Despite the critical role of SMEs in the economic system of most countries, obtaining financing from traditional banks for either cash flow or expansionary plans may prove challenging for many. In fact, according to the Asian Development Bank, ASEAN SMEs received only 14.8% of bank lending in 2020, despite contributing over 40% of the region’s GDP.
Looking to seize the opportunity in serving this huge underserved market is Catalist-listed, Luminor Financial (SGX Code: 5UA), previously known as Starland Holdings. From its beginnings as a property developer for integrated residential and commercial properties in China and Singapore, Luminor Financial pivoted to providing innovative financial solutions to SMEs across the ASEAN region as a non-bank financial institution (NBFI) in the last 3 years.
Today, the Group has a strong presence in Malaysia with established networks and is able to loan entirely out of its own balance sheet. Its financial solutions segment has grown to account for 83% of its total revenue, which includes services such as invoice factoring, supply chain financing, corporate advisory, and secured loans.
Here are 5 things to know about Luminor Financial for investors looking to have a direct play on the ASEAN SME loan market.
For someone who is new to your company, can you explain (in as little words as possible) what the Group does?
Think of a conventional bank. We are very much like one and we do almost everything a bank does. This includes extending loans to companies. A key difference in our business activity from a bank is that we do not take in deposits. As such, we have to find other avenues to raise capital to deploy to our customers, hence the name non-bank financial institution.
Having a “moat” or a competitive advantage is something many investors look for in companies they invest in. Can you share how the Group has a strong advantage?
“Fintech” has been a buzzword in the last decade, with many new players constantly raising huge capital at high valuations with their advanced technology platforms. While technology is an important enabler to increase efficiency, reach out to the masses and collect data, it is our Group’s belief that a personal touch still matters. As such, we have spent the last few years building networks and cultivating relationships with SMEs. Rather than plugging a one-time financing gap, we make sure to take the time to understand their business needs. This allows us to not just add value but to create value. We demonstrate our deep appreciation of the sector they operate in and are able to advise them on long-term cashflow planning and management, building a long-term partnership with them so they can focus on securing contracts to expand their business further.
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.
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.
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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.
Editor’s Note: Some answers for this article were extracted from the SGX 10 in 10 series published on 14 February 2023 and have been republished with permission. You can read more on Luminor Financial on the SGX website.
The post 5 Things About Luminor Financial (SGX Code: 5UA), The Company That Empowers Underserved Asian SMEs With Innovative Financing Solutions appeared first on DollarsAndSense.sg.
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