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Short-term pain for long-term gains

■ OneConnect’s Strategy Day shed much detail on its new strategy; its focus is shifting towards larger customers and integrated products.
■ This could create near-term pressure on revenue growth, given longer sales lead times, more sophisticated products and more specialised employees.
■ Its medium-term target to break even in three years remains, with additional numerical targets provided on a range of metrics.
■ Maintain Add but with a lower TP of US$7.20 from US$8.90 as we cut FY21- FY23 EPS estimates.

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Moving to stage 2: New strategic focus on customers and products

Its Strategy Day shed much detail on its change in strategy over the 2021-2025 period. Its customer focus is now on Ping An Group and medium and large financial institutions (FIs), while its product focus is now on three integrated products and on building its Gamma platform. Its previous focus over the 2015-2020 period for customers was Ping An Group and small- and medium-sized FIs, with a product focus of over 50 products (Fig 1).

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Some near-term pressure on growth

OneConnect stated that its strategic shift would cause longer sales lead times, as these integrated products tend to be more sophisticated and more in need of specialised employees. Consequently, we see near-term pressure on growth. We cut our FY21F revenue growth forecast by 3.5% pts to 21.5% yoy, and also trim FY22F revenue growth by 1.1% pts to 23.8% (Fig 10).

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Much more detail on medium-term targets

Despite near-term pressure on growth, OneConnect confidently reiterated its medium-term targets (which were previously given at its end-2019 IPO) of a >50% non-IFRS gross profit margin and breaking even. However, back at its IPO, it defined medium-term as 4-5 years; now it is three years. Much more clarity on other medium-term goals, including over 1,000 premium customers (FY20: 594, up 26% yoy; 1H21: 460, up 33% yoy), over 500 premium
plus customers (FY20: 160; 1H21: 113, up 30% yoy), premium customer net expansion rate of 100-120% (FY20: 84%), no.3 nationally in terms of total revenue (FY20: no.4), total revenue growth of twice the industry average, and third-party revenues comprising the majority of its revenues (Fig 8).

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Maintain Add; TP cut to US$7.20 on lower FY21-23F EPS

Our DCF-based TP is cut to US$7.20 from US$8.90 given our cuts in FY21F-23F EPS of 0.9-20.1%. As argued in Initiate with Add; sailing amid rocky waters, dated 13 Aug 2021, we are optimistic about its medium- to long-term revenue outlook as we see a ramp-up of technological spend by FIs and reduced revenue volatility given its relationship with Ping An Group. Key potential re-rating catalysts are regulatory approval to sell financial cloud services to banks, and stronger third-party revenues. Key risks are unexpected additional adverse regulations, and Ping An Group reducing its technology spending.