X Financial Form 20-F Summary
Business context and reporting period
X Financial is a Cayman Islands holding company operating primarily in China through subsidiaries, consolidated variable-interest entities and consolidated trusts. Its platform facilitates consumer loans and provides related servicing, collection, guarantee and investment-related services. The filing is an annual report for the fiscal year ended December 31, 2019, prepared under U.S. GAAP; it is not a standalone 2019 fourth-quarter filing.
The company reported RMB39.441 billion of loan facilitation volume in 2019, up from RMB36.913 billion in 2018. Xiaoying Card Loan remained the principal product, while Xiaoying Revolving Loan expanded materially. The company ceased facilitating Xiaoying Housing Loan in February 2019 and Xiaoying Preferred Loan in October 2019. It ceased offering new investment products through Xiaoying Wealth Management beginning January 1, 2020.
Financial performance and position
| Metric | 2018 | 2019 | Change |
|---|---|---|---|
| Net revenue | RMB3.541 billion | RMB3.088 billion | Down 12.8% |
| Operating income | RMB1.275 billion | RMB812.6 million | Down 36.3% |
| Net income | RMB883.1 million | RMB774.5 million | Down 12.3% |
| Net income attributable to X Financial | RMB883.1 million | RMB774.3 million | Down 12.3% |
| Basic EPS | RMB3.08 | RMB2.47 | Down 19.8% |
| Operating cash flow | RMB5.4 million | RMB600.6 million | Improved materially |
| Cash and cash equivalents | RMB1.069 billion | RMB1.006 billion | Down 5.9% |
| Total assets | RMB4.637 billion | RMB8.281 billion | Up 78.6% |
| Total liabilities | RMB1.119 billion | RMB3.914 billion | Up 249.7% |
| Total equity | RMB3.518 billion | RMB4.367 billion | Up 24.1% |
Amounts above are in RMB unless otherwise stated. The filing translates 2019 amounts at RMB6.9618 per U.S. dollar. 2019 net revenue was approximately US$443.6 million and net income was approximately US$111.2 million. Operating margin declined from 36.0% to 26.3%; net margin was approximately 24.9% in 2018 and 25.1% in 2019.
- Direct-model loan facilitation revenue declined from RMB2.958 billion to RMB1.986 billion as the company shifted toward institutional funding and trust-based arrangements.
- Post-origination service revenue increased from RMB131.2 million to RMB330.7 million, reflecting greater emphasis on servicing and collection.
- Financing income increased from RMB76.1 million to RMB408.4 million, principally due to newly established consolidated trusts.
- Origination and servicing expense increased 37.9% to RMB1.635 billion, exceeding the decline in revenue and contributing to lower operating income.
- Sales and marketing expense fell to RMB103.2 million from RMB205.7 million. Provision for contingent guarantee liabilities fell to RMB7.7 million from RMB216.4 million, while provisions for receivables and loan receivables remained material.
- The company recorded a RMB12.5 million impairment loss on a long-term investment and a RMB246.4 million unfavorable change in the fair value of the financial guarantee derivative.
- Income tax changed from RMB209.9 million of expense in 2018 to RMB93.1 million of benefit in 2019, primarily reflecting preferential tax treatment for a software enterprise.
Liquidity, debt and cash flow
Cash provided by operating activities was RMB600.6 million in 2019, compared with RMB5.4 million in 2018 and negative RMB615.3 million in 2017. Investing activities used RMB3.080 billion, primarily from principal payments on loans at fair value. Financing activities provided RMB2.711 billion, mainly from receipts from investors in consolidated trusts.
Cash, cash equivalents and restricted cash totaled RMB1.520 billion at December 31, 2019, including RMB514.3 million of restricted cash. Restricted cash included amounts held by consolidated trusts and collateral for guarantees. Short-term bank borrowings of RMB203 million drawn in 2019 were repaid during the fourth quarter, leaving no short-term bank borrowings at year-end. The company stated that existing cash and expected operating and financing cash flows should meet anticipated working-capital and capital-expenditure needs for the following 12 months, but also noted that additional capital may be required.
Loans at fair value increased to RMB2.782 billion from RMB33.4 million, with corresponding payable-to-investors liabilities of RMB3.006 billion. These balances primarily reflect consolidated trusts and are measured using Level 3 fair-value models with significant unobservable assumptions.
