Executive Summary / Key Takeaways

• Strategic Transformation to Profitability: OneConnect Financial Technology (OCFT) is undergoing a significant strategic pivot, divesting low-margin businesses like virtual banking and phasing out cloud services to focus on high-value, standardized fintech solutions for financial institutions, aiming for midterm profitability.
• AI-Driven Technological Moat: The company leverages advanced AI across its Digital Banking, Digital Insurance, and Gamma Platform segments, delivering quantifiable benefits such as a 50% improvement in loan approval efficiency, a 10%+ enhancement in counterfeit ID detection, and substantial cost savings in operations.
• Robust Overseas Growth Engine: International expansion, particularly in Southeast Asia, Hong Kong, South Africa, and the Middle East, is a key growth driver, with third-party overseas customer revenue increasing by 23.4% year-on-year in the first nine months of 2024.
• Improved Financial Health Amidst Restructuring: Despite a temporary top-line impact from strategic divestitures and cloud service phase-out, OCFT has significantly narrowed its net loss from continuing operations, achieving a 41.9% year-on-year decrease in Q3 2024, and recorded its first-ever net profit in H1 2024 (including a one-time gain).
• Competitive Differentiation: OCFT distinguishes itself through integrated, compliance-focused platforms and its unique "technology plus business" model, leveraging its deep ties with Ping An Group to export proven fintech solutions globally, positioning it strongly against both specialized and broader fintech rivals.

The Fintech Frontier: OneConnect's Strategic Evolution

OneConnect Financial Technology Co., Ltd. (NYSE:OCFT), established in 2015, has emerged as a pivotal provider of cloud-platform-based Fintech solutions and online information and operating support services for financial institutions, primarily within the People's Republic of China. The company operates at the heart of a rapidly evolving financial landscape, where digitalization is not merely an option but an imperative for institutions and large state-owned enterprises. This environment is shaped by key policy directives from the People's Bank of China, which emphasizes deepening structural reforms, guiding large banks to support the real economy, and fostering the "five major articles": technology innovation in finance, green finance, financial inclusion, pension finance, and digital finance. The Central Economic Work Conference further underscored the construction of a modernized industrial system led by technical innovation, directly influencing the financial sector's trajectory.

Against this backdrop, OneConnect has embarked on a strategic transformation, moving into its "Stage 2 strategy of broadening customer engagement." This involves a deliberate shift towards "quality growth," focusing on high-value, standardized products, and aggressively expanding its presence in overseas markets. The company's foundational strength lies in its unique "technology plus business" model, which allows it to leverage the extensive experience and proven solutions developed within the Ping An Group, acting as the sole fintech exporter for the conglomerate. This strategic positioning, coupled with its deep technological capabilities, forms the bedrock of its competitive stance against a diverse array of fintech players.

Technological Edge: AI as the Core Differentiator

OneConnect's core competitive advantage is deeply rooted in its differentiated technology, with artificial intelligence (AI) serving as a central pillar across its product offerings. The company's commitment to AI innovation is evident in its comprehensive suite of solutions, which are designed to enhance efficiency, reduce costs, and strengthen risk management for financial institutions.

The Gamma Platform, a foundational digital infrastructure, exemplifies this technological prowess. Its Gamma Vision risk management and verification platform effectively harnesses cutting-edge AI technologies, including device fingerprint identification and micro expression analysis, to significantly enhance anti-fraud capabilities and improve financial security. This translates into a notably higher interception rate for fraudulent activities, providing a critical layer of protection for institutions. The AI interview robot, available in English, further showcases OCFT's AI capabilities, utilizing over 20 AI features such as visual risk control, digital human interaction, and OCR recognition. This robot has achieved automatic loan approval of over RMB1 billion and has substantially reduced the cost of human agents, saving a total of over RMB2 million.

In digital banking, OneConnect's "Jing Jiang AI housing mortgage solution" and "3 E-Series products" (E-Banker App, E-Sales Management, E-Wealth Advance Map) leverage AI to drive intelligent operations. These tools have helped customers increase their Assets Under Management (AUM) by over 20%, improved business opportunity reach rates by 2x to 3x, and enhanced private banking customer growth by 38%. For credit lending, the smart credit system, particularly its international version, has improved loan processing efficiency by 40% and AI automated risk control capabilities by 50%, with iteration efficiency improved by 30% through configurable modules. One leading internet bank served by OneConnect achieved loan approval and release within seconds for standardized businesses, improving review and approval efficiency by 50%.

