CNFinance Holdings Limited — FY2019 Form 20-F
Period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone 2019 fourth-quarter report. Financial statements are prepared under U.S. GAAP and reported in RMB unless otherwise noted.
Business context
CNFinance provides home-equity loan facilitation and servicing for micro and small-enterprise owners in China, primarily through trust-company funding partners. It also has a small direct-lending business. In 2019, more than 99.9% of borrowers were introduced by sales partners under a collaboration model launched in late 2018; partners contribute credit-risk-mitigation deposits tied to introduced loans.
Financial and operating performance
| Metric | FY2018 | FY2019 | Change / context |
|---|---|---|---|
| Total operating income | RMB2.338bn | RMB1.615bn | Down 30.9% |
| Net interest and fees income after partner collaboration costs | RMB2.350bn | RMB1.486bn | Down 36.7%; includes RMB174.0m of 2019 collaboration costs |
| Provision for credit losses | RMB433.8m | RMB362.7m | Down 16.4% |
| Income before tax | RMB1.158bn | RMB721.0m | Down 37.7% |
| Net income | RMB860.9m | RMB534.6m (US$76.6m) | Down 37.9% |
| Basic / diluted EPS | RMB0.69 / RMB0.62 | RMB0.39 / RMB0.36 | Both lower |
| Net cash from operating activities | RMB1.325bn | RMB1.299bn | Nearly flat |
| Cash and cash equivalents at year-end | RMB3.162bn | RMB1.705bn | Includes RMB1.073bn restricted to structured-fund lending activities |
| Interest-bearing borrowings | RMB15.325bn | RMB7.523bn | Down about 50.9% |
| Total assets / shareholders’ equity | RMB19.355bn / RMB3.046bn | RMB13.026bn / RMB3.599bn | Assets fell; equity rose |
FY2019 investing activities provided net cash of RMB4.936bn, while financing activities used RMB7.696bn, principally reflecting repayment of borrowings. Operating expenses declined 28.9% to RMB531.0m; other expenses rose 60.8% to RMB182.7m. The filing does not present a conventional operating-margin measure.
Material changes and loan performance
- Home-equity loan originations declined 33.7% to RMB6.34bn; borrower count fell 20.9% to 12,790. Management attributed lower volumes to market conditions and a strategic emphasis on loan quality over growth.
- Interest and financing-service-fee income on loans fell 31.0% to RMB2.953bn, primarily due to lower average daily loan balances. Direct lending originations were nil in 2019, compared with RMB52.4m in 2018.
- Aggregate delinquency rate improved to 5.43% from 7.58%, which management attributed partly to collections and faster sales of delinquent loans. Aggregate NPL rate rose to 3.55% from 1.05%; management cited deteriorating borrower repayment capacity and longer legal proceedings. Charge-off ratio increased to 1.612% from 0.068%.
- Allowance ratio increased to 9.05% from 5.44%, while NPL provision coverage fell to 65.84% from 218.76%. The filing also reports year-end loans principal, interest and fee receivables net of allowance of RMB10.258bn, down from RMB14.998bn.
- Reported delinquency measures differ materially by methodology: delinquency ratio and NPL ratio were 21.08% and 13.75%, versus aggregate delinquency and NPL rates of 5.43% and 3.55%, respectively. The filing cautions that aggregate rates use cumulative originations since 2014 as the denominator.
Outlook, risks and unusual items
- COVID-19: Management said the outbreak disrupted operations and expected first-quarter 2020 revenue to decline year over year, with possible declines in subsequent 2020 quarters. The financial effect was not reasonably estimable as of the report; the company cited risks to borrower businesses, property collateral, site visits, collections and court processes.
- Funding and regulation: All 2019 home-equity loan originations were trust-funded. FOTIC funded 71.4% of originations, down from 84.1% in 2018. Changes in PRC rules could affect trust-company partnerships, credit-strengthening arrangements, sales-partner deposits, marketing practices or funding availability.
- Credit and collateral: The portfolio is concentrated in property-secured lending, including second liens, and recovery may be slowed by legal proceedings. As of December 31, 2019, 1,147 collection cases were pending, involving RMB551.9m in disputed amounts. Management said ordinary-course proceedings were not expected to have a material overall effect, but outcomes are uncertain.
- Liquidity and debt: Year-end cash included funds restricted to new lending. The company reduced borrowings substantially, but its funding model still entails repayment and credit-strengthening obligations. Management stated that cash and anticipated financing cash flows should meet needs for at least 12 months.
- Unusual accounting and controls: The company consolidated trust structures, including senior-unit liabilities, because it concluded it was their primary beneficiary. It adopted the expected-credit-loss standard on January 1, 2020, recording a RMB23.83m allowance increase and RMB17.87m after-tax reduction to retained earnings. The report identifies an unresolved material weakness in U.S. GAAP and SEC reporting personnel and policies; disclosure controls were deemed ineffective for that reason, although management separately concluded internal control over financial reporting was effective.
- Audit and shareholder items: KPMG issued an unqualified opinion on the financial statements but did not opine on control effectiveness. The filing notes that the auditor was not then subject to PCAOB inspection in China. No cash dividends were planned for the foreseeable future. No quantified operating guidance beyond the COVID-related revenue expectations was provided.
Investor verification priorities
- Confirm unrestricted cash and the uses, maturities and repayment obligations of structured-fund cash and borrowings.
- Assess whether 2019’s higher NPLs, charge-offs and lower provision coverage are adequately reflected in reserves and recoveries.
- Verify the sustainability and economics of the sales-partner model, including deposit recoverability, partner incentives and regulatory treatment.
- Review the pending collection cases, collateral enforcement timelines and any COVID-related deterioration in borrower repayment capacity.
- Track remediation of the disclosed material weakness and the differing management conclusions on disclosure controls and internal control over financial reporting.