

Inside the alumni network of billionaire Israel Englander

Millennium Management, the massive hedge-fund manager founded by the billionaire Israel Englander more than 30 years ago, has a sprawling web of alumni who have gone on to found their own firms.


Bradley Saacks found that more than 70 former employees have launched their own funds across the globe. You can see the full story, database, and graphic here.

Private equity pay, revealed

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While raises weren’t as common as they were a year ago, a majority of respondents to Heidrick & Struggles latest survey on private-equity compensation say they got a pay bump over their 2019 base salary.Associates, even at the smallest funds, averaged nearly $200,000 in base salary and bonus last year. You can see all the data here.

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Why Goldman Sachs and Blackstone are betting billions on data centers

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Demand for data centers has boomed and bluechip investors like Goldman Sachs, KKR, and Blackstone have taken notice, announcing deals and unveiling plans to invest.

On Tuesday, Goldman said it would invest $500 million into data centers around the globe. And as Dan Geiger reports, users continue to take spaces — with ByteDance, the parent of TikTok, signing up for 53 megawatts in Northern Virginia and Bloomberg LP anchoring a huge data-center complex in New Jersey.

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You can read our full analysis here.

The code for Goldman Sachs’ internal data platform is now open for anyone to use

After a six-month pilot period where banks like Morgan Stanley and Deutsche Bank put it to the test, Goldman Sachs’ internal data platform Legend is being released to whoever wants to use it on coding-collaboration site Github.

The bank’s data chief told Bradley Saacks why the firm decided to share something seven years in the making.

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How Deloitte and EY struck gold by helping states with their pandemic responses

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As Samantha Stokes reports, tax and audit firms Deloitte and EY have found business opportunities by contracting with state governments to provide technical support, staffing for unemployment claims centers, and more.

In 10 contracts with four states, the two firms have netted more than $63 million. The contracts were awarded without a bidding process.

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Highlights from this week’s Business Insider Global Trends Festival:

  • Klarna CEO Sebastian Siemiatkowski on why digital retail checkouts are a huge buy now, pay later battleground: “There are a lot of buttons in the checkout. I just want to be the most popular.”
  • Nasdaq CEO Adena Friedman on the future of the cloud: “Do I think in 10 years, that many of the markets around the world, including Nasdaq, could and should be able to leverage cloud to operate their actual trading activities? The answer is yes, I do.”
  • FactSet CFO Helen Shan on how the data giant quantifies innovation: “Speed, reliability, ease of use. People don’t necessarily think of that as innovation, but the reality is that is.
  • AlixPartners CEO Simon Freakley on what’s separated winners from losers in 2020: “One doesn’t have to have an online strategy to be successful, but one has to have a defining strategy.

On the move

Opendoor has hired Daniel Morillo to be the iBuyer’s chief investment officer. Morillo is currently a managing director and head of equity quantitative research at $34 billion hedge fund firm Citadel. Opendoor last month announced plans to merge with Social Capital Hedosophia Holdings Corp II, a SPAC led by venture-capitalist Chamath Palihapitiya.

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Real estate

  • This company is building 3-D printed, small homes on existing residential properties to fight back against California’s housing shortage. Look inside a unit that was move-in ready in one week.

What Does Marcus Mean to Goldman Sachs’ Stock?

What Does Marcus Mean to Goldman Sachs‘ Stock? Marcus is Goldman’s push into consumer banking, and could play a critical role in the bank’s …

Marcus is Goldman Sachs’(NYSE:GS) digital consumer bank that offers high-yield savings accounts, high-yield certificate of deposits, unsecured loans, and credit cards. Goldman launched the division in 2016, but in recent years it has become much more of a focus for the leading investment bank, as Goldman looks to diversify its revenue mix and add stability to earnings when investment banking and global markets activity isn’t as strong.

Here is what Marcus means to Goldman Sachs and its stock.

Digital Bank

Image source: Getty Images.

How big is the division?

If you look at a breakdown of Goldman Sachs’ revenue, 60% comes from investment banking and trading activities, while the remaining 40% is split between asset management and wealth management and consumer.

Goldman Sachs Q3 Revenue Mix

Image source: Goldman Sachs earnings presentation.

