Lufax/short sellers: from hot to not

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China’s largest finance groups have had a difficult month. Lufax, China’s second-biggest online lender and an offshoot of insurer Ping An, listed in the US on October 30. Shortly afterwards, the listing plans of Ant, which is backed by Alibaba, were halted. Lufax made it on to the market, but that does not mean it escaped pain-free.

In the span of three weeks Lufax has gone from hot tip to short sellers’ target. Shares are down more than a quarter in the past week alone. Short positions have jumped more than sixfold since Ant’s listing was suspended.

The shorts have a point. US threats to delist Chinese companies that do not follow US auditing rules were already hanging over Lufax. Its struggles at home are more worrying. Chinese regulators are tightening controls on lending rates. They are also investigating Lufax’s micro loans platform, which is accused of violating rules including bundling in Ping An insurance products.

Lufax, which started as a peer-to-peer lender, is no stranger to regulatory risks. A peer-to-peer lending crackdown in 2017 resulted in it cutting down the number of lenders on its platform from more than 5,000 to just three. That pushed back its planned listing by years.

Revenues have since shifted to a more stable mix of retail loans and wealth management. Yet shares trade at 18 times forward earnings — a 70 per cent premium to regional peers. This reflects expectations that Lufax and backer Ping An have invested in tech that will one day send sales skyrocketing.

Such ambitions will now be on the backburner. China’s changing regulatory stance raises the risk of a drop-off in users. Valuations of Chinese fintech companies are due a revision — though they will remain higher than traditional insurance and banking peers.

Tencent, another tech giant that faced a regulatory action two years ago, may provide Lufax investors with a hint of what to expect. Tencent spent years fighting regulation against its games. It was eventually successful. But even after problems eased it took the company nearly two years for shares to return to pre-crackdown levels.

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