The loan facilitator revealed previously undisclosed transactions and changed its CEO as it tries to resume trading of its Hong Kong shares after a year-long suspension
Key Takeaways:
- Lufax disclosed previously hidden transactions, admitted to breaching listing rules and issued restated profits for two years as it tries to move beyond an accounting scandal
- The company reported an annual net loss in its long-delayed 2024 annual report as its core business of channeling loans to small business owners shrank
By Warren Yang
Lufax Holding Ltd. (LU.US; 6623.HK) has been busy taking steps to shake free from an accounting scandal that has haunted it for the past year. But the online loan facilitator may emerge from that scandal only to face a much bigger issue that it can’t do much to overcome, namely, a weak economic reality that is hurting its core lending business.
In a flurry of filings to the Hong Kong Stock Exchange over the last week and a half, much of that over China’s long Lunar New Year holiday, the Ping An Group-backed company provided details of previously undisclosed transactions that are the source of its current predicament. It also admitted to breaking listing rules and restated two years of financial results. That series of actions culminated in the announcement of the departure of its longtime CEO last Tuesday.
Lufax’s Hong Kong-listed shares have been suspended since January last year after its auditor at the time, PricewaterhouseCoopers (PwC), raised concerns about potentially problematic, unreported transactions that led to a parting of ways between the two sides. Its U.S. shares have continued trading over that period, and initially fell, but later rebounded and currently trade roughly unchanged from pre-scandal levels. The latest disclosures and leadership overhaul, which followed an audit by PwC successor EY, appear to be part of a broader series of behind-the-scenes efforts to put its house in order and facilitate a trading resumption for its Hong Kong stock.
But such fixes can’t do much to address a more fundamental underlying problem. Lufax isn’t only grappling with governance malpractice issues, but also with a business model that looks increasingly fragile in today’s China, as its freshly issued 2024 annual report shows in new detail. The company made a loss that year as its business shrank, reflecting general challenges confronting lenders as China’s economic slump lingers.
The transactions that Lufax previously hid made things worse — and their magnitude won’t do anything to help the company gain investor confidence if and when the Hong Kong trading suspension is finally lifted.
For starters, in a Feb. 15 filing, Lufax revealed that it purchased a total of 59 wealth management products with an aggregate principal amount of more than 45 billion yuan ($6.5 billion) from June 2023 to December last year from various financial institutions, including military-affiliated Avic Trust, Bank of Communications, China International Capital Corp. (CICC), Citic Bank, China Minsheng Bank, Huatai Securities and Huaxia Bank.
The company now says some of these transactions should have been publicly disclosed due to their large size. Moreover, it admitted that it failed to seek shareholder approval for subscriptions to four of the wealth management products, totaling 2.1 billion yuan.
Complex transactions
Amassing a portfolio of these wealth management products without telling investors is a bad enough governance failure, but at least it didn’t affect the company’s bottom line. In what looks like a more serious violation, Lufax also concocted undisclosed complex related-party transactions that affected its financial statements.
From May 2023 to January 2024, some of the company’s subsidiaries and affiliates bought assets from related parties through trusts. From an unspecified month in 2022 to January 2023, Lufax also purchased non-performing assets from related parties by providing loans to an entity. Further, the company failed to consolidate three entities it effectively controls in its financial statements and disclose transactions involving them.
Lufax restated its financial results for 2022 and 2023 to reflect changes in the values of assets involved in these dealings. As a result, its net profit for 2022 was about 10% below what it originally reported, while it was about 8% lower for 2023. The company hasn’t released a quarterly financial report since the third quarter of 2024, though it will likely need to issue an annual report for 2025 in the next few months to comply with Hong Kong listing rules.
Now that the accounting cleanup appears to be complete, Lufax will have to switch its focus to reviving growth under Ji Xiang, who is set to replace current CEO Yong Suk Cho from April. While Cho had a long career as a banker, with stints at Citibank and HSBC, Ji spent more than a decade at business consulting giant McKinsey, most recently as global managing partner overseeing the firm’s Asia retail banking business. That deep consulting background may come in handy for an operational overhaul, something Lufax could use as it seeks to emerge from the scandal.
An existential question for Lufax going forward stems from its traditional focus on small businesses, a cohort that is particularly vulnerable in China’s sputtering post-pandemic recovery. The company is strategically pivoting toward lower-risk borrowers, but that’s a more limited pool that is targeted by many other lenders these days as well. Also, interest rates for safer loans tend to be lower, resulting in smaller fees for credit facilitation services and narrower interest margins for directly underwritten loans. This means it won’t be so easy for Lufax to boost its revenue or net profit as it attempts a rebound.
Lufax’s New York-listed shares jumped last Tuesday, the first trading day following the barrage of disclosures, which suggests that investors are relieved that the end of its auditing saga may finally be in sight.
But the stock is still down by about 38% from its peak last October and trades at a distressed price-to-sales (P/S) ratio of less than 1. But the ratio for its peers isn’t much better, with FinVolution (FINV.US), another online loan facilitator, fetching a multiple that barely exceeds 1.
All this shows investors aren’t so upbeat about credit companies in the current economic climate in China. And Lufax needs to restore not only its business but also its reputation following its various accounting maneuvers that look aimed at inflating profits. Its new CEO is in for a big test.
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