1 reason smart investors are watching OneConnect financial technology
Digital banking is gaining ground around the world, and in particular in emerging Asian countries. Globally, it is estimated to be an $ 8 trillion market that will grow 6% per year for the foreseeable future, according to research firm Global Market Insights. This shift in the banking industry is one reason savvy investors are watching the relatively new (and relatively unknown) Chinese company. OneConnect Financial Technology (NYSE: OCFT).
A growing market …
OneConnect is a fintech which provides technology-as-a-service platforms to financial institutions, primarily in China. Its solutions help clients in areas such as revenue generation, risk management and sales productivity. The company also offers solutions that help improve efficiency, reduce costs and improve service. The general idea is that OneConnect becomes a one-stop-shop for financial institutions, and it refers to this as a “bank in a box”.
Digital banking in a box is a growing market in Southeast Asia, particularly Singapore, Malaysia, and the Philippines. OneConnect’s offerings in this space involve mobile banking apps, customer analytics and targeted marketing, business start-up services, and sales force management modules. These offerings typically attack the revenue side of the equation, but OneConnect’s other offerings can help on the cost side as well.
OneConnect typically offers its customers products at lower cost to introduce them to their business, and then looks to sell other improvements and solutions. OneConnect provides both technology applications and business services with a transaction-based revenue model. The business covers just about the full range of life cycle phases: product development, sales and marketing, risk management, operations and infrastructure. The Chinese government is also encouraging financial services companies to invest in IT infrastructure to improve service, which will provide tailwind.
… but customer concentration is a risk
OneConnect has two major customers. One is a Chinese insurer Ping an, the former parent company of OneConnect and still a significant minority shareholder; it accounted for over 50% of OneConnect’s revenue last year. The other big customer is Lufax, a Chinese personal financial services platform that accounted for around 10% of OneConnect’s revenue. Concentration of oversized customer base is never a good thing, so investors are eager to see if the company can increase its business with third party customers.
Last year, sales to third-party customers increased by 20%, while sales to Ping An increased by 74% and sales to Lufax increased by 15%. Overall turnover increased by 42%. Operations support services, which improve efficiency, risk management and the customer experience, grew 82% and accounted for almost a third of the company’s revenue. The business origination segment fell by 21%, and that’s what led to a slowdown in the growth of third-party customers. Cloud services, a new segment, contributed around 10% of revenue.
OneConnect has yet to make a profit
Like many start-ups, OneConnect doesn’t make a profit. The gross margin is strong (and increasing) at 37.5%, but the company is investing heavily in research and development, so its overall profit margin is -43%. Still, this is quite the improvement from 2019, when the loss was -75%.
Digital banking is clearly growing and OneConnect is at the heart of this development. With a strong penetration of the Chinese banking market, the company is poised to expand its reach to other countries in Southeast Asia. While OneConnect’s losses and over-reliance on a single large customer may be too great for some investors, the company needs to watch.
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