The Digital Insurance segment also benefits from AI integration. An ecosystem platform provided for a large Hong Kong insurance company, which onboarded over 100 brokerage firms and more than 1,000 agents, has an average utilization rate exceeding 80%. Policyholders using this platform can save up to 50% of the time for online insurance applications, significantly improving efficiency and customer experience. Furthermore, the E-KYC Hong Kong ID single-angle verification product has halved user operation time and enhanced the counterfeit card risk identification rate by more than 10%, providing robust support for fraud detection.

OneConnect's R&D strategy is ROI-driven, with continued investment in cutting-edge technologies. The company views the financial industry as having the "best use cases for Artificial Intelligence Plus" and a strategic focus for new quality productive forces. This technological leadership, validated by numerous industry awards, including IDC China Emerging FinTech 50 and Forbes China FinTech Influential Enterprises Top 50, forms a significant competitive moat, enabling OCFT to offer superior, more efficient, and secure solutions that directly contribute to its market positioning and long-term growth strategy.

Strategic Pivot and Financial Performance

OneConnect's financial trajectory in recent periods reflects its strategic pivot towards quality growth and profitability. In 2023, the company achieved significant milestones in loss reduction, with net loss attributable to shareholders improving to CNY363 million from CNY872 million in the previous year. This was a direct result of proactive adjustments in its product portfolio, continuous expense control, and improved operational efficiency. The non-IFRS gross profit margin exceeded 40% in 2023, underscoring the effectiveness of these measures.

The momentum continued into 2024. In the first quarter of 2024, net loss from continuing operations attributable to shareholders narrowed by 21.2% year-on-year to CNY60 million. The IFRS gross margin improved by 0.3 percentage points year-over-year to 37.7%. The second quarter of 2024 marked a historic achievement for OneConnect, as the company reported a net profit attributable to shareholders of RMB243 million. This included a one-time gain of RMB216 million from the disposal of its virtual banking business to Lufax for HKD933 million in cash on April 2, 2024. This divestiture not only contributed to the company's first-ever net profit but also significantly bolstered its working capital and ensured sufficient resources for future development. Net loss from continuing operations for the first half of 2024 improved by approximately 38% year-on-year to RMB70 million.

However, the strategic decision to phase out the cloud service business, which began gradually in July 2024, has impacted the top line. In Q3 2024, total revenue decreased by 48.3% compared to the same period last year, primarily due to this strategic shift. Revenue generated from third-party customers also decreased by 12.4% to RMB236 million in Q3 2024. This reduction in revenue led to a decrease in the gross margin of continuing operations to 32.7% (IFRS) and 35.6% (non-IFRS) in Q3 2024, mainly due to a reduction in the economy of scale. Despite the top-line pressure, net loss from continuing operations attributable to shareholders further improved by 41.9% year-on-year to RMB30 million in Q3 2024, demonstrating the effectiveness of the company's cost control and efficiency improvement initiatives. Research and development expenses, for instance, declined significantly to RMB70 million in Q3 2024 from RMB230 million in the prior year, driven by a proactive adjustment of the business structure and an ROI-driven approach to R&D projects. Sales and marketing expenses also decreased due to enhanced sales efficiency.

Segment Deep Dive: Digital Banking, Digital Insurance, and Gamma Platform

OneConnect's core operations are structured around three primary business segments: Digital Banking, Digital Insurance, and the Gamma Platform, each contributing to the company's overarching strategy of empowering financial institutions.

The Digital Banking segment focuses on intelligent operations for retail and credit lending. While revenue in this segment decreased by 57.4% year-over-year in Q2 2024 and 37.6% in Q1 2024, accounting for 14.5% and 22.3% of total revenue respectively, this decline reflects the company's deliberate strategy to phase out lower-value products. Operationally, the segment has achieved significant milestones, such as a leading internet bank improving loan approval and release efficiency by 50% for standardized businesses. Overseas, the smart credit system has been widely adopted in Southeast Asia, improving loan processing efficiency by 40%, AI automated risk control capabilities by 50%, and iteration efficiency by 30%.

