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ITEM 4. | INFORMATION ON THE COMPANY |
| History and Development of the Company |
We commenced our online consumer finance platform business in June 2007 through Shanghai Daifeng. In January 2011, we relocated to Zhangjiang Hi-Tech Park in Pudong, Shanghai and starting then, our business operations gradually migrated from Shanghai Daifeng to another operating entity located in Zhangjiang Hi-Tech Park, Shanghai Xiazhong Information Technology Co., Ltd., which later changed its name to Shanghai PPDai Financial Information Service Co., Ltd. During the period between June and August 2012, we formed our offshore corporate structure to facilitate offshore financing. In June 2012, we incorporated PPDAI Group Inc. under the laws of the Cayman Islands as our holding company and incorporated PPDAI (HK) LIMITED as its wholly-owned subsidiary, which was renamed as FinVolution (HK) Limited, or FinVolution HK, in November 2019. In August 2012, Beijing Prosper Investment Consulting Co., Ltd., or Beijing Prosper, was incorporated as a wholly-owned PRC subsidiary of FinVolution HK, through which we obtained control over Shanghai PPDai and Beijing Paipairongxin Investment Consulting Co., Ltd., or Beijing Paipairongxin, a company incorporated in June 2012, based on two separate sets of contractual arrangements, including the equity pledge agreements, the business operation agreements, the power of attorneys, the option agreements, and the exclusive technology consulting and service agreements. In July 2014, following a restructuring, Shanghai PPDai became a wholly-owned subsidiary of Beijing Paipairongxin. We then subsequently terminated our contractual arrangements with Shanghai PPDai and its shareholders, and entered into an amended and restated exclusive technology consulting and service agreement with Shanghai PPDai and Beijing Paipairongxin.
In August 2015, we established Wuxi Boxi Information Technology Co., Ltd. (formerly known as Wuxi PPDai Financial Information Service Co., Ltd.), or Wuxi PPDai,Boxi, to provide customer services. In January 2016, we established Shanghai Paifenle Internet Technology Co., Ltd. to operate business related to our consumption loan products. The business operated by Shanghai Paifenle Internet Technology Co., Ltd. was discontinued in early 2018. In December 2016, we established Hefei PPDai Information Technology Co., Ltd., or Hefei PPDai, as another entity to provide customer services with a focus on loan collection. The business previously operated by Wuxi PPDaiBoxi was gradually migrated to Hefei PPDai and other entities. In June 2017, Shanghai Guangjian Information Technology Co., Ltd., or Shanghai Guangjian was incorporated as a wholly-owned PRC subsidiary of FinVolution HK. Shortly after its incorporation, Shanghai Guangjian established a wholly-owned subsidiary, Shanghai Shanghu Information Technology Co., Ltd., or Shanghai Shanghu. In June 2017, Shanghai Guangjian, Shanghai Shanghu, Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin entered into a new set of contractual arrangements, including an equity pledge agreement, a business operation agreement, a power of attorney, an option agreement and an exclusive technology consulting and service agreement, replacing the previous contractual arrangements among Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin. Based on the new set of contractual arrangements, we continue to have control over Beijing Paipairongxin and Shanghai PPDai through Shanghai Guangjian. In March 2018, we restated the contractual agreements among Shanghai Guangjian, Shanghai Shanghu, Beijing Prosper, Beijing Paipairongxin, Shanghai PPDai and the shareholders of Beijing Paipairongxin. See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Beijing Paipairongxin.” In July 2017, Shanghai Zihe Information Technology Co., Ltd., or Shanghai Zihe, was incorporated by Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our co-founders and shareholders. On November 10, 2017, our ADSs commenced trading on the NYSE under the symbol “PPDF.” We raised from our initial public offering approximately US$205.0 million in net proceeds after deducting underwriting discounts and the estimated offering expenses payable by us. Concurrently with our initial public offering, we also raised approximately US$49.5 million in net proceeds through issuing 19,230,769 Class A ordinary shares to a wholly-owned subsidiary of Sun Hung Kai & Co. Limited.
In January 2018, we incorporated Bluebottle Limited in Hong Kong. Shortly after its incorporation, Bluebottle Limited established Shanghai Manyin Information Technology Co., Ltd., or Shanghai Manyin, as its wholly-owned PRC subsidiary in China. In March 2018, we entered into a series of contractual arrangements through Shanghai Manyin with Shanghai Zihe and the shareholders of Shanghai Zihe, through which we obtained effective control over the operation of Shanghai Zihe. In April 2018, Shanghai Erxu Information Technology Co., Ltd., or Shanghai Erxu, was incorporated as a wholly-owned PRC subsidiary of Shanghai Zihe to operate business related to loan facilitation services. In August 2018, Shanghai Nianqiao Information Technology Co., Ltd., or Shanghai Nianqiao, was incorporated by Mr. Zhouhao Gu, a family relative of Shaofeng Gu, and Ms. Xiumeng Chen, a family relative of Jun Zhang. In January 2019, Shanghai Ledao Information Technology Co., Ltd., or Shanghai Ledao, was incorporated by Mr. Yejun Jiang, a family relative of Honghui Hu, and Mr. Lizhong Chen, a family relative of Tiezheng Li. We entered into two sets of contractual arrangements through Shanghai Manyin with (i) Shanghai Nianqiao and the shareholders of Shanghai Nianqiao on November 29, 2018, and (ii) Shanghai Ledao and the shareholders of Shanghai Ledao on January 14, 2019, respectively, through which we obtained effective control over the operations of Shanghai Nianqiao and Shanghai Ledao. In November 2019, Fujian Zhiyun Financing Guarantee Co., Ltd., or Fujian Zhiyun, was incorporated as a wholly-owned PRC subsidiary of Shanghai PPDai. Fujian Zhiyun provides financing guarantees services to our institutional funding partners for loans funded by them to the borrowers introduced by us. In November 2019, the name of the Company was changed from “PPDAI Group Inc.” to “FinVolution Group” and that “信也科技” was adopted as the dual foreign name of the Company. In addition, the Company’s ticker symbol on the New York Stock Exchange was also changed from “PPDF” to “FINV.”
In December 2019, Chengdu Yougao Information Technology Co., Ltd., or Chengdu Yougao, was incorporated by Yining Xu, one of our employees. In September 2020, we entered into a series of contractual arrangements through Shanghai Manyin with Chengdu Yougao and the current shareholders of Chengdu Yougao, Yining Xu and Fei Miao, two of our employees, through which we obtained effective control over the operation of Chengdu Yougao. We are a leading online consumer finance platform in China with strong brand recognition. Launched in 2007, we are a pioneer in China’s online consumer finance industry connecting borrowers, whose needs are unserved or underserved by traditional financial institutions, with investors and financial institutions. As of December 31, 2019,2020, we had over 105.9116.1 million registered users. We strategically focus on serving borrowers between ages of 20 and 40, the young generation that is typically more receptive to internet financial services and is poised to become the major driving force of China’s consumer finance market. Our borrowers are primarily acquired online and stretch across a large number of cities and counties in China. We primarily offer short-term loans to our borrowers to meet their immediate credit needs while allowing them to gradually establish their credit history through activities on our platform. In 20182019 and 2019,2020, loans originated on our platform had an average principal amount of RMB3,281RMB3,267 and RMB3,267RMB3,983 (US$469.3)610), respectively, and an average term of 9.48.7 months and 8.78.3 months, respectively. Borrowers come to our platform for convenient, simple and fast loan transaction process. We generally have a high level of borrower stickiness. In 20182019 and 2019, 73.6%2020, 78.1% and 78.1%88.2% of the total loan volume originated on our platform was generated from repeat borrowers who had at least one drawdown before, respectively. We had ceased facilitating new loans with funding from individual investors on our platform since October 2019 and improve our business model through acquisition of better quality borrowers and transition of our investor base from individual investors to institutional funding partners. Our platform appeals to individual investors and institutional funding partners by offering a wide spectrum of investment options.loan products. We provide our individual investors and institutional funding partners with an opportunity to invest inconnect with an emerging asset class—consumer loans—and achieve attractive returns. Individual investors may subscribe to loans based on the profiles of approved borrowers listed on our platform, use automated investing tools specifically designed to improve their investment efficiency, or enroll in investment programs that offer greater convenience in making investments. Institutional funding partners may extend loans to borrowers that we introduce to them, relying on the preliminary credit assessment services as well as other services we provide to them. We offer attractive risk-adjusted returns supported by a set of risk management procedures and implement protection mechanisms to control and mitigate investors’ risk exposure. We have built an extensive database that contains firsthand credit data as well as data from various third-party sources. We have established systematic risk management procedures which have proven to be effective in various macro-economic environments. Our proprietary and big-data based credit scoring model, the Magic Mirror Model, has been continually testing and refining its credit decision-making rules as we continue to study the increasing amount of data accumulated through our loan facilitation. We have also made progress in optimizing operational efficiency as we apply big-data analytics and machine learning capabilities to other aspects of our business operations, such as sales and marketing activities and loan collection.
Currently, our business primarily focuses on the PRC market. We are also expanding our business in the overseas markets, including the Philippines and Indonesia. For example, in December 2018 and June 2018,2019, we established two subsidiaries in the Philippines, and one of them is authorized to operate as a lending company and the other is authorized to operate as a financing company. In December 2019, we established a subsidiary in Indonesia, and havewhich has received a license for Technology and Information Based Financial Lending Institution lending license) from the Financial Services Authority of IndonesiaIndonesia. In January 2020, our subsidiary in December 2019.Singapore received the Capital Markets Services license from the Monetary Authority of Singapore to conduct regulated activities in dealing in capital markets products in Singapore. As of December 31, 2019,2020, we have only generated little revenues from the overseas markets. We generate revenues primarily by collecting transaction service fees. For loans funded by individual investors, we collect transaction service fees from borrowers for our services in matching them with investors and for other services we provide over the loans’ lifecycle. For loans funded by institutional funding partners, we collect transaction service fees primarily from institutional funding partners for our services provided to them such as borrower introduction and preliminary credit assessment, as well as other services we provide along the lifecycle of loans. Our operating revenues grew from RMB3.9 billion in 2017 to RMB4.5 billion in 2018 to RMB6.0 billion in 2019 and further to RMB6.0RMB7.6 billion (US$856.51.2 million) in 2019.2020. A substantial portion of our operating revenues for these periods were attributable to fees collected from borrowers.borrowers, third party guarantee companies and institutional funding partners. Our net profit increased from RMB1.1 billion in 2017 towas RMB2.5 billion in 2018, and was RMB2.4 billion in 2019 and RMB2.0 billion (US$341.1301.7 million) in 2019.2020.
Since our inception and up to December 31, 2019,2020, we havehad facilitated loans connecting over 17.918.9 million borrowers from 96%97% of the cities and counties in China with investors. In 20182019 and 2019,2020, over 80%84% of our borrowers arewere between 20 and 40 years of age. We strategically target the young generation in general and cultivate customer loyalty, aiming to capture the vast growth opportunities as our borrowers enter into different stages of their lives and qualify for higher credit limits. The number of unique borrowers were approximately 8.7 million in 2017, 6.8 million in 2018, and 6.7 million in 2019.2019 and 3.5 million in 2020.Our platform features a high proportion of repeat borrowers. We have an active repeat borrower base and our borrowers tend to borrow more on our platform over time. Out of the total loan volume facilitated through our platform in 2017, 2018, 2019 and 2019, 68.9%2020, 73.6%, 73.6%78.1% and 78.1%88.2%, respectively, was generated from repeat borrowers who had successfully borrowed on our platform before. Individual investors and institutional funding partnersInvestors
When we started our business, our investor base only included individual investors. We expanded our investor base to cover institutional funding partners for the first time in August 2014 and have been more actively and systematically expanding such type of investor base since 2018. Accordingly, the proportion of loan origination volume funded by institutional funding partners increased more significantly since the second half of 2018. In 2019, we further increased funding for loans on our platform from institutional funding partners and gradually reduced funding from individual investors. In October 2019, we completely ceased to accept new funding from the individual investors for loans on our platform. As of DecemberMarch 31, 2017, 2018 and 2019, we had 559,760, 667,738 and 712,750 cumulative2021, the outstanding balance of loans invested by individual investors respectively. The number of individual investors invested throughon our platform was 307,835 in 2017, 249,635 in 2018 and 160,373 in 2019. Average investment amount per individual investor was RMB149,252 in 2017, RMB163,508 in 2018, and RMB145,562 (US$20,908.7) in 2019.nil.As of December 31, 2019,2020, we had over 3037 institutional funding partners active on our platform. In 2019,2020, the proportion of loans facilitated by institutional funding partners to total loan origination volume increased to 100% in 2020 from 62.0% from 14.5% in 2018.2019. The loan origination volume facilitated by institutional funding partners increased significantly by 473.0%25.7% to RMB64.1 billion in 2020 from RMB51.0 billion in 2019 from RMB8.9 billion in 2018.2019. Currently, we primarily cooperate with commercial banks, private banks, consumer finance companies and trust management companies to diversify the funding sources on our platform.
In 2019, out of the total loan volume facilitated by us, loans funded by individual investors and institutional funding partners amounted to RMB31.2 billion (US$4.5 billion) and RMB51.0 billion (US$7.3 billion), respectively. As of December 31, 2019, the outstanding balance of loans invested by individual investors on our platform was RMB5.2 billion (US$0.7 billion), and2020, the outstanding balance of loans funded by institutional funding partners on our platform was RMB24.0RMB26.4 billion (US$ 3.44.0 billion). Our Products and Services Loan services offered to borrowers Our platform primarily offers standard loan products. We do not require security for loan products on our platform and generally provide loan applicants with a credit decision in around 10 minutes of application for first-time applicants and in as little as one minute for repeat borrowers. Approved borrowers typically receive loan disbursements within 24 hours following the loan listing, and in 2019,2020, over 79.8%91.8% of total number of loans facilitated through our platform were funded within two hours. We believe these features are essential to meeting borrowers’ often imminent financing needs. Subject to credit assessment result for each loan application, a borrower is allowed to take out multiple loans on our platform if the aggregate outstanding principal amount does not exceed such borrower’s credit limit for the type of loans the borrower applies for. Standard loan products – basic loan products Borrowers are able to apply for standard loan products using either mobile or PC devices by providing certain basic information, including bank account information, credit card information if any, educational level, marital status, occupation, email address, social media user name if any and mobile phone number of one or two alternative contact persons, in addition to the borrowers’ PRC identity card information and mobile phone numbers which are mandatory for initial user registration.
Depending on the credit assessment result, a borrower may be eligible to apply for a loan within the approved credit limit for a term ranging from one month to 36 months. The average loan amount for our standard loan products was RMB2,926 in 2017, RMB3,266 in 2018, RMB3,250 in 2019 and RMB3,250RMB3,983 (US$ 466.8)610) in 2019.2020. Different credit limits and borrowing costs are applicable to different tiers of borrowers based on their respective credit scores. Borrowers’ borrowing cost for taking out a standard loan on our platform include loan interest to be paid to individual investors or institutional funding partners a transaction service fee for our services for loans funded by individual investors, and, under certain circumstances, a quality assurance fund contribution for investor protection purpose or a guarantee service fee for services provided by financing guarantee companies. All of our standard loan products feature fixed monthly repayments, consisting of principal, interest and, where applicable, quality assurance fund contribution or guarantee service fee. Borrowers of our standard loan products may make prepayments without incurring penalties. See “—Our Platform and Transaction Process” for information on payment processing. In 2017, 2018, 2019 and 2019,2020, the origination amount of our standard loan products totaled RMB54.9 billion, RMB60.4 billion, and RMB81.5 billion and RMB64.1 billion (US$ 11.79.8 billion), representing 83.7%98.3%, 98.3%99.1% and 99.1%100.0%, respectively, of the total amount of the loans that were made through our platform. ConsumptionStandard loan products – small business loan products
We usedstarted to offer consumptionloans products to small business owners in 2020. Small business owners are able to apply for small business loan products on our platform through cooperation with retail stores to customersusing either mobile or PC devices by providing basic information, including business license for their purchases of electronic appliances. small business or self-employed license, PRC identity card information and mobile phone number, and certain optional information as applicable, including but not limited to bank account information, credit card information, educational level, marital status, email address and social media username. The principal amount of our consumptionsmall business loan products had variedvaries in the range depending on the price of electronic products. Consumptionfrom RMB500 to RMB100,000. Small business loan products could have a term of 9, 12, 15, 18 or 24ranging from one month to twelve months. We ceased to offer new consumption loan products in December 2017. As of December 31, 2019,In 2020, we facilitated the outstanding balanceborrowings on our platform for approximately 220,000 small business owners and the total origination amount of our existing consumptionsmall business loan products was nil. RMB3.7 billion (US$0.6 billion).In addition, we have offered other products and will continue to develop new products from time to time. For example, we cooperate with several third parties to offer their customers loan products similar to our standard ones but with varied features, such as more preferential interest rates. In implementing our strategy of expanding loan product offerings, we have developed and are developing new loan products. In 2017, 2018, 2019 and 2019,2020, origination amounts of our other loan products totaled RMB2.9 billion, RMB1.1 billion, and RMB0.7 billion (US$0.1 billion),and RMB37.0 million, accounting for 4.4%1.7%, 1.7%0.9% and 0.9%0.1%, respectively, of the total amount of the loans facilitated on our platform. As our business develops, we will continue to expand our loan product offerings to meet demands from different tiers of borrowers. Services offered to institutional funding partners We introduce borrowers to our institutional funding partners and provide preliminary credit assessment services as well as other services to them. Currently, our institutional funding partners primarily include commercial banks, private banks, consumer finance companies and trust management companies. The service arrangement between our institutional funding partners and us varies depending on the type of institutional funding partners. Institutional funding partners such as commercial banks and consumer finance companies typically extend loans with their own funds directly to the borrowers introduced by us. With respect to our institutional funding partners that are trust management companies, we usually collaborate with them to set up trusts with different types of investors to invest in loans through trusts on our platform. We typically invest in subordinate tranches in the trusts jointly established and other investors invest in senior tranches. Senior tranche investors in these trusts typically receive a fixed rate of return, whereas we, as the subordinate tranche investor, typically receive residual returns from the trusts. There are also trusts established by other investors without us making investment in such trusts. All trusts are administered by third-party trust management companies we collaborate with and such trust management companies are responsible for making investments in loans on our platform. In 2020, loans funded by institutional funding partners were RMB64.1 billion (US$9.8 billion), accounting for 100% of our total loan origination volume.
