Picture resource：QQ
Lufax is
just a part of CCP pond scheme stream.
It was reported by the Financial Times (FT) on 8 October
2020 that Lufax announced plans for a US IPO even as Trump pushes a plan to
delist companies from Communist China(PRC) reigned by Chinese Communist Party
(CCP) (See reference 1) Lufax’s debut
was just part of listing activity stream by PRC companies on US exchanges and 102
Chinese firms FT reported on 11 October 2020 have debuted on the New York Stock
Exchange and Nasdaq, elevating $25.5bn, in keeping with information from
analysis agency Dealogic since Trump became US President four years ago.
Throughout Mr Obama’s eight years 105 preliminary public choices of PRC firms
were held in the US, which raised a complete of $41bn thanks partly to the
blockbuster $25bn of ecommerce group Alibaba in 2014 (See reference 2). Ant
Group recently was also launching IPO in Hong Kong before Hong Kong lost access
to dollar supply.
However, there are many auditing and accounting problems
remaining unresolved satisfactorily. New York-listed PRC companies have been
the topic of scandals, such as Luckin Coffee delisted by Nasdaq after admitting
to fabricating gross sales.
According to report by Reuters (see reference 3), PRC says
it has made concessions in proposing to let U.S. regulators to audit some of
its most sensitive companies but would insist on redacting some information on
national security grounds. Many people forget that it is national security that
hinders PCAOB inspection. There is an abstract of SEC’s statement, “PRC’s state
security laws are invoked at times to limit U.S. regulators’ ability to oversee
the financial reporting of U.S.-listed, PRC-based companies. In particular, PRC laws governing the
protection of state secrets and national security have been invoked to limit
foreign access to PRC-based business books and records and audit work
papers. As a result, for certain
PRC-based companies listed on U.S. stock exchanges, the SEC and PCAOB have not
had access to the books and records and audit work papers to an extent
consistent with other jurisdictions both in scope and timing.” In consequence,
Trump decided to delist PRC entities but subject to serious delay.
Financial Statements of Lufax in the SEC Statement
Lufax published its FORM F-1 Registration
statement for certain foreign private issuers UNDER THE SECURITIES ACT OF 1933 on
7 October 2020 (See reference 4). The
consolidated statements of financial position of Lufax Holding Ltd and its
subsidiaries (the “Company”) as of December 31, 2019, 2018, 2017 and January 1,
2017, and the related consolidated statements of comprehensive income, of
changes in equity and of cash flows for each of the three years in the period
ended December 31, 2019, including the related notes were audited and given an
unqualified opinion by PricewaterhouseCoopers Zhong Tian LLP on 28 July 2020 which
was located in Shanghai (SHPWC), PRC. The accounts were said to be prepared in
conformance with IFRS.
Risk of lack of audit objectivity and independence
CCP have set work units or cells in both SHCPA and SHPWC as
indicated by the express of SHCPA (see reference 5). CCP also have unit in
Lufax (See reference 6) which was set up in Shanghai. Therefore, CCP units of
SHPWC, SHCPA and Lufax are subject to control of CCP Shanghai unit according to
the grade system of CCP. SHPWC, Lufax’s auditor, won't have the same
objectivity and independence as in the West as it’s more likely to be
influenced through CCP by Lufax’s management for example through bribery,
political interest exchange or inspection interest exchange. If objectivity and
independence are compromised due to undue influence, bias or other concerns,
auditors can’t be expected to demonstrate professional competence, scepticism,
professional conduct and due care when performing audit work. Auditors will be
unable to challenge management judgement confidently.
Risk of financial performance overstatement for the year
ended 31 December 2018
Comparison of consolidated financial performance of year
2018 with that of year 2017 as follows.
