Business Context and Reporting Period
The supplied filing is an annual Form 20-F for 360 Finance, Inc. (Nasdaq: QFIN), not “Qfin Holdings, Inc.” It covers the fiscal year ended December 31, 2019; the filing does not constitute a standalone fourth-quarter filing. The company operates a China-focused digital consumer finance platform under the 360 Jietiao brand, matching individual borrowers with institutional funding partners through consolidated PRC variable interest entities (VIEs).
The financial statements are prepared under U.S. GAAP and presented primarily in RMB. The filing’s U.S. dollar translations use RMB6.9618 per US$1.00 as of December 31, 2019.
Financial and Operating Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total net revenue | RMB9.220 billion | RMB4.447 billion | +107.3% |
| Income from operations | RMB2.894 billion | RMB1.645 billion | +75.9% |
| Operating margin | 31.4% | 37.0% | Down 5.6 percentage points |
| Net income | RMB2.501 billion | RMB1.193 billion | +109.6% |
| Net margin | 27.1% | 26.8% | Up 0.3 percentage points |
| Net income attributable to ordinary shareholders | RMB2.502 billion | RMB1.904 billion loss | Improved; 2018 included a RMB3.098 billion deemed dividend |
| Basic diluted EPS per ordinary share | RMB8.66 / RMB8.31 | RMB9.39 loss / RMB9.39 loss | Improved |
| Basic diluted EPS per ADS | RMB17.32 / RMB16.62 | RMB18.78 loss / RMB18.78 loss | Improved |
Credit-driven services generated RMB8.013 billion of revenue, while platform services generated RMB1.206 billion. Capital-light loan facilitation revenue increased to RMB814.6 million, and capital-light loans represented 22.0% of fourth-quarter 2019 originations versus 0.8% in the first quarter of 2019.
Loan origination volume was RMB198.7 billion in 2019, with an ending outstanding balance of RMB72.2 billion. Capital-heavy loans accounted for RMB171.4 billion of 2019 originations and RMB58.1 billion of ending balance; capital-light loans accounted for RMB27.2 billion of originations and RMB14.1 billion of ending balance.
- Cash flow: Operating cash flow was RMB2.973 billion, compared with RMB285.1 million in 2018.
- Investing cash flow: Used RMB8.860 billion, primarily reflecting RMB26.339 billion invested in loans receivable, partly offset by RMB17.504 billion of collections.
- Financing cash flow: Provided RMB7.708 billion, including RMB8.360 billion received from investors in consolidated trusts and RMB1.700 billion of short-term borrowings, partly offset by RMB1.500 billion of repayments.
- Liquidity: Cash and cash equivalents were RMB2.108 billion; restricted cash was RMB1.728 billion. Combined cash, cash equivalents and restricted cash were RMB3.836 billion, but restricted balances were not generally available for corporate liquidity.
- Balance sheet: Total assets were RMB20.356 billion and total liabilities were RMB13.141 billion. Loans receivable, net, increased to RMB9.240 billion from RMB811.4 million.
- Debt and trust obligations: Short-term bank loans were RMB200 million. Payables to consolidated trust investors totaled RMB7.866 billion, including RMB4.424 billion current and RMB3.443 billion non-current.
- Guarantees: Guarantee liabilities increased to RMB2.947 billion from RMB1.399 billion. Contractual outstanding loans subject to company guarantees were approximately RMB47.190 billion.
- Credit performance: M3+ delinquency was 1.31% at year-end, versus 0.9% at year-end 2018. The adjusted M3+ delinquency rate for fourth-quarter 2019 was 1.5%.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled, driven by growth in users with approved credit lines, loan originations and platform services.
- Operating expenses rose 125.7% to RMB6.326 billion. Sales and marketing increased to RMB2.852 billion, while provisions for loans receivable increased to RMB487.0 million.
- The company recorded RMB734.7 million of additional expense on guarantee liabilities in the fourth quarter due to higher expected default rates and weaker asset-quality expectations.
