The Collapse of Lufax: A Giant on the Brink of Delisting with a 255 Billion RMB Market Value Evaporation

 

Once a top player in China's fintech industry, Lufax is now mired in the darkest hour of its development. From the high spirits of its US IPO to a 95% plummet in market value and teetering on the edge of US delisting, this giant backed by the Ping An Group has suffered an all-round collapse in just three years. With its loan scale halved, performance slumping sharply, credit risks erupting, coupled with large-scale layoffs and controversial insider share sell-offs at low prices, the trajectory of its decline is a concentrated reflection of changes in the industry environment and its own operational risks.

 

Lufax's crisis is first reflected in the cliff-like decline in performance and the overall deterioration of its operating fundamentals. The 2023 Q3 financial report is a direct proof of its downturn: revenue plummeted 39% year-on-year to 8.05 billion RMB, and net profit nosedived 90.3% from 1.355 billion RMB in the same period last year to 131 million RMB. Even though net profit rebounded briefly in Q1 and Q2, it failed to reverse the trend of sustained performance decline, instead confirming that its operating condition is far from hitting the bottom. As a platform with loan services and guarantee services as its core income, Lufax's performance slump is directly related to the sharp contraction of its loan scale. After its outstanding loan balance hit a peak of 676.3 billion RMB in Q1 2022, it began to decline rapidly, dropping to 366.3 billion RMB by the end of Q3 2023, almost halving the outstanding loans. The continuous decline in the actual interest rate of internet loans has further intensified its income pressure. In order to maintain book profits, Lufax has to "struggle to hold on" by compressing costs across the board: sales and marketing, technical analysis and other expenses have been drastically reduced, and debts have been repaid in advance to lower financial costs. However, this palliative approach can never cover up the decline of its core business.

 

The sharp decline in asset quality and the concentrated outbreak of credit risks are the fundamental reasons for Lufax's predicament. In Q3 2023, Lufax's credit impairment loss reached 3 billion RMB, accounting for 37.3% of its current revenue, meaning more than one-third of its revenue was used to fill the bad debt hole. Even though the amount of impairment loss decreased year-on-year, it was backed by a faster shrinkage of asset scale, and the actual credit risk was even more severe. From a credit impairment loss to revenue ratio of only 3.85% in Q1 2021, to a surge to 54.39% in Q4 2022, and then remaining above 30% in all quarters of 2023, Lufax's credit risks have long since erupted in an all-round way. The overdue rate data directly reflects the deterioration of its asset quality: the M1+ overdue rate rose from 2.2% to 6%, and the M3+ overdue rate climbed from 1.3% to 3.7%, with no signs of a turnaround. At the same time, Lufax's risk exposure is still expanding continuously: the proportion of risk exposure, which was only 6.3% in 2020, soared to 31.8% by the end of Q3 2023, corresponding to more than 116.5 billion RMB of risky assets. Once the asset quality continues to decline, this huge risk exposure will become an unbearable burden for it. The adjustment of its risk-bearing model, from relying on Ping An Property & Casualty's credit guarantee insurance to transferring the risk of more than half of the new loans to its own guarantee subsidiary, is essentially just a risk cycle within the Ping An system, and does not solve the risk problem fundamentally.

 

Behind the business contraction are large-scale personnel adjustments and internal unrest of the enterprise, and the low-price share sell-off by the executive shareholding platform has further made the market lose confidence in Lufax's future. In order to reduce operating costs and shrink business scale, Lufax started large-scale layoffs from Q3 2022. Its core sales team shrank from a peak of 63,000 people to 36,000 people in Q1 2023, with a total of 27,000 layoffs and a layoff rate of over 43%. Even though Lufax interpreted the layoffs as "optimizing personnel structure and improving per capita output", this nearly halved personnel adjustment still plunged the enterprise into continuous unrest, and also reflected from the side that its previous business model of extensive manpower strategy had serious problems. What has caused even greater public outcry in the market is that against the background of Lufax's continuous stock price decline and teetering on the 1 US dollar delisting red line, its second largest shareholder, Tun Kung Company Limited, an overseas shareholding platform backed by Ping An insiders and Lufax executives, sold off shares continuously three times at low prices from June to August 2023, selling a total of nearly 47 million ADS and cashing out more than 520 million RMB, with the lowest selling price only 1.19 US dollars. Moreover, the platform also carried out covered call option transactions by lending out stocks, shorting Lufax in advance to lock in profits. The continuous sell-off and bearish stance at the executive level form a sharp contrast with the blind optimism of retail investors about Lufax's long-term value, and further aggravated the market panic.

 

From a fintech giant with a market value of over 270 billion RMB to a down-and-out enterprise with a market value of only 14.8 billion RMB that avoids delisting through a reverse stock split, Lufax's decline is not only an epitome of the fintech industry facing stricter regulation, lower interest rates and a deteriorating credit environment, but also exposes its deep-seated problems such as over-reliance on scale expansion, insufficient risk control capabilities and a single business model. A reverse stock split may allow Lufax to temporarily avoid the risk of US delisting, but facing the continuously declining performance, high credit risks, turbulent internal management and a crisis of market trust, if Lufax cannot fundamentally improve asset quality and restructure its core business model, its future development path is destined to be full of difficulties. Lufax's experience also sounds the alarm for the entire fintech industry: scale expansion divorced from risk control is ultimately a source of water without a root. Only by adhering to the essence of finance and building a solid risk defense line can enterprises achieve long-term development.