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As long-term investors we should always be on the lookout to invest in companies that could grow to become giants over time.
That’s because stocks with smaller market capitalisations have more room to grow into a larger market cap over time. The same potential may not exist with massive, albeit still great, companies such as Tencent Holdings Ltd (SEHK: 700) and Alibaba group Holding Ltd (NYSE: BABA) (SEHK: 9988).
And in the fintech space in China, there’s one such stock that I think could become a veritable giant in 10-20 years’ time.
Serving China’s financial services space
The stock I’m talking about it OneConnect Financial Technology Co Ltd (NYSE: OCFT). The company is a leading technology-as-a-service platform for financial institutions in China.
OneConnect was spun out from Ping An Insurance Group Co of China Ltd (SEHK: 2318) when the former listed its shares on the New York Stock Exchange in January 2020.
One of the group of Ping An’s technology bets, OneConnect has done a fantastic job of leveraging Ping An’s reach to build relationships with banks in China.
And it’s a great space to be serving given how little China’s financial sector utilises technology. The sector is extremely inefficient and OneConnect aims to address this through its offerings.
These offerings include 12 technology solutions across the full scope of financial services’ businesses – from sales and marketing, and risk management to customer service and technology infrastructure.
Growing fast but loss-making
The company is a feature of the banking space in China. It serves all of China’s major banks as well as 99% of its city commercial banks (which are the next level down).
Unsurprisingly, it has some impressive numbers to match its dominance in the technology of finance. In its latest quarterly results (for the three months ended 31 March), OneConnect reported RMB 581 million (US$81.77 million) in revenue, up 29.6% year-on-year.
Growth in its gross profit was even more impressive – up 58.1% year-on-year to RMB 202 million. However, on an operating profit basis it is still loss-making although its operating margin has improved from -103% to -77% year-on-year for its latest quarter.
What is encouraging, though, is that the company is starting to get more of its revenue from outside the Ping An group.
Whereas OneConnect derived 40% of its revenue from third-parties in the first quarter of 2019, this share had increased to 46% in its latest quarter.
Looking beyond China
Even though OneConnect is still loss-making, the addressable market that the company has in front of it is huge.
What’s even better is that OneConnect is also expanding overseas by helping other financial institutions within Asia to make the transition to digital.
For example, according to The Economist, OneConnect serves 47 clients in 16 overseas markets. This includes Thailand, where the company is helping power the credit-card processing of a leading bank.
Focusing on long-term efficiency
Just like OneConnect, as investors we should be focused on the long-term outcomes of what we invest in. The company clearly has a long runway for growth.
Its market cap is also currently very small – only US$5.7 billion – and its clients are just at the beginning of their digital transformation. This is definitely one stock that investors should keep an eye on for future growth.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips doesn’t own shares in any companies mentioned.