Qfin Holdings, Inc. annual report, Q4 FY2022

Qifu Technology, Inc. — FY2022 Form 20-F Summary

Business context and reporting period

The filing is Qifu Technology, Inc.’s annual report on Form 20-F for the fiscal year ended December 31, 2022, rather than a standalone fourth-quarter filing. The request identifies “Qfin Holdings, Inc.”, but the registrant named in the filing is Qifu Technology, Inc., formerly 360 DigiTech, Inc. The Company operates a China-focused Credit-Tech platform that matches consumers and SMEs with financial institutions through credit-driven services and capital-light platform services.

Qifu is a Cayman Islands holding company. Its China operations are conducted through PRC subsidiaries and contractual arrangements with variable interest entities. VIEs contributed approximately 92% of consolidated revenue in 2022. ADSs trade on Nasdaq under QFIN, with each ADS representing two Class A ordinary shares; Class A shares also trade in Hong Kong under 3660.

Key financial metrics

Metric	FY2022	FY2021	Change
Net revenue	RMB16.554 billion	RMB16.636 billion	Down 0.5%
Income from operations	RMB4.472 billion	RMB6.786 billion	Down 34.1%
Net income	RMB4.006 billion	RMB5.765 billion	Down 30.5%
Net income attributable to ordinary shareholders	RMB4.024 billion	RMB5.782 billion	Down 30.4%
Diluted EPS	RMB12.50	RMB17.99	Down 30.5%
Net cash from operating activities	RMB5.923 billion	RMB5.790 billion	Up 2.3%
Cash, cash equivalents and restricted cash	RMB10.512 billion	RMB8.760 billion	Up 20.0%

Operating margin declined to approximately 27.0% from 40.8%; net margin declined to approximately 24.2% from 34.7%.
Credit-driven-services revenue increased 13.7% to RMB11.586 billion, while platform-services revenue decreased 22.9% to RMB4.968 billion.
Loan facilitation volume increased 15.5% to RMB412.4 billion. Ending outstanding loan balance increased 15.1% to RMB163.5 billion, including RMB19.5 billion of on-balance-sheet loans and RMB144.0 billion of off-balance-sheet loans.
Platform services represented 56.1% of 2022 loan facilitation volume, compared with 54.4% in 2021. The capital-light model was affected by lower loan volume and lower average loan IRRs.
Provision for loans receivable increased to RMB1.580 billion from RMB965 million. Provision for contingent liabilities increased to RMB4.368 billion from RMB3.078 billion.
Revenue from releasing guarantee liabilities increased to RMB5.899 billion from RMB5.583 billion, while financing income increased to RMB3.488 billion from RMB2.184 billion.

Cash flow, liquidity, debt and balance sheet

Operating cash flow was RMB5.923 billion. Investing cash flow was negative RMB7.356 billion, primarily because investment in loans receivable exceeded collections. Financing cash flow was positive RMB3.204 billion, driven principally by consolidated-trust funding.
Cash and cash equivalents were RMB7.166 billion; restricted cash was RMB3.347 billion. Restricted cash is not generally available for corporate liquidity and includes funding-bank deposits and cash held by consolidated trusts and ABS plans.
Total assets increased to RMB40.343 billion from RMB33.505 billion. Total liabilities increased to RMB21.412 billion from RMB18.288 billion, while total equity increased to RMB18.931 billion from RMB15.217 billion.
Short-term loans were RMB150 million and outstanding long-term mortgage borrowings were RMB17.9 million. Payables to investors of consolidated trusts totaled RMB10.621 billion, including RMB6.100 billion current and RMB4.522 billion non-current.
Guarantee liabilities totaled RMB7.539 billion, comprising RMB4.120 billion of stand-ready liabilities and RMB3.418 billion of contingent liabilities. The Company made net guarantee payouts of RMB4.234 billion in 2022.
Management stated that available cash and expected operating cash flows should be sufficient for current and anticipated general corporate needs for at least the next 12 months.

