Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> is restructuring its business holdings, with at its core the setting up of a financial holding company</li>
<li>In addition, Ant will return to its roots in the payments division, it will set up a personal credit reporting company as well as establishing a consumer finance company</li>
<li>The official press release does not mention the investmentech arm that includes Ant’s in-house asset manager, but there is financial press speculation that it may be required to shrink its asset base</li>
<li>In essence, the new structure and more intrusive regulation will limit Ant’s ability to extract synergies from its – previously – tight knit financial eco-system, which can only hurt its potential develop further economies of scale and deliver premium revenue and earnings growth</li>
<li>It is also likely that in its consumer credit business it will need to retain a higher proportion of loans originated, thereby necessitating higher capital levels; the personal credit reporting company will also provide PBoC with access to Ant’s “big data” on payments, credit and other financial products</li>
<li>Despite the need for further clarity on the regulatory structure going forward, as well as the lack of any updated Ant financials to December 2020, we have arrived at a revised valuation range for Ant, based on our pre-money SOTP, of USD122-144bn</li>
<li>The regulator’s focus on big FinTech in China and especially Ant is constructive for the prospects of other less dominant non-bank financial companies (NBFCs) in China, such as <a href="https://www.smartkarma.com/entities/lexinfintech-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26036:1" rel="noopener">Lexinfintech Holdings (LX US)</a> and <a href="https://www.smartkarma.com/entities/lufax-holdings" target="_blank" data-smartkarma-citation="entities:29690:1" rel="noopener">Lufax Holdings (LU US)</a>, as well as retail focused banks like <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a> </li>
<li>Risks to our cautious view on Ant include an ability for management to navigate the climate of tighter regulatory constraints and to deliver better than expected premium growth and returns from its digital financial platform</li>
</ul>



Ant Financial Services Group (6688 HK) is restructuring its business holdings, with at its core the setting up of a financial holding company
In addition, Ant will return to its roots in the payments division, it will set up a personal credit reporting company as well as establishing a consumer finance company
The official press release does not mention the investmentech arm that includes Ant’s in-house asset manager, but there is financial press speculation that it may be required to shrink its asset base
In essence, the new structure and more intrusive regulation will limit Ant’s ability to extract synergies from its – previously – tight knit financial eco-system, which can only hurt its potential develop further economies of scale and deliver premium revenue and earnings growth
It is also likely that in its consumer credit business it will need to retain a higher proportion of loans originated, thereby necessitating higher capital levels; the personal credit reporting company will also provide PBoC with access to Ant’s “big data” on payments, credit and other financial products
Despite the need for further clarity on the regulatory structure going forward, as well as the lack of any updated Ant financials to December 2020, we have arrived at a revised valuation range for Ant, based on our pre-money SOTP, of USD122-144bn
The regulator’s focus on big FinTech in China and especially Ant is constructive for the prospects of other less dominant non-bank financial companies (NBFCs) in China, such as Lexinfintech Holdings (LX US) and Lufax Holdings (LU US), as well as retail focused banks like Postal Savings Bank of China (1658 HK) 
Risks to our cautious view on Ant include an ability for management to navigate the climate of tighter regulatory constraints and to deliver better than expected premium growth and returns from its digital financial platform


<ul>
<li>Globally, banking regulators are upping their scrutiny of Big Techs in finance, with China at the forefront of the regulatory effort to “level the playing field” between Big Techs and its banks</li>
<li>China stands out globally for the broad and rapid establishment of its Big Techs across the domestic finance ecosystem, led by <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> </li>
<li>Regulatory constraints on Ant Group’s online finance operations could potentially curtail the growth of its credit business; yet it has recently been reported that Ant is calling for a higher share of commissions from transactions on its payments platform</li>
<li>This could provide Ant with a revenue boost to its payments business, but we still see the big risk to Ant’s prospects (and its revised valuation) coming from tighter restrictions to its lending business and possibly the asset management arm, as well as the introduction of the e-Yuan eroding its leadership in digital payments</li>
<li>Consequently, we remain cautious on <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, and we stick with our view that key beneficiaries are smaller FinTechs like <a href="https://www.smartkarma.com/entities/lexinfintech-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26036:1" rel="noopener">Lexinfintech Holdings (LX US)</a> and, in the bank sector, the domestic bank <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a>
</li>
<li>Risks to our view include lighter touch regulation from PBoC on the large FinTechs including Ant; another risk is Ant Group being able to avoid a meaningful loss of market share in payments and being able to deliver stronger than expected returns from asset management operations to more than offset the restrictions on credit operations</li>
</ul>


Globally, banking regulators are upping their scrutiny of Big Techs in finance, with China at the forefront of the regulatory effort to “level the playing field” between Big Techs and its banks
China stands out globally for the broad and rapid establishment of its Big Techs across the domestic finance ecosystem, led by Ant Financial Services Group (6688 HK) 
Regulatory constraints on Ant Group’s online finance operations could potentially curtail the growth of its credit business; yet it has recently been reported that Ant is calling for a higher share of commissions from transactions on its payments platform
This could provide Ant with a revenue boost to its payments business, but we still see the big risk to Ant’s prospects (and its revised valuation) coming from tighter restrictions to its lending business and possibly the asset management arm, as well as the introduction of the e-Yuan eroding its leadership in digital payments
Consequently, we remain cautious on Alibaba Group (BABA US), and we stick with our view that key beneficiaries are smaller FinTechs like Lexinfintech Holdings (LX US) and, in the bank sector, the domestic bank Postal Savings Bank of China (1658 HK)

