In the past year, Lujin Holdings (LU.N/ 06623.HK) withstood market confusion and discussion, implemented four major risk reduction reform measures, and completed business model transformation at the same time.

Lujin Holdings, which is still undergoing transformation, released its first financial report after the implementation of the reform measures on April 23. There were mixed feelings. Overall, the company chose to take a certain amount of active deceleration in terms of business scale, pursue quality and steady development, and the transformation results were initially evident.

1. Actual profit before tax is 450 million, and the momentum for the five major strategic reforms is gradually being unleashed

According to the report, Lujin achieved revenue of 6.964 billion yuan in the first quarter, a year-on-year decrease of 30.9%, and a net loss of 830 million yuan. At first glance, it looks very bleak, but as an investor who continues to follow Lujin, such results are the short-term impact of the company's proactive business transformation and prudent operation. Excluding the income tax impact brought about by the previous special dividend introduction, the company's profit before tax for the first quarter was 450 million.

Against the backdrop of declining revenue, the company achieved a 27% year-on-year decline in total expenditure through agile operations and cost control.

The company has strong financial strength. At the end of the first quarter, the company's net assets were 92,825 billion yuan, and the monetary fund balance reached 39.442 billion yuan, which not only guaranteed short-term debt repayment and daily operating support, but also provided the company with the strength to maintain stability and continue to advance its strategic goals in the midst of market fluctuations.

Furthermore, the five major strategic reform measures that the company continues to implement have shown positive results in credit business, consumer finance business, asset quality, and front-line team reform.

2. Consumer finance is growing steadily, adding another dimension to diversified strategies

In response to national policies and based on market needs, the company formed a “small and micro loan+consumer finance” dual-engine business pattern.

As of the first quarter of 2024, the balance of loans enabled by the company was RMB 27.2 billion, and the cumulative number of borrowers served reached 21.7 million, an increase of 12.4% over the previous year, with additional loans of RMB 48.1 billion for the quarter.

Last year, the company's loan business was completely transformed into a 100% guarantee model, and its own financing guarantee subsidiary was introduced to increase credit for small and micro enterprises, making cooperative banks “dare to lend and be willing to lend” to small and micro enterprises. On the one hand, it helped expand the company's medium- to long-term business volume. On the other hand, in the past, customers could earn their own credit insurance premiums paid to Ping An Insurance, adding a way to generate income.

Under this model, the company's risk taking ratio increased to 48.3%, while the revenue ratio of the company's retail credit enabled business also increased to 9% from 7% in the fourth quarter of 2023. In the future, as the share of loans under the company's 100% guarantee model increases, the revenue ratio further increases, and the company's ability to cash out will be enhanced.

Furthermore, the company's diversification strategy has progressed significantly. During the reporting period, consumer finance added 20.3 billion new loans, an increase of 46% over the previous year. The share of new loans increased from 24% in the same period last year to 42%, and the total loan balance accounted for 14%, an increase over the previous year and quarter. At the beginning of April this year, Lujin Holdings also completed the acquisition of Ping An One Account Bank. Ping An One Account mainly provides loans to small and medium-sized enterprises in Hong Kong. This has added an international market footprint. In the future, using Ping An One Account as a springboard to serve Hong Kong's inclusive finance and support the economic development of the Greater Bay Area, it also injects new momentum into the company's medium- to long-term development.

3. Decrisking drives asset quality stabilization

In the current macroeconomic context, when examining financial companies that provide loan services, we should pay more attention to how their asset quality indicators change after loans are issued. Fluctuations in these indicators are often a key factor leading to differences in corporate performance.

According to the business process, after issuing a guaranteed loan, an enterprise will first establish risk provisions to cover losses that may be caused by the loan. Subsequently, throughout the life of the loan, the company will gradually collect fees to achieve profits. Since risk provision is usually carried out in the early stages of a loan, it will put pressure on the company's short-term financial performance, but if risk is properly controlled, early collective risk provision will not become a credit impairment loss.

Therefore, whether the company fully provides for the expected loss of asset risk, and whether risk-related indicators such as overdue rate, non-performing loan ratio, bad migration rate, capital adequacy ratio, etc. meet regulatory requirements have become important indicators for measuring the ability of such financial companies to withstand risk and asset quality, and are also the core factors causing performance differentiation.

Judging from the latest data, in the first quarter of 2024, the C-M3 migration rate of the total amount of loans granted by Lujin Institute (excluding consumer finance subsidiaries) was 1.0%, a decrease of 0.2 percentage points compared to 1.2% in the fourth quarter of 2023; the migration rates for general unsecured loans and secured loans were 1.0% and 0.7% respectively, down 0.4 percentage points and 0.1 percentage points respectively from 1.4% and 0.8% in the fourth quarter of 2023, and the quality of loan assets was improved.

The overdue rates for the total amount of loans granted for 30 days or more (excluding consumer finance subsidiaries) were 6.6% and 4.4%, respectively, down 0.3 percentage points compared to December 31, 2023; the overdue rates for general unsecured loans of 30 days or more and 90 days or more were 7.4% and 5.0%, respectively, down 0.3 percentage points and 0.4 percentage points from last year, respectively.

In addition, the company's two main operating entities have sufficient capital. The leverage ratio of the guarantee subsidiary is 2.4 times, which is 10 times lower than the regulatory upper limit. The capital adequacy ratio of consumer finance companies is about 15.1%, which is higher than the 10.5% regulatory requirement.

A number of risk indicators have improved, and the two major business entities have sufficient capital, which also shows that the company's risk reduction strategy has been implemented effectively.

epilogue

Faced with uncertainty in the credit market, Lu Jin chose to fight back with stability, preferring to sacrifice short-term interests and stick to strategic reforms. At present, these reform measures are already beginning to bear fruit.

Under the tone of prudent management and unweighted quality, we should focus more on the continuous verification of its strategic transformation and the gradual improvement of performance. Whether it is the market or investors, we might as well give Lujin a little more time and look forward to showing more reform results in the future.