Qfin Holdings, Inc. annual report, Q4 FY2021

Business Context and Reporting Period

The filing is an annual Form 20-F for 360 DigiTech, Inc. (NASDAQ: QFIN), not “Qfin Holdings, Inc.” as stated in the request. It covers the fiscal year ended December 31, 2021; the filing does not present standalone fourth-quarter results. The company is a Cayman Islands holding company operating primarily in China through PRC subsidiaries and contractual variable-interest entities (VIEs). It provides Credit-Tech services that match consumers and small-business borrowers with financial institutions through credit-driven and capital-light platform services.

The financial statements are prepared under U.S. GAAP. ADSs trade under QFIN, with each ADS representing two Class A ordinary shares.

Financial Results and Key Metrics

Metric	2021	2020	Change
Total net revenue	RMB16.636 billion	RMB13.564 billion	22.6% increase
Income from operations	RMB6.786 billion	RMB3.790 billion	79.1% increase
Operating margin	40.7%	27.9%	12.8 percentage-point increase
Net income attributable to ordinary shareholders	RMB5.782 billion	RMB3.497 billion	65.4% increase
Net margin attributable to ordinary shareholders	34.7%	25.8%	8.9 percentage-point increase
Diluted earnings per ADS	RMB35.98	RMB22.80	57.8% increase
Net cash provided by operating activities	RMB5.790 billion	RMB5.326 billion	8.7% increase
Net cash used in investing activities	RMB6.064 billion	RMB0.893 billion provided	Material shift to outflow
Net cash provided by financing activities	RMB2.264 billion	RMB3.282 billion used	Material shift to inflow

Platform-services revenue increased 198.4% to RMB6.446 billion and represented 38.8% of revenue. Credit-driven-services revenue declined 10.7% to RMB10.189 billion, representing 61.2% of revenue. Capital-light loan facilitation and servicing revenue increased to RMB5.678 billion from RMB1.827 billion.

Loan facilitation volume was RMB357.1 billion in 2021, comprising RMB162.9 billion of credit-driven services and RMB194.2 billion of platform services.
Ending outstanding loan balance was RMB142.0 billion, including RMB13.349 billion of on-balance-sheet loans and RMB121.599 billion of off-balance-sheet loans.
Capital-light loans represented approximately 54.4% of 2021 loan facilitation volume, while management’s revenue discussion also reports approximately 50%; the difference should be reconciled.
The 90-day-plus delinquency rate was approximately 1.54%, or 1.5% as presented in the historical table, unchanged from 2020 on a rounded basis.
Repeat borrower contribution was 88.1%, and users with approved credit lines reached 38.5 million.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents increased to RMB6.116 billion from RMB4.418 billion.
Total cash, cash equivalents and restricted cash increased to RMB8.760 billion from RMB6.774 billion. Restricted cash of RMB2.644 billion was not generally available for corporate liquidity.
Total assets increased to RMB33.505 billion from RMB24.387 billion, while total equity increased to RMB15.217 billion from RMB9.481 billion.
Loans receivable, net increased to RMB12.704 billion from RMB7.588 billion. The related allowance for loan losses was RMB948.9 million.
Guarantee liabilities consisted of RMB4.818 billion of stand-ready liabilities and RMB3.285 billion of contingent liabilities at year-end.
Short-term loans were RMB397.6 million, with a reported weighted-average interest rate of 3.46% and no financial covenants. The filing states that the company has no material long-term debt, although consolidated trusts had RMB6.315 billion payable to investors at year-end.
Contracted but unrecorded capital commitments were at least RMB500 million, primarily for the regional headquarters and affiliated industrial park. Expected 2022 capital expenditures were approximately RMB111.4 million.
Management stated that cash and expected operating cash flow should satisfy anticipated general corporate needs for at least the next 12 months, subject to restrictions on transferring cash from PRC entities.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven by a transition toward capital-light platform services and a larger borrower and financial-institution base.
Capital-heavy loan facilitation revenue fell sharply because of lower average loan interest rates and reduced capital-heavy volume, while guarantee-liability release revenue rose to RMB5.583 billion.
Operating expenses increased only 0.8% despite revenue growth, but sales and marketing expense rose 93.6% to RMB2.090 billion as the company pursued more proactive customer acquisition.
Provision for contingent liabilities declined to RMB3.078 billion from RMB4.794 billion, while provision for loans receivable increased to RMB965 million from RMB699 million.
Income tax expense increased to RMB1.258 billion from RMB586 million; management reported an effective tax rate excluding nondeductible share-based compensation of 17.3% versus 13.4%.
Investing cash flow turned negative primarily because investment in loans receivable exceeded collections by approximately RMB6.038 billion.
The company acquired control of 360 Changfeng, increasing its ownership to 70%, and recorded RMB1.019 billion of land-use rights associated with the headquarters and industrial-park project.
Fuzhou Microcredit ceased to be a separate VIE and became a wholly owned subsidiary of the VIE Shanghai Qiyu.
The company adopted a quarterly dividend policy in 2021, targeting approximately 15% to 20% of quarterly net income, subject to board approval and legal and liquidity constraints.