Investment services offered to individual investors in the past Our online lending information intermediary business used to provide investment options that cater to the needs of individual investors who prefer to proactively manage their investments as well as individual investors who want to rely on the tools we offer to allocate and manage their investments. We ceased to offer new investment services to individual investors oninvestors. Historically, our platform in October 2019. As of December 31, 2019, the outstanding balance of loans invested by individual investors on our platform was RMB5.2 billion (US$0.7 billion). Self-discretionary investing tool
Individual investors may directly invest in loans listed on our platform based on loan characteristics and borrower profiles. We provided a set of filters to help self-discretionary individual investors choose among thousands of investment opportunities. By using filters, an individual investor was able to quickly pinpoint specific loans the individual investor desires to invest in based on screening criteria, such as credit rating, interest rate, term, loan amount, profile and the borrowing history of the borrower on our platform. The minimum threshold for a lending commitment made through our self-discretionary investing tool was RMB50 (US$7.2). Upon subscription to a specific loan, an individual investor agreed to commit a certain amount of fund to the subscribed loan until its maturity. Funds would be transferred from the individual investor’s account with us to the borrower once the loan was fully subscribed. Individual investors who wanted to withdraw their funds prior to loan maturity might transfer their rights in loans on our secondary loan market. See “—Secondary Loan Market.” We did not charge fees for the use of our self-discretionary investing tool.
Automated investing tools
Backed by our sophisticated algorithms, we offered multiple automated investing tools in order to make investing easy and efficient. For example, we provided tools that facilitated fast investments in a large number of loans through one click and tools that enabled automated reinvestment according to individual investors’ preset investing criteria. We also offered tools that helped diversify investment risks by allocating funds into a portfolio of thousands of loans. These tools were designed for individual investors who preferred to invest according to their preset criteria, such as loan term and interest rate, instead of screening specific loans one by one. Once investors confirmed the investments selected by our system, the individual investors agreed to commit their funds throughout the life of the loans they invested in unless they transferred their rights in loans on our secondary loan market. See “—Secondary Loan Market.”
The scale and vibrancy of our platform had also attracted some third-party businesses which offered our individual investors additional investing tools to help them manage their investment portfolios. We partnered with some of these companies and shared with them a set of open application programming interfaces to link those investing tools with our platform. This way, individual investors could make investments on our platform through our partners’ websites and mobile applications.
Our investment programs enabled individual investors to enjoy investment returns while minimizing the time needed to manage their investments.
Before the launch of our re-designed investment programs in March 2018, we used to offer three types of investment programs (namely investment programs with fixed investing periods, investment programs with step-up returns, and investment programs with flexible investing periods) with different estimated rates of return and various terms up to 18 months. InvestorsIndividual investors could freely choose to invest in any investment programs based on their investment preference after committing a minimum amount of RMB100 (US$ 14.4)15.3).
We ceased offering investment programs with flexible investing periods and investment programs with step-up returns in July 2017 and March 2018, respectively, and launched new investment programs by re-designing our previous investment programs with fixed investing periods. Our new investment programs were featured by lock-up periods of various length and different estimated rates of return. By committing a minimum amount of RMB1,000 (US$ 143.6)153.3), individual investors could freely choose to invest in new investment programs with different lock-up periods and estimated rates of return. By opting for our new investment programs, individual investors authorized our platform to make investments in loans on our platform with different sizes, terms and interest rates, and after the expiration of the preset lock-up periods, to transfer their creditor’s rights to other investors on their behalf or extend the program tenor under certain circumstances at the individual investors’ option. The underlying loans we invested had weighted-average interest rates higher than the lower limit of the estimated rates of return of each investment program. Individual investors were able to exit before maturity of the investment program by transferring their creditor’s right to other investors on our platform after the preset lock-up period. In the event that the underlying loans invested by an individual investor through our investment programs failed to be transferred after expiration of the preset lock-up periods, the individual investor would continue to be a creditor of the underlying loans. The lock-up periods of our new investment programs typically ranged from 15 days to 540 days. We charged management fees to individual investors who subscribed investment programs and collected such fees when an investment program ended at its maturity. We had established a secondary loan marketceased to offer new investment services to individual investors on our platform to provide liquidity to investors. Loans heldin October 2019. As of March 31, 2021, the outstanding balance of loans invested by individual investors for no less than 48 hours and with principal balances of no less than RMB10 (US$1.4) might be posted on our platform for transfer once certain other conditions are met. Individual investors might withdraw the offers to transfer at any time before such offers were accepted by transferees. Although a successful transfer was not guaranteed, historical data showed that loans typically changed hands within the same day they were posted. Upon a successful transfer, the transferor would be charged a service fee at a rate ranging from 0.5% to 1% of the transfer price depending on whether the underlying loan had the quality assurance fund protection and the number of outstanding repayments. If the transfer did not happen within 24 hours after a loan was posted, the post would be automatically taken off our platform. In 2018 and 2019, the volume of loans transferred in the secondary loan market was RMB1,416.6 million and RMB1,345.5 million (US$193.3 million), respectively.nil. Investment services offered to institutional funding partners
We introduce borrowers to our institutional funding partners and provide preliminary credit assessment services as well as other services to them. Currently, our institutional funding partners primarily include commercial banks, consumer finance companies and trust management companies. The service arrangement between our institutional funding partners and us varies depending on the type of institutional funding partners. Institutional funding partners such as commercial banks and consumer finance companies typically extend loans with their own funds directly to the borrowers introduced by us. With respect to our institutional funding partners that are trust management companies, we usually collaborate with them to set up trusts with different types of investors to invest in loans through trusts on our platform. We typically invest in subordinate tranches in the trusts jointly established and other investors invest in senior tranches. Senior tranche investors in these trusts typically receive a fixed rate of return, whereas we, as the subordinate tranche investor, typically receive residual returns from the trusts. There are also trusts established by other investors without us making investment in such trusts. All trusts are administered by third-party trust management companies we collaborate with and such trust management companies are responsible for making investments in loans on our platform. In 2019, loans funded by institutional funding partners were RMB51.0 billion (US$7.3 billion), accounting for 62.0% of our total loan origination volume.
Our Platform and Transaction Process We incorporate advanced technology into every step of the transaction process on our platform to provide a better experience to our borrowers and investors.our institutional funding partners. The entire process appears simple, seamless and efficient but our platform leverages sophisticated, proprietary technology to make it possible. Set forth below is a description of the transaction process of our standard loan products facilitated on our platform between borrowers and investors.institutional funding partners.
Step 1: Initial Application Prospective borrowers are able to initiate applications online anytime, anywhere through our mobile applications and website. Potential borrowers may generally complete the application process for our standard loan products within a few minutes by providing the requested personal details, the type of information readily available to the application, and taking a selfie in real time holding the applicant’s PRC identity card if the loan application is initiated via mobile applications. If the applicant is a small business owner, they are provided with an option to upload the business license of their small business to the platform. Step 2: Fraud Detection and Credit Assessment Following the application for a standard loan product or a small business loan product, our system generally takes around ten minuteshelps to aggregate the data, run our anti-fraud model, conduct credit assessment and decide whether to extend credit, except where manual review process is triggered.
Upon submission of a complete application, our system begins to match the application with data from both internal and external sources, including information provided by the prospective borrowers, data gleaned from third-party data partners, and data aggregated from the internet using our proprietary data collection technologies with due authorization from the prospective borrowers. Information aggregated, and later used for fraud detection and creditworthiness evaluation, includes basic background information, such as age, gender and occupation, behavioral data, and if available, borrowers’ credit history, such as personal credit information maintained by the Credit Reference Center under the People’s Bank of China.PBOC. For repeat borrowers, historical loan performance data accumulated on our platform will also be incorporated into the borrowers’ profile. Once aggregated, the data are reviewed by our anti-fraud model to identify fraudulent behaviors. Our anti-fraud model uses a multifaceted detection method that combines sophisticated data integration with a hybrid analytical approach to both identify individual fraud based on existing fraud database and analyze collusive behaviors among multiple individuals to uncover fraudulent schemes. Once the anti-fraud detection process is completed, the prospective borrower’s loan application either proceeds to the next phase or the prospective borrower is notified of the decision if we decline the application. Following the fraud detection, we initiate a credit review process using our proprietary Magic Mirror Model to generate a Magic Mirror score for the prospective borrower. Each Magic Mirror score corresponds to a credit level in the range of I to VIII, with Level I representing the lowest risk and Level VIII representing the highest risk. See “—Risk Management—Proprietary Credit Scoring and Risk Pricing Models.” Applicants classified as Level VIII will be declined, and applicants falling under other credit levels will be assigned by our risk pricing system the approved credit amounts, maximum loan terms and applicable interest rates and other loan characteristics which are determined based on their respective Magic Mirror scores. In 2019,2020, among all the loan applications approved on our platform, 99.3% went through the automated process. The remaining 0.7% in the respective periods often requiring additional information or verification, are forwarded to our credit assessment team for manual review. The manual review process generally takes one to three days. Following this review, our credit assessment team will either approve the loan with one or more approved sets of loan characteristics or decline the loan application. Borrowers who pass our fraud detection and credit assessment procedures will be introduced to our institutional funding partners. See “—Our Platform and Transaction Process—Step 3: Loan Listing and Funding” for details. Borrowers who do not obtain our preliminary credit assessment approval will be introduced to third-party platforms for matching them with investors on such third-party platforms. Once those borrowers pass the relevant fraud detection and credit assessment procedures on such third-party platforms and successfully match with investors on these third-party platforms, we will charge service fees from these third-party platforms. Step 3: Loan Listing and Funding Loan funding process with individual investors
After obtaining credit approval, the borrowers could submit the final loan amount and loan term within the parameters of the credit approval. Our system would then automatically generate a form of loan agreement between the borrower and the individual investors. If the loan had not been matched automatically, the loan was then listed on our platform for individual investors to view and subscribe. Subject to credit assessment for each loan application, a borrower was allowed to take out one or more loans on our platform at a time. Individual investors who were willing to make investment through our platform could deposit their funds with us in custody accounts at China Merchants Bank. We had migrated to a custody account arrangement with China Merchants bank, whereby funds of individual investors had been deposited into and settled by custody accounts under its management. Upon the full subscription of a loan, the loan agreement would become effective, and the full amounts of funds would then be released from investors’ custody accounts to the borrower. Depending on different types of loan application, loans not fully subscribed within10-20
days would be automatically removed. We have ceased facilitating new loans with funding from the individual investors on our platform since October 2019.
Loan funding process with institutional funding partners
Loan funding process with institutional funding partners can be categorized into direct lending model and trust arrangement model. Direct lending model.model Our institutional funding partners that are commercial banks and consumer finance companies or third-party online lending information intermediaries typically invest under the direct lending model. Under this model, our institutional funding partners typically extend loans with their own funds directly to the borrowers introduced by us. After obtaining our preliminary credit assessment and approval, the borrowers may submit the final loan amount and loan term within the parameters of the credit approval. Our proprietary system will then match and refer qualified borrowers to our institutional funding partners based on their specific requirements of borrower profiles, such as credit limits or ticket size. Our institutional funding partners will then review the credit application and our preliminary credit assessment of the borrower introduced by us in accordance with their own credit assessment standards and decide to approve or decline the loan application. Once the borrower’s credit application is approved, our institutional funding partners will then directly disburse the loan amounts to the borrower’s bank account. Historically, we also collaborated with third-party online lending information under this direct lending model. Third-party online lending information intermediaries generally matchmatched qualified borrowers introduced by us with investors on their platforms. Loans will bewere funded by investors on their platforms upon a successful match. In light of the tightening regulatory environment and due to a lack of clear statutory interpretation and application of the relevant rules, we have been reducing our cooperation withceased offering new loans to third-party online lending information intermediaries since the third quarterDecember 2019.
For the quality assurance commitments we provide to our institutional funding partners under the direct lending model, see “Item 4. Information on the Company—B. Business Overview—Investor Protection—Quality Assurance Commitments for Our Institutional Funding Partners.” In addition to the direct lending model, we also collaborate with trust management companies to offer flexibilities to certain of our institutional funding partners and access to a broader range of investors. Under this model, we usually establish trusts jointly with various other investors. We typically invest in subordinate tranches in these trusts while other investors, including certain of our institutional funding partners and investors approached by trust management companies, invest in senior tranches. Under this model, other investors may also collaborate with trust management companies to establish a trust among themselves without us. The trusts established are managed by third-party trust management companies we collaborate with. After we complete our borrower creditworthiness assessments and introduce qualified borrowers to the third-party trust management companies, these trust management companies will then conduct their own credit assessment and decide to approve or decline borrowers’ loan applications. If a borrower’s loan application is approved, the corresponding trust management company will then directly disburse the loan amount from the trust to the borrower’s bank account. For the trusts jointly established by us and other investors, these investors, as senior tranche investors in the trusts, typically receive a fixed rate of return, while we, as the subordinate tranche investor, typically receive the residual returns, if any, from the trusts. In certain very limited cases, we may also receive from the trusts a service fee in addition to possible residual returns. For the trusts jointly established by other investors among themselves, we receive from trusts a service fee. In some cases, we have engaged licensed third-party financing guarantee companies to provide financing guarantees to the third-party trust management companies. If any borrower defaults, third-party guarantee companies engaged by us or our own guarantee company will be obligated to repay the full overdue amount to these trusts. After third-party financing guarantee companies repay the full overdue amount to these trusts, we will be obligated to purchase the loans from these guarantee companies at an amount equal to the repayment they made to those institutional funding partners. In 2019, out of the total loan volume facilitated by us,2020, loans funded by individual investors and institutional funding partners on our platform amounted to RMB31.2RMB64.1 billion (US$4.59.8 billion) and RMB51.0 billion (US$7.3 billion), respectively..
Step 4: Loan Servicing and Collection Loan servicing for individual investors
Upon the origination of a standard loan, we establish a repayment schedule with repayment occurring on a set business day each month and update the loan performance status in real time once a payment has been made or is overdue. Borrowers and investors are able to monitor the loan performance on a real-time basis. On or prior to each scheduled repayment date, borrowers should deposit sufficient funds (consisting of corresponding installment of principal, interest and transaction service fee, as well as quality assurance fund contribution or guarantee service fee to third-party guarantee companies for certain borrowers) in their respective accounts and authorize us to, on such repayment date, (i) transfer corresponding installment of principal and interest to the corresponding investors, (ii) transfer each installment of transaction service fee to our own account, and (iii) transfer quality assurance fund contribution made by certain borrowers to a separate account managed by third-party guarantee company, or transfer each installment of guarantee service fee to the corresponding third-party guarantee company. We used to have a custody account arrangement with China Merchants Bank and funds of borrowers and individual investors were deposited into and settled by the custody accounts under its management. The custody account arrangement expired on March 19, 2020. We will not pursue new custody account arrangements with other commercial banks since we have ceased to accept new investments from individual investors from October 2019 and are winding down investments from individual investors on our platform. The funds in the custody accounts of China Merchants Bank have been migrated to a third-party payment system managed by a third-party payment company. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We started our business as an online lending information intermediary, and the laws and regulations governing online lending information intermediary industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.”
