X Financial Form 20-F Summary
Business context and reporting period
X Financial is a Cayman Islands holding company whose operations are conducted primarily in China through subsidiaries and consolidated variable-interest entities under contractual arrangements. The company operates an online personal finance platform connecting borrowers with institutional funding partners, with Xiaoying Card Loan representing substantially all 2021 loan originations. The filing covers the fiscal year ended December 31, 2021, rather than a standalone fourth quarter.
The company ceased P2P operations and fully settled individual-investor principal and earnings by December 2020. It obtained an online microcredit qualification in May 2021 and began lending with its own capital in July 2021.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total net revenue | RMB3,626.5 million (US$569.1 million) | RMB2,193.0 million | +65.4% |
| Income from operations | RMB1,311.0 million | Loss of RMB1,430.3 million | Returned to operating profit |
| Net income attributable to X Financial | RMB825.4 million (US$129.5 million) | Loss of RMB1,308.5 million | Returned to profitability |
| Net margin | 22.8% | (59.7%) | Improved materially |
| Cash flow from operations | RMB449.2 million (US$70.5 million) | Use of RMB679.2 million | Turned positive |
| Cash and cash equivalents | RMB584.8 million (US$91.8 million) | RMB746.4 million | Down 21.7% |
| Restricted cash | RMB407.3 million | RMB852.1 million | Down 52.2% |
| Total assets | RMB7,342.7 million | RMB7,498.0 million | Down 2.1% |
| Total liabilities | RMB3,365.8 million | RMB4,422.0 million | Down 23.9% |
| Short-term bank borrowings | RMB166.5 million | RMB350.5 million | Down 52.5% |
Loan facilitation volume increased to RMB51.9 billion from RMB29.7 billion in 2020. Active borrowers increased to 2.37 million from 1.66 million. The outstanding balance of facilitated loans rose to RMB24.9 billion from RMB13.2 billion.
Operating expenses were RMB2,315.4 million, or 63.9% of revenue, compared with RMB3,623.3 million, or 165.2% of revenue, in 2020. Origination and servicing expense declined to RMB1,963.0 million, while provisions for accounts receivable and loans also declined. Share-based compensation was RMB88.4 million.
Funding shifted further toward institutional partners: 98.0% of 2021 loan funding came from institutional funding partners and 2.0% from company capital. As of December 31, 2021, 3.6% of outstanding loans were funded by the company’s own capital. The company reported a funding cost of 8.62% in 2021, compared with 8.31% in 2020.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher Xiaoying Card Loan volume and direct-model facilitation fees, which increased to RMB2,545.4 million from RMB1,266.5 million.
- Financing income increased to RMB671.9 million from RMB612.9 million, while post-origination service revenue increased to RMB315.6 million from RMB203.8 million.
- The company’s 2020 loss included a RMB960.0 million impairment of deposits to an institutional cooperator; no comparable impairment was recorded in 2021.
- The 31-to-60-day delinquency rate increased to 1.48% from 0.79%; the 31-to-90-day rate increased to 2.65% from 1.50%.
- Loans receivable from Xiaoying Credit and Revolving Loans increased to RMB2,484.1 million from RMB1,236.0 million, partly reflecting company-funded microcredit lending and consolidated partnerships.
- Deposits to institutional cooperators increased to RMB1,500.4 million from RMB907.9 million.
- Loans at fair value declined to RMB389.7 million from RMB1,585.7 million, and amounts payable to investors at fair value declined to RMB462.7 million from RMB1,914.2 million, primarily due to termination of portions of consolidated trust arrangements.
- Financial guarantee derivative liabilities increased to RMB566.0 million from RMB130.4 million, while the related asset position declined to RMB11.8 million from RMB297.9 million.
Cash flow, debt and liquidity
Operating cash flow was positive at RMB449.2 million, but investing activities used RMB2,347.6 million, primarily for loan origination and investments. Financing activities provided RMB1,301.3 million, including funding from institutional partners and consolidated partnerships, partly offset by bank-borrowing repayments. Cash and restricted cash decreased by RMB606.5 million to RMB992.0 million.
The company stated that existing cash, anticipated operating cash flow and financing activities should be sufficient for working capital and capital expenditures for the next 12 months. However, restricted cash includes amounts unavailable for general liquidity needs, including cash held by consolidated trusts and partnerships and collateral for borrowings.
As of December 31, 2021, contractual operating lease obligations totaled RMB30.7 million. The filing reports no off-balance-sheet arrangements, other than guarantees provided for certain loan products.
Outlook, commentary, risks and unusual items
- Management described 2021 operating and financial performance as progressing against strategic objectives and expected the microcredit business to remain a supplementary funding source.
- COVID-19 continued to create uncertainty around borrower liquidity, loan performance, funding-partner behavior and credit-loss estimates. Management reported no obvious adverse change from the early-2022 resurgence as of the filing date.
- PRC regulation of online lending, microcredit, guarantees, data security, personal information, credit information and overseas listings remains subject to evolving interpretation. Draft rules could impose additional capital, geographic, licensing or filing requirements.
- The company relies on a VIE structure rather than direct equity ownership of several operating entities. The VIE agreements have not been tested in a PRC court, and regulatory action could restrict operations, invalidate arrangements or impair the value of the ADSs.
- The company reported that its auditor, KPMG Huazhen LLP, was not subject to PCAOB inspection in China. The HFCAA therefore creates potential NYSE delisting and U.S. trading restrictions if inspection requirements are not satisfied.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective as of December 31, 2021. Three material weaknesses remained, relating to U.S. GAAP and SEC-reporting expertise, internal audit and risk-assessment processes, and tax-accounting oversight.
- The company’s ADSs trade on the NYSE under XYF. Class B shares carry 20 votes per share; the controlling shareholder held approximately 89.69% of aggregate voting power as of March 31, 2022.
- The board approved a share repurchase authorization of up to US$15 million in March 2022, to be funded from existing cash, but the filing does not indicate that repurchases had occurred by the filing date.
- Two securities class actions relating to the 2018 IPO were disclosed. One federal action was voluntarily dismissed with prejudice in April 2022; the New York state action remained pending as of the filing’s disclosure.
- The company paid tax adjustments and related late-payment fees after tax treatment decisions concerning 2016 through June 2019. The filing states these amounts were paid in December 2021 and January 2022.
Important facts for investors to verify
- Whether the sharp increase in loan originations can be sustained without further deterioration in delinquency, charge-offs or credit-loss provisions.
- The collectability and liquidity of RMB1.50 billion in deposits to institutional cooperators and RMB2.48 billion in company-held or non-qualifying loan receivables.
- The potential cash impact of financial guarantee derivative obligations, including the disclosed maximum potential undiscounted payment of approximately RMB1.29 billion.
- The availability of unrestricted cash after excluding restricted cash held by trusts, partnerships or pledged as borrowing collateral.
- Progress in remediating the three material weaknesses and any effect on the reliability and timeliness of future SEC reporting.
- The status of PCAOB inspection access, HFCAA determinations and the continuing ability to trade ADSs on the NYSE.
- The enforceability and regulatory treatment of the VIE agreements, online microcredit license and guarantee arrangements under evolving PRC rules.
- The outcome and potential exposure from remaining litigation and any additional tax, regulatory or compliance proceedings.
- The impact of the 2021 shift toward company-funded microcredit, including capital requirements, borrower defaults and concentration of credit risk.