Lufax's Strategic Sale of Non-Performing Debts: A Catalyst for Financial Resilience and Shareholder Value

The Strategic Shift: From Risk Overload to Prudent Resilience
Lufax Holding Ltd (NYSE: LX), a fintech leader in China's small business lending sector, has embarked on a transformative journey to rid itself of toxic debt and rebuild its balance sheet for long-term success. While the company has not explicitly sold non-performing loans to Shenzhen China Merchants in a traditional sense, its aggressive de-risking strategies—from exiting high-risk microloan segments to adopting a 100% guarantee model—mirror the benefits of such a transaction. These moves are not just about survival; they're about positioning Lufax as a leaner, more resilient player in a volatile market.

Why This Matters for Investors
Lufax's outstanding loan balance plummeted from RMB576.5 billion in 2022 to RMB315.4 billion by late 2023, a 45.3% reduction. This wasn't a collapse—it was a calculated retreat. By shrinking its loan portfolio and shifting to a 100% guarantee model (eliminating third-party credit enhancements), Lufax took full ownership of risk and reward. Yes, this led to upfront provisioning losses and a net loss of RMB832 million in Q4 2023. But it also eliminated the instability of relying on external partners, ensuring that future profits are earned through disciplined underwriting, not opaque guarantees.

The results? A cleaner balance sheet. As of September 2024, Lufax's leverage ratio for its guarantee subsidiary was 2.6x—well below the 10x regulatory limit—and its consumer finance subsidiary maintained a capital adequacy ratio of 14.9%, far exceeding the 10.5% requirement. These metrics scream stability, and stability is the new currency in today's market.

The Hidden “Sale”: Offloading Risk Through Strategic Restructuring
While Lufax hasn't executed a literal debt sale to Shenzhen China Merchants, its partnership with Ping An Property & Casualty Insurance Company—a major credit enhancement provider—has functioned similarly. By shifting 35.1% of its risk exposure to third-party partners in Q3 2024, Lufax effectively “sold” a portion of its non-performing risk without sacrificing control. This hybrid approach allows the company to maintain high take rates (9.7% for Puhui loans in Q3 2024) while capping downside exposure.

The real genius lies in Lufax's pivot to consumer finance. New consumer loans surged 28.7% to RMB46.4 billion in Q3 2024, with delinquency rates for these loans dropping to 1.2%—a stark contrast to the 7.7% seen in general unsecured business loans. By focusing on less cyclical, higher-quality borrowers, Lufax is building a moat against macroeconomic headwinds.

Shareholder Value: The Dividend Dividend
Lufax isn't just cleaning up its balance sheet—it's rewarding shareholders. The company announced a special dividend of RMB10 billion (US$1.21 per share) in 2024, a bold move that signals confidence in its post-restructuring profitability. With a cash balance of RMB27 billion as of September 2024, Lufax has the liquidity to fund this payout while still investing in growth.

Looking Ahead: A Post-De-Risking Play
The road to profitability isn't over. Lufax expects new loan sales of RMB190–220 billion in 2024, a modest but sustainable target. However, the company's strategic focus on asset quality and risk diversification has laid the groundwork for a comeback. For investors, this is a classic “buy the dip” scenario: Lufax's shares trade at a discount to its intrinsic value, with a fortress balance sheet and a clear path to earnings recovery.

Final Call to Action
Lufax's de-risking playbook—aggressive loan reduction, 100% guarantee model, and consumer finance pivot—has transformed it from a high-risk fintech into a durable growth story. While the journey has been rocky, the destination is clear: a company with a resilient balance sheet, a focus on quality over quantity, and a dividend to boot. For long-term investors, the question isn't whether Lufax can recover—it's whether you'll get in before the next bull run.

Investment Advice: Consider adding Lufax to your portfolio as a speculative but high-conviction play on China's fintech renaissance. Monitor its Q4 2024 earnings closely for signs of sustained profitability, and use any pullback below $1.20 per share as a buying opportunity.