Spaghetti wrote: Yu likes to play fast and loose with the original VFRPG story. It's a potential outcome of Ryo vs Lan Di, but that's all.
If I remember correctly, during some interview didn' t Yu say something like "Shenmue 3 is the end of this part of the story but not the end of THE story" I might have dreamed that, but if it happened it definitely falls in line with Ryo defeating Lan Di in Shenmue 3.
My personal prediction is
Ryo fights Lan Di, Lan Di has upper hand but makes a mistake, Ryo gains upper hand and defeats Lan Di, but decides against killing him. Ryo then feels lost, he's wasted 2 years of his life. He sets out on a new journey and discovers that there's so much he didn't understand before, about Lan Di, about the mirrors, about his father.
Personally, I don't think Lan Di will turn out to be evil. The ways he does things is wrong, but the reasons for them is not.