Business Context and Reporting Period
The filing is an annual Form 20-F for 360 Finance, Inc. (NASDAQ: QFIN), although the request identifies the company as Qfin Holdings, Inc. The filing covers the fiscal year ended December 31, 2018; it does not provide a standalone fourth-quarter income statement. The company operates a Chinese digital consumer finance platform, primarily under the 360 Jietiao brand, connecting borrowers with institutional funding partners and providing loan facilitation, servicing, risk-management, collection and guarantee-related services.
The company was incorporated in the Cayman Islands in 2018 and operates substantially through PRC subsidiaries and variable interest entities under contractual arrangements. Its ADSs began trading on Nasdaq on December 14, 2018. Financial statements are prepared under U.S. GAAP and presented primarily in RMB; U.S. dollar amounts use RMB6.8755 per US$1.00.
Key Financial Metrics
| Metric | 2018 | 2017 | Change or commentary |
|---|---|---|---|
| Total net revenue | RMB4.447 billion (US$646.8 million) | RMB788.1 million | Up approximately 464% |
| Operating income | RMB1.645 billion | RMB210.6 million | Operating margin increased to 37.0% from 26.7% |
| Net income | RMB1.193 billion (US$173.6 million) | RMB164.9 million | Up approximately 624% |
| Net income attributable to ordinary shareholders | Loss of RMB1.904 billion | Income of RMB164.9 million | Impacted by RMB3.098 billion deemed dividend related to preferred share issuance and reorganization |
| Basic and diluted EPS | Loss of RMB9.39 per ordinary share; RMB18.78 per ADS | RMB0.83 per ordinary share; RMB1.66 per ADS | Distorted by the deemed dividend |
| Operating cash flow | RMB285.1 million | Use of RMB111.0 million | Turned positive |
| Cash and cash equivalents | RMB1.446 billion | RMB468.5 million | Excludes restricted cash |
| Cash, cash equivalents and restricted cash | RMB2.014 billion | RMB956.4 million | Includes restricted cash and trust cash |
| Total assets | RMB7.350 billion | RMB3.099 billion | Up approximately 137% |
| Total liabilities | RMB2.910 billion | RMB2.365 billion | Guarantee liabilities increased materially |
| Guarantee liabilities | RMB1.399 billion | RMB300.9 million | Reflects expanded guarantee exposure |
| Total equity | RMB4.440 billion | RMB734.1 million | Supported by financing and IPO-related capital changes |
Revenue consisted primarily of loan facilitation services of RMB3.108 billion, post-origination services of RMB758.0 million, financing income of RMB267.8 million and other service fee revenue of RMB313.6 million. Operating expenses were RMB2.803 billion, including RMB1.322 billion of sales and marketing expense, RMB729.0 million of origination and servicing expense, and RMB607.4 million of share-based compensation.
The company had no reported conventional long-term debt category in the selected financial data. However, it had RMB300.3 million payable to investors of consolidated trusts, RMB1.399 billion of guarantee liabilities and significant contractual guarantee exposure. Outstanding loans subject to company guarantees were estimated at RMB40.8 billion at year-end.
Operating and Portfolio Metrics
- 2018 loan origination volume was RMB96.0 billion, compared with approximately RMB28.2 billion of off-balance-sheet originations in 2017.
- Total loans facilitated since inception exceeded RMB127.4 billion; the December 31, 2018 outstanding balance was RMB43.1 billion.
- Users with approved credit lines increased from approximately 3.3 million at December 31, 2017 to 12.5 million at December 31, 2018.
- Repeat borrower contribution was 62.7% for the three months ended December 31, 2018.
- M3+ delinquency was approximately 0.92% at December 31, 2018, compared with 0.4% at December 31, 2017.
- Loans with APRs exceeding 24% represented 71.0% of outstanding balances, versus 43.5% at December 31, 2017. The company stated that all loans were priced below a 36% APR under its calculation methodology.
- Financial institutions funded 74.7% of cumulative originations, a related P2P institutional partner funded 23.6%, and the company’s online microcredit company funded 1.7%.
Material Changes Versus the Prior Comparable Period
- Revenue and loan volume expanded rapidly, driven by borrower growth, increased platform utilization and the company’s relationship with 360 Group.
- Operating margin improved as revenue growth exceeded expense growth, although marketing and servicing expenses increased substantially.
