10 Questions for Luminor Financial

Company Overview

Luminor Financial Holdings Limited is a financial solutions business that aims to provide innovative financing solutions to SMEs across the region. The Group first started out as a Singaporean-owned and managed property developer for residential and commercial properties in China and Singapore. The Group has since diversified and shifted its focus to the Financial Solutions Business in Malaysia and Singapore in 2019.

1. Luminor Financial was formerly known as Starland Holdings, could you elaborate on the new positioning of the company and its business segments?

• The Group was formerly known as Starland Holdings, a residential and commercial property developer in China and Singapore. In 2021, the Group changed its name to Luminor Financial to reflect the Group’s shift in focus, commitment and diversification into the business of providing financial solutions.

• Since our diversification into the financial solutions business 3 years ago, we are now firmly established in Malaysia to address the growing demand for short-term financing needs among small and medium enterprises (SMEs) across the region. In FY2021, the Financial Solutions segment contributed 83% of our total revenue. Our portfolio of service offerings include invoice factoring, supply chain financing, corporate advisory and secured loans. Going forward, the Group will no longer focus on the property business and intends to sell the remainder of our property inventory, which includes commercial units that were previously leased out.

2. What Are the Main Growth Areas for Luminor Financial Over the Next 1-2 Years?

• Financing of SMEs that service government entities and MNCs – We are one of c.30 financial institutions (mostly comprising international and local banks) in Malaysia that have been granted access by the Ministry of Finance (Malaysia) to e-Perolehan (eP), which is Malaysian Government’s electronic procurement system. We started out with financing SMEs that had been awarded contracts from government ministries and agencies (e.g. Ministry of Education, Ministry of Defence and the Public Works Department) through eP. Having established the infrastructure as a Non-Bank Financial Institution (NBFI), we have expanded to financing SMEs that supply goods and services to multi-national corporations (MNCs) in the oil and gas industry such as ExxonMobil and Shell as well as in the contract manufacturing industry such as Panasonic.

• Development of fee-based revenue stream – The Group recently completed our acquisition of 58.41% of FundedHere, an equity and debt crowdfunding peer-to-peer (P2P) platform headquartered in Singapore. FundedHere is able to match borrowers with retail and accredited investors. While the Group presently derives its revenue from balance sheet lending, the addition of FundedHere will allow the Group to earn fee-based revenue and combine the benefits of balance sheet and marketplace lending. The Group is also able to leverage on FundedHere, being a P2P platform, to provide investors access to deals originated from around the region, thus providing an impetus for the Group to expand into the ASEAN region seamlessly.

• Financing of SMEs in the e-commerce space – We recently marked our first foray into the e-commerce space through providing invoice financing services to a regional e-commerce enabler. The rapid growth seen in the e-commerce market over the last few years is expected to continue in the next 5 years, with Southeast Asia’s e-commerce gross market value expected to continue rising from US$129 billion in 2022 to US$280 billion in 2027. We have developed an innovative closed-loop inventory financing for e-commerce market resellers in the beauty, body and baby sector selling their goods on platforms such as Lazada and Shopee, which can be easily duplicated in the broader fast-moving consumer goods (FMCG) e-commerce market.

3. How Would You Describe the Scalability of the New Business That Luminor Is Endeavoring?

• Luminor Financial has built a strong brand name in Malaysia with well-established networks. Since our establishment, we have also invested significant resources to develop policies and processes for loan origination, loan management as well as credit and risk management. Our business is asset-light and is highly scalable operationally.

• The Group presently loans out of its own balance sheet. As our business continues to grow, the challenge is to find the right level and balance of funding to increase our loan book. In tandem with this, the Group is constantly seeking alternative and additional funding capital to match its balance sheet lending needs in the debt and equity markets via various funding structures and instruments.

4. How would the transition away from property development affect the Group’s financials and resources?

• The Group has assets held for sale of RMB25.6 million (held at cost). This comprises 25 commercial units, 9 residential units, and 56 carpark spaces in Fuling district of Chongqing, China as of 30 June 2022. The Group intends to convert all its remaining property inventory into cash and redirect the Group’s additional cash toward supporting the growth of the Financial Solutions segment.

5. Describe Luminor Financial’s Recent Financial Performance.

• In 1H22, the Group recorded a net profit of RMB19.6 million, recovering from a net loss of RMB1.7 million a year ago.

• 1H22 revenue more than doubled to RMB15.6 million as revenue from the Financial Solutions business more than tripled to RMB14.4 million year-on-year. Sales of properties declined as the Group ceased all promotional sales activities following the lockdown in China and the overall weakening of the Chinese property market.

• Other income for the period increased due to compensation received for the repossession of land by the China government, while other administrative expenses have also increased. As a result, the Group recorded a net profit of RMB19.6 million in 1H22, swinging from a net loss of RMB1.7 million in 1H21.

• The Group generated a strong positive net operating cash flow of RMB20.1 million. This brought the Group’s cash and cash equivalent to RMB101.4 million as of 30 June 2022, with a healthy net cash position of RMB62.5 million.

6. Could you elaborate more on the company’s latest lead in the US$1.75 million fundraising round for PT ADI?

• In September 2022, Luminor Financial subscribed to Exchangeable and Convertible Notes issued by PT AdiWisista Daya Investama (PT ADI).

