X Financial Form 20-F Summary
Business context and reporting period
X Financial is a Cayman Islands holding company operating primarily in China through contractual arrangements with consolidated variable interest entities. Its platform matches borrowers with individual, corporate and institutional investors and provides loan facilitation, servicing, guarantee-related and wealth-management services. The filing is an annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing; the source text does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP and reported primarily in RMB.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total net revenue | RMB3.541 billion | RMB1.787 billion | Up 98.2% |
| Operating income | RMB1.275 billion | RMB502 million | Up 154.2% |
| Operating margin | 36.0% | 28.1% | Up 7.9 percentage points |
| Net income attributable to X Financial | RMB883.1 million | RMB340.3 million | Up 159.5% |
| Net margin | Approximately 24.9% | Approximately 19.0% | Improved |
| Basic EPS | RMB3.08 | RMB1.30 | Improved |
| Operating cash flow | RMB5.4 million | Negative RMB615.3 million | Turned positive |
Revenue growth was led by direct-model loan facilitation, which increased to RMB2.958 billion from RMB1.231 billion and represented 83.6% of revenue, compared with 68.9% in 2017. Intermediary-model revenue declined 24.6% to RMB228.3 million following the cessation of the online intermediary model in April 2017 and the offline intermediary model funded by banking institutions in February 2018.
Loan facilitation volume increased to RMB36.913 billion from RMB34.400 billion. Xiaoying Card Loan represented RMB26.011 billion, or 70.5% of total facilitated volume, compared with 36.7% in 2017. Active borrowers increased to 2.371 million from 2.249 million.
Operating expenses were RMB2.265 billion, or 64.0% of revenue, compared with 71.9% in 2017. Origination and servicing expense was RMB1.186 billion; provisions for contingent guarantee liabilities were RMB216.4 million; provisions for accounts receivable and contract assets were RMB397.0 million; and the provision for Xiaoying Housing Loan receivables was RMB40.3 million. Share-based compensation increased to RMB171.8 million from RMB74.0 million.
Cash and cash equivalents were RMB1.069 billion at year-end, while total cash and restricted cash were RMB1.278 billion. Restricted cash was RMB208.3 million, primarily associated with bank borrowings and consolidated trusts. Total assets were RMB4.637 billion and total liabilities were RMB1.119 billion, producing total equity of RMB3.518 billion. Year-end short-term bank borrowings were RMB198.0 million at a stated annual interest rate of 2.08%; the filing reports no other material conventional debt balance.
The company completed its September 2018 IPO, receiving approximately RMB713.1 million of net proceeds. Financing cash flow was RMB181.8 million, investing cash flow was RMB412.9 million and net cash increased by RMB593.7 million. Management stated that existing cash and anticipated operating and financing cash flows were expected to cover working-capital requirements and capital expenditures for the next 12 months.
Material changes versus the prior comparable period
- Product and revenue mix shifted materially toward the higher-fee direct model and Xiaoying Card Loan.
- Delinquency rates increased substantially. For all outstanding loans, 31–90 day delinquency rose to 3.54% from 1.46%, and 91–180 day delinquency rose to 5.28% from 1.34%.
- Individual investors supplied 88.6% of funding at year-end, compared with 82.3% in 2017; corporate and institutional funding declined to 9.2% from 17.7%, while company-funded loans represented 2.2%.
- Guarantee liabilities declined to RMB20.9 million from RMB545.2 million because of the New ZhongAn Model and arrangements with Jiangxi Ruijing. However, the fair-value change in the financial guarantee derivative became a RMB201.0 million expense, compared with an RMB18.1 million expense in 2017, and the derivative was reported as a RMB358.3 million asset at year-end.
- Accounts receivable and contract assets increased 24.2% to RMB1.379 billion, while the related allowance for doubtful accounts increased to RMB221.2 million.
- Loans at fair value declined 95.0% to RMB33.4 million following the termination of portions of the consolidated trust business. Payables to consolidated-trust investors declined from RMB667.1 million to nil.
- The company invested RMB225.0 million for a 15% equity interest in Jiangxi Ruijing through a nominee arrangement and paid it a RMB20.0 million security deposit. Jiangxi Ruijing guaranteed RMB1.334 billion of loans and received RMB21.9 million of guarantee fees in 2018.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantitative revenue, earnings or loan-volume guidance. Management expects to focus on direct-model loan facilitation, institutional funding cooperation, technology-enabled credit assessment and continued development of Xiaoying Card Loan and other products. Management also states that regulatory impacts from measures issued in late 2017 and 2018 may not yet be fully reflected.
- Regulatory and licensing risk: PRC online-lending rules remained evolving. The company submitted P2P registration materials in April 2018, entered the relevant data-submission system in November 2018 and underwent an onsite inspection in December 2018, but had not received final registration or detailed implementation requirements as of the filing date.
- Business-model risk: Authorities could require further rectification, conversion to another type of financial platform, restrictions on investor numbers or loan balances, or cessation of operations. The company’s interpretation of cash-loan and guarantee regulations was not authoritative.
- Credit and liquidity risk: Rising delinquencies, tighter liquidity and failures of other Chinese online-lending platforms reduced investor confidence and affected funding availability, particularly for Xiaoying Card Loan borrowers.
- Counterparty concentration: ZhongAn credit insurance covered 89.9% of facilitated loans at year-end. Changes to ZhongAn’s terms, insurance capacity or relationship with the company could materially affect funding and investor confidence.
- VIE and China risks: Substantially all operations and revenue are in China and depend on contractual arrangements with VIEs rather than direct equity ownership. PRC authorities could challenge the structure, restrict fund transfers or require restructuring.
- Cash conversion risk: Despite RMB883.1 million of net income, operating cash flow was only RMB5.4 million, reflecting increased receivables, guarantee-related cash movements and other working-capital requirements.
- Internal controls: Two material weaknesses had previously been identified in U.S. GAAP and SEC-reporting staffing and in the formal internal audit, risk-assessment and internal-control framework. Management reported effective disclosure controls but had not yet provided a Section 404 management assessment or auditor attestation because of the new-public-company transition period.
- Litigation: The CEO was named in a ChinaCast Education lawsuit seeking damages of at least US$200 million against multiple defendants. The filing states that the outcome and potential impact are uncertain.
- Dividends: The board declared a cash dividend of US$0.10 per ADS for 2018 on March 18, 2019, although the company generally stated that it intended to retain earnings and did not expect periodic cash dividends in the foreseeable future.
Most important facts for investors to verify
- Whether the reported increase in profitability is sustainable after considering rising delinquencies, guarantee costs, provisions and the concentration in Xiaoying Card Loan.
- The collectability and aging of RMB1.379 billion of accounts receivable and contract assets and the adequacy of the RMB221.2 million allowance.
- The cash economics of the business, including why RMB883.1 million of net income converted into only RMB5.4 million of operating cash flow.
- The status of P2P registration, regulatory inspections, required licenses and any subsequent mandated business-model changes.
- The enforceability and continued operation of the VIE contractual arrangements and the ability to transfer cash from PRC entities to the offshore parent.
- The terms, renewal status and financial capacity of ZhongAn insurance and other guarantee providers, including Jiangxi Ruijing.
- The potential cash exposure represented by the financial guarantee derivative, whose maximum potential undiscounted future payment was reported at RMB371.0 million at year-end.
- The remediation status of the two previously identified material weaknesses and the results of future Section 404 internal-control testing.
- The dilution implications of 77.5 million outstanding options, including 40 million options granted to senior management in 2018.
- The source text’s conflicting references to related-party security deposits and the precise use and remaining balance of IPO proceeds.