- The company shifted from primarily collecting service fees from borrowers to charging funding partners directly, in response to Circular 141 and related regulatory developments.
- The company increasingly used licensed third-party guarantee companies and back-to-back guarantees. Guarantee liabilities rose from RMB300.9 million to RMB1.399 billion.
- On-balance-sheet loans declined from RMB1.197 billion to RMB811.4 million, while off-balance-sheet loans increased from RMB11.005 billion to RMB42.247 billion.
- Operating cash flow improved to positive RMB285.1 million, but working capital absorbed significant cash through increases in accounts receivable, financial assets receivable and prepaid guarantee deposits.
- The company adopted ASC Topic 606 using full retrospective application. The adoption accelerated recognition of certain loan facilitation revenue and restated prior-period results.
- The company granted approximately 25.3 million share options and recorded RMB607.4 million of share-based compensation, with RMB638.8 million of unrecognized compensation cost remaining at year-end.
Guidance, Outlook, Risks and Unusual Items
No formal revenue, earnings or origination guidance is provided in the filing. Management expects continued growth from borrower acquisition, repeat usage, additional financial institution funding partners, technology investment and gradual expansion into near-prime borrowers. Planned 2019 capital expenditures were approximately RMB19.5 million, primarily for information technology infrastructure.
- Regulatory risk: The PRC online consumer finance framework was evolving. The company acknowledged uncertainty regarding Circular 141, Circular 56, interest-rate limits, guarantee practices, payment flows, credit assessment assistance and licensing requirements.
- Licensing exposure: Shanghai Qiyu provided commercial internet information services but had not obtained a VATS license as of December 31, 2018. The company also faced uncertainty regarding online microcredit and financing-guarantee requirements.
- Credit and guarantee risk: The company bears substantial direct or indirect credit exposure through guarantee arrangements. Actual delinquencies could exceed estimates and require additional provisions.
- Funding concentration: The top five financial institution funding partners provided approximately 57% of cumulative funding. Regional banks funded 58.2% of outstanding balances, and a related-party P2P platform funded 23.6% of cumulative originations.
- Related-party dependence: 360 Group supplied important user traffic, technology, branding and marketing support. In 2018, services provided by 360 Group entities were RMB77.3 million. Beijing Qibutianxia and related entities also provided services and guarantees.
- VIE structure: Substantially all operations are conducted through PRC VIEs controlled through contractual arrangements rather than direct ownership. Changes in PRC interpretation or enforcement could impair control, access to economic benefits or financial consolidation.
- Internal controls: One material weakness remained at year-end relating to insufficient accounting personnel with U.S. GAAP expertise and inadequate formal period-end financial reporting controls. Management concluded that disclosure controls and procedures were not effective.
- Unusual accounting items: The RMB3.098 billion deemed dividend materially reduced income attributable to ordinary shareholders despite consolidated net income of RMB1.193 billion. The financial statements also include allocations of certain corporate costs from Beijing Qibutianxia.
- Liquidity restrictions: Restricted cash was RMB567.8 million and prepaid deposits to third-party guarantee companies were RMB795.7 million. PRC statutory and foreign-exchange restrictions may limit transfers of cash and dividends to the Cayman Islands holding company.
The filing reports no material pending legal or administrative proceedings and total operating lease obligations of RMB27.1 million at December 31, 2018.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for 360 Finance, Inc., not an entity expressly named Qfin Holdings, Inc.
- Reconcile consolidated net income with the RMB3.098 billion deemed dividend and the reported loss attributable to ordinary shareholders.
- Assess the sustainability of the 37.0% operating margin after excluding or normalizing RMB607.4 million of share-based compensation and considering higher guarantee costs.
- Review guarantee-liability methodology, expected loss assumptions, cash collateral and the RMB40.8 billion of loans subject to guarantees.
- Analyze the increase in M3+ delinquency and the rapid growth of higher-APR loans, including potential effects of regulatory interest-rate interpretations.
- Evaluate funding concentration, related-party P2P funding, regional-bank exposure and the continued availability of 360 Group traffic and support.
- Track remediation of the material weakness in U.S. GAAP financial reporting controls.
- Verify the status of VATS, online lending, microcredit and financing-guarantee licenses and the continuing enforceability of the VIE arrangements.
- Reconcile unrestricted liquidity with restricted cash, guarantee deposits, trust cash and PRC restrictions on upstreaming funds.