Yiren Digital Ltd. annual report, Q4 FY2020

Full document

Yiren Digital Ltd. — FY2020 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; quarterly FY2020 figures are not presented consistently in the supplied text. Financial statements are prepared under U.S. GAAP and reported in RMB; U.S. dollar figures are convenience translations. Comparisons reflect businesses acquired from CreditEase and, for FY2020, the business disposed of at year-end.

Business context and material changes

  • Yiren operated credit facilitation and wealth-management businesses in China. On December 31, 2020, it transferred control of Hengcheng, which operated its online consumer lending platform funded by individual investors, to controlling shareholder CreditEase for RMB67.0 million in cash. Yiren said future credit-platform funding would come only from institutional partners. It had stopped accepting new individual-investor funding in September 2020.
  • COVID-19, tighter risk controls, reduced loan activity and the shift in funding and business mix coincided with a sharp contraction in operating scale. Management said COVID-related relief to affected customers also reduced 2020 revenue.

Financial and operating performance

  • Revenue: RMB3,962.0 million (US$607.2 million), down 54.0% from RMB8,616.8 million in 2019. Credit revenue fell 60.7% to RMB2,529.6 million; wealth-management revenue fell 34.2% to RMB1,432.4 million.
  • Revenue mix: Loan facilitation RMB1,329.7 million; post-origination services RMB670.4 million; account management RMB921.8 million; insurance brokerage RMB430.8 million; other revenue RMB609.2 million. Account-management revenue from the disposed individual-investor platform was expected to cease from January 2021.
  • Profitability: Net loss was RMB692.7 million (US$106.2 million), versus net income of RMB1,155.6 million in 2019; net margin was negative 17.5%. Loss before tax was RMB773.4 million. Credit segment operating loss was RMB1,173.4 million, partly offset by wealth segment operating income of RMB672.2 million.
  • Costs and unusual items: Operating costs and expenses were RMB4,667.8 million, or 117.8% of revenue. These included a RMB655.8 million loss on disposal, RMB371.6 million allowance for contract assets, receivables and other items, and RMB144.0 million fair-value loss related to consolidated asset-backed financing entities. The company also recorded RMB595.3 million of borrower repayment exemptions as a reduction of revenue.
  • Loan activity and credit quality: Facilitated loan volume was RMB11,651.5 million, down 70.2% from RMB39,103.0 million in 2019. Institutional partners funded 82.5% of FY2020 loans; offline channels accounted for 68.4% of loan volume. Year-end delinquency rates for all loans were 1.2% at 15–29 days, 1.7% at 30–59 days and 1.4% at 60–89 days. The reported FY2020 Q1–Q3 vintage M3+ net charge-off rate was 0.7% as of year-end, but those loans had limited seasoning.
  • Wealth management: Reported Yiren Wealth AUA at December 31 was RMB23,227.4 million (US$3,559.8 million). The filing’s product-flow table separately shows RMB15,308.9 million of fixed-income AUA disposed with Hengcheng and ending AUA of RMB7,918.5 million in other products; investors should reconcile these disclosures and the AUA scope.
  • Cash flow: Operating cash flow was positive RMB282.0 million, versus RMB274.2 million in 2019. Investing cash flow was negative RMB1,796.7 million and financing cash flow positive RMB955.4 million. Cash, cash equivalents and restricted cash together fell RMB562.0 million to RMB2,707.1 million.
  • Liquidity and debt: Cash and cash equivalents were RMB2,469.9 million; restricted cash was RMB237.2 million, much of which was unavailable for general liquidity. Total assets were RMB6,702.3 million and total liabilities RMB2,924.6 million. Secured borrowings were RMB500.5 million; amounts due to related parties were RMB970.3 million, including RMB361.5 million associated with financing arrangements. Management believed available cash and expected operating cash flow would cover ordinary working-capital and capital-expenditure needs for the next 12 months.
  • Equity: Total equity was RMB3,777.7 million; accumulated deficit was RMB1,257.6 million. The company reported 167,965,710 ordinary shares outstanding at year-end.

Outlook, risks and contingencies

  • No quantified financial guidance was provided. Management described plans to develop risk-based and market-based loan pricing and expand wealth, insurance and brokerage offerings; it also said future results remained exposed to COVID-19 and regulatory and market uncertainty.
  • Key business risks include attracting enough institutional funding partners after the funding-source transition, sustaining borrower volume and repayment performance, and adapting to fast-changing Chinese rules for online lending, credit reporting, financing guarantees and insurance. Yiren Wealth Management was still applying for an ICP license; the filing also describes uncertainty around other required internet-service licensing.
  • The company operates through variable-interest-entity contractual arrangements. Their enforceability and continued compliance with PRC rules are uncertain; adverse government action could disrupt operations or prevent consolidation of VIE results.
  • CreditEase is the controlling shareholder and related-party service provider. It held 85.4% of voting power as of March 31, 2021; the filing reports RMB1,023.2 million of 2020 costs and expenses for CreditEase-provided services. The restructuring and continuing service arrangements warrant scrutiny.
  • The filing identifies underpayments to required PRC employee-benefit plans, including at acquired entities; it says penalties are possible, though management considered their probability remote. It also identifies the risk that the U.S. auditor could not then be inspected by the PCAOB, with potential consequences under the HFCA Act. The company believed it was a PFIC for U.S. tax purposes in 2020.
  • The audit opinion was unqualified. Management reported effective disclosure controls and internal control over financial reporting as of year-end, but the filing did not include an auditor attestation on internal controls. The auditor highlighted the disposal accounting and the allowance for contract assets as critical audit matters.

Most important facts for investors to verify

  1. Reconcile the reported RMB23.2 billion AUA with the product-level year-end table, the disposal of fixed-income assets and the related revenue outlook.
  2. Assess the remaining collectability and assumptions behind contract assets: net balance was RMB750.2 million, with RMB467.3 million allowance; the auditor identified the long-term-loan allowance estimate as a critical audit matter.
  3. Review the disposal’s RMB67.0 million consideration, RMB655.8 million loss, transferred assets and liabilities, and the accounting decision to present Hengcheng operations as continuing operations.
  4. Track post-restructuring loan volumes, institutional funding concentration, credit performance as vintages season, and the contribution and profitability of each segment.
  5. Confirm the availability of cash for parent-company needs, including restricted cash, related-party balances and debt maturities; assess continuing dependence on CreditEase and VIE arrangements.
  6. Monitor regulatory licensing and compliance, employee-benefit contributions, PCAOB inspection and delisting exposure, and the tax implications of PFIC status.