FinVolution Group — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. Although the request specifies 2019 Q4, this annual filing does not provide a clear standalone fourth-quarter income statement, cash flow, or balance sheet; the figures below are annual unless otherwise stated. Financial statements are prepared under U.S. GAAP. Amounts are in RMB unless noted.
Business context
FinVolution operates a China-focused online consumer finance platform connecting borrowers with individual investors and institutional funding partners. In 2019 it accelerated its shift toward institutional funding and stopped facilitating new loans funded by individual investors in October. It reported 105.9 million registered users at year-end and expanded into Indonesia, which contributed little revenue.
Key financial and operating metrics
| Metric | FY2018 | FY2019 | Change / context |
|---|---|---|---|
| Net revenues | RMB4.54bn | RMB5.96bn (US$856.5m) | +31.2% |
| Net profit | RMB2.47bn | RMB2.37bn (US$341.1m) | -3.8%; net margin fell to 39.8% from 54.3% |
| Profit before tax | RMB2.62bn | RMB2.86bn | +9.0%; pre-tax margin was 47.9%, versus 57.7% |
| Loan origination volume | RMB61.5bn | RMB82.2bn (US$11.8bn) | +33.7% |
| Operating cash flow | RMB1.88bn inflow | RMB215.5m outflow | Turned negative despite reported profit |
| Cash and cash equivalents | RMB1.62bn | RMB2.32bn | Excludes restricted cash |
| Restricted cash | RMB3.68bn | RMB3.69bn | Includes customer, trust, collateral, and assurance-related funds |
| Total assets / liabilities / equity | RMB13.14bn / 7.16bn / 5.99bn | RMB18.30bn / 10.29bn / 8.01bn | Year-end balances |
| Short-term borrowings | RMB25m | RMB235m | 2019 borrowings due within one year; some collateralized by restricted cash |
Institutional funding partners funded RMB51.0bn, or 62.0% of 2019 originations, compared with 14.5% in 2018. More than 30 institutional partners were active at year-end. Repeat borrowers generated 78.1% of 2019 loan volume, up from 73.6%.
Loan facilitation fees rose 13.4% to RMB3.31bn, while post-facilitation fees rose 30.1% to RMB1.20bn. Net interest income increased to RMB1.11bn from RMB256.1m, largely reflecting consolidated trust activity. Operating expenses rose to RMB3.32bn; provisions for loans and accounts receivable were RMB299.5m and RMB261.9m, respectively. The filing reports no conventional operating-margin figure; operating expenses were 55.6% of net revenues, compared with 59.4% in 2018.
Material changes and unusual items
- Operating cash flow swung to a RMB215.5m outflow. The filing attributes this mainly to a RMB1.6bn increase in quality assurance receivables, RMB1.1bn of gains on investments in loans, and a RMB1.1bn increase in prepaid expenses and other assets, partly offset by higher quality assurance payables.
- Quality assurance receivables increased to RMB3.65bn and quality assurance payables to RMB4.78bn. These balances reflect credit-enhancement and investor-protection arrangements, not simply unrestricted cash or conventional borrowing.
- Other income was RMB210.1m, down from RMB774.1m in 2018. The prior-year amount included larger quality assurance and derivative gains. The 2019 amount included a RMB98.4m quality assurance gain and a RMB56.3m loss from fair-value changes in financial guarantee derivatives.
- Income tax expense rose to RMB482.0m from RMB151.2m, partly because a 2018 tax benefit related to software-enterprise status did not recur.
- FinVolution adopted ASC 606 in 2018; the filing says this increased 2018 operating revenue by RMB511.1m versus the prior accounting treatment. In 2019 it also reclassified loan-loss provisions from revenue presentation to operating expenses, so comparisons should account for presentation and accounting differences.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2019. A previously identified material weakness in financial reporting controls was reported as remediated.
Outlook, commentary, and risks
- The filing gives no numerical FY2020 or quarterly guidance. Management said available cash and expected operating cash flows should meet anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that additional capital could be needed.
- Management expected 2020 capital expenditures of approximately RMB32.7m. Capital expenditures were RMB48.7m in 2019.
- The institutional-funding transition exposes the business to partner concentration, funding availability, guarantee obligations, and evolving rules governing online lending, credit enhancement, and financing guarantees. The company also reported that online-lending record-filing procedures remained unclear.
- The China Merchants Bank custody arrangement expired in March 2020. Funds for historical individual-investor loans were migrated to a third-party payment system; the filing warns that this arrangement may conflict with bank-custody requirements.
- COVID-19 affected operations after year-end. The filing reports higher defaults and provisions, weaker loan volume, and lower revenue in Q1 2020 versus Q1 2019 and Q4 2019; the duration and severity of effects were uncertain.
- Credit risk remains material: 2019 vintage delinquency was 4.43% as of year-end for the first three quarters, and the filing cautions that the figure may rise as loans season. Loans with interest above 24% represented 18.5% of 2019 originations; some excess interest may not be judicially enforceable.
- Other risks include the VIE contractual structure and uncertainty under PRC foreign-investment rules, data protection and collection practices, and restricted ability to move cash from China. The company disclosed U.S. securities class actions related to its 2017 IPO; outcomes and any loss range were not estimable in the filing.
- Subsequent events: the board approved a US$0.12-per-ADS dividend in March 2020, payable around April 30, 2020. The filing also describes the early repayment of certain individual-investor investment programs during the 2019 transition.
Most important facts for investors to verify
- Obtain the Q4 2019 earnings release or quarterly data to verify stand-alone Q4 revenue, profit, cash flow, originations, and delinquency metrics; the 20-F does not clearly provide them.
- Reconcile reported profit with negative operating cash flow, and determine how much of the RMB6.01bn combined cash and restricted cash is freely available to the parent and operating entities.
- Review the composition, funding, collectability, and potential cash requirements of the RMB3.65bn quality assurance receivable and RMB4.78bn payable, including guarantee obligations on institutional-funded loans.
- Confirm compliance and operational arrangements following the March 2020 custody-account expiry, and monitor the status of online-lending record-filing and guarantee licensing.
- Track post-year-end COVID-19 effects on loan volume, delinquencies, provisions, collection performance, and institutional funding partner appetite.
- Review the status and potential exposure of the IPO-related class actions, and check the terms and payment of the declared dividend.