|
|
2017 |
2018 |
Increase rate |
2019 |
|
|
Column No. |
1 |
2 |
3=(2-1)÷1 |
4 |
|
|
Row No. |
RMB’000 |
RMB’000 |
RMB’000 |
||
|
Technology
platform-based income |
1 |
17,221,116.00 |
32,221,439.00 |
87.10% |
41,929,077.00 |
|
Sales and
marketing expenses |
2 |
-7,450,984.00 |
-10,766,966.00 |
44.50% |
-14,931,096.00 |
|
General
and administrative expenses |
3 |
-2,822,510.00 |
-2,796,098.00 |
-0.94% |
-2,853,049.00 |
|
Credit
impairment losses |
4 |
-934,594.00 |
-1,862,745.00 |
||
|
Asset
impairment losses |
5 |
-3,735,786.00 |
-7,492.00 |
-99.80% |
-134,516.00 |
|
Impairment
loss totalled |
6=4+5 |
-3,735,786.00 |
-942,086.00 |
-74.78% |
|
|
Profit
before income tax |
7 |
8,363,712.00 |
18,649,260.00 |
122.98% |
19,433,841.00 |
|
Less:
Income tax expenses |
8 |
-2,336,723.00 |
-5,073,326.00 |
117.11% |
-6,116,697.00 |
|
Net
profit for the year |
9 |
6,026,989.00 |
13,575,934.00 |
125.25% |
13,317,144.00 |
|
Cash
generated from operating activities |
10 |
3,945,410.00 |
1,537,249.00 |
-61.04% |
6,422,582.00 |
|
Income
tax paid |
11 |
1,270,693.00 |
2,989,616.00 |
135.27% |
4,230,688.00 |
|
Net
cash generated from/(used in) operating activities |
12 |
2,674,717.00 |
-1,452,367.00 |
-154.30% |
2,191,894.00 |
Technology platform-based income in 2018 rose by
87.1%, while general and administrative expenses and total impairment losses
contrasted 0.94%, 74.78% respectively and sales and marketing expenses only
increased by 44.5% resulting in profit before income tax surge by 122.98% in
2018. Thereon, for the year ended 31 December 2019, it tried to rationalize
technology platform-based income and profit before income tax respectively of RMB41.93bn
and 19.43bn while credit impairment loss increased to 1.86bn.
Despite substantial increase of profit before
income tax in 2018, cash generated from operating activities slide down 61.04%
to RMB1.54bn which was only 8.24% of profit before income tax. The profit
number is questionable.
Material tax risk imposed by CCP turned cash
generated from operating activities into negative
In 2018, income tax paid increased 135.27% to
RMB3bn resulting in net cash generated
from/(used in) operating activities of negative RMB1.45bn. In 2019, income tax
paid raised further substantially by 41.51% to 4.23bn and consequently net cash generated from/(used in) operating activities was less
65.87% than cash generated from operating activities for the year 2019.
Statement of cash flow indicated business is
investment and reinvestment rather than technology platform service
Though it claimed it was principally engaged in retail
credit facilitation and wealth management businesses, from 2017 to 2019, both
proceeds from sale of investment assets and payment for acquisition of
investment assets were above RMB112bn as follows which indicated it made many
investments deals each year.
|
2017 |
2018 |
2019 |
|
|
RMB’000 |
RMB’000 |
RMB’000 |
|
|
Proceeds
from sale of investment assets |
112,224,538 |
134,989,169 |
118,648,110 |
|
Payment
for acquisition of investment assets |
-113,566,600 |
-132,109,150 |
-128,570,535 |
Risk in defending investors’ rights under CCP totalitarian
It’s not fresh in PRC that investment deal was
usually used for transferring fund to CCP gangsters cheated from investors via
platform or other means. Given no rule of law, no free speech and Great
Firewall, it’s usually difficult for investors and fintech platform users to
defend rights. Courts, police and Lufax shared direction and leadership of CCP.
As many videos at Gnews website showed, investors who defended rights often
suffered CCP police gangsters’ violence.
Risk in foreign currency conversion
There are three broad categories of exchange
rate systems. In the free-floating systems, exchange rates are set purely by
private market forces. In the managed float systems, currency values are
allowed to change, but governments participate in currency markets in an effort
to influence those values. Finally, in the fixed exchange rate system,
governments may seek to fix the values of their currencies.
As far as RMB is concerned, CCP adopts managed
float systems which is a kind of dirty exchange rate system and entitles CCP
ease of manipulating exchange rate. CCP is an organized crime organization.
Recently onshore-RMB jumped 1.45% over USD to 6.693 on 9 October 2020 but The
People’s Bank of China soon adjusted its policy to stop RMB appreciation and
onshore-RMB fell 0.9% to 6.754 on 12 October 2020.
Lufax’s major operations are within the PRC and
return on investment is impacted heavily by RMB’s exchange rate. Although it
presented financial statements using RMB, its shares will be invested and
divested via USDs and return, if any, will also be realized in USDs. If its
shares are purchased after RMB has already surged much, it’s more likely to
suffer great loss if CCP manipulates exchange conversion rate downside.
A risk can’t be neglected that PRC will have liquidity problem and RMB is likely to fall a lot in that if USD1.8tn bonds owed to American investors are demanded to repay by PRC.