- Operating margin contracted from 37.0% to 31.4%, despite higher net income.
- On-balance-sheet lending expanded substantially, increasing loans receivable and related trust-investor payables.
- The company continued shifting toward capital-light services and reduced reliance on peer-to-peer funding. P2P platforms funded 3.0% of fourth-quarter 2019 originations, compared with 21.9% in the fourth quarter of 2018.
- Share-based compensation declined to RMB250.4 million from RMB607.4 million, while share-based awards remained material.
- The company was no longer an emerging growth company as of December 31, 2019, increasing applicable public-company compliance requirements.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal revenue, earnings or origination guidance. Management expects continued development of the capital-light, technology-enabled model, diversification of funding sources and ongoing investment in risk management and technology.
- COVID-19: The outbreak disrupted operations beginning in early 2020, reduced economic activity and discretionary consumption, and created potential for higher borrower defaults. Management stated that the financial impact could not yet be reasonably estimated.
- Regulatory exposure: PRC rules governing online consumer finance, cash loans, financing guarantees, online microcredit, data privacy and telecommunications licensing remain evolving. The filing states that 14.9% of fourth-quarter 2019 originations involved guarantees or credit enhancements by PRC subsidiaries without the relevant guarantee license.
- Licensing: Shanghai Qiyu had not obtained a VATS license as of December 31, 2019, although the business may require one.
- Guarantee contingency: The company was restructuring certain guarantee arrangements through licensed entities. Approximately RMB13 billion of outstanding loans were under the potentially non-compliant guarantee model at year-end, representing approximately 17% of total outstanding facilitated loans excluding loans delinquent more than 180 days. Management stated that potential financial exposure could not be reasonably estimated.
- Interest-rate risk: Loans with APRs exceeding 24% represented RMB54.1 billion, or 72.3% of outstanding loan balances, at year-end. The company states that all APRs were below 36%, but borrowers may challenge amounts above 24% under PRC rules.
- Accounting change: Adoption of ASC 326/CECL on January 1, 2020 was expected to reduce beginning retained earnings by approximately RMB1.8 billion before tax effects.
- Internal controls: Management and the auditor concluded internal control over financial reporting was effective, but identified a significant deficiency involving controls over inputs used to account for off-balance-sheet loans.
- Structural and concentration risks: The company relies on contractual VIE arrangements, 360 Group for traffic, technology and branding, and a concentrated funding base; its top five financial institution funding partners provided approximately 57.0% of cumulative funding at year-end.
- Ownership: Class B shares carry 20 votes per share. Hongyi Zhou was reported to control approximately 76.0% of aggregate voting power, limiting minority shareholder influence.
Most Important Facts for Investors to Verify
- Confirm the issuer identity and ticker discrepancy: the filing is for 360 Finance, Inc., Nasdaq QFIN, rather than Qfin Holdings, Inc.
- Reconcile reported profitability with the RMB734.7 million fourth-quarter guarantee-liability expense and rising delinquency rates.
- Assess the effect of ASC 326/CECL adoption, including the expected RMB1.8 billion reduction in opening retained earnings.
- Review guarantee-liability coverage, the RMB47.2 billion guaranteed-loan exposure and the unresolved regulatory treatment of approximately RMB13 billion under the older guarantee model.
- Evaluate liquidity excluding restricted cash and consider the RMB7.9 billion of consolidated trust-investor payables.
- Monitor COVID-19-related borrower defaults, loan demand, collection effectiveness and subsequent asset-quality disclosures.
- Verify the status of VATS licensing, VIE enforceability and compliance with PRC financing-guarantee and online-microcredit rules.
- Review related-party activity, including 360 Group services, funding arrangements and approximately RMB1.04 billion of services provided to related parties in 2019.
- Consider dilution from outstanding options, restricted shares and future incentive-plan grants, as well as the implications of the dual-class voting structure.