Loan servicing for institutional funding partners
Borrowers are able to repay loans through our online platform based on the terms and conditions of the loan agreements between borrowers and institutional funding partners. For borrowers who are unable to repay loans online, we accept bank transfer on behalf of our institutional funding partners. Borrowers and institutional funding partners are able to monitor the loan performance on a real-time basis. On or prior to each scheduled repayment date, borrowers should deposit sufficient funds consisting of corresponding installment of principal, interest, late payment penalty (if applicable), guarantee service fee to third-party guarantee companies for certain borrowers in their respective accounts and authorize institutional funding partners and us, including third-party payment companies designated by us or institutional funding partners, to, on such repayment date, (i) transfer corresponding installment of principal, interest and late payment penalty (if applicable) to the corresponding institutional funding partners, and (ii) transfer each installment of guarantee service fee to the corresponding third-party guarantee company. Our institutional funding partners subsequently pay us a transaction service fee for the services we provide to them, such as borrower introduction and preliminary credit assessment as well as other services we provide over the lifecycle of loans. In addition, we also receive a portion of our transaction service fees under certain circumstances from third-party guarantee companies for services we provide to them. We have a collection team of over 1,600600 employees as of December 31, 20192020 and have developed a systematic process to handle collection of delinquent loans. Upon becoming delinquent, a loan enters into our collection process, which is divided into stages based on severity of delinquency. The first 90-day collection period is typically handled by our collection team although we also engage third-party payment collection service providers to assist us from time to time. Primary collection measures, including text message reminders, phone calls, legal letters and legal proceedings, are taken in succession as a loan becomes increasingly overdue. If a loan remains overdue after the 90-day period, we then outsource loan collection to third-party service providers to optimize collection efficiency. Any amount recovered from the borrower will be remitted to first cover third-party collection expenses, if any, then to repay overdue principal and interest. Any remaining amount will be used to pay the late payment penalty and the collection fee charged to the borrower.
Our strong risk management capabilities are one of the key competitive advantages that enable us to make credit available to the large unserved or underserved population in China, whose credit histories have yet been recorded in the country’s developing credit system, while maintaining a sustainable business at a healthy profitability level.
We have invested significant resources in building up a comprehensive credit database since our inception. Today, we own an extensive database with several thousands of variables for our borrowers, covering a wide range of information pertinent to a borrower’s creditworthiness and presenting a user profile from a 360-degree view. Data are aggregated from a number of sources. We have cooperation with a number of organizations, such as industry associations, who grant us the access to their respective data. Our strong data-mining capabilities, which we believe differentiate us from many other players in the online consumer finance industry, also enable us to collect a large amount of data concerning prospective borrowers. We have developed a number of proprietary automated programs that are capable of searching, aggregating and processing massive data from the internet in a short period of time. Another important component of our credit database is the payment histories of our prior and existing borrowers. We take various measures to ensure high level of reliability and accuracy of data. The following are typical data that we seek to collect for each loan application: historical credit data accumulated through our online platform; behavioral data that we glean from an applicant’s behaviors as they apply for loans, such as the location of the applicant or the use of multiple devices to access our platform; personal identity information maintained by an organization operated under the PRC Ministry of Public Security;MPS; background information, such as education level and marital status, collected from prospective borrowers; personal credit information maintained by the Credit Reference Center under the People’s Bank of China;PBOC, which is authorized by the borrowers to our platform to access; and list and database of fraud cases. Upon the data aggregation, our system converts the originally unstructured data into structured data using machine learning techniques. We have been working closely with multiple partners in a joint effort to identify emerging fraudulent schemes, scams, trends, threats, and criminal organizations and have accumulated massive data as related to fraud. The database we maintain helps us to fine-tune the rules we set and enhance our fraud detection capabilities. We adopt a multifaceted fraud detection method. First, we set up rules based on known fraud cases to filter activities for fraudulent behaviors. Afterwards, we apply advanced network techniques to identify relationships pertinent to fraud and connect the individual fraudulent activities to uncover complex fraud schemes and criminal organizations. In addition, we run anomaly detection to detect individual and aggregated abnormal patterns in order to catch unknown fraud behaviors. If available information is insufficient for our system to draw a conclusion, the relevant loan applications will be forwarded to our anti-fraud team for offline verification, which involves members of our anti-fraud team speaking with applicants to inquire after any inconsistencies in a loan application.
Proprietary Credit Scoring and Risk Pricing Models In August 2014, we developed and launched a proprietary credit scoring model, known as Magic Mirror Model, which we believe represents one of our key competitive advantages. Our Magic Mirror Model leverages a huge database that we have built up gradually through our years of operations. Such a vast amount of data lays a strong foundation for our use of machine learning to optimize the Magic Mirror Model on a continuing basis.
Following data aggregation and fraud detection, prospective borrowers enter into credit assessment phase. Different algorithms are applied to prospective borrowers with different features in assessing the potential risks associated with them and based on the assessment results, our credit scoring model generates Magic Mirror scores for each of the prospective borrowers. A new Magic Mirror credit score is generated each time a borrower applies for a loan, which may change the borrower’s credit limit for that type of loan. We apply various machine learning techniques to the data collected. Through monitoring model performance as well as variable consistency, our system is able to evaluate the effectiveness of existing variables while discovering new ones. The Magic Mirror Model then is optimized by adjusting the group of variables used. The following factors are associated with variables that are important for assessing the probability of delinquency: Repayment history
personal identity information Personal identity information
Education
Consumption behavior
Social network behavior
Credit reports
Internetinternet behavior, such as visiting history of our website and time spent on completing a loan application
Fraudulent records
For applicants of our standard loan products, the Magic Mirror score derived from our proprietary credit scoring model is used to determine which of the eight segments in our existing credit grid such applicants fall into. Among the eight segments, Level I represents the lowest risks associated with the borrowers, while Level VIII represents the highest risks. Level VIII loan applications will be rejected. Once a credit level is assigned to a specific loan, it will not be changed during the tenor of the loan. The following charts indicate the historical cumulative30-day
plus past due delinquency rates by credit level for loans facilitated in 2017, 2018 and 2019, which demonstrate distinctive credit risks associated with borrowers falling under each credit level:(1) | Vintage delinquency rate for loans facilitated in 2017 is calculated as the volume weighed average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(2) | Vintage delinquency rate for loans facilitated in 2018 is calculated as the volume weighed average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(3) | Vintage delinquency rate for loans facilitated in 2019 is calculated as the volume weighed average of the quarterly vintage delinquency rates as of December 31, 2019. |
For borrowers who were not subject to the quality assurance fund program before December 2017, the borrowing cost included an upfront transaction service fee for most of our loans and the subsequent monthly cost, which equaled to monthly interest payment. Starting from December 2017, we have ceased collecting the transaction service fee upfront. Since then, the transaction service fee is being collected by installments commencing the date one month after the borrower is funded. For borrowers who were subject to the quality assurance fund program before April 2017, the borrowing cost included an upfront transaction service fee, an upfront portion of quality assurance fund contribution, and the subsequent monthly cost, which was comprised of the monthly quality assurance fund contribution and monthly interest payment. Between April and December 2017, we ceased collecting the upfront portion of quality assurance fund contribution upon the origination of standard loan products. Instead, the entire quality assurance fund contribution was collected through monthly payments. During this period of time, the transaction service fee was still collected upfront. Starting from December 2017, we ceased collecting the transaction service fee upfront, and both the quality assurance fund contribution and the transaction service fee have been collected by installments commencing the date one month after borrowers are funded since then. See “—Investor Protection—Quality Assurance Fund” for more information on the quality assurance fund. We review and modify our segmented pricing from time to time, taking into consideration not only the borrower credit risk but also other factors, such as market interest rates, adequacy of investor protection mechanism and competition in the market. The following table presents the facilitation amount
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Contents (1) | Include loans facilitated for testing our system or other purposes. |
We provide quality assurance commitments to our institutional funding partners. We also used to employ two types of investor protection mechanisms to help limit individual investors’ risk exposure on our online lending intermediary platform:platform in the past: quality assurance fund and investor reserve fund. We ceased setting aside new investor reserve funds contributions starting from January 1, 2018 and launched a new quality assurance program in February 2018. As we gradually transform our business model, we also started to provide quality assurance commitments to our institutional funding partners. The following is a summary of the latest features of our quality assurance commitments, quality assurance fund and investor reserve funds, andfunds. Quality Assurance Commitments for Our Institutional Funding Partners We make available for our institutional funding partners two major types of quality assurance commitments.commitments: financing guarantee, and insurance policy. We engage licensed third-party financing guarantee companies to provide financing guarantees to our institutional funding partners. For loans guaranteed by third-party financing guarantee companies, if a borrower defaults, the corresponding third-party guarantee company will be obligated to repay the full overdue amount to the institutional funding partner. After the guarantee company repays the full overdue amount, we will be obligated to purchase creditor’s right from the third-party guarantee companies at a price equal to the repayment it made to the institutional funding partner. Under certain circumstances, we also provide security deposits to third-party financing guarantee companies for loans funded by certain institutional funding partners as an additional quality assurance commitment. In addition, we also provide quality assurance commitments through cooperation with third-party insurance companies. Under this arrangement, if borrowers introduced by us defaults, our institutional funding partners are able to seek insurance compensations under the insurance policies from third-party insurance companies. In some cases, if the overdue amount exceeds insurance coverage, the remaining overdue amount will be repaid by a third-party guarantee companies engaged by us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding. In 2019 and 2020, we incorporated three financing guarantee companies in Fujian, Tianjin and Hainan. In some cases, our own financing guarantee companies provide financing guarantee services directly to our institutional funding partners for loans funded by them.
Under our previous quality assurance mechanism, we provideprovided protection for individual investors who invested in the loans taken out by those borrowers who contributed to the quality assurance fund. Certain borrowers of our standard loans and all borrowers of our handy cash loans and consumption loans were required to make contributions to the respective quality assurance fund. In February 2018, we launched a new quality assurance program, or the New QAF Program, by partnering with China United SME Guarantee Corporation, or Sino Guarantee.Guarantee, a Chinese financial services company that provides credit-enhancement services for financial products and risk-sharing services to small and medium enterprises. Beginning from February 9, 2018, investments in new eligible loans facilitated on our platform will bewere protected by the New QAF Program, and relevant borrowers will bewere required to contribute to a quality assurance fund managed by Sino Guarantee under rules that arewere substantially the same as those applicable to our existingthe previous quality assurance fund. Sino Guarantee will makemade payouts based on the relevant rules set out by us. After the launch of the New QAF Program, we will continuecontinued to manage the existing quality assurance fund for eligible loans facilitated before February 9, 2018. Whether under our previous quality assurance fund mechanism or under the New QAF Program, when a borrower isbecame delinquent for one day in repaying an installment of principal and interest of a loan, we will withdrawwithdrew an amount from the dedicated account to repay the delinquent installment of principal and interest to the corresponding individual investors. The repayments will bewere made in succession according to the age of the delinquency—the earliest delinquent installment iswas repaid first. If the quality assurance fund becomes insufficient to pay back all the investors with delinquent loans, these investors will be repaid on a pro rata basis, and the repayment of their outstanding unpaid balances will be deferred to the next time the quality assurance fund is replenished, at which time a distribution will again be made to all investors with delinquent loans having quality assurance fund protection according to the foregoing rules. If the quality assurance fund is continually underfunded, investors may need to wait for extended periods to receive a full distribution from the quality assurance account. Once we recover any amount from the defaulted borrower through our collection efforts, the recovered amount will be remitted first to replenish the portion of the quality assurance fund used to repay the investors. We adjustadjusted our quality assurance fund contribution policy from time to time based on our monitoring of market risks. We determinedetermined the quality assurance fund contributions required from a borrower by taking into consideration delinquency rate of loans taken out by borrowers with similar risk profile.
Due to our business model transformation, we have discontinued setting aside quality assurance fund from the individual investors since the third quarter of 2019. We used to operate investor reserve funds, which were self-protection mechanisms for investors of our investment programs. The investment programs that invested in loans that were not covered by the quality assurance fund used to have their own dedicated investor reserve funds that cover potential payouts to investors of the respective type of investment programs. Funds from investors in an amount equal to a certain percentage of the total principal amount of the underlying loans were set aside into the relevant investor reserve funds at the end of each investment program, which were maintained in the custody accounts managed by China Merchants Bank. If the amount of principal and interests collected, net of our management fee and the investor reserve set aside, was insufficient to cover the investment principal plus the expected return, payouts would be made from the relevant investor reserve funds to cover the difference. If the investor reserve funds were insufficient to pay all the relevant investors with their investment principal and expected returns, the investors would be paid on a pro rata basis, and any losses associated with their outstanding unpaid balances would not be deferred until the next time the fund was replenished by another investment program but would be borne by the investors. Upon completion of an investment program, excess returns, if any, net of our management fee and the investor reserve that was set aside, would be distributed to the investors. The investor reserve fund arrangement was not applicable to those investment programs that invest in loans backed by the quality assurance fund, which would not be mixed with those investment programs investing in loans not subject to the quality assurance mechanism. In light of the tightening regulatory environment, we have discontinued setting aside investor reserve funds since January 1, 2018. Quality Assurance Commitments for Our Institutional Funding Partners
We make available for our institutional funding partners two major types of quality assurance commitments: financing guarantee, and insurance policy.
We engage licensed third-party financing guarantee companies to provide financing guarantees to our institutional funding partners. For loans guaranteed by third-party financing guarantee companies, if a borrower defaults, the corresponding third-party guarantee company will be obligated to repay the full overdue amount to the institutional funding partner. After the guarantee company repays the full overdue amount, we will be obligated to purchase creditor’s right from the third-party guarantee companies at a price equal to the repayment it made to the institutional funding partner. Under certain circumstances, we also provide security deposits to third-party financing guarantee companies for loans funded by certain institutional funding partners as an additional quality assurance commitment. In November 2019, we incorporated Fujian Zhiyun Financing Guarantee Company, or Fujian Zhiyun. The establishment of Fujian Zhiyun has been approved by Fujian Branch of Financial Administrative Bureau on November 11, 2019. In some cases, Fujian Zhiyun provides financing guarantee services directly to our institutional funding partners for loans funded by them.
In addition, we also provide quality assurance commitments through cooperation with third-party insurance companies. Under this arrangement, if borrowers introduced by us defaults, our institutional funding partners are able to seek insurance compensations under the insurance policies from third-party insurance companies. If the overdue amount exceeds insurance coverage, the remaining overdue amount will be repaid by a third-party guarantee companies engaged by us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
The success of our business is dependent on our strong technological capabilities that support us in delivering superior user experience, protecting information on our platform, increasing operational efficiency and enabling innovations. Principal components of our technology include: . Data science technology is extensively used in various aspects of our operations. Our data mining and user behavior analytics capabilities allow us to build a comprehensive credit profile for each borrower. Our multi-dimensional real-time analytics capabilities enable fast and accurate credit decisions. Our massive data processing capabilities enable us to provide an array of automated investing tools assisting investors in increasing investment efficiency. In 20182019 and 2019,2020, a total of 178.1251.4 million and 251.4160.9 million investment transactions were matched on our platform, respectively. Data-based machine learning is also used in numerous applications, such as improving fraud detection, optimizing marketing resource allocation and increasing collection efficiency. . We are committed to maintaining a secure online platform. We have built a firewall that monitors and controls incoming and outgoing traffic on our platform around the clock. Once any abnormal activity is detected, our system will immediately notify our IT team and at the same time automatically take relevant measures, such as activating third-party traffic control service, to prevent any harm to our platform. For any transmission of user information, we use data encryption to ensure confidentiality. Within our organization, we have adopted a series of policies on internal control over information system, including physical security measures, such as entry and equipment control, and network access management, such as identification, authentication and remote access control. We employ data slicing and distribute the storage of a user’s data points across several servers. We also maintain redundancy through a real-time multi-layer data backup system to prevent loss of data resulting from unforeseen circumstances. We conduct periodic reviews of our technology platform, identifying and correcting problems that may undermine our system security.