Risk in misapplying consolidation accounting
standard
Just as disclosed in the note to its accounts,
it is required to judge whether it is an agent or principal in relation to
structured entities and therefore possible to result in misstatement. With
respect to the Consolidated Affiliated Entities as well as other subsidiaries
in the consolidation scope, it may fail to apply IFRSs in the group accounts in
all the aspects such as recognizing revenue, classifying financial instruments
as well as categorization of cash flow as if the whole group is a single
entity. It’s unsure whether Lufax has made such mistakes.
Risk of understatement of provision for
impairment losses
Provision rate of receivables and contract
assets is calculated as below.
|
|
Row No. |
2017 |
2018 |
2019 |
|
RMB’000 |
RMB’000 |
RM | ||
Book balance of accounts and other receivables and contract assets |
1 |
18,691,743 |
20,347,160 |
26,698,064 |
|
Provision
for impairment losses |
2 |
225,069 |
252,324 |
401,626 |
|
Provision rate |
3=2÷1 |
1.20% |
1.24% |
1.50% |
Provision rate of loans to customers is
calculated as below
|
|
Row No. |
2017 |
2018 |
2019 |
|
RMB’000 |
RMB’000 |
RMB’000 |
||
|
Book balance of loans to customers |
1 |
101,760,563 |
36,021,540 |
48,749,826 |
|
Provision
for impairment losses |
2 |
4,207,626 |
1,593,846 |
1,251,314 |
|
Provision rate |
3=2÷1 |
4.13% |
4.42% |
2.57% |
Given subjective character in judging expected
credit loss on receivables, contract assets and loans and severe macroeconomic
condition that already have begun since 2015 when local governments even in
Guangdong had to replace outstanding bank loans with new bonds issued and
subsequently conversion of debt to equity
scheme was mentioned for those bonds issued by local government owned entities
and the situation deteriorated due to environmental protect storm, CCP
corruption and tariff conflicts, the impairment loss provision rate is likely
to too low.
Risk of fair value valuation manipulation
Most of its financial assets at fair value
through profit or loss (FAFVPL) were not measured in Level 1 fair value hierarchy.
Level 2 and Level 3 fair value hierarchies are more likely subject to
valuation manipulation. If any manipulation, the fair value of those assets will be
overstated. There’s a table to show its financial assets measured using
non-Level 1 fair value hierarchy.
|
|
Row No. |
2017 |
2018 |
2019 |
|
RMB’000 |
RMB’000 |
RMB’000 |
||
|
Non-Level
1 FAFVPL |
1 |
14,084,184.00 |
15,168,771 |
12,850,214 |
|
FAFVPL |
2 |
14,965,683.00 |
16,444,395 |
18,583,056 |
|
Non-Level
1 ratio |
3=1÷2 |
94.11% |
92.24% |
69.15% |
Conclusion
According to the discussions above, because many
manipulation risks are implicit in fair value measurement, impairment loss
measurement, consolidation accounting and there’s operation cash flow scarcity
and lack of reliable audit in PRC, revenue and profit reported in the income
statement were likely to be overstated. The investment cash flow shows there’s huge risk in its business model. On account of
significant risks in tax reducing operation cash flow to negative, exchange
rate, politics and so forth brought by CCP totalitarian, it’s unlikely to realize
any dividend income from investment on Lufax. More likely, the
investment on Lufax will be used by CCP to buy police arms to compromise rule
of law, press freedom, conduct BGY scheme and build Great Firewall or research
bioweapons.
Author：CPA
Jim
References:
1.FT.8 October 2020.
China’s Lufax files for US IPO against backdrop of rising tensions.https://www.ft.com/content/4a59be25-c05d-460e-b9d5-3b00d5301da9
2.FT. 11 October 2020. China stock listings on Wall Street
accelerate under Trump.https://www.ft.com/content/1acd60ed-f549-430e-822c-8155baf125a8
3.Reuters. 27 August 2020 China makes proposal to U.S. in
concession to solve accounting dispute: Bloomberg. https://www.reuters.com/article/us-china-audit-dispute/china-makes-proposal-to-u-s-in-concession-to-solve-accounting-dispute-bloomberg-idUSKBN25N0BR
4. SEC. 7 October 2020
Form F-1 Lufax Holding Ltd Registration statement for certain foreign
private issuers. https://www.sec.gov/Archives/edgar/data/1816007/000119312520265571/d934009df1.htm
5.SHCPA.31 July 2020. Work report express of Shanghai
Institute of Certified Public Accountants.https://www.shcpa.org.cn/manager/cms/upload/1597396762843_15.pdf
6.Lufax. 2 April 2020. Assignment of board chair and CCP
unit chief for Lufax .https://www.lu.com/about/202004021100.html
There's widespread Corruption and Accounting Fraud in other Communist China’s State-Owned Enterprises.
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