guidance at its 2Q21 results to not less than 25% yoy, from not less than 42.3% yoy (Fig 12).

OneConnect maintained its FY21F net margin guidance at a double-digit percentage point improvement yoy. 2Q21 net margin improved 6.7%-pts yoy, with 1H21 net margin improving 18.5%-pts yoy

Revenue growth has been slowing, from FY18’s 143% yoy to FY20’s 42% yoy and 1Q21’s 41% yoy. While OneConnect’s revenue relies heavily on Ping An Group and its associate, Lufax, with both of these comprising 65% of total revenues in 1H21, it had been making an effort to expand revenues from other parties.

Unfortunately, the Covid-19 outbreak has made it more difficult to source new customers.

Consequently, OneConnect announced at its 2Q21 results that it has decided to shift its strategy to focus more on existing premium customers, including the ‘premium plus’ segment. OneConnect defines the ‘premium plus’ segment as customers (excluding Ping An Group and its subsidiaries) with annual revenue contribution of at least Rmb1m, which is in contrast with the ‘premium’ segment, which is defined as customers (excluding Ping An Group and its subsidiaries) with annual revenue contribution of at least Rmb100,000.

Figure 22: Revenue by source

<table><tr><td></td><td>FY17</td><td>FY18</td><td> FY19</td><td> FY20</td><td> 1H20</td><td>4Q19</td><td>1Q20</td><td> 2Q20</td><td> 3Q20</td><td> 4Q20</td><td>1Q21</td><td>2Q21</td></tr><tr><td colspan="13">Revenue by customer (Rmb m)</td></tr><tr><td>Ping An Group</td><td>236</td><td>528</td><td>995</td><td>1,727</td><td>1,000</td><td>317</td><td>228</td><td>392</td><td>491</td><td>616</td><td>436</td><td>564</td></tr><tr><td>Lufax</td><td>175</td><td>387</td><td>299</td><td>343</td><td>165</td><td>114</td><td>83</td><td>95</td><td>88</td><td>77</td><td>75</td><td>90</td></tr><tr><td>3rd-party customers</td><td>171</td><td>499</td><td>1,034</td><td>1,242</td><td>623</td><td>341</td><td>270</td><td>287</td><td>302</td><td>383</td><td>309</td><td>314</td></tr><tr><td>Total</td><td>582</td><td>1,413</td><td>2,328</td><td>3,312</td><td>1,788</td><td>773</td><td>581</td><td>774</td><td>881</td><td>1,076</td><td>820</td><td>968</td></tr><tr><td colspan="13">Mix of revenue by customer</td></tr><tr><td>Ping An Group</td><td>41%</td><td>37%</td><td>43%</td><td>52%</td><td>56%</td><td>41%</td><td>39%</td><td>51%</td><td>56%</td><td>57%</td><td>53%</td><td>58%</td></tr><tr><td>Lufax</td><td>30%</td><td>27%</td><td>13%</td><td>10%</td><td>9%</td><td>15%</td><td>14%</td><td>12%</td><td>10%</td><td>7%</td><td>9%</td><td>9%</td></tr><tr><td>3rd-party customers</td><td>29%</td><td>35%</td><td>44%</td><td>38%</td><td>35%</td><td>44%</td><td>46%</td><td>37%</td><td>34%</td><td>36%</td><td>38%</td><td>32%</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td></tr><tr><td colspan="13">Growth yoy</td></tr><tr><td>Ping An Group</td><td></td><td>124%</td><td>89%</td><td>74%</td><td>61%</td><td>40%</td><td>11%</td><td>68%</td><td>105%</td><td>94%</td><td>92%</td><td>44%</td></tr><tr><td>Lufax</td><td></td><td>121%</td><td>-23%</td><td>15%</td><td>-8%</td><td>3%</td><td>30%</td><td>44%</td><td>61%</td><td>-33%</td><td>-10%</td><td>-6%</td></tr><tr><td>3rd-party customers</td><td></td><td>192%</td><td>107%</td><td>20%</td><td>12%</td><td>98%</td><td>50%</td><td>29%</td><td>4%</td><td>12%</td><td>14%</td><td>9%</td></tr><tr><td>Total</td><td></td><td>143%</td><td>65%</td><td>42%</td><td>32%</td><td>51%</td><td>30%</td><td>48%</td><td>51%</td><td>39%</td><td>41%</td><td>25%</td></tr></table>

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 23: Revenue by customer type