. Our systems infrastructure is hosted in data centers at two separate locations in Shanghai. We maintain redundancy through a real-time multi-layer data backup system to ensure the reliability of our network. Our platform adopts modular architecture that consists of multiple connected components, each of which can be separately upgraded and replaced without compromising the functioning of other components. This makes our platform both highly reliable and scalable. . With modular architecture, our platform can be easily expanded as data storage requirements and user visits increase. In addition, load balancing technology helps us improve distribution of workloads across multiple computing components, optimizing resource utilization and minimizing response time. . In addition to the foregoing technologies we employ to support our highly automated platform, we have taken various measures to ensure uninterrupted operation of our platform. For example, we adopt self-healing technology that enables our system to perceive malfunction and make necessary adjustments to restore itself to normal operation without any human intervention. Also, our system is connected with systems of multiple data providers that serve as backups for each other. If services provided by one data provider are suspended, our system will shift to the backup sources automatically to ensure no interruption to our operation.
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. As of the date of this annual report,March 31, 2021, we have (i) registered five12 patents in China including our proprietary facial recognition technology used for fraud detection and applied for 119125 additional patents with the PRC State Intellectual Property Office, (ii) registered 122171 software copyrights with the PRC National Copyright Administration, (iii) registered 197179 domain names, including ppdai.com, and (iv) registered 200245 trademarks, including our “FINV,” “PPDAI,” “信也”, “拍拍贷” and “魔镜” trademarks. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources. In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.” Our market position benefits significantly from our large user base and our strong brand recognition throughout China. We believe that our variety of loan products that offer attractive returns, as well as our effective risk management and investorvarious protection mechanisms lead to strong promotion, which drives awareness of our brand among investors. As a supplement to ourword-of-mouth
marketing, we often offer investment promotions on our websiteusers and mobile application to acquire new investors and holdin-person
meetings with investors to enhance brand awareness among existing investors.business partners.We use a variety of traditional and internet marketing channels to acquire borrowers although most of our borrowers are acquired online. Our borrower acquisition channels mainly include: . From time to time, we work with App Stores to promote our mobile applications and with internet companies to place online advertisements.
. We team up with certain websites that are able to reach quality borrowers to provide consumer finance services to their customer. . We also use paid placement on major online search engines in China. Online consumer finance market is an emerging industry in China. It provides a new means for consumers to obtain financing. As a leading player in China’s online consumer finance platform market, we face fierceintensive competition from other online marketplaces, online finance service providers, technology giant backed internet finance platforms, as well as traditional financial institutions. Consumer finance marketplaces which operate online platforms connecting borrowers and institutional funding partners compete directly with us for both borrowers and institutional funding partners. As of the date of this annual report, our key competitors include Lufax. In addition, for borrowers, we compete with other online platforms. Examples of such companies include Ant Finance, JD.com and WeBank. We also compete with traditional financial institutions, including credit card issuers, consumer finance business units in commercial banks and other consumer finance companies. Some of our larger competitors have substantially broader product or service offerings and rich financial resources to support heavy spending on sales and marketing. We believe that our ability to compete effectively for borrowers and institutional funding partners depends on many factors, including the variety of our products, user experience on our platform, effectiveness of our risk management, the return offered to institutional funding partners, our partnership with third parties, our marketing and selling efforts and the strength and reputation of our brands.
In addition, as our business continues to grow rapidly, we face significant competition for highly skilled personnel, including management, engineers, product managers and risk management personnel. The success of our growth strategy depends in part on our ability to retain existing personnel and add additional highly skilled employees. We experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience lower transaction volume on our online consumer finance platform during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. As we have more institutional funding partners, such as commercial banks, in our investor base, our business may also be affected by liquidity seasonality in the banking system. For example, liquidity in China’s banking sector has historically had a tendency to be looser at the beginning of each calendar year and tighter towards the end of each calendar year. Overall, the seasonality of our business may increase in the future. This section sets forth a summary of the most significant laws, rules and regulations that affect our business activities in the PRC and our shareholders’ rights to receive dividends and other distributions from us. Regulations Relating to Online Consumer Finance Services Due to the relatively brief history of the online consumer finance industry in China, the regulatory framework governing our industry has not developed comprehensively. Even though few specificThe PRC government and relevant regulatory authorities have issued various laws and regulations ongoverning the online consumer finance industry have been issued in the past two years, detailed guidance and interpretation has yet to be promulgated by the regulators.few years. Regulations on online lending information servicesintermediaries On July 18, 2015, thethe Guidelines on Promoting the Healthy Development of Online Finance Industry
, or the Guidelines, were promulgated by ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC. The Guidelines define online lending and borrowing as direct loans between individualslenders and borrowers through an online platform, which is under the supervision of the CBRC, and governed by the PRC Contract Law of the PRC, the General Principles of the PRC Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. The Contract Law of the PRC, and the General Principles of the Civil Law of the PRC, had been repealed by the Civil Code of the PRC, and the Civil Code of the PRC integrates the rules and guidelines set forth by the Contract Law, the General Principles of the Civil Law, the General Provisions of the Civil Law and other basic civil laws of the PRC. Pursuant to the Guidelines, a company that provides online lending information services shall make it clear its nature of being an information intermediary and provide information services rather than engage in illegal fund-raising, which further requires such company to separate funds of the borrowers and the investors from its own funds.
On April 13, 2016, the CBRC issued the Notice on the Implementation Plan of the Special Rectification of Online Lending Risk by the General Office of the State Council . By categorizing the market players based on their different levels of legal compliance, the CBRC started to regulate the online lending service industry. On August 17, 2016, the CBRC, the MIIT, the Ministry of Public SecurityMPS and the CAC jointly issued the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries , or the Interim Measures. The Interim Measures also define the online lending information service providers as financial information intermediaries. Pursuant to the Interim Measures, online lending information service providers shall complete registration with local financial regulatory authority and apply for appropriate telecommunication business license in accordance with relevant rules issued by competent telecommunication authority. The Interim Measures also require the online lending information service providers to substantially cover “online lending information intermediary” in its business scope filed with the local registration regulatory authority.
According to the Interim Measures, online lending information service providers shall not engage in or accept entrustment to engage in certain activities, including, among others, (i) fund raising for the intermediaries themselves, (ii) holding investors’ fund or setting up capital pools with investors’ fund, (iii) providing security or guarantee to investors as to the principals and returns of the investment, (iv) issuing or selling any bank wealth management products, assets management products of securities companies, fund products, insurance products, trust products or other financial products, (v) mismatch between investor’s expected timing of exit and the maturity date, (vi) securitization, (vii) promoting its financing products on physical premises other than through the permitted electronic channels, such as telephones, mobile phones and internet, (viii) providing loans with its own capital, except as otherwise permitted by laws and regulations; and (ix) equity crowd-funding. The Interim Measures require that online lending information service providers shall restrict the maximum balance of fund borrowed by the same borrower on the same online lending information intermediary platform as well as on several such online lending information intermediary platforms so as to prevent credit concentration risks. The maximum balance of fund borrowed by any individual on the same online lending information intermediary lending platform shall be RMB200,000 (US$28,728.2)30,651.3), and the maximum total balance of the fund borrowed by the same individual on several lending information intermediary platforms shall be RMB1,000,000 (US$143,641.0)153,256.7). The maximum balance of fund borrowed by any entity or other kind of organization on the same online lending information intermediary platform shall be RMB1,000,000 (US$143,641.0)153,256.7), and the aggregate maximum total balance of fund borrowed by any entity or other kind of organization on all online lending information intermediary platforms shall be RMB5,000,000 (US$718,205.1)766,283.5). With respect to the online lending information intermediary platforms established prior to the implementation of the Interim Measures, provided that such platforms have not been in compliance with the applicable requirements of the Interim Measures, the competent local financial regulatory department would require such platforms to make correction or rectification within a 12-month transition period specified by the Interim Measures. Pursuant to the Interim Measures, if an online lending information service provider violates any applicable laws, regulations or relevant regulatory provisions relating to online lending information services, sanctions could be imposed by the local financial regulatory departments or other relevant regulatory departments, including, among others, supervision interviews, regulatory warning, correction order, condemnation, credit record modification, fine up to RMB30,000 (US$4,309.2)4,597.7), and criminal liabilities if the act constitutes a criminal offense. Pursuant to the Interim Measures, if an online lending information intermediary fails to set up custody accounts with qualified bank for the funds of investors and borrowers, administrative sanctions includes but not limited to fines, warning letter, rectification order, public notice of criticism, filing the non-compliance conducts with the public credit record system, and other penalties according to the laws and regulations. In accordance with the Guidelines and the Interim Measures, the CBRC issued theGuidelines for the Funds Custodian Business of Online Lending
, or the Custodian Guidelines on February 22, 2017. The Custodian Guidelines further clarifies the custodian requirement for the funds of investors and borrowers held by online lending information service providers.The Custodian Guidelines specifies that an online lending information service provider may only designate one qualified commercial bank as its fund custodian institution for the funds of investors and borrowers held by it, and further clarifies detailed requirements and procedures for setting up custody accounts with commercial banks. To the extent that the relevant online lending information service providers and commercial banks are not in full compliance with the Custodian Guidelines, they are required to make correction or rectification within asix-month
rectification period specified by the Custodian Guidelines.
In accordance with the Guidelines and the Interim Measures, the CBRC further issued theGuidelines on Information Disclosure of the Business Activities of Online Lending Information Intermediaries
, or the Disclosure Guidelines, on August 23, 2017. The Disclosure Guidelines further clarified the disclosure requirements for online lending information service providers. Pursuant to the Disclosure Guidelines, online lending information service providers should disclose certain information on their websites and all other internet channels, including mobile applications, WeChat official accounts or Weibo, including, among others (i) the record-filing and registration information, the organization information, the examination and verification information, and transaction related information, including transactions matched through the online lending information service providers for the previous month, all of which shall be disclosed to the public; (ii) the basic information of the borrowers and the loans, the risk assessment of such loans, and the information of the outstanding transactions matched, all of which shall be disclosed to the investors; and (iii) any event that would result in a material adverse effect to the operations of online lending information providers, which shall be disclosed to the public within 48 hours upon occurrence. The Disclosure Guidelines also require online lending information service providers to record all the disclosed information and retain such information for no less than five years from the date of the disclosure. To the extent that the relevant online lending information service providers are not in full compliance with the Disclosure Guidelines, they are required to make correction or rectification within asix-month
rectification period starting from the date the Disclosure Guidelines was issued.In December 2017, the Internet Finance Rectification Office and the Online Lending Rectification Office jointly issued theNotice on Regulating and Rectifying “Cash Loan” Business
, or the Circular 141, outlining general requirements on the “cash loan” business conducted by network micro-lending companies, banking financial institutions and online lending information intermediaries. The Circular 141 specifies the features of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, no qualification requirement on customers, and with no security. Borrowers on our platform are required to specify their uses of loan proceeds. The Circular 141 sets forth several general requirements with respect to “cash loan” business, including, without limitation: (i) the aggregated borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court; (ii) all relevant institutions shall follow the “know-your-customer” principle and prudentially assess and determine the borrower’s eligibility, credit limit andcooling-off
period, among others; (iii) loans to any borrower without income sources are prohibited; (iv) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model; (v) online lending information intermediaries are prohibited from facilitating any loans to students or other persons without repayment source or repayment capacity, or loans with no designated use of proceeds; (vi) online lending information intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from the principal of loans provided to the borrowers in advance; and (vii) for the financial institutions that participate in the “cash loan” business, no third parties will charge borrowers any interests or fees.On December 8, 2017, the National Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Information Intermediaries, or the Circular 57, providing further clarification on several matters in connection with the rectification and record-filing of online lending information intermediaries, including, among other things, requiring the online lending information intermediaries discontinue setting aside additional funds as risk reserve funds or originating new risk reserve funds, and the existing balance of risk reserve funds shall be gradually reduced.
In accordance with the Circular 57 sets forth certain requirements which an online lending information intermediary shall not be in breach before it can qualify for the record-filing, including: (i) an online lending information intermediary may not conduct the “thirteen prohibited actions” or exceed the Individual Lending Amount Limit after August 24, 2016, and shall gradually reduce the balance; (ii) an online lending information intermediary which has participated in businesses of the real estate mortgage, campus loan or “cash loan,” is required to suspend the new loan origination and the outstanding balance of the abovementioned loan shall be gradually reduced within a certain timetable as required under the CBRC Circular 26 and the Circular 141; and (iii) the online lending information intermediaries are required to set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the National Online Lending Rectification Office to hold customer funds. For the online lending information intermediaries that are unable to accomplish the rectification and record-filing but are continuing to participate in the online lending business, the relevant authorities shall subject online lending information intermediaries to administrative sanctions, including but not limited to revoking their telecommunicating business operation license, shutting down their business websites and requesting financial institutions not to provide any financial services to such online lending information intermediaries.
According to the Circular 57, the local governmental authorities shall conduct and complete acceptance inspection of the rectification with the following timetable: (i) completion of record-filing for major online lending information intermediaries by the end of April 2018; (ii) with respect to online lending information intermediaries with substantial outstanding balance of those loans prohibited under the relevant laws and regulations and timely reduction of those balance is difficult, the relevant business and outstanding balance shall be disposed and/or carved out, and record-filing shall be completed by the end of May 2018; (iii) with respect to those online lending information intermediaries with complex and extraordinary circumstances and substantial difficulties exist to complete rectification, the “relevant work” shall be completed by the end of June 2018.
In accordance with the latest regulations regarding online lending information intermediaries issued by relevant departments, Shanghai Financial Office and China Banking Regulatory Commission Shanghai Office jointly issued the Instructions on the Reviewing of Compliance and Rectification and Inspection and Acceptance of Shanghai Online Lending Information Intermediaries, or the Instructions, on December 26, 2017, providing the further clarification on illegal issues and requirements in connection with rectification and acceptance of online lending information intermediaries, including, among others thing:
Violation of prohibited regulations;
Violation of legal obligations and requirements of risk management;
Failure to perform the protection obligation to borrowers and investors;
Violation of requirements of information disclosure;
Violation of regulations of “college online loan” and “cash loan”;
Other violation of relevant regulations and risk disclosure matters.
It is unclear whether our standard loan products would be viewed as the “cash loans” specified in the Circular 141 and thus be subject to the provision thereunder. Nevertheless, we have made several adjustments to comply with these new requirements.
With respect to network micro-lending companies, the Circular 141 requires the relevant regulatory authorities to suspend the approval of the establishment of network micro-lending companies and the approval of any micro-lending business across provinces. The Circular 141 also specifies that network micro-lending companies shall not provide campus loans, and should suspend the funding of network micro-loans with no specific scenario or designated use of loan proceeds, gradually reduce the volume of the existing business relating to such loans and take rectification measures in a period to be separately specified by authorities. Further detailed requirements on network micro-lending companies are provided in a rectification implementation plan issued by the Online Lending Rectification Office on December 8, 2017.
The Circular 141 also sets forth several requirements on banking financial institutions participating in “cash loan” business, including (i) such banking financial institutions shall not extend loans jointly with any third-party institution which has not obtained approvals for the lending business, or fund such institution for the purpose of extending loans in any form; (ii) with respect to the loan business conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource the core business (including the credit assessment and risk control), and shall not accept any credit enhancement service whether or not in a disguised form (including the commitment to taking default risks) provided by any third-party institutions with no guarantee qualification and (iii) such banking financial institutions must require and ensure that the third-party institutions shall not collect any interests or fees from the borrowers.
In additions, the Circular 141 emphasizes several requirements on the online lending information intermediaries. For instance, such intermediaries are prohibited from facilitating any loans to students or other persons without repayment source or repayment capacity, or loans with no designated use of proceeds. Also, such intermediaries are not permitted to deduct interest, handling fee, management fee or deposit from the principal of loans provided to the borrowers in advance.
Any violation of the Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, revocation of license, order to cease business operation, and criminal liabilities.
