OneConnect Files for Hong Kong Listing, But Customer Diversification Remains Key

Key Takeaways:

• OneConnect said it has filed to make a ‘listing by introduction’ in Hong Kong, meaning it will become traded there but won’t raise any money or issue new shares
• Provider of digital services to banks reported its number of ‘premium’ customers grew 34% last year, but controlling shareholder Ping An’s contribution to revenue grew to 56% from 52% 

By Warren Yang

Just a day after announcing its latest earnings, OneConnect Financial Technology Co. Ltd. OCFT has filed for a second listing in Hong Kong, aiming at broadening its investor base and boosting its share liquidity. The move would make it the latest among a growing list of its Chinese peers pursuing second listings as a hedge in case the U.S. regulator forces Chinese companies to delist from Wall Street.

OneConnect would make a “listing by introduction” that isn’t something one sees in the U.S. Such low-key listings allow companies to become publicly traded without issuing new shares or raising new funds.

OneConnect considered both the Asian financial hub and New York for its 2019 IPO, but ended up choosing the latter, reportedly to get a higher valuation. A successful dual listing in Hong Kong would be the first by a New York-listed Chinese fintech company, adding OneConnect to the ranks of non-internet Chinese companies like Tesla rival Xpeng XPEV 9868.HK)), which also recently completed a Hong Kong listing to complement its current New York listing.

Word of the listing plan came close on the heels of the company’s latest results announcement, which showed some progress in its ongoing drive to diversify its client base in the fourth quarter as its losses narrowed during the period.

OneConnect shares didn’t move on the latest earnings report or the listing announcement. They now trade at a price-to-sales (P/S) ratio of just 0.9 based on 2021 revenue, far below multiples for some of the other providers of financial technology services, such as Lufax, which commands a P/S ratio of 2.3. 

But the stock surged 18% the day before the earnings announcement, fueled by the company’s separate announcement of a share buyback plan. The program, which will see the company buy back up to 2% of its total outstanding shares, is a shot in the arm for OneConnect’s slumping stock, which has lost more than 80% of its value since its IPO in 2019.

Customer Diversification

Since its founding, OneConnect’s heavy reliance on business from its de-facto parent, Ping An Group, has been a bit of an Achilles’ heel for the company. Its latest annual results show it’s making progress in addressing that vulnerability, although the company still has a lot of work to do ahead of the planned second listing in Hong Kong.

OneConnect, whose technology platform for financial institutions performs functions like anti-fraud checks and credit risk assessments, reported its revenue grew 19% year-on-year in the fourth quarter to 1.3 billion yuan ($206 million), while its loss for the period narrowed to 358 million yuan from 365 million yuan. That brought its revenue for the year to about 4.1 billion yuan, representing solid 25% growth from 2020. Gross profit for the year grew 15.5% to 1.4 billion yuan, while its annual net loss narrowed to 3.47 yuan per share from 3.81 yuan in 2020.

A promising element of its latest results is that the number of “premium” customers – those that contribute at least 100,000 yuan each annually, excluding Ping An and its subsidiaries – increased 34% to 796 last year, faster than the 26% growth in 2020. The pool of “premium-plus” customers, institutions that bring in at least 1 million yuan each in annual revenue, expanded about 26% to 212.

The company’s revenue retention rate for premium customers, as measured by how much those customers spent last year compared to 2020, also increased to 96% from 84%. This essentially means the company did a better job at retaining revenue from each customer on average, indicating its clientele has become more loyal.    

Growing its high-value customer base outside the Ping An family is a key focus for OneConnect, and something closely watched by investors. OneConnect was initially Ping An’s financial technology arm and was spun off as a separate company in 2017. But the two maintain close business ties, which many see as a major weakness for OneConnect, even though the company’s customers also include all of China’s major banks and more than half of the country’s insurers.

Despite the expansion of its premium customer base, revenue from overall third-party clients outside the Ping An family increased by an underwhelming 12% last year, slower than the 20% growth rate in 2020. Revenue from Ping An increased 34% for the year, accounting for 56% of total sales, up from 52% in 2020. Another 10% came from Lufax LU, Ping An’s separately-listed fintech affiliate, the same proportion as in 2020.

Ping An’s continued big contribution may owe partly to slowing sales growth to non-premium customers as OneConnect switched its focus to larger accounts. Such a strategy could make sense in the long-term by allowing OneConnect to focus its resources on its best customers to build them up as a greater buffer against any potential changes in its Ping An-related business.

Last year was a tough time for U.S.-listed Chinese stocks in general, as they became pawns in a range of regulatory tensions between Beijing and Washington. OneConnect also faced some company-specific issues, including accusations by a former employee, which the company denied.

Winning New Customers

For now, delivering more significant revenue growth from third-party customers to boost its longer-term attractiveness remains a priority, while the company also seeks to broaden its investor base in Asia. Since 2021, the company has shifted its strategy to deepening its engagement with customers who will have more sizable demand for its solutions and have the potential to become premium and premium plus customers. That’s part of its five-year growth strategy, aimed at convincing investors it can thrive with or without Ping An.

Opportunities to win new customers should be plentiful for OneConnect. With Covid-19 and its resulting changes in working arrangements, financial institutions in China and elsewhere are increasingly trying to go digital, which will translate into growing demand for OneConnect’s services. Plus, unlike other technology-related companies that face tougher government scrutiny, OneConnect stands to benefit from a government push for the digitalization of financial services, which is forecast to become a $60-plus billion industry in China by 2024.

In a highly symbolic development in that regard, OneConnect in January signed a strategic partnership with a financial technology company established by the People’s Bank of China, the county’s central bank. Such shows of government-related support are critical for a company’s success in China, especially in the heavily regulated financial sector. Also, its effort to replicate its success overseas will be crucial to its customer diversification. The Company currently has presence in 20 markets covering 130 customers. All this should give OneConnect enough to work with to create a more compelling story for investors. At the end of the day, the biggest challenge will be for it to produce more concrete evidence of its ability to survive without relying on Ping An.