Geoffrey Ventures to China For Depressed Value Plays: Lufax & Alibaba

EDGE Client analysis/trades by LaDucTrading's Economics Advisor, Geoffrey Fouvry

China tech stocks are all the rage now - after advancing 30% off the January bottom. 

Luckily for our EDGE clients, they were positioned at the right moment - from Alibaba (BABA) in late January to Lufax (LU) early Februrary.

Lufax was and still is a special situation hedge fund recommendation by our Economics Advisor, Geoffrey Fouvry. 

Here's what Geoffrey had to say about it:

Lufax is a company operating in China in the business of microlending to small business owners. It is not a minor fintech company nor a company new to this activity since it started in 2005. The company was established with the help of a strong backer, the Ping An Group, one of the largest companies in China operating in financial services and insurance products.

Lufax took advantage of the IPO craze of Chinese fintech companies back in 2020 - but it was also when microlending was entering a bubble and the Chinese government pushed back against the IPO of Alibaba. They said these new products lacked adequate supervision. To add insult to injury, China was enforcing restrictions over Covid for a much longer period than other countries. As a result, small Chinese businesses were particularly hurt and Lufax's book of loans soured.

After carefully reviewing their loans, and knowing these would mature in 2 years, it appeared clear that Lufax was starting to trade at a very deep discount - especially after shrinking their book of business. Their balance sheet showed they had low leverage, large cash balance, and flow rate that indicated they would be able to run off their book of business without denting its tangible book value - despite lack of earnings power as they transitioned into consumer lending.

It also makes sense to assume that the controlling shareholder, Ping An Group, would not let this cash (their cash in large part) be squandered.

Another assumption proved correct, after their 2023 Q3 conference call when one analyst asked if the company was open to a return of capital. And instead of rejecting it, the CEO answered that the dividend was certainly easy to pay.

So, I reasoned that either the company would return its excess capital (WIN), or that the company would have digested its slowdown and would position for growth. The asymmetry of reward was compelling.

After the company became a penny stock from sell-first-think-later shareholders, Lufax did a reverse-split in its stock to re-establish its listing requirements. Then, because Yahoo Finance miscalculated the ADR (American Depositary Receipts) ratio and published the wrong market capitalization, many investors did not realize that the discount to tangible book value had actually grown.

Two months after recommending LU and BABA, our EDGE clients have realized a 126% and 19% return, respectively, based on the underlying stock performance of these two China issues.

In particular, Lufax announced a very large return of capital on March 21st that propelled the stock higher and closer to its true value.

But we are not done trading this special situation stock. There are more opportunities around the dividend payment date, as the discount is “rebased” - which is something I know something about as an arbitrage and special situation/liquidation analyst, having spent 15 years as Portfolio Manager at York Asset Management.

So get your EDGE account and see what else Geoffrey is offering up for analysis and trades on global bonds, precious metals, and special situation stocks.