On March 28, 2018, National Internet Finance Rectification Office issuedthe Notice on Strengthening Rectification and Carrying Out Inspection Acceptance Work of Online Asset Management Operations
, or Circular 29, which provided that without the license or approval from the PRC financial regulatory authorities, no entity may issue or sell asset management products through the internet. The definition of “asset management product” is not provided in Circular 29. The application and interpretation of Circular 29 are ambiguous and may be interpreted and applied inconsistently between different government authorities. Any entities that violate Circular 29 may be deemed to be conducting illegal financial business operation and subject to administrative sanctions such as revoking telecommunication license, revoking business license, shutting down the business website, removing the mobile application from application stores and application distributing channels, requesting financial institutions not to provide any financial services to such entity, and even criminal liability. On April 27, 2018 the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange issuedthe Guiding Opinions on Regulating the Asset Management Business of Financial Institutions
, or the New Asset Management Rule, which provides, among others, that (i) the “asset management products” includes, among others, thenon-guaranteed
bank wealth management products denominated in RMB or foreign currency, trust products, asset management products issued by security companies and their subsidiaries, fund management companies and their subsidiaries, futures companies and their subsidiaries, insurance asset management institutions, financial asset investment companies; (ii) non-financial
institutions and individuals are not allowed to sell the asset management products as a role of an agent without the approval of the financial regulatory authorities; and (iii) “sell as a role of an agent” means recommending and selling the asset management products lawfully issued by the third-party institutions to the investors within its own sales channel. Thenon-financial
institutions in violation of the New Asset Management Rules to publicly advertise the asset management products through the internet may be deemed as illegal fundraising, illegal securities offering, or illegal absorbing public deposits, and subject to penalties according to the laws and regulations, including criminal liabilities. We display financial products provided by commercial banks and securities fund selling companies on our mobile application and WeChat official account. By one click, individual investors can access directly to the selling webpage of the banks and securities fund selling companies. As we only provide a channel for our individual investors to purchase third-party financial products and we are not directly involved in the sales of those financial products, we do not believe that we are engaged in selling bank wealth management products or fund products on an online lending information platform, which is explicitly prohibited by the Interim Measures, or selling asset management products without license or approval, which is explicitly prohibited by Circular 29 and the New Asset Management Rules. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.”In December 2018, the National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Guidance on the Classification and Disposal of Risks of Online Lending Information Intermediaries and Risk Prevention , or Circular 175. Circular 175 refers to normal intermediaries as large-scale online lending information intermediaries that are strictly in compliance with relevant laws and regulations and have not demonstrated any high-risk characteristics. Circular 175 reiterated relevant regulatory requirements by providing that normal intermediaries should strictly control and manage the business scale and the number of investors. Circular 175 further tightens the regulation of the industry by requiring institutions other than normal intermediaries, including shell intermediaries with no substantive operations, small-scale intermediaries, intermediaries with high risks, and intermediaries that are unable to repay investors or otherwise unable to operate their businesses, to exit the online lending information intermediary industry.
We have taken various measuresPursuant to comply with the Interim Measures, the Custodian Guidelines, the Disclosure Guidelines, the Circular 141, the Inspection Notice and the Checklist, Circular 175, and other laws and regulations that are applicable to our business operations. For example, we have changed the cooperation model with certain institutional funding partners and ceased certain practice that could be regarded as a formaforementioned changes of credit enhancement or guarantee. However, given that detailed regulations and guidance in the area of online lending information services are yet to be promulgated, we cannot be certain that our existing practices would not be deemed to violate any existing or future rules, laws and regulations. In addition, the custody account agreement between China Merchants Bank and us expired in March 2020. We have migrated the funds of outstanding loans historically facilitated by our online lending information platform to a third-party payment system managed by a third-party payment company. Handling the repayment and settlement between borrowers and individual investors by a third-party payment company, as opposed to a custodian bank, is explicitly prohibited by the Interim Measures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We started our business as an online lending information intermediary, and the laws and regulations governing online lending information intermediary industry in China are developingconsumer finance, we have ceased facilitating new loans with funding from individual investors on our platform since October 2019 and evolving and subject to changes. Ifimprove our business practices are deemedmodel through acquisition of better quality borrowers and transition of our investor base from individual investors to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.”institutional funding partners.
Regulations on loans between individualslending activities The PRC Contract Law confirms the validity of loan agreement between individuals and provides that a loan agreement becomes effective when an individual lender provides loan to an individual borrower provided that the interest rates charged under the loan agreement do not violate the applicable provisions of the PRC laws and regulations. The 13On December 28, 2019, the Standing Committee of the th
National People’s Congress orapproved the SCNPC, approved a resolution to submit the draft Civil Code of the PRC to the third annual session of the 13th
National People’s Congress, or the NPC, for review and approval. If the draft Civil Code of the PRC is approved by the NPC, uponon May 22, 2020. Upon the effectiveness of the Civil Code of the PRC on January 1, 2021, the PRC Contract Law, the General Provisions of the PRC Civil Law, and the General Principles of the PRC Civil Law will behave been abolished and replaced, while their provisions will beare generally incorporated into the Civil Code of the PRC with certain changes and supplements. The third annual session of the 13th
NPC was planned to be held on March 5, 2020, which has been postponed to May 22, 2020 due to the outbreak ofCOVID-19
in China. It remains unclear with respect to the final version of the Civil Code of the PRC, the timetable for enactment, and the relevant interpretations and implementations. Moreover, it remains unclear how theimplementations of certain provisions of the Civil Code of the PRC if enacted as proposed,and how these provisions of the Civil Code of the PRC will apply to our business operations. For example, pursuant to the draft of the Civil Code of the PRC, published by the SCNPC on December 28, 2019, the usurious loans are explicitly banned, but a clear definition or interpretation of “usurious loans” is not provided. Therefore, ifPursuant to the General Provisions of the PRC Civil Law, the statute of limitations for civil disputes, including breach of contract, is two years from the date on which the party concerned know or should have known of the infringement of its rights. The General Provisions of the PRC Civil Law had been repealed upon the effectiveness of the Civil Code of the PRC willon January 1, 2021, pursuant to which the statute of limitations for civil disputes, including breach of contract, is three years from the date on which the party concerned know or should have known of the infringement of its rights. As of the date of this annual report, the current judicial interpretation is still unclear whether thetwo-year or the three-year statute of limitations should apply for the civil disputes relating to the default loans funded by the individual investors and facilitated on our platform before January 1, 2021. We cannot rule out the possibility that certain of our operation activities would be enacted as proposed, we cannot assure youdeemed to violate or not fully comply with the Civil Code of the PRC. If that happens, our business, collaboration with our institutional funding partners willresults of operations and financial condition would be materially and adversely affected. On September 4, 2020, nine local governmental authorities in full compliance with it.Shanghai jointly issuedthe Guidance on Further Strengthening the Administration of Financial Advertisement , which stipulates, among others, that (i) advertisements released by financial institutions and financial service providers should be within the scope permitted by the local governmental authorities; (ii) any market players without the relevant financial business qualifications cannot advertise or promote financial business; (iii) the financial advertisements should not induce purchase of improper financial products or services; and (iv) financial service provider is required to disclose name of its client when acting as an intermediary. In accordance with the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private Lending Judicial Interpretations, which came into effect on September 1, 2015, in the event that loans are made through an online lending information intermediary platform and the platform only provides intermediary services, courts shall dismiss any claim concerned against the platform demanding the repayment of loans by the platform as a guarantor.
The Private Lending Judicial Interpretations also provide that agreements between lenders and borrowers on loans with interest rates below 24% per annum are valid and enforceable. As to the loans with interest rates per annum between 24% (exclusive) and 36% (inclusive), if the interest on the loans has already been paid to the lender, and so long as such payment has not damaged the interest of the state, the community and any third parties, the courts will turn down the borrower’s request to demand the return of the excess interest payment. If the annual interest rate of a private loan is higher than 36%, the agreement on the excess part of the interest is invalid, and if the borrower requests the lender to return the part of interest exceeding 36% of the annual interest that has been paid, the courts will support such requests. The interest rates of all our loan products are below 36% and certain loans financed by our investment programs have interest rates that exceed 24%. In addition, on August 4, 2017, the Supreme People’s Court issued the Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases , which provides, among others, that (i) the claim of the borrower under a financial loan agreement to adjust or cut down the part of interest exceeding 24% per annum on the basis that the aggregate amount of interest, compound interest, default interest, liquidated damages and other fees collectively claimed by the lender is overly high shall be supported by the PRC courts; (ii) in the context of Internet finance disputes, if the online lending information intermediary platforms and the lender circumvent the upper limit of the judicially protected interest rate by charging intermediary fee, it shall be determined as invalid; and (iii) private lending transaction is defined as lending between individuals, legal persons and other organizations. Loans funded by financial institutions which are licensed by financial regulatory authorities are not private lending transactions.
On August 20, 2020, the Supreme People’s Court issued the Decision on Amendingthe Provisions on Several Issues Concerning Laws Applicable to Trial of Private Lending Cases , which is further amended by the Supreme People’s Court on December 29, 2020, or the Private Lending Judicial Interpretation Amendment, which amended the upper limit of private lending interest rates under judicial protection. The Private Lending Judicial Interpretation Amendment provides that where the lender requests the borrower to pay interest in accordance with the interest rate agreed upon in the agreement, the people’s court shall support such request, except where the interest rate agreed by both parties exceeds four times of theone-year Loan Prime Rate at the time of the establishment of the agreement, or the Quadruple LPR Limit. Theone-year Loan Prime Rate refers to theone-year loan market quoted interest rate issued by the National Bank Interbank Funding Center which was authorized by the PBOC, on the 20th of each month since August 20, 2019. According to the Private Lending Judicial Interpretation Amendment, the upper limit of interest rates of 24% and 36% provided in the 2015 Private Lending Judicial Interpretation, are replaced by the Quadruple LPR Limit. Moreover, if the lender and the borrower agree on both the overdue interest rate and the liquidated damages or other fees, the lender may choose to claim any or all of them, but the portion in total exceeding the Quadruple LPR Limit shall not be supported by the people’s court. The Private Lending Judicial Interpretation Amendment applies to new first-instance cases of private lending disputes accepted by the People’s Court after the implementation of the Judicial Interpretation Amendment on August 20, 2020. If the lending occurred before August 20, 2019, the upper limit of the protected interest rate can be determined by referring to four times of theone-year Loan Prime Rate at the time of the plaintiff’s filing of lawsuit. On January 21, 2021, in the response letter to the Guangdong High People’s Court relating to the inquiry on the scope of application of the Private Lending Judicial Interpretation Amendment issued by the Supreme People’s Court, it further clarifies that seven types of financial organizations, including micro-loan lending companies and financing guarantee companies, are financial institutions licensed by the financial administrative authorities, and the disputes arising out of their financial business activities do not apply to the Private Lending Judicial Interpretation Amendment. However, as the regulatory authorities have wide discretion in administration, interpretation and enforcement of the laws and regulations, we cannot rule out the possibility that the regulatory authorities may hold different opinions on whether Quadruple LPR Limit applies to the loans funded by financial institutions on our platform. For example, according tothe Notice on Regulating and Rectifying “Cash Loan” Business , or Circular 141, promulgated by the Internet Finance Rectification Office and the Online Lending Rectification Office in December 2017, in the context of “cash loan” business operated by various types of institutions, the aggregated borrowing costs of borrower charged in forms of interests and all kinds of fees should be annualized and subject to the upper limit on interest rate of private lending set forth in the judicial interpretations issued by the Supreme People’s Court. On March 31, 2021, the PBOC released its No. 3 announcement in 2021, or the PBOC No. 3 Announcement, which stipulates, among others, that the annual interest rate of a loan should be the annualized form of ratio calculated based on the percentage of all expenses charged from the borrower for the borrowing to the principal actually borrowed by this borrower. The expenses charged from the borrower include the interests and the various expenses directly related to the borrowing. If the loan is repaid in installments, the remaining principal after the deduction of the total repaid principal should be deemed as the actual borrowed principal when calculating the annual interest rate. Compound interest rate and simple interest rate are both allowed to be used to calculate the annual interest rate, provided that if simple interest rate is used, it should be explicitly disclosed to the borrower. The PBOC No. 3 Announcement applies to deposit-taking financial institutions, consumer finance companies, micro-loan lending company, and internet platforms providing loan application services like us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Interest rates of certain of our loan products exceed the statutory interest rate limit and therefore part of the interests is not enforceable through the PRC judicial system.” In December 2017, theThe Circular 141 further clarifies that inspecifies the contextfeatures of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, unsecured, and no qualification requirement on customers, among others. The Circular 141 also sets forth several general requirements with respect to “cash loan” business, operated by various types of institutions,including but without limitation: (i) the aggregated borrowing costs (as opposed to interest rate) of borrowers charged by “cash loan” business operatorsinstitutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court.
Regulations on record-filings of online lending information intermediary service agency
In November 2016,Court;(ii) all relevant institutions shall follow the CBRC,“know-your-customer” principle and prudentially assess and determine the MIITborrower’s eligibility, credit limit and cooling-off period; (iii) all relevant institutions shall enhance the State Administration for Industryinternal risk control and Commerce, orprudentially use the SAIC, jointly published the Guidelines on the Administration of Record-filings of Online Lending Information Intermediary Agencies, or the Record-filings Guidelines, to establish and improve the record-filing mechanisms for online lending information intermediaries.According to the Record-filings Guidelines, a newly established online lending information intermediary shall make the record-filings with the local financial regulatory authority after obtaining the business license; while with respect to any online lending information intermediary which is established and begins to conduct the business prior to the publication of this Record-filings Guidelines, the local financial regulatory authority shall, pursuant to relevant arrangement of specific rectification work for risks in onlinepeer-to-peer
lending, accept the application for record-filings submitted by a qualified online lending information intermediary, or any online lending information intermediary which has completed the rectification confirmed by relevant authorities.On December 8, 2017, the National Online Lending Rectification Office issued the Notice on the Rectification and Inspection Acceptance of Risk of Online Lending Information Intermediaries, or the Circular 57, providing further clarification on several matters in connection with the rectification and record-filing of online lending information intermediaries, including, among other things:
Requirements relating to“data-driven” risk reserve funds
. The online lending information intermediaries shall discontinue setting aside additional funds as risk reserve funds or originating new risk reserve funds. In addition, the existing balance of risk reserve funds shall be gradually reduced. Moreover, online lending information intermediariesmanagement model; (iv) all institutions are prohibited from promoting their services by publicizingextending any loans to any persons without repayment source or repayment capacity, or loans with no designated use of proceed; (v) funds from banks cannot be used for “cash loan” or “campus loan”; and (vi) in the risk reserve funds, and authorities shall actively encouragecase where a financial institution participates in the online lending information intermediaries“cash loan” business, any third parties are not allowed to seekcharge borrowers any interests or fees. Circular 141 further provides that financial institutions cooperating with third parties to engage in lending business (i) are not allowed to outsource any core lending business operations, such as credit assessment and risk management, to third parties, (ii) are not allowed to accept any credit enhancement provided by third parties without any license or approval to provide lendersguarantees, including credit enhancement service in the form of a commitment to assume default risks, (iii) should comply with alternate means of investors protection, including third-party guarantee arrangements.Requirements to qualify for record-filing
. The Circular 57 sets forth certain requirements which an online lending information intermediary shall not be in breach before it can qualify for the record-filing, including: (i) an online lending information intermediary may not conductjudicial interpretations by the “thirteen prohibited actions” or exceed the Individual Lending Amount Limit after 24, 2016, and shall gradually reduce the balance; (ii) an online lending information intermediary which has participated in businessesSupreme People’s Court of the real estate mortgage, campus loanPRC regarding interest rates in private lending regarding the annual borrowing cost charged to a borrower, i.e. interests plus other fees, and (iv) should ensure that third parties do not collect any interests or “cash loan,” is required to suspend the new loan origination and the outstanding balance of the abovementioned loan shall be gradually reduced within a certain timetable as required under the CBRC Circular 26 and the Circular 141; and (iii) the online lending information intermediaries are required to set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the National Online Lending Rectification Office to hold customer funds. For the online lending information intermediaries that are unable to accomplish the rectification and record-filing but are continuing to participate in the online lending business, the relevant authorities shall subject online lending information intermediaries to administrative sanctions, including but not limited to revoking their telecommunicating business operation license, shutting down their business websites and requesting financial institutions not to provide any financial services to such online lending information intermediaries.fees from borrowers.