Material changes versus the prior comparable period
- Loan facilitation volume increased 6.9%, but active borrowers declined from 2.371 million to 2.153 million and outstanding facilitated loan balances declined from RMB20.849 billion to RMB17.267 billion.
- Xiaoying Card Loan volume increased to RMB27.702 billion and represented 70.2% of total facilitated volume. Xiaoying Revolving Loan volume increased to RMB4.780 billion from RMB105 million.
- The funding mix shifted away from individual investors: individual investors funded 68.1% of 2019 volume versus 88.6% in 2018; corporate and institutional funding increased to 26.6% from 9.2%, and company funds represented 5.3% versus 2.2%.
- Individual-investor funding outstanding on Xiaoying Wealth Management declined to RMB8.837 billion from RMB17.257 billion. The platform was subsequently closed to new investment products.
- Delinquency for loans 31–90 days past due increased to 4.05% from 3.54%; delinquency for loans 91–180 days past due decreased slightly to 5.11% from 5.28%. The estimated default rate used for financial guarantee derivatives declined to 10.13% from 11.06%.
- Accounts receivable and contract assets declined 44.1% to RMB771.2 million, while prepaid expenses and other current assets increased to RMB1.226 billion, including RMB518.7 million of deposits to financial institutional cooperators.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that it expects to focus on institutional funding partners and loan facilitation after discontinuing new investment products on Xiaoying Wealth Management. The company is also pursuing possible conversion of an online lending information intermediary into a nationwide online microcredit company, but approval was uncertain.
- COVID-19: The company reported that operations were severely disrupted in early 2020. First-quarter 2020 loan facilitation volume was RMB6.823 billion, down 29.1% year over year, and the estimated borrower default rate increased from 10.13% at December 31, 2019 to 11.01% at March 31, 2020.
- Regulatory exposure: PRC rules governing online lending, consumer finance, financing guarantees, licensing, APR limits and VIE structures remain evolving. The company had not completed the relevant online-lending filing and telecommunications licensing process as of the filing date.
- Funding and partner concentration: The company depends on institutional funding partners, ZhongAn credit insurance and third-party guarantee providers. Approximately 76.5% of facilitated loans were covered by ZhongAn credit insurance at year-end 2019.
- Guarantees and credit risk: The company reported maximum potential undiscounted guarantee payments of RMB1.442 billion at December 31, 2019, including RMB1.400 billion related to loans referred by third-party channel cooperators. It also voluntarily assumed certain guarantee exposure for reputational reasons.
- Internal controls: Management concluded that internal control over financial reporting and disclosure controls were ineffective as of December 31, 2019. Four material weaknesses were identified, including insufficient U.S. GAAP and SEC-reporting expertise, an incomplete internal-audit and risk framework, ineffective controls over new business arrangements and inadequate oversight of certain tax accounting practices.
- Litigation: The company is defending consolidated putative securities class actions in New York arising from its 2018 IPO and a separate federal action. The possible loss or range of loss was not ascertainable.
- Auditor: KPMG replaced Deloitte as independent registered public accounting firm in February 2020. The filing states there were no disagreements or reportable events associated with the change.
- Ownership: Founder and CEO Yue Tang controlled all Class B shares, representing approximately 89.96% of aggregate voting power at the reported ownership date.
The filing contains an inconsistency: one business-overview passage refers to 2019 net income of RMB699.4 million, while the audited consolidated financial statements report RMB774.5 million of net income and RMB774.3 million attributable to X Financial. The audited financial statements should be used unless the discrepancy is reconciled.
Most important facts for investors to verify
- Reconcile the reported 2019 net-income discrepancy and confirm the final audited figures.
- Review the quality, maturity and collectability of the RMB2.782 billion of loans at fair value and the related RMB3.006 billion payable to trust investors.
- Assess delinquency, default and recovery trends after the COVID-19-related deterioration reported for the first quarter of 2020.
- Confirm the status and consequences of online-lending filings, telecommunications licensing and the proposed microcredit-company conversion.
- Evaluate ZhongAn’s continuing insurance capacity and the company’s maximum guarantee exposure, including voluntary guarantees to channel partners.
- Monitor remediation of the four material weaknesses and any subsequent auditor or SEC-related developments.
- Review the securities class actions, ChinaCast-related litigation involving the CEO, and any required loss accruals or disclosures.
- Assess liquidity available at the parent-company level, since cash is concentrated in PRC subsidiaries and VIEs and transfers offshore are subject to PRC restrictions.