OneConnect Inches Closer to Profits Under Leadership of New Chairman

Key Takeaways:

• OneConnect’s revenue increased 17% in the second quarter, while its loss narrowed by nearly a third
• The company promoted CEO Shen Chongfeng to the additional role of chairman, consolidating its leadership into a single executive

By Warren Yang

Financial technology service provider OneConnect Financial Technology Co. Ltd. OCFT is continuing to make strides in its journey to profitability, as reflected in its latest financial results that show growing revenue and more efficient operations helped to significantly narrow its quarterly loss. Yet there’s still work to do as it tries to expand its client base and to become more independent of shareholder Ping An Group.

The company hopes it can achieve such independence by appealing to a broader range of customers under the leadership of a new chairman, whose appointment was announced last week concurrent with the latest results. Shen Chongfen became OneConnect’s clear leader with his elevation to the new role while also retaining his current position as CEO.

OneConnect’s revenue grew about 17% year-on-year to 1.1 billion yuan ($161 million) in the second quarter, according to its announcement. While that’s a solid achievement, equally important was the substantially narrower loss on the technology-as-a-service provider’s bottom line. Its operating loss for the three months narrowed about 30% to 278 million yuan from a year earlier. Excluding expenses related to its Hong Kong IPO last month, which complemented its older New York listing, the figure shrank further to 246 million yuan.

Growing revenue isn’t the only engine pushing OneConnect closer to profitability, with cost controls also playing a role. The company’s cost of revenue increased just 12%, well below the 17% revenue growth, which means it spent less to generate each dollar of revenue. Consequently, the company’s gross margin improved by about 2 percentage points to 36.2%.

In a research note, Morgan Stanley analysts said that “despite macro headwinds, (OneConnect) is likely to maintain decent growth in (the second half of 2022), riding on resilient operational business.”

OneConnect, whose technology helps financial institutions perform functions like anti-fraud checks and credit risk assessments, attributed the improved efficiency to increased product standardization, a key priority as it tries to improve profitability by reducing costly customization.

Somewhat unexpectedly, the company has been resilient in that regard from the Covid-19 pandemic, which has mostly hurt other businesses in China. That’s because most of OneConnect’s products were customized in the past for the banks that are its main customers.

But many of those customers have been shifting to standardized products since the start of the pandemic as a cost control measure, said Shen, speaking on a post-results conference call for the first time in his new role as both chairman and CEO. Better yet, in the process of shifting to standardized products, the company’s bank customers increasingly realize such tools are actually better, which makes them stick to those products. 

OneConnect’s operating expenses fell as well during the quarter. Its R&D costs increased, in line with the firm’s aim to always offer cutting-edge products and services. But spending for sales and marketing fell as the company’s salesforces became more efficient while new Covid-19 outbreaks hindered marketing activities.

Like many U.S.-listed Chinese firms, OneConnect made a dual primary listing in Hong Kong in July to complement its New York listing that dates back to 2019. Such dual listings or second listings make the shares more accessible to Chinese investors that are more familiar with the company, and also act as a hedge against volatile relations between the U.S. and Chinese securities regulators. 

OneConnect’s margins also got a second-quarter boost from a growing pool of lucrative customers. The number of “premium-plus” customers — those that contribute at least 1 million yuan each annually, excluding Ping An and its subsidiaries — grew about 19%.

New leader to execute strategic plan

Despite the profitability gains, OneConnect remained dependent on Ping An in the second quarter. The company was initially set up in 2015 as Ping An’s financial technology arm and was spun off as a separate company later when it was ready to provide its products and services to external customers. Revenue from Ping An increased about 21% during the quarter and its overall contribution to OneConnect’s total revenue increased slightly to about 60% in the period.

According to the firm’s management, having Ping An as its largest customer allows the firm to develop and hone its products and services. In that process it can then fix any shortcomings before introducing them to the wider market.

OneConnect laid out a five-year plan a year ago with a central focus of diversifying its revenue to include a wider range of customers, both within China and also overseas. The plan’s central plank was aimed at helping banks to digitize their products and services to improve their efficiency. It also aimed to focus more closely on government policy, and to develop a corporate ecosystem around its products and services, while also building up its overseas business.

On a more practical front, the five-year plan also includes a shift to focusing on customers that can bring in large revenue so the company can eventually prosper with or without Ping An. But the second-quarter results show that achieving this goal remains a top priority.

That plan was initially rolled out by former chairman Ye Wangchun. With the company now helmed by the relatively young Shen, who arrived a year ago and is now 52, OneConnect will have a clear leader responsible for executing that plan.

Investors appear undecided on whether they should pay more attention to OneConnect’s improving margins and the fact that it delivered earnings that were better than what analysts had anticipated, or its continued reliance on Ping An. Many investors may also be waiting to see if the U.S. and China will reach an important information-sharing agreement that would remove the threat of delisting from many U.S.-traded Chinese stocks. The stock initially fell after the announcement, but has surged in the last two days amid a broader rally for Chinese stocks on reports that Beijing and Washington are close to ending the long-time impasse on audit disclosures.

OneConnect’s shares trade at a price-to-sales (P/S) ratio of about 0.78 both in New York and Hong Kong. That’s lower than 1.3 for Lufax, though neither figure implies a fair valuation, especially for a technology company.

At the end of the day, OneConnect’s progress in its efforts to turn a profit looks promising. But investors probably want to see more business with non-Ping An customers drive that journey, and they may also worry more generally about China’s slowing economy.