Requirements relating to the timing of record-filing
. The local governmental authorities shall conduct and complete acceptance inspectionAny violation of the Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, revocation of license, be ordered to cease business operations, and even criminal liabilities.On July 12, 2020 the CBIRC promulgated the Interim Measures for Commercial Banks Doing Online Lending Business, or the Interim Measures for Banks, pursuant to which the banks may collaborate with the following timetable: (i) completion of record-filing for majorfinancing guarantee companies,e-commerce business companies, third-party payment companies and information technology companies in various online lending business processes and activities, including but not limited to client referral, joint loan origination, risk distribution, information intermediaries by the end of April 2018; (ii)technology and loan collection. However, when collaborating with respect tothird parties for online lending information intermediariesbusinesses, the banks are required to independently manage core risk control procedures, such as the credit assessment and contract conclusion, and should be responsible for post-loan managements. Each of the regional banks, which is an important category of our institutional funding partners, should (i) provide online lending services primarily to its local clients, (ii) be prudent to extend loans to borrowers who reside outside its region, and (iii) take appropriate measures to monitor the business operations when serving the clients who are located outside its region. The banks may not accept credit enhancements, in a direct or a disguised form, provided by a third-party partner without financing guarantee license or credit security insurance license. The banks shall adopt appropriate measures to monitor the use of loan proceeds. The banks should evaluate and review the online lending partners they collaborate with substantialat least once a year and terminate the cooperation if any incompetency is identified. On February 19, 2021, the CBIRC further issuedthe Notice of Further Regulating Online Loan Business of Commercial Banks , also known as Circular 24, which provides that the commercial banks shall independently carry out the risk management of online loans and are forbidden from outsourcing the material procedures of loan management. The outstanding balance of thoseonline loans extended by a bank in collaboration with third-party platforms should not exceed 50% of the bank’s total outstanding balance. Where a commercial bank and its joint lending partner jointly contribute funds to issue online loans, the funding contribution percentage of its joint lending partner shall not be less than 30%. Circular 24 further strengthens the requirement that commercial banks are strictly prohibited underfrom outsourcing the relevant lawsmaterial procedures of loan management, and regulationslocal commercial banks from engaging in an online loan business outside the territory of their registered place. The requirements on the limit of 30% lower limit for the joint lending loans and timely reductionthe cross-regional prohibition will take effect on January 1, 2022. Thenon-conforming legacy loans that extended before the promulgation of those balance is difficult,Circular 24 may be settled on their relative maturity dates. With certain limited exceptions, the relevantInterim Measures for Banks and Circular 24 apply to the consumer finance companies and trust companies when they conduct online lending business. As our institutional funding partners include commercial banks, consumer finance companies and trust companies, they are required to evaluate and review us as required by the Interim Measures for Banks. If any of our institutional funding partners identifies any incompetency of us in such evaluation and review, it may terminate the cooperation with us and our business and outstanding balance shalloperation results would be disposed and/or carved out,adversely and record-filing shall be completed bymaterially affected. Furthermore, we act as an intermediary between institutional funding partners and borrowers, and we cannot assure you that all the end of May 2018; (iii)institutional funding partners we cooperate with respect to those online lending information intermediaries with complexhave been and extraordinary circumstances and substantial difficulties exist to complete rectification, the “relevant work” shall be completed by the end of June 2018. In August 2018, the National Online Lending Rectification Office issuedthe Notice on Launching Compliance Inspection on Online Lending Information Intermediaries
, or the Inspection Notice, which requires that online lending information intermediaries, internet finance associations and local online lending rectification offices conduct compliance inspections based on a checklist of 108 compliance criteria, or the Checklist, and that such inspections shall be completed by the end of December 2018. After the compliance inspection, online lending information intermediaries that comply with applicable rules and regulations are allowed to integrate their business operation systems into the industry-wide information disclosure systems and product registration systems. Upon completion of such integration, the online lending information intermediaries will be able to submit filing applicationsin strict compliance with the Interim Measures for record-filings pursuant to detailed procedures to be issued by the competent regulatory authorities. However, it remains unclear when the detailed procedures for such system integrationsBanks and filing applications will be issued.According to the Inspection Notice and the Checklist, compliance inspection should specifically focus on the following ten aspects: (i) whether it is operated as information intermediary as opposed to operating credit intermediary, (ii) whether a capital pool exists and whether there are advance payments on behalf of clients, (iii) whether there is any self-financing activities or activities similar to self-financing, (iv) whether guarantees or guaranteed repayment of principal and interest are provided directly or indirectly to lenders, (v) whether guaranteed repayment of principal and payment of interest were made upon maturity, (vi) whether a risk evaluation on lenders is made and whether lenders are managed based on different risk levels, (vii) whether risks regarding borrowers are fully disclose to lenders, (viii) whether thesmall-sized
and diversified online lending principle is followed, (ix) whether wealth management products are offered to raise capital (or offer wealth management products through a divested affiliates), (x) whether large amount and high interest are used in the advertisement to attract borrowers or lenders.Circular 24.We did a self-inspection based on the Inspection Notice and the Checklist and submitted a self-inspection report to Association
Regulations on illegal financial institutions and intermediaries The Measures for Banning of Illegal Financial Institutions and Illegal Financial Business Operations , or the Measures for Illegal Financial Institutions, promulgated by the State Council on July 13,1998, provides that the establishment of financial institution should be subject to the approval of People’s Bank of China, or PBOC. Without such approval, no entity or individual may establish financial institution or conduct financial business operation. Pursuant to the Measures for Illegal Financial Institutions, extending loans without the approval of PBOC is deemed as illegal financial business operation and the entity extending loans without the approval of PBOC is deemed as an illegal financial institution. The online consumer finance industry is new and developing rapidly, and the regulatory environment has evolved since the promulgation of the Measures for Illegal Financial Institutions. There are uncertainties as to the interpretation of the Measures for Illegal Financial Institutions as well as whether such laws and regulations are applicable to us or our business. Shanghai PPDai actsacted as an information intermediary for borrowers and individual investors and iswas not a party to the loan agreements of loans facilitated through our platform. We entered into a custody account arrangement with China Merchants Bank, whereby funds of borrowers and individual investors were deposited into and settled by custodian bank. Our custody account arrangement with China Merchants Bank expired on March 19, 2020. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business— We started our business as an online lending information intermediary, and theThe laws and regulations governing online lending information intermediaryconsumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.” Furthermore, in some cases we repaid outstanding balance of certain loans to the individual investors on our platform. In connection with our quality assurance commitments provided through third-party financing guarantee companies, we purchased creditor’s rights from third-party financing guarantee companies after these financing guarantee company repay the full overdue amounts to our institutional funding partners. We may be deemed to be financing loans without the approval of PBOC. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be deemed to finance certain loans and therefore subject us to regulatory risks.” If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.” Although the trust management companies that administer the trusts have been licensed and approved by the financial regulatory authorities to extend loans and we believe that it is the licensed trust management companies, not us, that extend loans to the borrowers under such trust arrangements, we cannot assure you that the financial regulatory authorities will hold the same view as ours. Our investments in the trusts may be deemed to be extending loans to the borrowers and we may be regarded as a lender in this arrangements, and therefore we may be deemed to be an illegal financial institution, which may subject us to penalties, including confiscation of illegal gains together with a fine from one time to five times of the illegal gains, or a fine of RMB100,000 to RMB500,000 if there are no illegal gains, and criminal liability if the violation constitutes a criminal offense.
In addition, the Supreme People’s Court, the Supreme Peoples’ Procuratorate, the Ministry of Public Security,MPS, and the Ministry of Justice jointly issued the Guidance on Several Issues for Illegal Lending Regarding Criminal Case , or the Guidance on Illegal Lending, on July 23, 2019, which provides, among others, that (i) if any entity or individual is engaged in extending loans to the unspecified public individuals consistently for the purpose of profits and without the approval from the regulatory authorities or outside its business scope, which disturbs the stability of financial markets, such entity or individual may face a criminal charge of unfair competition and may be imposed criminal liability in accordance with the applicable laws and regulations; “extending loans to the unspecified public individuals consistently” refers to extending loans to entities and individuals no less than ten times within two years; and (ii) if the actual annual interest rate of the loans extended by such entity or individual exceeds 36%, it would be deemed as an aggravated circumstance when such entity or individual face the abovementioned criminal charge of unfair competition. The Guidance on Illegal Lending is new and does not provide a clear definition to calculate the actual annual interest rate, and it is still unclear how the regulatory authorities will interpret and implement it in the future. We cannot rule out the possibility that regulatory authorities may deem our operation activities under the trust arrangements as unfair competition and impose criminal liability on us. If that happens, our business, results of operations and financial condition would be materially and adversely affected. According to the Civil Code of the PRC, Contract Law, an intermediation contract is a contract whereby an intermediary presents to its client an opportunity for entering into a contract or provides the client with other intermediary services in connection with the conclusion of a contract, and the client pays the intermediary service fees. Our business practice of connecting our institutional funding partners with individual borrowers may constitute intermediary service, and our service agreements with borrowers and investorsinstitutional funding partners may be deemed as intermediation contracts under the PRC Contract Law.Civil Code of the PRC. Pursuant to the Civil Code of the PRC, Contract Law, an intermediary must provide true information relating to the proposed contract. If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and is liable for the damages caused. Regulations on financial guarantee In June 1995, the Standing Committee of the National People’s Congress, or the SCNPC, promulgated the PRC Guarantee Law. According to the PRC Guarantee Law, an action of guarantee means that the guarantor agrees to repay the outstanding debts to the creditor or assume any other relevant responsibilities when the debtor fails to repay the outstanding debts or fulfill the responsibilities.
The Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Regulations, was promulgated by the State Council on June 21, 2017 and took effect on October 1, 2017. According to the Financing Guarantee Regulations, the establishment of financing guarantee companies should be subject to the approval of the competent government authority, and unless otherwise stipulated, no entity is allowed to operate the financing guarantee business without such approval. If any entity operates the financing guarantee business without such approval, the entity may be subject to penalties, including termination or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the applicable laws and regulations. In October 2019, the China Banking and Insurance Regulatory Commission,CBIRC, together with eight other regulatory agencies jointly promulgated thethe Supplemental Rules to the Administration of Financing Guarantee Companies
, or the Supplements to the Financing Guarantee Rules, which provides that any entity providing client referral or credit assessment services to the lending institutions may not provide financing guarantee services in a direct or a disguised form without the regulatory approval. If any entity operates financing guarantee business without appropriate approval, its business operations will be banned by the regulatory authorities and it will be required to properly settle existing business. On July 14, 2020, the CBIRC issuedthe Guidelines forOff-Site Supervision of Financing Guarantee Companies , or theOff-Site Supervision Guidelines, which took effect on September 1, 2020. TheOff-Site Supervision Guidelines provides, among others, that (i) the relevant regulatory authorities and CBIRC shall collect data andnon-data information from the financing guarantee companies and banks respectively; (ii) financing guarantee companies shall establish and implement anoff-site supervision information report system and submit data andnon-data information timely according to the requirements of the competent regulatory authorities; and (iii) for theoff-site supervision, the competent regulatory authorities shall mainly focus on the corporate governance, internal control, risk management capabilities, guarantee business, . associated guarantee risks, asset quality, liquidity indicators and investment conditions of financing guarantee companies.
We incorporate three financing guarantee companies and provide quality assurance commitments to our institutional funding partners either through our own financing guarantee subsidiarysubsidiaries or through third-party financing guarantee companies/insurance companies. We are subject to certain regulatory risks as a result of such business practices. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.” Regulations on anti-money laundering The PRC Anti-money Laundering Law , or the AML Law, promulgated by the PBOC on October 31, 2006 and effective since January 2007, stipulates that special non-financial institutions which are required by relevant regulations to perform obligations of anti-money laundering shall comply with the anti-money laundering obligations. The PBOC and other governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and special non-financial institutions. Furthermore, the Guidelines, the Interim Measures and the Custodian Guidelines require online lending information service providers to comply with certain anti-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. In October 2018, the PBOC, the CBIRC, and the CSRC, jointly issued thethe Anti-money Laundering and Anti-terrorism Financing Administrative Measures for Internet Finance Institution
, or Anti-money Laundering and Anti-terrorism Measures, providing that internet finance institutions are obliged to accept the anti-money laundering and anti-terrorism financing inspection conducted by the PBOC and its branches. The Anti-money Laundering and Anti-terrorism Measures also authorized the establishment of the internet finance anti-money laundering and anti-terrorism financing monitor platform, or the Monitor Platform, by the National Internet Finance Association, or NIFA under the instruction of PBOC and other financial governmental authorities to improve the online monitoring mechanism and information sharing between the institutions.
While we have formulated and implemented policies and procedures, including internal controls and “know-your-customer” policies, aimed at preventing money laundering and terrorism financing, we cannot assure you that we will be able to establish and maintain anti-money laundering policies and procedures which can effectively protect our platform from being exploited for money laundering or terrorism financing purposes, or that such policies and procedures, if adopted, will be deemed to be fully in compliance with all applicable anti-money laundering laws and regulations, including the Interim Measures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any failure by our institutional funding partners or third-party service providers to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations could damage our reputation.” Regulations Relating to Credit Reference On January 21, 2013, the State Council promulgated theStipulations for Regulating Credit Reference , provides that any person or organization that conducts personal credit reference business without approval of the competent credit reference administrative department of the State Council may be subject to penalties, including cessation of business operations, confiscation of illegal gains, imposing fines from RMB50,000 to RMB500,000, and even criminal liability. On January 11, 2021, the PBOC released theMeasures for Regulating Credit Reference (Draft) , the 2021 Draft, for public comments, which provides that (i) the credit information includes, but is not limited to, information relating to identity, address, debt, finance, payment and consumption, as well as analysis and appraisal of an individual or a business association prepared based on such information; (ii) services relating to user profiles, user scorings, user ratings and anti-fraud products are deemed as credit reference services, which should be approved by the competent credit reference administrative authority. We provide borrower referral and preliminary credit assessment services to our institutional funding partners; and (iii) information processors who collaborate with credit reference agencies shall enter into cooperation agreements and file such cooperation agreements with the PBOC or its provincial branches. The 2021 Draft was released for public comments only, and significant uncertainties exist with respect to its enactment timetable, interpretation and implementation. We believe that we are positioned as an intermediary and our services are to facilitate loan applications of borrowers on our platform to institutional funding partners, which are not credit reference services. However, we cannot assure you that the regulatory authorities may share the same view as ours. Regulations Relating to Wealth Management On March 28, 2018, National Internet Finance Rectification Office issued theNotice on Strengthening Rectification and Carrying Out Inspection Acceptance Work of Online Asset Management Operations , or Circular 29, which provided that without the license or approval from the PRC financial regulatory authorities, no entity may issue or sell asset management products through the internet. The application and interpretation of Circular 29, including the definition of “asset management product,” are ambiguous and may be inconsistent between different government authorities. Any entity that violates Circular 29 may be deemed to be engaged in illegal financial business operations and be subject to administrative sanctions, such as revocation of telecommunication license, revocation of business license, closure of business website, removal of mobile application from application stores and application distributing channels, require financial institutions not to provide any financial services to such entity, and even criminal liability. On April 27, 2018 the PBOC, the CBIRC, the CSRC, and the SAFE issued theGuiding Opinions on Regulating the Asset Management Business of Financial Institutions , or the New Asset Management Rule, which provides, among others, that (i) the “asset management products” includes, among others, thenon-guaranteed bank wealth management products, trust wealth management products, asset management products issued by security companies and their subsidiaries, fund management companies and their subsidiaries, futures companies and their subsidiaries, insurance asset management institutions, financial asset investment companies;(ii) non-financial institutions and individuals are not allowed to sell the asset management products as a role of an agent without permission of the financial regulatory authorities; and (iii) “sell as a role of an agent” refers to recommending and selling asset management products legally issued by third-party institutions to the investors within its own sales channels.Non-financial institutions in violation of the New Asset Management Rule to publicly advertise asset management products through the internet may be deemed as illegal fund-raising, illegal securities offering, or illegal absorbing public deposits, and subject to penalties according to the laws and regulations, including criminal liabilities.
According tothe Administrative Measures on Supervision of Selling Company of Public Offered Securities Investment Funds , or the Funds Selling Supervision Measures, which was issued by the CSRC and the PBOC and became effective on October 1, 2020, no one may engage in selling promotion, share offering, subscription, redemption of investment funds or providing fund account record checking services or other related activities without filing with the local branches of the CSRC and obtaining the relevant fund selling business qualifications. On January 13, 2021 the PBOC and the China Banking and Insurance Regulatory Commission, or the CBIRC, jointly issuedthe Guidance of Online Personal Deposit Business by Commercial Banks , or the Guidance of Online Deposit, which provides that commercial banks can only carry out online deposit selling on its own websites. Third-party online platforms are prohibited from providing commercial banks any services relating to advertisements, product display, information transmission or purchasing portals. Thenon-conforming legacy products sold before the publish of the Guidance of Online Deposit may be settled on their relevant maturity dates. Currently, we provide a channel for our users to purchase securities investment funds and we are not directly involved in the sales of those funds. However, we may be deemed by the regulatory authorities as engaging in fund selling promotion and providing fund account record checking services without filing with the local branches of CSRC and obtaining the relevant fund selling business qualifications, which would be deemed as violation to the Funds Selling Supervision Measures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.” Regulations Relating to Foreign Investment Investment activities in the PRC by foreign investors are governed by the Guidance Catalog of Industries for Foreign Investment , or the Catalog, which was promulgated and is amended from time to time by the MOC and the National Development and Reform Commission. The Catalog divides industries into three categories in terms of foreign investment, which are “encouraged”, “restricted” and “prohibited”, and all industries not listed under one of these categories are generally deemed to be permitted. Foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended inseveral times during 2011 2015, 2017 and 2018to 2019 and further amended by Special Administrative Measures for the Access of Foreign Investment (Negative List) in 2019,2020, and other applicable laws and regulations.
