CNFinance Holdings Limited — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in RMB unless noted.
Business context
CNFinance provides home-equity loan facilitation and servicing in China, primarily to micro- and small-enterprise owners. Loans are funded almost entirely through trust-company partners. Since late 2018, the company has increasingly relied on sales partners to refer borrowers and contribute a 10%–25% credit risk mitigation position (CRMP) against referred loans.
Financial and operating performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total operating income | RMB887.9 million | RMB1,614.7 million | Down 45.0% |
| Net interest and fees income after sales-partner costs | RMB698.4 million | RMB1,486.3 million | Down 53.0% |
| Provision for credit losses | RMB277.6 million | RMB362.7 million | Down 23.5% |
| Operating expenses | RMB447.7 million | RMB531.0 million | Down 15.7% |
| Net income | RMB114.9 million (US$17.6 million) | RMB534.6 million | Down 78.5% |
| Adjusted net income, non-GAAP | RMB176.9 million | RMB550.5 million | Down 67.9% |
Basic and diluted EPS were RMB0.08 per share, compared with RMB0.39 and RMB0.36, respectively, in 2019. Net income was about 12.9% of operating income in 2020; adjusted net income excludes share-based compensation and is not a U.S. GAAP measure.
- Interest and financing-service-fee income on loans fell 38.1% to RMB1.829 billion, reflecting lower average daily loan balances and lower loan rates. Sales-partner collaboration costs rose to RMB415.1 million from RMB174.0 million.
- Loan originations increased 39.5% to RMB8.846 billion, and borrowers served rose 38.4% to 17,703. Outstanding loan principal declined to RMB9.679 billion from RMB11.268 billion.
- Weighted-average effective loan interest rate was 17.3%, down from 19.4%; average loan tenor was 24 months versus 22 months. Management said rates were voluntarily reduced amid uncertainty following the revised private-lending rate cap.
- Reported provision expense was lower partly because of declining loan balances, CRMP-supported loans and the 2020 CECL methodology. Gains on loan sales increased to RMB149.6 million from RMB76.0 million, largely as the company accelerated NPL disposals.
Cash flow, balance sheet and liquidity
- At year-end, total assets were RMB12.233 billion, total liabilities RMB8.492 billion, and shareholders’ equity RMB3.741 billion. Interest-bearing borrowings were RMB6.158 billion, down from RMB7.523 billion.
- Cash, cash equivalents and restricted cash totaled RMB1.961 billion, versus RMB1.705 billion. This includes RMB1.035 billion of structured-fund cash restricted to making new loans and unavailable for general liquidity needs.
- Net cash provided by operating activities was RMB1.120 billion; investing activities provided RMB524.1 million; financing activities used RMB1.367 billion. Capital expenditures were RMB3.2 million.
- Management stated that cash and anticipated financing cash flows should cover working capital and capital expenditure needs for at least the next 12 months. Funding access remains dependent on trust partners and other financing sources.
- The company reported a 3.3x leverage ratio at year-end, down from 3.7x in 2019. Senior-unit funding costs, excluding trust administration fees, ranged from 7.0% to 12.7% in 2020.
Credit quality, changes and unusual items
- Delinquency ratio rose to 22.63% from 21.08%; the NPL ratio (loans more than 90 days past due) was 11.66%, down from 13.75%. Management attributed the higher delinquency to COVID-19’s effect on borrowers and the lower NPL ratio to accelerated sales and foreclosures.
- NPL provision coverage declined to 58.44% from 65.84%. The company revised its charge-off policy to write loans 180 days past due down to net realizable collateral value, unless well-secured and in active collection. The reported charge-off ratio rose to 11.299% from 1.612%; comparisons are affected by the policy change.
- CNFinance adopted CECL on January 1, 2020, increasing the opening allowance by RMB23.8 million and reducing retained earnings by RMB17.9 million after tax. The company also recorded RMB433.4 million of increases in guaranteed recoverable assets related to sales-partner support.
- COVID-19 disrupted on-site borrower assessment, borrower acquisition, collections and foreclosure work. The company reported 2,608 collection proceedings pending at year-end involving RMB1.1575 billion in disputed amounts; these were proceedings brought by trust partners, directly or with the company’s assistance.
- Management disclosed an unremediated material weakness in financial reporting controls: insufficient personnel with U.S. GAAP and SEC-reporting expertise and inadequate communication of accounting policies. Disclosure controls were assessed as ineffective at year-end.
Outlook, risks and contingencies
The filing gives no quantified earnings or origination guidance. Management expects available cash and anticipated financing to meet needs for at least 12 months, but emphasizes uncertainty around funding and business conditions. No cash dividends are planned in the foreseeable future.
- Key exposures include China’s evolving rules for loan facilitation, financing guarantees, trust products, sales-partner CRMPs, financial marketing and borrower-data handling. The company says certain arrangements’ regulatory treatment remains uncertain and could require business changes or affect funding.
- All 2020 home-equity origination volume was trust-funded; FOTIC represented 69.3% of trust-funded originations. Loss or restriction of major funding partners could materially affect liquidity and operations.
- Credit risk is concentrated in property-secured lending, including second liens, which made up 56.3% of 2020 originations. Property-value declines, collection delays, and sales partners’ ability to meet repayment commitments could increase losses.
- The filing identifies PCAOB inspection limitations for the China-based auditor and potential U.S. listing risks, as well as foreign-exchange, dividend-repatriation, cybersecurity, tax and PRC legal-system risks.
- The independent auditor issued an unqualified opinion on the consolidated financial statements, but did not attest to internal-control effectiveness. The company also stated it was likely a PFIC for 2020, subject to uncertainty and possible application of proposed regulations.
Most important facts for investors to verify
- Whether operating income and earnings stabilize after the sharp FY2020 decline, and how lower loan pricing and sales-partner costs affect unit economics.
- Whether delinquency, NPL and recovery trends improve; assess results using the revised charge-off policy and distinguish new collaboration-model loans from legacy loans.
- How much reported cash is unrestricted, and whether trust partners and other funding sources remain available on acceptable terms.
- Whether CRMP recoveries are collectible in practice and whether sales-partner guarantee arrangements remain compliant with evolving PRC regulation.
- Progress in remediating the material weakness and the implications of auditor-inspection restrictions for the U.S. listing.