LexinFintech Holdings Ltd. — FY2018 Form 20-F
Period clarification: This is an annual report for the fiscal year ended December 31, 2018, not a standalone Q4 filing. The figures below are annual or year-end amounts unless stated otherwise. Financial statements use U.S. GAAP and RMB; dollar equivalents are as reported.
Business context and reporting period
Lexin operates Fenqile, an online consumer finance and e-commerce platform serving primarily educated young adults in China, and Juzi Licai, an online investment platform. It originates personal installment and purchase loans, funded by individual investors, institutional partners and other channels. From April 2018, new Juzi Licai investor-funded loans generally shifted to off-balance-sheet facilitation rather than on-balance-sheet lending.
Key financial and operating metrics
| Metric | FY2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Operating revenue | RMB 7.597 billion (US$1.105 billion) | RMB 5.582 billion in 2017; +36.1% reported |
| Gross profit / margin | RMB 3.012 billion / 39.6% | RMB 1.320 billion / 23.6% |
| Net income | RMB 1.977 billion (US$287.6 million); 26.0% net margin | RMB 240.4 million in 2017 |
| Operating cash flow | RMB 2.795 billion | RMB 1.662 billion in 2017 |
| Investing / financing cash flow | RMB 3.604 billion provided / RMB 5.618 billion used | RMB 4.988 billion used / RMB 4.412 billion provided in 2017 |
| Cash and cash equivalents | RMB 1.148 billion | RMB 1.126 billion |
| Restricted cash / restricted time deposits | RMB 1.349 billion / RMB 344.2 million | Restricted cash RMB 608.8 million; time deposits RMB 7.4 million |
| Total assets / liabilities / equity | RMB 12.471 billion / RMB 8.364 billion / RMB 4.107 billion | RMB 14.730 billion / RMB 13.028 billion / RMB 1.702 billion |
| Funding debts | RMB 4.804 billion, including current and long-term balances | RMB 10.692 billion |
| Bank borrowings | RMB 438.0 million, all short-term | RMB 169.1 million total |
| Loan originations / outstanding principal | RMB 66.1 billion / RMB 32.4 billion | RMB 47.7 billion / RMB 19.3 billion |
Current assets were RMB 10.305 billion and current liabilities RMB 8.019 billion. However, a substantial portion of reported liquidity was restricted or held in restricted deposits and should not be assumed available for general use. Funding-debt maturities totaled RMB 4.646 billion within 12 months and RMB 157.9 million in 13–24 months; reported contractual obligations also included RMB 444.3 million of short-term borrowings and RMB 335.2 million payable to pre-IPO Series C-1 shareholders, all due within one year.
- Financial services income rose to RMB 4.996 billion (+65.7%); loan facilitation and servicing fees increased to RMB 2.076 billion from RMB 378.9 million. Online direct sales fell 5.5% to RMB 2.397 billion.
- Credit-loss provisions were RMB 884.1 million for financing receivables and RMB 38.3 million for contract assets and service-fee receivables. Sales and marketing expense was RMB 590.0 million; R&D RMB 320.2 million; G&A RMB 279.9 million.
- Outstanding loan principal was RMB 32.4 billion, of which RMB 25.6 billion was off-balance-sheet and RMB 6.8 billion on-balance-sheet. Institutional funding partners represented 56.2% of funding balances and individual investors 43.8% at year-end.
Material changes versus 2017
- Revenue increased 36.1% as loan activity grew and off-balance-sheet facilitation expanded. The mix shifted: financial services accounted for 65.8% of revenue, versus 54.0% in 2017.
- Gross margin rose to 39.6%, primarily because facilitation and servicing revenue from off-balance-sheet loans carries higher gross margins than income from on-balance-sheet loans.
- Reported 2018 revenue includes an estimated RMB 826 million uplift from adopting ASC 606, mainly due to earlier recognition of loan facilitation and servicing fees. Without ASC 606, the filing presents revenue of RMB 6.771 billion and net income of RMB 1.312 billion; prior-year figures were not restated. ASC 606 also increased opening 2018 retained earnings by RMB 209.5 million.
- Funding debts fell as the new Juzi Licai model moved new loans off balance sheet. Short-term financing receivables declined 47.8% to RMB 5.141 billion, while contract assets and service-fee receivables reached RMB 1.238 billion.
- Credit-loss provisions rose 44.5%. The reported charge-off share of average outstanding principal increased to 4.74% from 3.59% in 2017. Year-end delinquency rates for loans 90–179 days past due rose to 1.41% from 1.14%.
- Management reported a net gain of RMB 108.3 million on guarantee liabilities and a RMB 197.0 million gain from fair-value changes in financial guarantee derivatives. These estimates and guarantee-related accounting materially affect reported earnings.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash flows and borrowing facilities should cover general corporate needs for at least 12 months. It did not provide specific revenue or profit guidance. Expected 2019 capital expenditure was approximately RMB 61.3 million, mainly for technology infrastructure.
- Management cited growth in users, repeat borrowing and institutional partnerships, while warning that historical growth may not continue. Active borrowers increased to 4.9 million from 4.1 million; approximately 80% of active users were repeat users in both 2017 and 2018.
- Regulation remains a central risk. Juzi Licai completed the stated inspections, but Lexin had not been told the result of Shenzhen’s administrative inspection and had not been permitted to submit its local record-filing application. Failure to file or comply could restrict or end platform operations.
- Ji’an Microcredit’s license expired in August 2018. The company said renewal and a registered-capital increase were approved by the local authority on April 29, 2019, after year-end, and final renewal procedures were still in progress.
- Other key risks include borrower defaults and collection effectiveness; dependence on funding partners; possible restrictions on campus lending, loan purposes, fees and guarantees; liquidity demands from investors; cybersecurity and data privacy; and the enforceability of the China VIE contractual structure. The 2019 Foreign Investment Law added uncertainty about VIE treatment.
- The company’s auditor issued unqualified opinions on the financial statements and internal controls as of December 31, 2018. Management said a material weakness in financial reporting controls identified for 2016–2017 had been remediated. The filing also notes that the PCAOB could not inspect the auditor in China at that time.
Important facts for investors to verify
- How much of the RMB 1.148 billion cash balance and RMB 2.759 billion combined cash, restricted cash and restricted time deposits was freely available, and whether cash-flow movements in restricted balances are sustainable.
- The regulatory status and timing of Juzi Licai record-filing and inspection results, as well as completion of Ji’an Microcredit’s license renewal.
- The quality and aging of on- and off-balance-sheet loans, including charge-offs, delinquencies, recoveries and the assumptions behind credit-loss provisions.
- The sustainability of earnings after separating ASC 606 timing effects and gains from guarantee liabilities and fair-value changes in guarantee derivatives.
- Exposure to guarantees, risk-safeguard obligations, funding-partner concentration and near-term maturities; also assess the reliability of the VIE arrangements and PRC cash-transfer restrictions.