On March 15, 2019, the National People’s Congress enacted the Foreign Investment Law of the People’s Republic of China , or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law , the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law , together with their implementation rules and ancillary regulations. The Foreign Investment Law sets a general principal that foreign investors and their investments in China will enjoy national treatment and subject to a negative list. It embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. On December 26, 2019, the State Council promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However, the Implementation Regulations on the Foreign Investment Law still does not explicitly define whether contractual arrangement would be deemed as a form of foreign investment. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.” Foreign investment in telecommunications companies in the PRC is governed by the Provisions for the Administration of Foreign-Invested Telecommunications Enterprises , or the Foreign-Invested Telecommunications Enterprises Provisions, which was promulgated by the State Council on December 11, 2001, and amended on September 10, 2008 and February 6, 2016, respectively. The Foreign-Invested Telecommunications Enterprises Provisions prohibit a foreign investor from holding over 50% of the total equity interest in any value-added telecommunications service business in China. In addition, the major foreign investor who invests in a foreign-invested value-added telecommunications enterprise and operates the value-added telecommunications business in China must demonstrate a good track record and experience in operation of value-added telecommunications business.
Regulations Relating to Internet Companies Regulations on value-added telecommunication services The Telecommunications Regulations of the PRC , or the Telecommunications Regulations, promulgated by the State Council on September 25, 2000 and amended on February 6, 2016, provide a regulatory framework for telecommunications services providers in the PRC. The Telecommunications Regulations require telecommunications services providers to obtain an operating license prior to the commencement of their operations. The Telecommunications Regulations categorize telecommunications services into basic telecommunication services and value-added telecommunications services. According to the Catalog of Telecommunications Business , attached to the Telecommunications Regulations, information services provided via fixed network, mobile network and Internet fall within value-added telecommunications services. In July 2017, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses . Under these regulations, a commercial operator of value-added telecommunications services must first obtain a license for value-added telecommunications business, or VATS License, from the MIIT or its provincial level counterparts.
In July 2006, the Ministry of Information Industry, the predecessor of the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business , which prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such businesses in China. Before the issuance of the Interim Measures in August 2016, there was no clear or official regulation or guidance from the PRC government as to whether online consumer finance service was a type of value-added telecommunication services and whether its provider should be subject to value-added telecommunication regulations. After the Interim Measures came into force, an online consumer finance information intermediary shall apply for appropriate telecommunication business license in accordance with relevant provisions of competent telecommunications departments. However, the relevant implementation rules regarding such filing is yet to be issued and therefore currently we are not able to make the necessary filing or apply for the VATS License. Furthermore, as we are providing mobile applications to mobile device users, it is uncertain if any of our subsidiaries will be required to obtain a separate operating license in addition to the VATS License. We have not applied for such separate license since we have not obtained the VATS License. We cannot assure you that we will not be required to apply for an operating license for our mobile applications in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.” Regulation on mobile internet applications information services In addition to the Telecommunications Regulations and other regulations above, mobile applications are especially regulated by the Administrative Provisions on Mobile Internet Applications Information Services , or the APP Provisions, which was promulgated by the Cyberspace Administration of China, or the CAC, on June 28, 2016 and became effective on August 1, 2016. The APP Provisions regulate mobile application information service providers. According to the APP Provisions, the CAC and local offices of cyberspace administration shall be responsible for the supervision and administration of nationwide or local mobile application information, respectively.
Under the APP Provisions, mobile application information service providers are required to obtain relevant qualifications prescribed by laws and regulations and shall be responsible for the supervision and administration of mobile application information required by laws and regulations and implement the information security management responsibilities strictly, including but not limited to: (1) to authenticate the identity information of the registered users, (2) to protect user information, and obtaining the consent of users while collecting and using users’ personal information in a lawful and proper manner, (3) to establish information content audit and management mechanism, and take against any information content in violation of laws or regulations depending on circumstances, and (4) record and keep users’ log information the same for sixty (60) days. We have implemented necessary programs in our mobile application to make sure the collection, protection and preservation of user information are in compliance with the APP Provisions in all material aspects. Regulations on internet security Internet information in China is regulated and restricted from a national security standpoint. The SCNPC, has enacted the Decisions on Maintaining Internet Security on December 28, 2000 and further amended on August 27, 2009, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. In 1997, the Ministry of Public SecurityMPS has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service provider violates these measures, the Ministry of Public SecurityMPS and the local security bureaus may revoke its operating license and shut down its websites.
The Network Security Law of the PRC , which was promulgated by the SCNPC on November 7, 2016 and became effective on June 1, 2017. Under this regulation, network operators, including online lending information service providers, shall comply with laws and regulations and fulfill their obligations to safeguard security of the network when conducting business and providing services, and take all necessary measures pursuant to laws, regulations and compulsory national requirements to safeguard the safe and stable operation of the networks, respond to network security incidents effectively, prevent illegal and criminal activities, and maintain the integrity, confidentiality and usability of network data. In July 2020, the Standing Committee of the National People’s Congress released the Data Security Law (Draft) for public comments, which requires data processing intermediaries to identify the source of data, review the identifications of data providers and users, and maintain the transaction records. Transaction of data with illegal source may result in different penalties, including but not limited to order for rectification, fines, confiscation of illegal gains, and revocation of business license or other relevant licenses. The Data Security Law (Draft) further requires that the following systems relating to data or data security should be established: a data classification management system based on importance of data, a risk assessment system, a monitoring and early warning system, and an emergency disposal system. We have, in accordance with relevant provisions on network security of the Sate and the requirements of the State’s system for classified protection of information security, conducted the record-filing of class determination and class testing of information system, possessed perfect network security facility and management system such as firewall, intrusion detection, data encryption, and disaster recovery. Regulations on privacy protection The Several Provisions on Regulating the Market Order of Internet Information Services , issued by the MIIT in December 2011, provide that, an internet information service provider may not collect any user personal information or provide any such information to third parties without the consent of a user. An internet information service provider must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An internet information service provider is also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, online lending service providers must take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the SCNPC in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes.
Pursuant to the Ninth Amendment to the Criminal Law issued by the SCNPC, in August 2015 and became effective in November 2015, any internet service provider that fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders, should be subject to criminal penalty. On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, or the Interpretations, which became effective on June 1, 2017. The Interpretations provide more practical conviction and sentencing criteria for the infringement of citizens’ personal information and mark a milestone for the criminal protection of citizens’ personal information. The Office of the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security,MPS, and the State Administration for Market RegulationSAMR jointly promulgated thethe Notice on Rectification of Illegal Collection of Personal Information on Application
, or the Notice on Illegal Collection on January 23, 2019, which requires application operators to strictly comply with the Cyber Security Law of the PRC and strengthens the personal information protection. Application operators should, among others, (i) clearly state the authorized purpose, methods and scope of the collection and usage of personal information, and obtain the consent of users for collecting and processing such users’ personal information, and (ii) establish appropriate user information protection systems with remedial measures. To further implement and interpret the Notice on Illegal Collection, thethe Measures on Identifying Illegality of Personal Information Collection Conducts on Application
was promulgated on November 28, 2019. On March 22, 2021, the CAC, the MIIT, the MPS, and the SAMR jointly promulgated theRegulations on the Scope of Necessary Personal Information Collected by the Frequently Used Mobile Applications , or the Scope of Necessary Personal Information, which will come into effect on May 1, 2021, which provides, among others, that: (i) the application operators may not refuse to provide fundamental function services to the users for reason that such users refuse to provide the personal information out of the scope of necessity; (ii) the fundamental function service of online lending applications is to facilitate loans provided to the users online for use of personal consumption and business operation; and (iii) the necessary personal information includes the borrower’s mobile phone number, name, bank account, as well as type, number and valid period of its identity card.Furthermore, the Interim Measures require online lending information service providers to reinforce the management of lenders’ and borrowers’ information, so as to ensure the legitimacy and security regarding the collection, processing and use of lenders’ and borrowers’ information. Also, online lending information service providers should keep confidential the lenders’ and borrowers’ information collected in the course of their business, and should not use such information for any other purpose except for services they provide without approval of lenders or borrowers. The Ministry of Public SecurityMPS promulgated the Guidance on Several Issues for Soft Violence Regarding Criminal Case , or the Guidance on Soft Violence, on April 9, 2019, which provides that, among others, harassments by means of internet or telecommunication to disturb people’s normal life, work, production, business, and social order may be deemed as soft violence, which may be subject to criminal liabilities. On August 31, 2020, the MIIT published87the Administrative Provisions for Text Message and Voice Call Service (Draft)
While we have taken measures to protect the confidential information that we have access to, our security measures could be breached. Any accidental or willful security breaches or other unauthorized access to our platform could cause confidential borrower and investorinstitutional funding partner information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions of us or of a third party could result in disclosure or misuse of confidential informationIf our ability to collect delinquent loans is impaired, our business and misappropriation of funds of our borrowers and investors, subject us to liabilities, cause reputational harm and adversely impact our results of operations might be materially and financial condition.adversely affected.”
Regulations Relating to Foreign Exchange Regulations on foreign currency exchange The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations , most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China. On February 13, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment , or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration. On March 30, 2015, the SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB fund converted from foreign exchange capital. Under Circular 19, the foreign exchange capital in the capital account of foreign-invested enterprises upon the confirmation of rights and interests of monetary contribution by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operation needs of the enterprises. The proportion of discretionary settlement of foreign exchange capital of foreign-invested enterprises is currently 100%. SAFE can adjust such proportion in due time based on the circumstances of international balance of payments. However, Circular 19 and another circular promulgated by SAFE in June 2016, SAFE Circular 16, continues to, prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. On October 23, 2019, the SAFE promulgated the Notice of the Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment , or the SAFE Circular 28. The SAFE Circular 28 provides that non-investment foreign-invested entities may use foreign exchange capital or Renminbi funds converted from the foreign exchange capital to make equity investments, provided that such investments should comply with the 2019 Negative List and other relevant PRC laws and regulations. On April 10, 2020, SAFE issued theNotice on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business , or the SAFE Circular 8. The SAFE Circular 8 provides that on the premise of ensuring the true and compliant use of funds and compliance with the existing regulations on use of income under the capital account, enterprises which satisfy the criteria are allowed to use income under the capital account, such as capital funds, foreign debt and overseas listing for domestic payment, without prior provision of proof materials for veracity to the bank for each transaction. However, there are substantial uncertainties of the further implementation of SAFE Circular 28.28 and SAFE Circular 8. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering and the concurrent private placement to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”
Regulations on foreign exchange registration of overseas investment by PRC residents SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Round-trip Investment through Special Purpose Vehicles , or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75”. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle”. SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu, and Mr. Shaofeng Gu, who directly or indirectly hold shares in our Cayman Islands holding company and are known to us as mainland China residents have completed the foreign exchange registrations in accordance with SAFE Circular 75 then in effect and have updated their registrations in accordance with SAFE Circular 37. They are now in the process of updating their registration required in connection with our recent corporate restructuring. Ms. Wei Luo, who indirectly hold shares in our Cayman Islands holding company and is known to us previously to be a mainland China resident, has changed her citizenship to Hong Kong. Ms. Wei Luo registered in accordance with SAFE Circular 75 previously and now is seeking to cancel or update the registration in accordance with SAFE Circular 37. On February 13, 2015, SAFE released Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies , or SAFE Circular 13, under which local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, starting from June 1, 2015. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.” Regulations on employee stock incentive plans of overseas publicly-listed company Pursuant to the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company , issued by SAFE in February 2012, individuals participating in any stock incentive plan of any overseas publicly listed company who are PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. We and our executive officers and other employees who are PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year and have been granted options are subject to these regulations. Failure by these individuals to complete their SAFE registrations may subject us and them to fines and other legal sanctions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.” The SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Regulations on Intellectual Property Rights The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names. . Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years. . The Patent Law provides for patentable inventions, utility models and designs, which must meet three conditions: novelty, inventiveness and practical applicability. The State Intellectual Property Office under the State Council is responsible for examining and approving patent applications. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.
. The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Law has adopted a principle with respect to trademark registration. The Trademark Office under the State Administration of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC, and grants a term of ten years to registered trademarks and another ten years if requested upon expiry of the initial or extended term. Trademark license agreements must be filed with the Trademark Office for record. . Domain names are protected under the Administrative Measures on the China Internet Domain Names promulgated by the MIIT in 2004, which will be replaced by the Administrative Measures on the Internet Domain Names effective on November 1, 2017. The MIIT is the major regulatory authority responsible for the administration of the PRC Internet domain names. The registration of domain names in PRC is on a “first-apply-first-registration” basis. A domain name applicant will become the domain name holder upon the completion of the application procedure. Our major domain name “ppdai.com” has been registered. Regulations Relating to Dividend Distribution Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from Shanghai Guangjian, which is a wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested enterprises include the Foreign-Invested Enterprise Law, as amended in September 2016, and its implementation rules. Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends. Regulations Relating to Employment The and the require that employers must execute written employment contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. In addition, the PRC Individual Income Tax Law requires companies operating in China to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. The General Office of the Central Committee of the Communist Party of China and the General Office of the State Council of the PRC issued the Reform Plan of the State Tax and Local Tax Collection Administration System , or the Tax Reform Plan, on July 20, 2018, which provides that commencing from January 1, 2019, tax authorities would be responsible for the collection of social insurance contributions. The effect of the Tax Reform Plan is still uncertain.
We have not made adequate contributions to employee benefit plans, as required by applicable PRC laws and regulations. We have recorded accruals for the estimated underpaid amounts for the current employees in our financial statements. However, we have not made any accruals for the interest on underpayment and penalties that may be imposed by the relevant PRC government authorities in the financial statements as we believe it would be unlikely that the relevant PRC government authorities will impose any significant interests or penalties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Failure to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations may subject us to penalties.” Regulations Relating to Tax Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income , the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements , or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties , or Circular 60, which became effective on November 1, 2015. Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, FinVolution (HK) Limited, our Hong Kong subsidiary, may be able to enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries, if it satisfies the conditions prescribed under Circular 81 and other relevant tax rules and regulations. However, according to Circular 81 and Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. The Enterprise Income Tax Law , or the EIT Law, and its implementing rules, which became effective on January 1, 2008, are the principal regulations governing enterprise income tax in the PRC. The EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises.
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of FinVolution Group and our offshore subsidiaries. Under the EIT Law, an enterprise established outside China with its “de facto management bodies” located within China is considered a “resident enterprise”, which means that it is treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management body as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. The SAT issued the Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese- Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management , or SAT Circular 82 in 2009. According to SAT Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:(a) the primary location of the operational management is in China; (b) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (c) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in China; and (d) 50% or more of voting board members or senior executives habitually reside in China.
We do not believe that we meet all of the conditions outlined in the immediately preceding paragraph. We believe that FinVolution Group and our offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in SAT Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we may be treated as a resident enterprise for PRC tax purposes under the EIT Law, and we may therefore be subject to PRC income tax on our global income. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible. In the event that FinVolution Group or any of our offshore subsidiaries is considered to be a PRC resident enterprise: FinVolution Group or our offshore subsidiaries, as the case may be, may be subject to the PRC enterprise income tax at the rate of 25% on our worldwide taxable income; dividend income that FinVolution Group or our offshore subsidiaries, as the case may be, received from our PRC subsidiaries may be exempt from the PRC withholding tax; and interest paid to our overseas shareholders or ADS holders who are non-PRC resident enterprises as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of up to 10%, subject to any reduction or exemption set forth in relevant tax treaties, and similarly, dividends paid to our overseas shareholders or ADS holders who are non-PRC resident individuals, as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs, may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of 20%, subject to any reduction or exemption set forth in relevant tax treaties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
SAT issued a Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises , or SAT Public Notice 7, on February 3, 2015, which replaced or supplemented certain previous rules under the Circular on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-Resident Enterprises , or SAT Circular 698. Under SAT Public Notice 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to SAT Public Notice 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of SAT Public Notice 7. If SAT Public Notice 7 was determined by the tax authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with SAT Public Notice 7 or to establish that the relevant transactions should not be taxed under SAT Public Notice 7. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.” Under applicable PRC laws, payers of PRC-sourced income to non-PRC residents are generally obligated to withhold PRC income taxes from the payment. In the event of a failure to withhold, the non-PRC residents are required to pay such taxes on their own. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes.