The Digital Insurance segment provides end-to-end P&C insurance systems and accelerates online transformation. Revenue for this segment decreased by 33.3% year-over-year in Q2 2024 and 25.3% in Q1 2024, contributing 18.4% and 18.2% of total revenue, respectively. This decrease is primarily attributed to a change in the business model within the auto ecosystem. Despite this, the company has successfully provided an ecosystem platform for a large Hong Kong insurance company, which has onboarded over 100 brokerage firms and more than 1,000 agents, achieving an average utilization rate exceeding 80% and enabling policyholders to save up to 50% of the time for online insurance applications.

The Gamma Platform serves as a digital infrastructure, empowering decision-making, business, and management scenarios for financial government and large enterprise customers. This segment accounted for the largest portion of revenue, though it saw a decrease of 9.4% year-over-year in Q2 2024 and 6.2% in Q1 2024, primarily due to reduced demand for cloud services. The platform's strength lies in its high customer stickiness and advanced AI capabilities, such as Gamma Vision, which enhances anti-fraud measures, and the AI interview robot, which provides efficient risk identification services.

Global Ambitions: Overseas Expansion as a Growth Engine

Overseas expansion is a cornerstone of OneConnect's growth strategy and has demonstrated strong momentum. In the first nine months of 2024, revenue from third-party overseas customers increased by 23.4% year-on-year. For the first half of 2024, this revenue grew by 14.8% year-on-year, with overseas customers contributing 21.2% of total third-party revenue. This robust growth is a testament to the effectiveness of the company's international market expansion strategy.

OneConnect's global footprint now spans 20 countries and regions, including Singapore, Thailand, Malaysia, Indonesia, the UAE, the Philippines, Vietnam, and South Africa, serving 185 overseas financial institutions. Key offerings for these markets include core banking, SLP platforms, E-KYC, omnichannel agent platforms for life insurance, AI large models, and AI voice assistants. The company has established strategic partnerships with foreign banks like CMC, SBF (which launched OCFT's core banking and SLP credit systems, significantly improving credit process efficiency), and TP Bank. In Q3 2024, the successful launch of the SLP Product Upgrade project in Southeast Asia further improved customer business development capabilities and operational efficiency, receiving strong recognition.

Looking ahead, OneConnect plans to target six ASEAN countries for further expansion, leveraging its product capabilities and technical strength. Future overseas development will focus on Southeast Asia, Hong Kong, South Africa, and the Middle East, with an initial emphasis on exporting smart credit lending systems to markets like the Philippines and Thailand. For the insurance business, the strategy involves replicating successful omnichannel agent projects in international markets, building on experiences like the partnership with Old Mutual (ODMTY) in South Africa. The company is also deepening its engagement in Hong Kong, expanding to financial industry and government partners, and developing integrated solutions tailored to overseas market demands, including P&C solutions, auto financing, AI voice assistants, and E-KYC products. To support this growth, OneConnect intends to increase its overseas teams in solutions, R&D, and delivery through local recruitment and ecosystem partnerships.

Competitive Landscape: Differentiating in a Dynamic Market

OneConnect operates in a highly competitive fintech landscape, where it differentiates itself through a focused B2B institutional approach, integrated platforms, and a strong emphasis on regulatory compliance. Compared to consumer-oriented platforms like Futu Holdings (FUTU) and Up Fintech (TIGR), which excel in retail brokerage and wealth management with user-friendly interfaces, OCFT's offerings are more specialized for the complex needs of banks and insurers. OCFT's comprehensive end-to-end solutions, such as its Gamma Core banking system and Regtech offerings, provide deeper regulatory and operational support, potentially offering significantly higher efficiency in handling complex institutional workflows. While Futu and Up Fintech might demonstrate faster adaptation to retail trends and stronger growth in high-volume trading, OCFT's strength lies in its ability to build integrated ecosystems and provide robust data management and compliance tools for enterprise-level clients.

