Lufax deepens Ping An reliance, as it works towards trading resumption

The online loan facilitator has signed a flurry of agreements strengthening its ties to its parent, Ping An Group, as it works towards reinstatement of trading for its Hong Kong stock

Key Takeaways:

• Lufax has hired Ernst & Young as its new auditor after firing PwC over disagreements about related-party transactions
• At the same time, the online loan facilitator disclosed a series of new agreements involving its parent, Ping An, to support its business growth

By Warren Yang

Lufax Holding Ltd. (LU.US; 6623.HK) has been embroiled in a scandal this year over questionable transactions with related parties, likely involving parent Ping An Group and the financial services giant’s subsidiaries. Yet the online loan facilitator’s financial dependence on its parent appears to be only deepening as it seeks to jumpstart its growth. That doesn’t exactly help reduce the very risk that has led to the company’s current predicament, which led to the suspension of trading for Lufax’s Hong Kong-listed shares in January.

Lufax has been in hot water since late last year when a senior executive tipped off then-auditor PricewaterhouseCoopers (PwC) about potentially problematic related-party transactions that the company had made. PwC started expressing reservations, only to get sacked by Lufax early this year. The sudden absence of an auditor meant the company couldn’t publish its annual report for 2024 on time, which led to the suspension of its Hong Kong-listed shares.

Lufax’s Hong Kong shares remain suspended to this day. Last Thursday, the company provided its latest quarterly update on what it’s doing to return to compliance so its Hong Kong stock can resume trading.

For starters, Lufax said it’s still answering questions from the stock exchange about its situation, and, more importantly, that it has hired Ernst & Young (E&Y) and the auditing giant’s Ernst & Young Hua Ming China affiliate as its new auditor. In that process, though more by coincidence than as a deliberate act, Lufax joined a long list of Chinese companies that have ditched PwC since last summer after PwC was punished for its role in questionable accounting practices at troubled property developer Evergrande. 

Lufax said it has also turned to Deloitte for independent evaluations of its internal controls across a wide range of areas, from corporate governance to the management of related-party transactions.

In the same disclosure, the company gave a sneak preview of its operational performance for the second quarter, though the numbers are unlikely to awe investors. The balance of its total outstanding loans shrank about 18% year-on-year to 193.4 billion yuan ($27 billion) at the end of June, even as the number of users of its services increased nearly 20%.

The discrepancy between those two trends seems to be the result of Lufax’s growing focus on consumer lending. Such loans, intended to cover personal purchases of goods and other expenses, tend to be smaller in size than business loans. Lufax’s traditional bread-and-butter has been loans to small businesses, but it has been increasingly branching out to individuals by setting up a consumer finance subsidiary in 2020 with Ping An as the minority shareholder. 

The establishment of that venture, Ping An Consumer Finance, is probably a bet that credit demand will grow among ordinary consumers as China takes steps to rejuvenate its economic growth partly through greater private consumption. That move marked a departure from Lufax’s original focus on simply connecting borrowers with lenders to earn fees, since the unit makes direct loans using its own capital.

Credit risks

Ping An Consumer Finance can directly earn interest on its loans, but it’s also exposed to credit risks that loan facilitators don’t typically incur. To reduce this vulnerability — as odd as it sounds — Lufax provides the subsidiary with services to cover defaults on some of its loans. These guarantee services allow Lufax to earn fee income, while Ping An Consumer Finance can deflect some of its credit risks, though to its parent company.

In fact, last Thursday — the same day Lufax disclosed its progress toward a Hong Kong trading resumption — the company said it agreed to raise the maximum amount of fees it can earn from the consumer finance unit per year by more than 50% to 1.1 billion yuan, anticipating growth for the business, partly fueled by Beijing’s efforts to spur consumption. 

Further leaning on its ties to its massive parent, Ping An Consumer Finance on Monday signed a deal to transfer some of its nonperforming loans to an entity owned by Ping An’s life insurance unit and state-owned China Merchants Financial Holdings.

And under yet another Ping An-related deal signed in the past week, Lufax’s insurance agency subsidiary set up in March last year will sell Ping An’s health insurance products until the end of this year, extending an original deadline of the end of October.

This flurry of deals within the Ping An ecosystem only underscores Lufax’s need for parental support to sustain its operations. Its inability to become independent is a crucial risk. For one thing, related-party transactions are susceptible to breaches of rules if they are not handled properly, as vividly illustrated by Lufax’s current difficulties and the resulting trading suspension.

Also, the actual benefits of some of these deals involving Ping An are questionable. For example, the loan guarantee arrangement for Ping An Consumer Finance only shifts credit risks within Lufax and not to outside third parties. If defaults on Ping An Consumer Finance’s loans increase, Lufax will still take a hit, even if the subsidiary is protected. And any eventual divorce between Ping An and Lufax could be disastrous to Lufax, depriving it of business and relationships with its well-connected, resource-rich parent.

While Lufax’s Hong Kong-listed shares are suspended, its New York-listed stock has continued trading throughout this year. Those New York-listed shares have gained more than 7% in the past five trading days after the company’s latest update. But they are still down more than 90% since their IPO in 2020, and trade at a mediocre trailing price-to-earnings (P/E) ratio of about 3, based on its latest available annual net profit for 2023. That’s less the half the multiple for FinVolution (FINV.US), another online loan facilitator.

That valuation gap shows Lufax has a lot of ground to recover to earn its way back into investors’ good graces. But to do that, it will need to resume trading of its Hong Kong shares, and also reassure investors that it can operate profitably and isn’t becoming too dependent on its powerful parent. 

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