LexinFintech Holdings Ltd. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed April 30, 2020. This is an annual report, not a standalone Q4 report, and the filing text does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP; amounts below are in RMB unless otherwise noted.
Business context
Lexin operates Fenqile, an online consumption and consumer-finance platform focused on educated young professionals in China, and Juzi Licai, an online investment platform. It earns revenue from e-commerce direct sales and from lending-related interest, loan facilitation, servicing and guarantee services. Most newly funded loans in Q4 2019 were funded by institutional partners; the company stopped facilitating new loans funded by individual investors on Juzi Licai in November 2019.
Financial and operating metrics
| Metric | FY2019 / year-end 2019 | FY2018 / year-end 2018 |
|---|---|---|
| Total operating revenue | RMB10.604 billion; +39.6% | RMB7.597 billion |
| Gross profit / gross margin | RMB4.994 billion / 47.1% | RMB3.012 billion / 39.6% |
| Operating expenses | RMB2.367 billion; +98.9% | RMB1.190 billion |
| Income before tax | RMB2.707 billion | RMB2.110 billion |
| Net income | RMB2.295 billion; +16.0%; net margin 21.6% | RMB1.977 billion; net margin 26.0% |
| Net cash from operating activities | Used RMB778.5 million | Provided RMB2.795 billion |
| Cash and cash equivalents | RMB2.085 billion | RMB1.148 billion |
| Total assets / liabilities / equity | RMB19.236 billion / RMB12.637 billion / RMB6.600 billion | RMB12.471 billion / RMB8.364 billion / RMB4.107 billion |
| Loans originated / outstanding principal | RMB125.959 billion / RMB60.567 billion | RMB66.087 billion / RMB32.397 billion |
Revenue mix shifted further toward facilitation: loan facilitation and servicing fees rose 171% to RMB5.628 billion, while interest and financial services income fell 58.6% to RMB1.135 billion as on-balance-sheet lending declined. Online direct sales increased 51.2% to RMB3.624 billion. Sales and marketing expenses rose 161% to RMB1.539 billion, primarily due to advertising and promotion.
Operating cash flow turned negative despite higher net income. Management attributed the outflow principally to growth in contract assets and service-fee receivables, guarantee receivables and deposits to insurance and guarantee companies. These working-capital movements accompanied the expansion of off-balance-sheet originations and revenue recognized earlier under ASC 606.
At year-end, restricted cash was RMB1.900 billion and restricted time deposits totaled approximately RMB1.967 billion, including non-current deposits. These balances are not equivalent to unrestricted cash. Current assets were RMB16.506 billion against current liabilities of RMB9.803 billion.
Balance-sheet debt included RMB1.978 billion of short-term borrowings, RMB4.206 billion of funding debts and convertible notes with a carrying value of RMB2.046 billion. The company issued US$300 million of 2.0% convertible notes in September 2019, due in seven years; holders may convert at US$14 per ADS and may require cash repurchase in September 2023. Short-term borrowings rose substantially, and some were secured by time deposits.
Material changes versus prior year
- Originations nearly doubled, up 90.6%, while outstanding principal rose 87.0%; off-balance-sheet loans increased to RMB55.782 billion from RMB25.589 billion.
- Institutional funding partners supplied 87.2% of the outstanding loan funding balance at year-end, versus 56.2% in 2018. Individual-investor funding balance fell 42.8% to RMB7.657 billion.
- Gross margin improved as facilitation fees from off-balance-sheet loans became a larger revenue source. Net income grew more slowly than revenue, and net margin declined, alongside sharply higher operating expenses.
- Credit indicators weakened: year-end 30–59-day delinquency rose to 1.12% from 0.69%, and 90–179-day delinquency to 1.56% from 1.41%. Charge-offs after 180 days were 6.02% of average outstanding principal in 2019, versus 4.74% in 2018.
- ASC 606 adoption increased 2018 revenue by approximately RMB826 million and opening retained earnings by RMB209.5 million; the 2018 comparative was not restated. In 2019, the company recorded a RMB66.1 million out-of-period adjustment reducing financial-services income and related receivables, which management assessed as not material.
Outlook, risks and unusual items
- Outlook: No quantified revenue, earnings or origination guidance is provided. Management said available cash, operating cash flows and financing sources were expected to cover anticipated needs for at least 12 months. It planned to continue shifting funding toward institutions and reduce individual-investor funding.
- Regulatory exposure: The PRC online-lending framework remained unsettled. Juzi Licai completed specified inspections but had not been permitted to submit its Shenzhen record-filing application; failure to register or further restrictions could require changes or termination of its operations. The company also disclosed uncertainty over whether some personal installment loans could be treated as restricted “cash loans,” and over the compliance of guarantee arrangements.
- Guarantees and credit risk: Guarantee liabilities rose to RMB1.726 billion, reflecting growth in guaranteed off-balance-sheet loans and a change in the accounting treatment of certain guarantees. The company reported a RMB212 million loss from fair-value changes in financial-guarantee derivatives, versus a gain in 2018. Credit-loss estimates and guarantee liabilities depend on management models and expected loss rates; the auditor identified these as critical audit matters.
- COVID-19: The filing describes adverse effects beginning in early 2020, including reduced consumption and originations, disrupted collections in Wuhan and increased credit risk. Management warned that delinquencies, provisions and charge-offs could rise; the duration and financial impact were uncertain.
- Litigation: A third-party complaint sought to void a RMB120 million debt-interest acquisition and recover the purchase price from Shenzhen Fenqile. The case was pending, and the company said it could not estimate the possible outcome or loss.
- Other commitments: The company agreed to acquire Shenzhen land-use rights for RMB1.032 billion in February 2020 and paid RMB516 million in the first quarter. It estimated 2020 capital expenditures of approximately RMB603 million, including spending on the new headquarters.
- Audit and structure: The auditor issued an unqualified opinion and management assessed internal control over financial reporting as effective. The filing also highlights VIE-control and foreign-investment-law uncertainty, and states that the China-based auditor was not subject to PCAOB inspection at the time.
Important facts for investors to verify
- Whether the growth in facilitation revenue and off-balance-sheet originations is sustainable, and how much related contract-asset and service-fee receivables will convert to cash.
- Subsequent delinquency, charge-off and recovery trends, particularly after the COVID-19 disruption, and the assumptions behind credit-loss and guarantee-liability estimates.
- The size, terms and liquidity implications of guarantees, deposits and other credit support provided to funding partners and third-party guarantors.
- Progress on Juzi Licai record-filing, the transition away from individual-investor funding, and any regulatory changes affecting loan products, fees or guarantees.
- Cash available for general use after restricted balances and collateral, near-term borrowing maturities, and funding capacity under the convertible notes and other obligations.
- The RMB66.1 million out-of-period adjustment, ASC 606’s effect on comparability, and the resolution or financial exposure of the pending RMB120 million case.