Risks to our view include lighter touch regulation from PBoC on the large FinTechs including Ant; another risk is Ant Group being able to avoid a meaningful loss of market share in payments and being able to deliver stronger than expected returns from asset management operations to more than offset the restrictions on credit operations


Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<ul class="">
<li>The new law impacts Alibaba (BABA) and Tencent (700 HK) loan business.</li>
<li>Alibaba (BABA) is strengthening its “community group purchase” of fresh food.</li>
<li>Trip.com (TCOM) was still in stress in 4Q20.</li>
<li>Baidu (BIDU) set up an automobile joint venture.</li>
</ul>


The new law impacts Alibaba (BABA) and Tencent (700 HK) loan business.
Alibaba (BABA) is strengthening its “community group purchase” of fresh food.
Trip.com (TCOM) was still in stress in 4Q20.
Baidu (BIDU) set up an automobile joint venture.


China Internet Weekly (Mar 8): New Law Limits BABA & Tencent’s Loan Biz, BIDU Starts Car Production.

<ul>
<li>With <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a> under regulatory pressure from PBoC, Chinese NBFCs are set to gain market share in Chinese consumer and SMB credit</li>
<li>We review prospects and valuations for four listed names in this report</li>
<li>We see fundamental opportunities still, despite the marked outperformance of three out of four names since November 2020</li>
<li>We would highlight <a href="https://www.smartkarma.com/entities/lexinfintech-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26036:1" rel="noopener">Lexinfintech Holdings (LX US)</a> for its premium returns and most attractive valuations versus peers</li>
<li>
<a href="https://www.smartkarma.com/entities/lufax-holdings" target="_blank" data-smartkarma-citation="entities:29690:1" rel="noopener">Lufax Holdings (LU US)</a> is the unloved name, and it is lower return than its peers; yet it should deliver better returns with faster growth in credit volumes going forward</li>
<li>Delinquency ratios remain ranging from 2% to under 5% in 3Q 2020, and we do not expect these ratios to rise sharply and threaten profitability</li>
<li>Risks to our positive view on Chinese NBFCs generally include a sharp deterioration in credit quality, which could drive far higher credit costs; on the regulatory side, an increase in required capital adequacy for NBFCs could adversely impact the pace of loan origination</li>
</ul>


With Ant Financial Services Group (6688 HK) under regulatory pressure from PBoC, Chinese NBFCs are set to gain market share in Chinese consumer and SMB credit
We review prospects and valuations for four listed names in this report
We see fundamental opportunities still, despite the marked outperformance of three out of four names since November 2020
We would highlight Lexinfintech Holdings (LX US) for its premium returns and most attractive valuations versus peers

Lufax Holdings (LU US) is the unloved name, and it is lower return than its peers; yet it should deliver better returns with faster growth in credit volumes going forward
Delinquency ratios remain ranging from 2% to under 5% in 3Q 2020, and we do not expect these ratios to rise sharply and threaten profitability
Risks to our positive view on Chinese NBFCs generally include a sharp deterioration in credit quality, which could drive far higher credit costs; on the regulatory side, an increase in required capital adequacy for NBFCs could adversely impact the pace of loan origination


China Non-Bank Finance Companies (NBFCs); Ant’s Loss, Their Gain

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> almost raised US$35bn in the largest IPO in history. While the IPO may eventually proceed, we are unsure of the valuations the company could demand the next time around.Following the suspension of listing on the STAR Market by the Shanghai Stock Exchange due to a 'major event', <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> announced the suspension of the H-share listing too. The company also said that the refund of the application monies will be made as soon as possible to Hong Kong retail investors.This 'major event' will have knock-on implications for a host of other trades/strategies as well. In this Insight, we take a look at some of them.

Ant Group (6688 HK) almost raised US$35bn in the largest IPO in history. While the IPO may eventually proceed, we are unsure of the valuations the company could demand the next time around.Following the suspension of listing on the STAR Market by the Shanghai Stock Exchange due to a 'major event', Ant Group (6688 HK) announced the suspension of the H-share listing too. The company also said that the refund of the application monies will be made as soon as possible to Hong Kong retail investors.This 'major event' will have knock-on implications for a host of other trades/strategies as well. In this Insight, we take a look at some of them.

China

LexinFintech Holdings Ltd. operates as a holding company. The Company, through its subsidiaries, provides online consumer finance services. LexinFintech Holdings offers installments, money loans, wealth management, and other financial services. LexinFintech Holdings serves customers in China.

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Lexinfintech Holdings (LX US)

Ant Group: Nearing Regulatory Closure

Ant Group is restructuring its operations, under PBoC pressure which will limit Ant’s ability to extract synergies from its entire financial...

Victor Galliano

Ant Group: Alibaba’s Albatross?

Ant is demanding higher transactions fees on its payment platform, which could help but it should not offset the PBoC's constraints on its credit...

Victor Galliano

China Internet Weekly (Mar 8): New Law Limits BABA & Tencent’s Loan Biz, BIDU Starts Car Production.

The new law impacts Alibaba and Tencent loan business. Alibaba is strengthening its “community group purchase” of fresh food. Trip.com was still in...

Ming Lu

China Non-Bank Finance Companies (NBFCs); Ant’s Loss, Their Gain

Chinese NBFCs' share prices have rallied as Ant's regulatory hurdles mounted; yet we see more scope for re-rating in the case of LexinFintech on...

Victor Galliano

Ant Group: IPO Suspension Implications

With Ant Group suspending the H-share listing following SSE's suspension of the A-share listing, there will be multiple implications for trades and...

Brian Freitas

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