Material changes versus the prior comparable period

Revenue was broadly flat, but profitability contracted substantially because costs and provisions rose faster than revenue. Total operating costs and expenses increased 22.7% to RMB12.082 billion.
The principal cost pressure was the increase in contingent-liability provisions, reflecting updated estimates for credit losses amid a challenging macroeconomic environment and COVID-19 impacts.
Loan quality deteriorated: the 90-day-plus delinquency rate increased to 2.03% at December 31, 2022 from 1.54% at December 31, 2021.
The Company continued shifting toward technology-enabled, capital-light services, but 2022 revenue from platform services declined as capital-light loan facilitation volume and average IRRs decreased.
Users with approved credit lines increased to 44.5 million from 38.5 million, and repeat-borrower contribution was 88.7% for 2022.
All 2022 loan funding came from financial institutions, including Fuzhou Microcredit. Fuzhou Microcredit funded RMB19.6 billion, or approximately 4.8% of total funding.
The Company completed its Hong Kong secondary listing in November 2022 and raised approximately RMB239 million net of issuance costs. It paid approximately RMB989 million of dividends during 2022.

Guidance, outlook, commentary and risks

The filing provides no formal numerical revenue, earnings or loan-volume guidance. Management expects future performance to depend on borrower acquisition and retention, funding availability, credit-risk management, operating efficiency, regulatory developments and macroeconomic conditions. The Company intends to continue its quarterly dividend policy, generally targeting approximately 15% to 20% of quarterly net income after tax, subject to board approval, liquidity, legal restrictions and other factors.

Credit risk: The business bears credit risk on on-balance-sheet loans and guaranteed off-balance-sheet loans. Expected-loss estimates depend heavily on historical vintages, delinquency trends and macroeconomic assumptions. A 0.5 percentage-point increase in the estimated default rate would increase the allowance for loans receivable by approximately RMB209.5 million and contingent guarantee liabilities by approximately RMB586.1 million.
Regulatory risk: Loan facilitation, micro-lending, financing guarantees, credit reporting, pricing, data privacy and cybersecurity rules in China remain complex and subject to evolving interpretation. The Company stated that it has substantially completed regulatory rectification measures, but remains subject to ongoing supervision.
VIE and China exposure: Investors own shares in the Cayman Islands holding company, not equity in the Chinese VIEs. The enforceability of contractual arrangements and the ability to transfer cash from China remain subject to PRC law, regulatory discretion, foreign-exchange controls and dividend restrictions.
Funding concentration and counterparties: The top five financial institution partners supplied approximately 35.1% of 2022 funding, excluding ICE and risk-management SaaS. Kincheng Bank was the largest partner by outstanding loan balance and is a related party.
COVID-19 and macroeconomic conditions: Regional outbreaks affected borrower repayment performance. The Company also expects uncertainty from the post-zero-COVID reopening, economic growth, consumption and SME credit conditions.
Data and cybersecurity: The Company handles sensitive personal and financial information and may face additional costs, penalties, business restrictions or reputational harm from data-security incidents or regulatory changes.
HFCAA and audit access: The PCAOB vacated its 2021 determination regarding mainland China and Hong Kong on December 15, 2022, and the Company did not expect to be identified as a Commission-Identified Issuer after filing this report. Future PCAOB access remains relevant to potential trading restrictions.
Unusual items: The Company recorded RMB231.6 million of government grants in 2022, impaired its investment in Hangzhou Qifei and accrued RMB10.9 million for estimated future losses. A previously disclosed securities class action was dismissed and became final in 2022.

Most important facts for investors to verify

Confirm the registrant identity: the filing is for Qifu Technology, Inc., not Qfin Holdings, Inc., and the period is the year ended December 31, 2022.
Reconcile the significant decline in earnings and margins with the increase in loan volume, particularly the effect of contingent-liability provisions and other expected-credit-loss estimates.
Review the sustainability and availability of cash, distinguishing unrestricted cash from restricted cash held for guarantees, trusts and ABS structures.
Assess the scale and potential volatility of guarantee liabilities, net guarantee payouts, delinquency rates and on-balance-sheet loan growth.
Evaluate the enforceability and regulatory status of the VIE arrangements, licenses, credit-reporting model and financing-guarantee structure.
Review related-party exposure, including Kincheng Bank, 360 Group, Shanghai Qibutianxia and other affiliates controlled by the chairman or related parties.
Verify the quarterly dividend amount, payment dates and the ability of PRC subsidiaries and VIEs to upstream funds under PRC reserve, tax and foreign-exchange restrictions.
Monitor future PCAOB determinations, CSRC filing requirements, cybersecurity reviews and any changes affecting U.S. ADS trading or Hong Kong fungibility.