Marcus is part of the consumer slice, and had gathered $96 billion in deposits and $7 billion in loan volume at the end of the third quarter, $3 billion of which is from Goldman’s new Apple card . The $96 billion in deposits is a good haul, considering there are only about 30 banks in the U.S. with more than $100 billion in assets.

However, the consumer division still makes up a small portion of revenue. Of the roughly $1.5 billion of revenue in the third quarter from Goldman’s consumer and wealth management division, nearly $1.2 billion is from wealth management, while $326 million is attributed to the consumer banking, although that’s up 50% year over year .

A key part of the strategy

Although Marcus is still relatively small when you look at the portion of revenue it brings to the mix, it is a critical piece of Goldman’s long-term strategy. The market right now seems to find investment banks with greater revenue diversity more attractive, with the belief that these banks can generate higher earnings when sales, trading, and investment banking activity are not as strong.

For instance, Morgan Stanley(NYSE:MS) has really worked to bulk up its asset and wealth management divisions this year, acquiring E*Trade and then Eaton Vance(NYSE:EV) in two landmark deals collectively worth $20 billion. Once both of those companies are fully integrated, Morgan Stanley expects to generate more revenue from asset and wealth management than investment banking and trading.

Currently trading at about 10 times earnings, Morgan Stanley’s CEO James Gorman said investors are only valuing the company as a pure trading business. However, he said he thinks the stock should and will eventually trade more like one of its main competitors, Charles Schwab(NYSE:SCHW), which trades around 20 times earnings. The majority of Schwab’s revenue comes from a range of banking services and asset management .

Goldman is probably thinking about its consumer and wealth and asset management divisions in a similar way, trying to increase their share of overall revenue. After the third quarter, Goldman is trading at a trailing price-to-earnings multiple of 11.4 , and that’s after two very strong quarters of earnings, leaving it some potential upside.

Look for Marcus to grow

The consumer piece of Goldman has been getting bigger and bigger. Marcus’ high-yield savings accounts expanded into the United Kingdom and performed incredibly well. The investment bank teamed up with Apple to offer a new credit card. Recently, Marcus teamed up with Walmart to offer marketplace sellers lines of credit ranging from $10,000 to $75,000 . Goldman ultimately wants Marcus to be a full-service bank, according to Goldman’s Chief Strategy Officer Stephanie Cohen , so expect Marcus to keep growing and offering new products. As of now, it looks like the more Goldman can increase revenue at Marcus, the higher investors will value the stock.

Morgan Stanley’s CEO explains why the bank’s $7 billion bid for Eaton Vance makes sense even …

This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Morgan Stanley chief executive James …
  • Morgan Stanley chief executive James Gorman told analysts on Thursday’s earnings call that his bank paid a steep price in its bid to acquire investment manager Eaton Vance for $7 billion in cash and stock.
  • Nevertheless, he maintained that the deal will bear fruit for the New York-based bank.
  • The announcement of the Eaton Vance deal came just six days after closing its all-stock E-Trade acquisition, which was valued at $13 billion when the deal was announced in February.
  • Gorman seemed to throw cold water on the notion that Morgan Stanley might be entering into an M&A shopping spree.
  • Visit Business Insider’s homepage for more stories.

Morgan Stanley chief executive James Gorman defended the bank’s recently announced bid for asset manager Eaton Vance despite the high price tag of the deal.

Earlier this month, the New York-based bank announced its plans to acquire the Boston-based investment manager for $7 billion in cash and stock.

“I’m not ashamed to say it’s fully priced, but this is a quality asset,” Gorman told analysts on the bank’s 2020 third-quarter earnings call. “We will get the expenses out of this. We will consolidate this. We will generate revenues from it.”

“I’m positive that this deal is going to deliver,” he added.

Read more: Why Morgan Stanley’s $7 billion bid for a storied asset manager gives it a leg up on rivals and signals more deals to come

The announcement of the Eaton Vance deal came just six days after closing its all-stock E-Trade acquisition, which was valued at $13 billion when it was announced in February. The closure of the E-Trade deal and announcement of the Eaton Vance acquisition in such quick succession had some industry watchers wondering if Morgan Stanley might be on the precipice of a buying frenzy.

But Gorman seemed to cast cold water on that theory on the call, and laid out reasons why the Eaton Vance deal — which would beef up Morgan Stanley’s asset management division to $1.2 trillion in assets — makes sense.

