Yiren Digital Ltd. (Yirendai) — FY2016 Form 20-F
Period note: The filing covers the fiscal year ended December 31, 2016, with comparisons to FY2015 and FY2014. It is an annual report, not a standalone 2016 Q4 earnings filing. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless stated. The company changed its reporting currency from U.S. dollars to RMB in 2016 and recast prior periods.
Business context
Yirendai operates a China-focused online marketplace connecting individual borrowers and investors. It earns primarily borrower transaction fees and investor service fees, and says it does not use its own capital to fund marketplace loans. It operates through subsidiaries and PRC variable interest entities (VIEs), and is controlled by parent CreditEase.
Key financial metrics
| Metric | FY2015 | FY2016 | Change / context |
|---|---|---|---|
| Net revenue | RMB1,313.6m | RMB3,238.0m (US$466.4m) | Up about 146%; primarily higher facilitated loan volume and borrower growth |
| Operating costs and expenses | RMB903.2m | RMB2,153.2m | Up about 138%; sales and marketing was the largest expense |
| Income before tax | RMB403.9m | RMB1,102.4m | Pre-tax margin rose from 30.8% to 34.0% |
| Net income | RMB275.3m | RMB1,116.4m (US$160.8m) | Net margin rose from 21.0% to 34.4% |
| Operating cash flow | RMB861.3m | RMB2,113.4m (US$304.4m) | Positive; materially affected by growth in quality assurance program liabilities and other working-capital movements |
| Cash and cash equivalents | RMB846.1m | RMB968.2m (US$139.5m) | Unrestricted cash |
| Restricted cash | RMB484.0m | RMB1,218.3m (US$175.5m) | Primarily quality assurance program funds and cash held by consolidated financing entities; not generally available for corporate liquidity |
| Total assets / liabilities / equity | RMB2,190.0m / RMB1,213.1m / RMB976.9m | RMB4,783.4m / RMB2,643.5m / RMB2,139.9m | Liabilities include substantial quality assurance program obligations |
| Loans facilitated | RMB9,557.6m | RMB20,277.9m (US$2,920.6m) | Up about 112%; borrowers increased from 146,390 to 321,019 |
Sales and marketing expense was RMB1,571.0m in 2016, or 48.5% of revenue versus 51.7% in 2015. Origination and servicing expense was 5.6% of revenue versus 6.6%; general and administrative expense was 12.4% versus 10.4%, including a fraud-related provision. Interest income was RMB36.8m; fair-value adjustments related to consolidated asset-backed financing entities were a negative RMB19.7m.
Yirendai reported no debt securities in the filing’s debt-securities section. The supplied filing text does not clearly quantify conventional corporate borrowings; reported liabilities include quality assurance program obligations and payables to investors associated with consolidated financing entities.
Material changes and unusual items
- Quality assurance program liability rose from RMB546.3m to RMB1,471.0m. The company recorded RMB1,679.5m of 2016 provisions, including RMB81.3m tied to a July 2016 fraud incident, and made RMB754.8m of net payouts. Restricted cash increased alongside this program.
- A fraud incident involving FastTrack loan products was detected in July 2016. The company temporarily suspended the affected product and later resumed it with tighter requirements. The incident also led to an RMB81.3m provision for estimated net payouts.
- The 2016 income tax benefit was RMB13.9m, compared with tax expense of RMB128.5m in 2015. The change principally reflected software-enterprise tax incentives, including a 2016 benefit relating to the prior-year exemption.
- Investing cash outflow was RMB1,421.7m, primarily for available-for-sale and held-to-maturity investments, loans at fair value, and equipment and software. Financing cash inflow was RMB135.3m, including trust and asset-backed securities activity; consolidated financing-entity cash is not available for general liquidity.
- CreditEase referral sourcing remained material: it generated 42.5% of borrowers and 61.8% of loan volume in 2016. CreditEase’s offline borrower referral fee increased to 6% of facilitated loans for the three years beginning in 2016.
Outlook, risks and contingencies
Management expected operating cash flows to cover ordinary working-capital needs and capital expenditures for the next 12 months, while noting that additional funding might be needed if conditions or investment plans changed. No specific revenue or earnings guidance was provided. Management expected sales and marketing, servicing, and general and administrative expenses to rise in absolute terms as the business grew. It also said restricted cash was expected to continue increasing.
- Regulation: China’s online-lending rules were evolving. Filing, telecommunications licensing and implementation requirements remained unsettled. The company identified possible compliance questions around its automated investing tool, quality assurance program, borrower-size limits, offline CreditEase referrals, and institutional trust/asset-backed financing arrangements. It planned to stop facilitating loans with principal over RMB200,000 from May 1, 2017, while some existing loans exceeded the limit.
- Credit and liquidity: Defaults above assumptions could increase quality assurance payouts, expenses and restricted-cash needs. The program’s 100% payout aim is subject to program terms and available funds; the filing describes pro rata payments if the fund is insufficient and a two-year limit on investors’ repayment rights.
- Loan performance: Delinquency rates increased year over year in several aging buckets. For all loans, the 360-days-and-over delinquency rate was 1.5% at year-end 2016 versus 0.4% in 2015. Vintage charge-off measures are subject to limited performance history, and newer vintages had shorter observation periods.
- Concentration and structure: The company depends on CreditEase for referrals, collections and other services, and reported RMB911.7m of related-party service costs in 2016. Its PRC marketplace operations depend on VIE contracts whose enforceability and regulatory treatment are uncertain.
- Legal and operational risks: Two consolidated U.S. securities class actions alleged misstatements concerning fraud and regulatory risks. The company said it would defend the cases; it had not accrued a loss at year-end and could not estimate a possible loss range. Other disclosed risks include cyber incidents, inaccurate borrower data, currency controls, foreign-exchange volatility and underfunded employee benefit contributions.
Most important facts for investors to verify
- Whether subsequent loan vintages confirm the reported improvement in 2016 charge-off rates, given their shorter observation periods, and how delinquencies progress into realized losses.
- Whether quality assurance program funding, payouts, restricted cash and recorded liabilities remain adequate as loan volume and defaults evolve.
- Progress on required PRC filings and licenses, borrower balance limits, and regulatory treatment of the assurance program, automated investing and trust/ABS arrangements.
- How much operating cash flow is attributable to sustainable operations versus changes in quality assurance liabilities and other working-capital accounts; distinguish unrestricted cash from restricted and financing-entity cash.
- Changes in CreditEase referral dependence, related-party fees, and the status and potential financial exposure of the shareholder litigation and employee-benefit shortfall.