Against specialized credit technology providers like Qifu Technology (QFIN), OCFT offers a broader suite of solutions, integrating risk management with banking and insurance platforms. While Qifu might lead in niche credit analytics, OCFT's holistic approach, including its Hainan partnership for smart financial services, positions it strongly in regulatory and supervisory tools, a key differentiator in compliance-heavy markets. Similarly, when compared to Lufax Holding (LU), which focuses on consumer finance and wealth management, OCFT's platforms provide more advanced institutional tools for banking and insurance, delivering greater efficiency in data management and operations. OCFT's emphasis on regulatory technology and blockchain enables stronger compliance features, whereas Lufax leads in consumer accessibility and retail market share.

OCFT's competitive advantages, or moats, include its proprietary technology platforms, particularly its AI and blockchain capabilities, which enable superior efficiency and risk mitigation. Its strategic partnerships, notably with the Ping An Group as its sole fintech exporter, provide a proven track record and a pipeline for technological innovation. These advantages translate into enhanced customer loyalty for institutional clients, potentially leading to stronger recurring revenue and improved margins through efficient operations. The company's ability to cross-sell products and deeply integrate its Gamma platform with banking and insurance solutions further strengthens its competitive edge. However, OCFT's reliance on the Chinese market and potential gaps in retail-focused innovation present vulnerabilities, exposing it to threats from competitors with broader global reach or stronger consumer-facing agility. Regulatory approvals and the high cost of advanced technology also act as significant barriers to entry, helping OCFT defend its established position.

Outlook and Risks: Charting a Course Through Uncertainty

OneConnect's outlook is firmly anchored in its commitment to achieving midterm profitability, driven by its Stage 2 strategy. Management anticipates continued cost control and efficiency improvement measures across R&D, sales and marketing, and general and administrative expenses. Resources will be strategically aggregated on high-quality products, with ongoing development and upgrades to ensure market competitiveness. The company expects the Ping An Group's demand for its products and services to increase from 2025 onwards, reflecting the broader recovery of the financial industry.

Overseas expansion remains a critical growth vector, with management confident about achieving double-digit growth in overseas revenue. The focus will remain on key markets such as Southeast Asia, Hong Kong, South Africa, and the Middle East, with plans to deepen insights into local demands and form integrated solutions. This includes exporting P&C solutions, auto financing, AI voice assistants, and E-KYC products. The company's strategic investment in promising business lines, particularly overseas, underscores its commitment to sustainable development.

Despite this optimistic outlook, OneConnect acknowledges a degree of volatility and uncertainty in the market, particularly regarding the pace of full economic recovery. The strategic decision to phase out the cloud service business is expected to impact top-line performance for the second half and full year of 2024. Furthermore, industry-specific pressures, such as the challenging business development and profitability for P&C insurance companies and the slowing IT spending in the short run, pose risks. The life insurance business also faces ongoing recovery challenges. Shifting procurement strategies from customers, as seen with the cloud business, highlight the need for continuous adaptation. However, by focusing on improving third-party revenue, enhancing gross margins, and disciplined cost controls, OneConnect aims to stay on its path to midterm profitability.

Conclusion

OneConnect Financial Technology is in a transformative phase, strategically shedding lower-margin businesses to sharpen its focus on high-value, AI-powered fintech solutions for institutional clients. The company's impressive progress in narrowing net losses and achieving a historic net profit in the first half of 2024, despite a temporary revenue impact from restructuring, underscores the effectiveness of its disciplined approach to cost control and operational efficiency. Its technological leadership, particularly in AI-driven risk management and operational tools, provides a robust competitive moat, enabling superior efficiency and security for its diverse client base.

The aggressive expansion into overseas markets, particularly in high-growth regions like Southeast Asia, represents a significant future revenue engine, leveraging its proven solutions and strategic partnerships. While market volatility and industry-specific headwinds present ongoing risks, OneConnect's clear strategic roadmap, commitment to technological innovation, and disciplined financial management position it for continued progress towards its midterm profitability targets. For discerning investors, OCFT presents a compelling narrative of a company strategically repositioning itself for sustainable growth, driven by technological differentiation and expanding global reach in the burgeoning institutional fintech sector.