Lufax buyback boosts case for direct listings - Reuters

A Chinese flag is pictured at Lujiazui financial district in Pudong, Shanghai, China May 22, 2020. REUTERS/Aly Song

Returning unneeded funds to shareholders is generally a good idea. Doing so shortly after raising capital in an initial public offering, however, suggests something is amiss. The decision by $31 billion Chinese financial technology company Lufax (LU.N) to buy back some the same stock it sold to new investors seven months ago speaks to equity issuance problems and lifts the case for direct listings.

Ping An Insurance-backed (601318.SS), (2318.HK) Lufax, which specialises in facilitating small business loans, said on Monday it would repurchase as much as $300 million of shares. They have been trading at a limp 14 times expected earnings for the coming year since last October’s New York IPO, despite solid financial performance and perkier management forecasts.

Lufax is only the latest to swiftly reverse capital-market gears. Boutique investment bank China Renaissance (1911.HK) announced a share buyback only a month after its messy October 2018 market debut. Chinese microlender Qudian (QD.N) did something similar.

The Lufax case is also curious because its prospectus suggested that raising money was not even the primary objective. With $2 billion of cash on hand, Lufax led with the idea that it wanted a currency to help retain employees and make it easier for existing backers to exit when ready. That sounds like a candidate for a direct listing, where the price is determined by orders to the stock exchange and funds are not typically raised. Spotify (SPOT.N) and Slack (WORK.N) both tried the cheaper and quicker approach to useful effect.

It’s not a fail-safe option. Website hosting service Squarespace (SQSP.N), valued at $10 billion in March, lost a third of its value last week after a direct listing. The format also could work better for companies with strong brand recognition since underwriters aren’t doing the introductory work associated with IPOs. That might have been tricky for Lufax, whose $2.4 billion stock sale was overshadowed by rival fintech Ant before its $35 billion deal imploded.

As with all things investing, timing is a factor. And fledgling direct listings are gathering momentum, with U.S. regulators moving ahead with plans to allow companies to raise funds with them too. As other companies contemplate options for going public, it’s worth considering the consequences of the clumsy turnabout at Lufax.

Follow @JennHughes13 on Twitter

CONTEXT NEWS

- Lufax said on May 24 it plans to spend up to $300 million buying back its shares, about seven months after its Oct. 30 initial public offering, when it raised $2.4 billion. Senior executives at the Chinese financial technology company also will spend personal funds to buy up to a further $5 million of shares.

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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Lufax buyback boosts case for direct listings - Reuters
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