• PT ADI is part of the AdiWisista Group, which provides loans to small business and individuals in Indonesia through its P2P-lending platform, danai.id, and holds an Information Technology-Based Borrowing-Lending Service Provider license issued by the Financial Services Authority of Indonesia.

• The Group generated a strong positive net operating cash flow of RMB20.1 million. This brought the Group’s cash and cash equivalent to RMB101.4 million as of 30 June 2022, with a healthy net cash position of RMB62.5 million.

• Having established our presence in Singapore and Malaysia, Luminor Financial is continuously looking for opportunities to expand its footprint within the ASEAN region, particularly Indonesia. AdiWisista’s aim to democratise access to credit for both corporates and individuals through its platform is aligned with the Group’s goal service markets that are overlooked or underserved. The collaboration with AdiWisista will allow us to gain knowledge of the Indonesian market and develop opportunities to allow the Group to enter the market.

7. What Do You Think Are Some Key Drivers or Trends in the Business Segments You Operate?

• Listed below are key drivers for our Financial Solutions business and the Group believes that it is well-positioned to capitalise on these structural tailwinds to grow its business segments further.
  • Plugging the SME funding gap – According to the Asian Development Bank, only 14.8% of bank lending was to ASEAN SMEs in 2020 despite contributing 41.1% to the region’s GDP. This funding gap, due to the lack of financing from mainstream banks, represents the market that we will be able to tap on and provide as an alternative source of SME funding.
  • Continued rise of the e-commerce industry – As e-commerce continues to grow, SMEs in this space will face the problem of needing funds to stock and store inventory. We have allocated more capital to support inventory financing for SMEs to ease their cashflow dilemmas.
  • Increasing financial inclusion in Indonesia – Digital financial services in ASEAN are forecast to represent a US$38 billion revenue opportunity by 2025, translating to a 6-year compound annual growth rate (CAGR) of 22% between 2019 and 2025. In recent years, financial inclusion has been a critical area of focus in Indonesia. The Group’s right of first refusal to fund up to 20% of danai.id’s borrowers on terms reasonably specified by the Group will allow the Group to access the Indonesian market.

8. What Are Some Key Risks for the Business and How Are You Managing These Risks?

• Foreign Currency Risk – The Group’s transactions are largely denominated in Malaysian Ringgit, with borrowings in Singapore Dollars. While the Group presently has not entered any derivative foreign currency contracts, we will closely monitor fluctuations in exchange rates and will hedge when deemed necessary.

• Credit Risk – Our exposure here arises primarily from trade and other receivables. For other financial assets (including cash and cash equivalents), we minimise credit risk by investing significant resources in conducting in-depth due diligence prior to client onboarding. Our Risk and Credit Department also independently assesses the risk profile of all customers and provides recommendations and/or risk mitigation measures. Established limits and levels of exposure are regularly reviewed and reported to the committee on a periodic basis.

• Interest Rate Risk – This refers to the risk that the fair value or future cash flows of the Group’s financial instruments will fluctuate because of changes in market interest rates. This is managed principally through having pre-approved limits for issuance of facilities to its customers.

• Fraud Risk – Being an NBFI, the Group also faces fraud risk, particularly fraudulent statements to obtain financing. The Group actively mitigates this through thorough due diligence such as verification of contracts with contract awarders, acknowledgement of assignment of invoices by contract awarders, physical site visits to the client’s office and factories. Due diligence checks also extend to the client’s suppliers.

9. What Is Luminor Financial Doing to Fulfil Your Sustainability Commitments?

• Our Sustainability Committee has identified specific Environmental, Social and Governance (ESG) factors which are material to the Group. These factors include Regulatory Compliance, Product Quality & Responsibility, and Anti-Corruption & Anti-Fraud.

• To demonstrate our commitment to sustainability, the company has established performance targets to measure and improve various ESG factors. These include constant engagements with stakeholders, improving corporate governance, and environmental initiatives. Please refer to our Sustainability Report for more information.

10. Why Should Investors Take a Closer Look at Luminor Financial?

• As an NBFI, our Financial Solutions business empowers financial inclusion, a key area of focus identified by central banks across ASEAN, through its provision of solutions to SMEs currently underserved in the present regulatory and financing eco-system. The Group is still at its infancy stage operating in an extremely high growth area.

• As such, the Group believes that Luminor Financial is a proxy for investors looking for an alternative NBFI poised for regional growth. As at end January 2023, the Group is trading at approximately 40% discount to its net asset value (NAV), which is backed by hard assets such as properties and cash.

10 in 10 – 10 Questions in 10 Minutes With SGX-listed Companies

Designed to be a short read, 10 in 10 provides insights into SGX-listed companies through a series of 10 Q&As with management. Through these Q&As, management will discuss current business objectives, key revenue drivers as well as the industry landscape. Expect to find wide-ranging topics that go beyond usual company financials.

This report contains factual commentary from the company’s management and is based on publicly announced information from the company.

For More, Visit Sgx.com/research.

For More Company Information, Visit Https://www.luminorfinancialholdings.com/

Click Here for Luminor Financials’ 1H2022 Financial Results.