Business context and reporting period
The supplied filing is Hexindai Inc.’s annual report on Form 20-F for the fiscal year ended March 31, 2019—not a quarterly report for 2018 Q4. The metadata names Akso Health Group, but the filing identifies the registrant as Hexindai Inc. (NASDAQ: HX); verify the issuer and period before relying on this summary. Hexindai operated a China-focused consumer lending marketplace and an online microlending business. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Financial and operating results
| Metric | FY ended Mar. 31, 2019 | FY ended Mar. 31, 2018 |
|---|---|---|
| Net revenue | $61.3 million | $107.3 million |
| Operating income | $5.1 million | $75.9 million |
| Net income | $5.5 million | $65.5 million |
| Operating margin | 8.3% | 70.7% |
| Net margin | 9.0% | 61.1% |
| Net cash from operating activities | $(1.7) million | $87.7 million |
| Net cash used in investing activities | $(68.1) million | $(27.6) million |
| Cash and cash equivalents at year-end | $57.4 million | $132.6 million |
| Total assets | $173.3 million | $163.9 million |
| Total liabilities | $46.8 million | $23.8 million |
Revenue figures are net of taxes and surcharges and reflect cash incentives as reductions of revenue. The filing reports a $20.0 million senior unsecured note issued in March 2019, bearing 12% annual interest and due in March 2022. Year-end working capital, excluding amounts due from related parties, was a deficit of $71.1 million. Management said available cash, operating cash flows and financing proceeds should cover anticipated working-capital needs for the next 12 months.
Material changes versus the prior year
- Net revenue fell 42.8% and net income fell 91.6%. Loan facilitation revenue declined 43.4%, primarily as marketplace lending volume and investor funding contracted.
- Marketplace loan volume decreased 54.5% to RMB3.79 billion ($564.9 million); borrower count fell 16.1% to 84,891. Investor count declined 14.3% to 118,247, and total investor funding was RMB5.89 billion versus RMB9.92 billion.
- Operating costs and expenses rose 79.2% to $56.2 million. Sales and marketing grew 112.1% to $32.3 million, and share-based compensation increased to $6.6 million from $1.8 million.
- Operating cash flow swung from $87.7 million provided to $1.7 million used. Investing outflows rose, including $123.5 million of loan originations, partly offset by $72.9 million of repayments, and $16.5 million of long-term investment purchases. Cash also funded dividends, repurchases and other activity; the filing attributes the cash decline in part to lower net income.
- Microlending interest income increased to $3.6 million. Microlending originations reached RMB828.0 million, up 260% year over year; net loans receivable were $76.4 million, including a $1.1 million allowance.
Outlook, risks and unusual items
- Management described tighter Chinese marketplace-lending regulation and industry disruption as key reasons for lower investor sentiment, funding and loan volumes. Stricter borrower checks reduced approval rates to 9% and 11% in fiscal Q3 and Q4, respectively.
- Regulatory filing and inspection outcomes remained uncertain. Beijing’s field inspection concluded in June 2019, but the company had not been informed of the administrative inspection result and had not received permission to submit its filing application. The filing also flags uncertainty over microlending rules, payment arrangements, guarantee practices, licenses and the VIE structure.
- Investor protection arrangements changed: Changan Insurance cooperation ended November 30, 2018; new loans from December 1 required guarantees from Zhengxuan Guarantee, capped at residual principal plus three months’ accrued interest. The filing warns coverage may not fully protect investors.
- Loan delinquency over 90 days was 3.778% of outstanding principal and interest at March 31, 2019, versus 0.980% a year earlier. The fiscal 2019 vintage M3+ net charge-off rate was 0.63% as of year-end, but loans originated in the final quarter had not yet had three months to become delinquent.
- In January 2019 a short seller alleged financial-reporting fraud. The company’s internal review, assisted by a forensic accountant, found no conclusive proof of fraud; two law firms had opened investigations, but no securities lawsuit had been initiated as of the filing date.
- The company changed its auditor: Deloitte audited fiscal 2019; Marcum Bernstein & Pinchuk audited earlier years. The filing reports no disagreements, and management said previously identified internal-control material weaknesses had been remediated; management assessed controls as effective at March 31, 2019. Deloitte did not attest to internal controls.
- The board approved a $0.40 per share/ADS dividend, including a $0.13 special dividend, and a policy targeting annual dividends of approximately 15%–25% of anticipated after-tax income, subject to board discretion. Cash dividends paid during fiscal 2019 were $19.5 million. A $25 million repurchase program was authorized; $1.3 million had been spent by year-end.
- Management expected adoption of lease accounting in April 2019 to add approximately $2.7 million each in right-of-use assets and lease liabilities. No formal earnings or operating guidance is provided.
Most important facts to verify
- Confirm this filing is for Hexindai Inc. and fiscal 2019, rather than Akso Health Group or 2018 Q4.
- Review audited statements and cash-flow details, including the operating cash outflow, working-capital deficit, and use of cash for lending, investments and distributions.
- Check the $20 million note’s terms, interest payments and repayment plan, and assess liquidity against the $71.1 million working-capital deficit.
- Track delinquency and loss performance as newer loan vintages mature, and verify the scope and collectability of Zhengxuan Guarantee coverage and outstanding Changan claims.
- Confirm regulatory inspection, filing, licensing and bank-custody status, including any effect on the P2P marketplace, microlending and VIE arrangements.
- Reconcile reported performance with the sharp increase in marketing spend, cash incentives, dividend payments and repurchases; review the status of the short-seller-related inquiries.