This article was compiled from: Guotai Junan's “Lujin Institute: A Fintech Platform with Advantages on the Asset Side and Capital Side” and CITIC Securities's “How to Value the Financing Business of Fintech Companies?”

What is a reasonable valuation for the new Lujin company?

Prior to the IPO, Lujin Holdings completed Series C financing totaling 1.411 billion US dollars in November 2018 and December 2019. Investors include many star investment institutions such as Chunhua Capital, Qatar Investment Authority, and J.P. Morgan Chase. It is reported that the valuation of this round of financing reached 39.4 billion US dollars.

Assuming that its net profit for the full year of 2020 was 15 billion yuan, equivalent to 2.256 billion US dollars, the pre-IPO valuation was 17.5 times PE.

It is worth noting that Lujin's revenue continued to grow, but the growth rate declined: in the first half of 2020, the company's revenue growth rate was +9.5% year-on-year, down 8.6pct from 2019A.

So, how much is Lujin's IPO valuation reasonable? Zhongtai Securities has already called out 25 times.

Overview of the internet financing business

Before calculating the valuation, let's first briefly understand how the internet financing business works.

Internet financing services generally refer to capital lending services carried out through the Internet. According to the different licensing methods, Internet financing institutions can be divided into two categories:

Direct licensing institutions: Companies whose main business is financing, including internet banks, consumer finance companies, and internet small loan companies

Indirect licensing institutions: Internet companies that not only hold the above licenses, but also have scenarios and data ecosystems, such as Tencent and Jingdong departments.

There are generally two types of internet financing business models, including interest income models for operating balance sheets and service revenue models for operating profit statements; the above two types of institutions may involve one or both models at the same time.

Lujin's main business is a financing service model. The core of this model is not listed, does not require capital, does not assume credit risk, and charges service fees. The main representatives are leading fintech platforms and some Internet small loan companies.

Internet small loan P/E: 1X-15X

How to value Lu Jin? Let's first take a look at the market's valuation level for small loans on the Internet.

CITIC Securities believes that the valuation logic of Internet finance institutions and Internet companies is essentially the same, that is, determined by drainage capacity and monetization model. Specifically, for the financing business, the “flow” of different quality and the “monetization path” of different models determine the final difference in valuation.

Currently, neither consumer finance companies nor fintech platforms are listed. Internet finance companies that have already been listed are mainly Internet small loan companies listed on US stocks and Hong Kong stocks.

The profit model of “user traffic → loan issuance → profit” determines that the valuation of Internet finance institutions can use either traditional price-earnings ratio estimates or the intermediate indicator “loan issuance size” for relative valuations:

Size perspective: You can use “market capitalization/loan issuance size” or “market capitalization/loan balance” valuation. Five Internet small loan companies listed on US stocks (some converted from online lending platforms) currently have “market capitalization/loan issuance size” in the 0.03X-0.08X range, and the “market capitalization/loan balance” is basically distributed in the 0.1X-0.2X range;

Profit perspective: P/E or P/S valuation can be used. For the five institutions mentioned above, the current P/E valuation is distributed in the 1X-15X range, and the P/S valuation is distributed in the 0.3X-1.5X range.

The valuation logic of fintech giants: the value of internet platforms

Since the Internet small loan sample platform mentioned above may actually still bear credit risk, the valuation results do not fully reflect the valuation level of the financing service model. At the same time, due to the lack of huge traffic and customer base of Internet giants, the above sample does not fully reflect the valuation level of financial technology giants' financing business.

For large-scale fintech platforms to be listed, their “ecological platform” is expected to break through the valuation limit of existing financing services, and the ecological platform will bring “traffic quality” to the company:

1) Massive scenarios and customers, bringing the potential for continuous financing scale → financing scale;

2) Massive data and technology bring risk identification and pricing capabilities → risk pricing.

In short, only an ecosystem of scenarios, customers, and data can help financial logic enjoy technological valuations. Using the retail industry or as a reference, the valuation center of traditional retail companies is currently in the 10X to 20XPE range, while most of the valuations of Internet giants are at the level of 30X to 40XPE.

It is worth mentioning that Ant Group's current valuation has reached 280 billion US dollars. Simply assuming that Ant earned as much in the second half of 2020 as in the first half of 2020, the annual net profit of 42.468 billion yuan is equivalent to 6.388 billion US dollars, which is 43.83 times 2020 PE.

Summarize

In summary, Lu Jin's reasonable valuation range can probably be understood in this way:

Lower limit, 15 times PE for small loans on the Internet, 17 times PE before IPO;

The upper limit, or the upper valuation limit may be opened by ants.