X Financial Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F, not a standalone quarterly filing; Q4-specific results are not separately presented. Financial statements are prepared under U.S. GAAP and reported primarily in RMB.
Business Context
X Financial is a Cayman Islands holding company operating in China through subsidiaries and contractual arrangements with variable interest entities. It facilitates unsecured consumer loans, principally Xiaoying Credit Loan and Xiaoying Revolving Loan, for institutional funding partners. The company completed the wind-down of its P2P business and fully settled individual-investor principal and earnings by December 17, 2020.
- Total loans facilitated declined to RMB29.676 billion from RMB39.441 billion in 2019.
- Institutional funding represented 95.3% of 2020 funding, versus 26.6% in 2019; individual investors represented 4.7%, versus 68.1%.
- New loans reached 100% institutional funding by the end of the second quarter of 2020.
- Active borrowers decreased to 1,663,737 from 2,152,962 in 2019.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change or comment |
|---|---|---|---|
| Total net revenue | RMB2.193 billion | RMB3.088 billion | Down approximately 29.0% |
| Operating income (loss) | RMB(1.430) billion | RMB812.6 million | Turned materially negative |
| Net income (loss) | RMB(1.308) billion | RMB774.5 million | Large swing to loss |
| Net loss attributable to X Financial | RMB(1.309) billion | RMB774.3 million | Basic and diluted loss per share: RMB4.07 |
| Operating expenses | RMB3.623 billion | RMB2.275 billion | Increased approximately 59.2% |
| Operating cash flow | RMB(679.2) million | RMB600.6 million | Turned negative |
| Cash and cash equivalents | RMB746.4 million | RMB1.006 billion | Declined approximately 25.8% |
| Cash and restricted cash | RMB1.599 billion | RMB1.520 billion | Increased modestly; restricted cash is not fully available for general liquidity |
| Total assets | RMB7.498 billion | RMB8.281 billion | Declined approximately 9.4% |
| Total liabilities | RMB4.422 billion | RMB3.914 billion | Increased approximately 13.0% |
| Total equity | RMB3.076 billion | RMB4.367 billion | Declined approximately 29.6% |
Revenue mix shifted materially. Direct-model loan facilitation revenue declined to RMB1.267 billion from RMB1.986 billion, while financing income increased to RMB612.9 million from RMB408.4 million. Post-origination revenue declined to RMB203.8 million from RMB330.7 million.
Origination and servicing expense increased to RMB2.072 billion from RMB1.635 billion. The company also recorded RMB227.2 million of provisions for loans receivable and a RMB960.0 million impairment loss on deposits to institutional cooperators, partially offset by a RMB299.9 million income-tax benefit.
Margins, Credit Performance, Debt and Liquidity
- Net margin was approximately negative 59.7% in 2020, compared with approximately positive 25.1% in 2019. Operating margin was approximately negative 65.2%, compared with positive 26.3%.
- The 31–60-day delinquency rate for all outstanding loans improved to 0.79% at December 31, 2020 from 2.40% at December 31, 2019. Delinquency rates for 31–90 days and 91–180 days were 1.50% and 2.53%, respectively, versus 4.05% and 5.11% in 2019.
- Outstanding loan balance decreased to RMB13.218 billion from RMB16.070 billion. On a comparable basis excluding loans over 180 days delinquent, the balance decreased to RMB13.662 billion from RMB17.267 billion.
- Loans receivable from Xiaoying Credit Loans and Revolving Loans increased to RMB1.236 billion from RMB289.6 million, reflecting loans that could not be transferred in transactions qualifying for sale accounting.
- Deposits to institutional cooperators increased to RMB907.9 million from RMB518.7 million. The company used approximately RMB970.0 million of deposits to compensate an institutional cooperator for borrower-default claims and recognized a RMB960.0 million impairment loss.
- Short-term bank borrowings were RMB350.5 million at year-end, secured in part by restricted cash; the reported weighted-average interest rate was 4.04%.
- Management stated that cash and cash equivalents plus restricted cash were sufficient for anticipated requirements for the next 12 months, but also disclosed that additional financing may be needed.
Material Changes and Unusual Items
- COVID-19 reduced loan origination and worsened credit performance during the first half of 2020. Management reported recovery beginning in the third quarter as risk policies were tightened and loan volume and delinquency improved.
- The company adopted ASC 326, the current expected credit losses model, on January 1, 2020. The adoption reduced opening retained earnings by RMB17.2 million after tax.
- The company ceased the P2P operation, repaid individual investors, ceased Yaoqianhua operations in December 2020, and substantially ended facilitation for other platforms during the second half of 2020.
- Yaoqianhua and Xiaoying Revolving Loan represented a larger share of facilitated volume, while Xiaoying Housing Loan and Xiaoying Preferred Loan were discontinued.
- Management reported three material weaknesses in internal control over financial reporting as of December 31, 2020. Disclosure controls and internal control over financial reporting were deemed ineffective. The auditor did not provide an internal-control attestation because the company was an emerging growth company.
- The company changed its independent auditor from Deloitte to KPMG in February 2020.
- The company disclosed a significant risk that it was a passive foreign investment company for U.S. tax purposes in 2020 and may remain one in future years.
Guidance, Outlook, Risks and Contingencies
The filing does not provide numerical revenue, earnings or origination guidance. Management expects to focus on institutional funding, loan facilitation and risk management, but future results remain dependent on funding availability, borrower demand, credit performance and regulatory approvals.
- The company was applying to convert to a nationwide online microcredit company but could not assure that it would obtain the required license.
- PRC regulation of online lending, microcredit, financing guarantees, fees, data protection and foreign investment remains evolving and subject to uncertain interpretation and enforcement.
- The company relies on contractual arrangements with VIEs rather than direct equity ownership. Regulatory action could restrict the arrangements, impair control over VIEs or prevent consolidation of their results.
- ZhongAn credit insurance covered 54.36% of 2020 facilitated loan volume. Loss of insurance or guarantee partners, increased fees or reduced coverage could materially affect funding and profitability.
- Maximum potential undiscounted future payments under financial guarantee derivatives were RMB272.2 million for ZhongAn-related arrangements and RMB454.7 million for financing guarantee companies at year-end 2020.
- Two putative securities class actions related to the 2018 IPO remained pending. The filing states that the possible loss or range of loss could not be determined.
- A Shenzhen tax inspection involving two subsidiaries and two VIEs had not reached a final result as of the filing date.
- The company’s auditor is located in China, where PCAOB inspection access was unavailable as described in the filing, creating potential HFCA Act delisting risk.
- The company disclosed a ChinaCast lawsuit naming the CEO as a defendant; the potential outcome and impact were uncertain.
Most Important Facts to Verify
- Whether the RMB960.0 million deposit impairment and RMB970.0 million compensation payment represent a one-time event or indicate continuing counterparty and credit exposure.
- Whether negative operating cash flow, increased retained loan balances and restricted cash could create a recurring liquidity requirement.
- Status and economic impact of the nationwide online microcredit license application and any subsequent PRC regulatory actions.
- Whether the three material weaknesses have been remediated and whether future filings remain subject to control deficiencies.
- Current PCAOB inspection status, HFCA Act exposure and NYSE listing status.
- Developments in the two IPO-related securities lawsuits and the unresolved Shenzhen tax inspection.
- Whether reported delinquency improvements persist after changes in product mix, charge-off policy and COVID-19 effects.
- The company’s ability to maintain institutional funding and insurance or guarantee coverage without further deposits, impairments or margin pressure.