<table><tr><td>(Rmb m)</td><td>FY17</td><td>FY18</td><td>FY19</td><td>FY20</td></tr><tr><td>Ping An Group</td><td>236</td><td>528</td><td>995</td><td>1,727</td></tr><tr><td>Premium Customers</td><td>345</td><td>865</td><td>1,306</td><td>1,517</td></tr><tr><td>Basic Customers</td><td>1</td><td>21</td><td>27</td><td>68</td></tr><tr><td>Total</td><td>582</td><td>1,414</td><td>2,328</td><td>3,312</td></tr><tr><td>Growth yoy</td><td></td><td></td><td></td><td></td></tr><tr><td>Ping An Group</td><td></td><td>124%</td><td>89%</td><td>74%</td></tr><tr><td>Premium Customers</td><td></td><td>151%</td><td>51%</td><td>16%</td></tr><tr><td>Basic Customers</td><td></td><td>1960%</td><td>33%</td><td>150%</td></tr><tr><td>Total</td><td></td><td>143%</td><td>65%</td><td>42%</td></tr><tr><td>Mix</td><td></td><td></td><td></td><td></td></tr><tr><td>Ping An Group</td><td>41%</td><td>37%</td><td>43%</td><td>52%</td></tr><tr><td>Premium Customers</td><td>59%</td><td>61%</td><td>56%</td><td>46%</td></tr><tr><td>Basic Customers</td><td>0%</td><td>1%</td><td>1%</td><td>2%</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td><td>100%</td></tr></table>

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

OneConnect has two main types of revenue: (i) implementation and (ii) transaction-based and support services.

Implementation revenue primarily consists of revenue from customer-specific software development, or customisation services provided to customers for using OneConnect’s platform either via cloud offerings or on-site.

On the other hand, transaction-based and support services relate to revenue charged to financial institution customers (mainly retail banking) based on the transaction volume generated on OneConnect’s platform. As of FY20, 74% of OneConnect’s revenue was transaction-based, and rose to 79% in 1Q21.

OneConnect has six main sources of transaction-based and support services. Business origination services were previously the most important, comprising 78% of total revenue in FY17. This segment has fallen markedly in importance, contributing only 18% of total revenue in FY20 (and only 12% in 2Q21). Business origination services involved OneConnect assisting financial institutions in acquiring customers for their loans, wealth management products and insurance policies. This is typically via the provision of customer leads, either via their own systems or third-party sources.

The most important revenue segment at the end of FY20 was operation support services, comprising 32% of revenues in FY20. FY20 growth was an impressive 82% yoy. Operation support services primarily include artificial intelligence (AI) customer services and adjuster and roadside assistance management modules.

COVID-19 has also had a negative impact on project implementation and customer usage of OneConnect’s solutions as it has caused delays in project implementation and client interaction.

# Regulatory risk is hurting revenue growth in the near-term

OneConnect operates in an industry where customers face high regulatory risk, with the regulatory environment still evolving. This is especially the case for revenues relating to co-lending or facilitation of loans, which we think a sizeable number of small banks employ to help boost loan growth.

The revenue segment most at risk from stricter regulations is OneConnect’s business origination segment (13% of revenue in 1H21), in particular those relating to Internet marketing-related services. Some element of operation support (27% of revenues in 1H21), in particular those relating to asset monitoring services, are also impacted. Risk management revenues (11% of revenues in 1H21) are also at risk.

Specifically, OneConnect has flagged four regulations in Fig 25 that impact its business in two main areas - namely the use of personal data and limits to the geographical expansion of regional banks (namely city commercial banks and rural commercial banks).

For the use of personal data, the key regulations are Measures for the Administration of Credit Investigation Services (Draft for Comments)（征信业务管理办法 (征求意见稿)）and Measures for Cybersecurity Review (Revision Draft for Comments)（国家互联网信息办公室关于《网络安全审查办法(修订草案征求意见稿)》.

These state that Internet platforms need authorisation from individuals to collect personal data. This means that Internet platforms collecting personal data are now required to obtain explicit approval from users. As a result, banks have to adjust their way of approaching risk management to ensure compliance with the new regulations.

For geographical limitations on regional banks, the regulations are Notice on Regulating Personal Deposit Business by Commercial Banks through the Internet (关于规范商业银行通过互联网开展个人存款业务有关事项的通知) and Interim Measures for the Administration of Internet Loans of Commercial Banks(商业银行互联网贷款管理暂行办法).

Under these two regulations, regional banks are not allowed to carry out any activities beyond branch presence. Also, commercial banks cannot offer deposit products through third-party Internet platforms. This new rule affects new business development through online channels for these regional banks. OneConnect has stopped offering products that are not compliant with the new rules on its platform.

OneConnect quantified the revenue impact of these four regulations, stating at its 2Q21 results that revenue exposure to these regulations was more than Rmb500m in FY20. In 1H21, the actual negative impact to revenues from these regulations was Rmb170m, and stemmed from hits to Internet marketing-related services and asset monitoring services, in particular in 2Q21. OneConnect stated at its 2Q21 analyst briefing that risk management revenues would also be impacted in 2H21F.