Guidance, Outlook, Risks and Unusual Items

The filing provides no formal revenue, earnings or loan-volume guidance. Management expects growth to depend on borrower acquisition and retention, risk-management performance, funding-partner cooperation, regulatory compliance and continued expansion of capital-light services.

Regulatory risk: PRC rules governing loan facilitation, microcredit, financing guarantees, credit reporting, data privacy, cybersecurity, online marketing and cross-region lending remain evolving and subject to uncertain interpretation. The company’s 2021 regulatory rectifications remained subject to regulators’ final review.
VIE structure: The company has no equity ownership in its principal VIEs and relies on contractual arrangements. VIEs contributed a substantial majority of revenue; however, the filing contains differing disclosures, reporting 92% in one section and 82% in the financial-statement notes for 2021. This should be verified.
Guarantee exposure: The company had RMB49.858 billion of outstanding loans subject to its guarantee model, against RMB8.103 billion of stand-ready and contingent guarantee liabilities. Estimates depend heavily on expected default rates and collection performance.
Accounting estimates: Expected default rates used for loan allowances and guarantee liabilities were identified as a critical audit matter. A 0.5 percentage-point change in the overall estimated default rate would change the loan-loss allowance by approximately RMB66 million and the contingent guarantee liability by approximately RMB586 million.
Accounting change: Adoption of ASC 326 in 2020 resulted in a RMB1.430 billion reduction to opening retained earnings and materially changed guarantee-liability presentation and expense recognition.
Funding concentration: The top five financial-institution partners provided approximately 45.5% of 2021 funding. Funding from financial institutions represented 100% of 2021 loan funding.
Legal proceeding: The company and certain current and former officers and directors face a putative securities class action concerning alleged disclosure failures related to compliance and data-collection practices. The company cannot estimate any loss or range of loss.
PCAOB and HFCAA: The auditor was identified as located in a jurisdiction where the PCAOB could not fully inspect or investigate firms. The filing warned of potential U.S. trading restrictions or delisting under the HFCAA if inspection limitations continued.
COVID-19 and macroeconomic risk: Renewed outbreaks, borrower credit deterioration, changing consumption and employment conditions, and broader China or global economic weakness could increase defaults and reduce loan demand.
Share repurchase: A plan authorized repurchases of up to US$200 million through August 17, 2022; no ADSs had been repurchased as of February 28, 2022.
Internal controls: Management and Deloitte concluded that internal control over financial reporting was effective as of December 31, 2021.

Most Important Facts for Investors to Verify

Confirm the registrant’s identity and ticker: the filing is for 360 DigiTech, Inc. and QFIN, not Qfin Holdings, Inc.
Reconcile the reported capital-light share of loan volume, stated as both 54.4% and approximately 50%.
Reconcile the conflicting 2021 VIE revenue contribution disclosures of 92% and 82%.
Assess the sensitivity of earnings and equity to default-rate assumptions, guarantee payouts, delinquency trends and recoveries.
Review the composition and availability of RMB8.760 billion of cash and restricted cash, including cash held by consolidated trusts.
Evaluate the RMB49.858 billion guaranteed loan exposure relative to guarantee liabilities, reserves and the company’s capital-light transition.
Monitor PRC regulatory developments affecting VIE enforceability, credit reporting licenses, financing guarantees, interest-rate limits, data transfers and online lending.
Track PCAOB inspection status and the resulting HFCAA delisting risk.
Follow the securities class action, including any ruling on the motion to dismiss and potential loss exposure.
Verify future dividend capacity because dividends depend on board approval, PRC retained earnings, statutory reserves, currency controls and cash-transfer restrictions.