“It certainly came hot on the tail of E-Trade,” Gorman said. “We didn’t want to communicate, all of a sudden, we’re trying to do an acquisition week. We’re not. We didn’t control the timing.”

He explained that he is optimistic that Eaton Vance will bolster Morgan Stanley’s fixed income asset management business “in a way that we couldn’t have done otherwise, and it provides us some real growth endurance.”

Gorman also expects to see fund sales go up through the acquisition.

“We have trouble getting our product distributed domestically because we don’t have a strong wholesaling sales force as others do. They do. They have a world-class one,” he said.

Representatives for Morgan Stanley did not immediately respond to a request for comment from Business Insider.

Despite its recent purchases, Gorman signaled that Morgan Stanley is not on an M&A buying spree

On the earnings call, Mike Mayo, an analyst with Wells Fargo, pressed Gorman on the bank’s long-term M&A strategy, suggesting that Morgan Stanley had altered course in recent years, “reversing some of the actions that you took,” Mayo said.

He referred to deals like Morgan Stanley’s sell-off of Van Kampen Investments for $1.5 billion a decade ago.

“We’ve not had a long-term reversal,” Gorman said. “This is not a change in strategy at all. This is about getting scale in the businesses we want to be in.”

Gorman pointed to other instances in which the bank has sold off some of its assets, including its 2011 split from hedge fund FrontPoint; the 2012 sale of resident mortgage loan provider Saxon Mortgage Services; and its 2014 sale of oil pipeline company Transmontaigne.

Those deals demonstrate the bank has maintained a steady trajectory in streamlining other business lines in recent years, Gorman said.

As a result, Morgan Stanley shouldn’t be seen as going on an M&A shopping spree in light of its two recent purchases.

“We have fundamentally … changed the profile of this company to focus on originating, distributing and managing capital for individuals, governments, and institutions,” Gorman said. “That’s what we do, and this is entirely consistent with that.”

Morgan Stanley’s Gorman believes the Eaton Vance deal will generate long-term value prospects

In expressing bullishness for the long-term prospects of the Eaton Vance acquisition, Gorman refuted the notion that the deal wouldn’t yield returns meaningful enough to warrant its cost.

In shoring up his argument, Gorman made a reference to the high costs of past deals Morgan Stanley has made, like the $900 million purchase of software company Solium last year, or its $2.7 billion purchase of Citigroup’s wealth division in 2008, which went on to become Morgan Stanley Smith Barney. (The group was renamed to Morgan Stanley Wealth Management in 2012.)

“If we overpaid by a couple of hundred million dollars [on the Eaton Vance purchase], people said we overpaid Solium by a couple of hundred million dollars. Some people said we overpaid Smith Barney by a couple of hundred million dollars,” he said.

“I take a very long-term view on acquisitions,” he added.

Other Wall Street giants are looking to ramp up deals

Meanwhile, M&A activity has begun to regain some of the rhythm it lost earlier this year as the coronavirus pandemic ground much M&A activity to a halt.

Earlier this week, the chief executives of BlackRock and JPMorgan Chase — the largest asset manager and the largest US bank by assets, respectively — indicated that they were interested in ramping up acquisition activity on their firms’ individual quarterly earnings calls.

Read more:JPMorgan and BlackRock say they’re interested in money-management deals, but they’re eyeing very different targets

“We would be very interested, and we do think you’ll see consolidation of the business,” said JPMorgan chief Jamie Dimon on the bank’s earnings call Tuesday.

And Gary Shedlin, BlackRock’s CFO, suggested on his firm’s earnings call that the rest of the industry is trying to catch up to the portfolio the $7.3 trillion fund manager has already built.

Now, BlackRock is more interested in pushing ahead into new M&A territory, he said on the call, considering deals that “will broaden our technology capabilities, expand our global distribution reach and potentially scale certain parts of our private markets franchise.”

BlackRock is “much less focused on the pursuit of traditional investment management consolidation,” Shedlin added.

Morgan Stanley crushes profit estimates

Morgan Stanley eased past Wall Street estimates for profit on Thursday, wrapping up mixed third-quarter earnings for big U.S. banks that saw those …

Morgan Stanley eased past Wall Street estimates for profit on Thursday, wrapping up mixed third-quarter earnings for big U.S. banks that saw those focused on trading clocking big gains while retail banks took a hit from the pandemic. Fred Katayama reports.