Pursuant to applicable PRC regulations promulgated by the Ministry of Finance of China and the SAT, entities or individuals conducting business in the service industry are required to pay a valued-added tax, or VAT, at a rate of 6% with respect to revenues derived from the provision of online information services. A taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided.
The following diagram illustrates our corporate structure as of the date of this annual report, including our principal subsidiaries and our principal variable interest entity and its principal subsidiaries. (1) | Beijing Paipairongxin currently has four shareholders: Jun Zhang, our co-founder and director, Tiezheng Li, our co-founder, vice chairman and chief strategy officer,president, Honghui Hu, our co-founder director and president,director, and Shaofeng Gu, our co-founder, chairman and chief innovation officer, each holding 13.22%, 4.81%, 12.85%, and 69.12% of Beijing Paipairongxin’s equity interests, respectively. |
(2) | Shanghai Zihe currently has four shareholders: Jun Zhang our co-founder and director, Tiezheng Li, our co-founder, vice chairman and chief strategy officer,president, Honghui Hu, our co-founder director and president,director, Shaofeng Gu, our co-founder, chairman and chief innovation officer, each holding 25% of Shanghai Zihe’s equity interests, respectively. |
(3) | Shanghai Ledao currently has two shareholders: Lizhong Chen, a family relative of Tiezheng Li, and Yejun Jiang, a family relative of Honghui Hu, each holding 50% of Shanghai Ledao’s equity interests, respectively. |
(4) | Shanghai Nianqiao currently has two shareholders: Zhouhao Gu, a family relative of Shaofeng Gu, and Xiumeng Chen, a family relative of Jun Zhang, each holding 50% of Shanghai Nianqiao’s equity interests, respectively. |
(5) | Chengdu Yougao currently has two shareholders: Yining Xu and Fei Miao, two of our employees, each holding 50% of Chengdu Yougao’s equity interests, respectively. |
PRC laws and regulations impose restrictions on foreign ownership and investment in internet-based businesses such as distribution of online information, value-added telecommunications services. We are a Cayman Islands company and our PRC subsidiary is considered a foreign-invested enterprise. Before the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries was published in August 2016, there was no official guidance or interpretation from the PRC government clarifying whether online consumer finance services fall within the category of value-added telecommunication services and whether providers of such services should be subject to value-added telecommunication regulations. However, we believe the online consumer finance services offered through our platform constitute a type of value-added telecommunication services that foreign ownership and investment are restricted; and therefore, we should operate our platform through contractual arrangements with a variable interest entity and its shareholders to ensure compliance with the relevant PRC laws and regulations.
We had entered into a series of contractual arrangements, through Beijing Prosper, with Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (with respect to the amended and restated exclusive technology consulting and service agreement only) to obtain effective control over Beijing Paipairongxin and its subsidiaries. In June 2017, we, through Shanghai Guangjian and Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), entered into a new set of contractual arrangements with Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only) to replace the previous contractual arrangements and continue our effective control over Beijing Paipairongxin and its subsidiaries, in particular Shanghai PPDai, through which we operate our online lending information intermediary business. Shanghai PPDai has made applications for value-added telecommunication business license with the relevant local telecommunication regulatory authority, but due to the lack of detailed implementation rules, the local authority has tentatively put its applications on hold. Shanghai PPDai intends to apply for a value-added telecommunication business license again once it becomes feasible under PRC laws and regulations. In March 2018, we restated the contractual arrangements with Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (the “Newly Restated Contractual Arrangements”). In March 2018, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Zihe, and the shareholders of Shanghai Zihe. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Zihe, (ii) business operation agreement among Shanghai Manyin, Shanghai Zihe and shareholders of Shanghai Zihe, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Zihe, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Zihe and shareholders of Shanghai Zihe, (v) exclusive option agreement among Shanghai Manyin, Shanghai Zihe and shareholders of Shanghai Zihe, and (vi) power of attorney between shareholders of Shanghai Zihe and Shanghai Manyin. In January 2019, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Ledao, and the shareholders of Shanghai Ledao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Ledao, (ii) business operation agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Ledao, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, (v) exclusive option agreement among Shanghai Manyin, Shanghai Ledao and shareholders of Shanghai Ledao, and (vi) power of attorney between shareholders of Shanghai Ledao and Shanghai Manyin.
In November 2018, we entered into another set of contractual arrangements, through Shanghai Manyin, with Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Shanghai Nianqiao, (ii) business operation agreement among Shanghai Manyin, Shanghai Nianqiao and shareholders of Shanghai Nianqiao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Shanghai Nianqiao, (iv) equity pledge agreement among Shanghai Manyin, Shanghai Nianqiao and shareholders of Shanghai Nianqiao, (v) exclusive option agreement among Shanghai Manyin, Shanghai Nianqiao and shareholders of Shanghai Nianqiao, and (vi) power of attorney between shareholders of Shanghai Nianqiao and Shanghai Manyin. In September 2020, we entered into another set of contractual arrangements, through Shanghai Manyin, with Chengdu Yougao, and the shareholders of Chengdu Yougao. These contractual arrangements consist of (i) loan agreement between Shanghai Manyin and shareholders of Chengdu Yougao, (ii) business operation agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, (iii) exclusive technology consulting and service framework agreement between Shanghai Manyin and Chengdu Yougao, (iv) equity pledge agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, (v) exclusive option agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, and (vi) power of attorney between shareholders of Chengdu Yougao and Shanghai Manyin The contractual arrangements with Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, and Shanghai Nianqiao and Chengdu Yougao allow us to: exercise effective control over Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, Shanghai Nianqiao, Chengdu Yougao, and their respective subsidiaries; receive substantially all of the economic benefits of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, Shanghai Nianqiao, Chengdu Yougao, and their respective subsidiaries; and
have an exclusive option to purchase all or part of the equity interests in Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, Shanghai Nianqiao, Chengdu Yougao, and their respective subsidiaries when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have become the primary beneficiary of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, and Shanghai Nianqiao and Chengdu Yougao, and we treat Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, and Shanghai Nianqiao and Chengdu Yougao as our variable interest entities under U.S. GAAP. We have consolidated the financial results of Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao, and Shanghai Nianqiao and Chengdu Yougao and their respective subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. Contractual Arrangements with Beijing Paipairongxin The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Guangjian and its wholly-owned subsidiary, Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), our variable interest entity, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin, and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only). Agreements that provide us with effective control over Beijing Paipairongxin Shanghai Guangjian entered into a loan agreement with each of the shareholders of Beijing Paipairongxin, namely Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our co-founders and shareholders in March 2018. Under these loan agreements, Shanghai Guangjian has granted an interest-free loan of RMB100.0 million to the shareholders of Beijing Paipairongxin solely for the capital contributions to Beijing Paipairongxin. Upon written notice by Shanghai Guangjian, the loan shall be repaid by the shareholders of Beijing Paipairongxin from the proceeds received by transferring their equity interests in Beijing Paipairongxin to Shanghai Guangjian pursuant to the terms and conditions of the option agreement among Shanghai Guangjian, Beijing Paipairongxin, Beijing Prosper and the shareholders of Beijing Paripairongxin.Paipairongxin. If the proceeds received by the shareholders of Beijing Paipairongxin from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Guangjian together with the principal. Shanghai Guangjian has the right to request repayment of the loan before maturity.
Restated Business Operation Agreement.Agreement . Shanghai Guangjian, Shanghai Shanghu, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Beijing Prosper entered into a restated business operation agreement in March 2018. Pursuant to this restated agreement, Beijing Paipairongxin and its shareholders agree that to the extent permitted by law, they will accept and unconditionally execute instructions from Shanghai Guangjian and Shanghai Shanghu on business operations, such as appointment of directors and executive officers. Beijing Paipairongxin and its shareholders further agree that, without prior written consent of Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin will not take any action that may have material adverse effects on its assets, businesses, human resources, rights, obligations, or business operations. The shareholders of Beijing Paipairongxin agree to transfer any dividends or other similar income or interests they receive as the shareholders of Beijing Paipairongxin, if any, immediately and unconditionally to Shanghai Guangjian and Shanghai Shanghu. This restated agreement also requires each of Beijing Paipairongxin’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Guangjian or any person(s) designated by Shanghai Guangjian to execute shareholders’ rights on behalf of such shareholder. Unless Shanghai Guangjian and Shanghai Shanghu terminate this agreement in advance, this restated agreement will remain effective until Beijing Paipairongxin is dissolved pursuant to PRC law. Restated Power of Attorney. Through a restated power of attorney dated March 21, 2018, each shareholder of Beijing Paipairongxin irrevocably authorizes Shanghai Guangjian or any person(s) designated by Shanghai Guangjian to act as his or her to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Beijing Paipairongxin, such as the right to appoint directors, supervisors and officers, as well as the right to sell, transfer, pledge and dispose of all or a portion of the shares held by such shareholder. The power of attorney will remain in force for ten years unless the restated business operation agreement is terminated earlier than the expiration of the 10-year term. Upon request by Shanghai Guangjian, the shareholders of Beijing Paipairongxin shall extend the term of this power of attorney accordingly.
Restated Equity Pledge Agreement. Shanghai Guangjian, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Beijing Prosper entered into a restated equity pledge agreement in March 2018. Pursuant to the equity pledge agreement, each shareholder of Beijing Paipairongxin has pledged all of his equity interest in Beijing Paipairongxin to Shanghai Guangjian to guarantee the performance by such shareholder and Beijing Paipairongxin of their respective obligations under the restated business operation agreement (including the power of attorney), the restated option agreement, the restated exclusive technology consulting and service agreement and the loan agreement. If Beijing Paipairongxin or any of its shareholders breaches any obligations under these agreements, Shanghai Guangjian, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Beijing Paipairongxin agrees that before his or her obligations under the contractual arrangements are discharged, he or she will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this restated agreement without the prior written consent of Shanghai Guangjian. The restated equity pledge agreement will remain effective until Beijing Paipairongxin and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We are preparing for the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law. Agreement that allows us to receive economic benefits from Beijing Paipairongxin and Shanghai PPDai Restated Exclusive Technology Consulting Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin, Shanghai PPDai and Beijing Prosper entered into a restated exclusive technology consulting and service agreement in March 2018. Pursuant to this agreement, Shanghai Guangjian, Shanghai Shanghu or their designated party has the exclusive right to provide Beijing Paipairongxin and Shanghai PPDai with technical support, consulting services and other services. Without prior written consent from Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin and Shanghai PPDai shall not accept any technical support and services covered by this agreement from any third party. The service fees that Beijing Paipairongxin and Shanghai PPDai are going to pay to Shanghai Guangjian and Shanghai Shanghu shall be determined on a basis based on the level of difficulty and complexity, time spend by Shanghai Guangjian and Shanghai Shanghu and their employees in providing the services, the specific scope and commercial value of the services, the revenue generated by Beijing Paipairongxin and Shanghai PPDai resulting from such services, and other relevant factors. Shanghai Guangjiang and Shanghai Shanghu own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Guangjian and Shanghai Shanghu terminate this restated agreement in advance, this restated agreement will remain effective until Beijing Paipairongxin and Shanghai PPDai are dissolved in accordance with PRC law. Although this restated agreement can be terminated by mutual agreement among Shanghai Guangjian and Shanghai Shanghu, Beijing Paipairongxin, Shanghai PPDai and Beijing Prosper, Beijing Paipairongxin and Shanghai PPDai have no right to unilaterally terminate this restated agreement.
Agreement that provides us with the option to purchase the equity interest in Beijing Paipairongxin Restated Option Agreement. Shanghai Guangjian, Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Beijing Prosper entered into a restated option agreement in March 2018. Pursuant to the restated option agreement, the shareholders of Beijing Paipairongxin have irrevocably granted Shanghai Guangjian or any third party designated by Shanghai Guangjian an exclusive option to purchase all or part of their respective equity interests in Beijing Paipairongxin. The purchase price is equal to the registered capital corresponding to the concerning equity interest. Unless otherwise agreed, the shareholders of Beijing Paipairongxin will immediately gift Shanghai Guangjian or any third party designated by Shanghai Guangjian with the purchase price after Shanghai Guangjian or any third party designated by Shanghai Guangjian exercises the option. The shareholders of Beijing Paipairongxin agree that without their separate consent, Shanghai Guangjian may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Guangjian or its designated third party, Beijing Paipairongxin shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Beijing Paipairongxin also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Beijing Paipairongxin to any third party or create or allow any encumbrance on their equity interests within the term of this restated agreement. This restated agreement will remain effective until Shanghai Guangjian has acquired all equity interests of Beijing Paipairongxin from its shareholders.
Contractual Arrangements with Shanghai Zihe The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our variable interest entity, Shanghai Zihe, and the shareholders of Shanghai Zihe. Agreements that provide us with effective control over Shanghai Zihe . Shanghai Manyin entered into a loan agreement with each of the shareholders of Shanghai Zihe, namely Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our co-founders and shareholders in March 2018. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB100.0 million to the shareholders of Shanghai Zihe solely for the capital contributions to Shanghai Zihe. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Shanghai Zihe from the proceeds received by transferring their equity interests in Shanghai Zihe to Shanghai Manyin pursuant to the terms and conditions of the exclusive option agreement among Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe. If the proceeds received by the shareholders of Shanghai Zihe from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity. Business Operation AgreementAgreement. . Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe entered into a business operation agreement on March 21, 2018. Pursuant to this agreement, Shanghai Zihe and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Shanghai Zihe and its shareholders further agree that, without prior written consent of Shanghai Manyin, Shanghai Zihe will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Shanghai Zihe’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin.
Power of AttorneyAttorney. . Through a power of attorney dated March 21, 2018, each shareholder of Shanghai Zihe irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or her to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Shanghai Zihe, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Shanghai Zihe. Equity Pledge AgreementAgreement. . Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe entered into an equity pledge agreement on March 21, 2018. Pursuant to the equity pledge agreement, each shareholder of Shanghai Zihe has pledged all of his equity interest in Shanghai Zihe to Shanghai Manyin to guarantee the performance by such shareholder and Shanghai Zihe of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive option agreement and the exclusive technology consulting and service framework agreement. If Shanghai Zihe or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Shanghai Zihe agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Zihe.Manyin. The equity pledge agreement will remain effective until Shanghai Zihe and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law.
Agreement that allows us to receive economic benefits from Shanghai Zihe Exclusive Technology Consulting and Service Framework Agreement.Agreement . Shanghai Manyin, and Shanghai Zihe entered into an exclusive technology consulting and service framework agreement on March 21, 2018. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Shanghai Zihe with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Shanghai Zihe shall not accept any technical support and services covered by this agreement from any third party. The service fees Shanghai Zihe is going to pay to Shanghai Manyin shall be determined on a basis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Shanghai Zihe generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Shanghai Zihe, Shanghai Zihe has no right to unilaterally terminate this agreement. Agreement that provides us with the option to purchase the equity interest in Shanghai Zihe Exclusive Option Agreement.Agreement . Shanghai Manyin, Shanghai Zihe, and the shareholders of Shanghai Zihe entered into an exclusive option agreement on March 21, 2018. Pursuant to the exclusive option agreement, the shareholders of Shanghai Zihe have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Shanghai Zihe at the lowest price permitted by the PRC laws. The shareholders of Shanghai Zihe will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Shanghai Zihe agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Shanghai Zihe shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Shanghai Zihe also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Shanghai Zihe to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice.
Contractual Arrangements with Shanghai Ledao The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our variable interest entity, Shanghai Ledao, and the shareholders of Shanghai Ledao. Agreements that provide us with effective control over Shanghai Ledao . Shanghai Manyin entered into a loan agreement with each of the shareholders of Shanghai Ledao, namely Mr. Lizhong Chen and Mr. Yejun Jiang on January 14, 2019. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB50.0 million to the shareholders of Shanghai Ledao solely for the capital contributions to Shanghai Ledao. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Shanghai Ledao from the proceeds received by transferring their equity interests in Shanghai Ledao to Shanghai Manyin pursuant to the terms and conditions of the exclusive option agreement among Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao. If the proceeds received by the shareholders of Shanghai Ledao from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity.
Business Operation AgreementAgreement. . Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao entered into a business operation agreement on January 14, 2019. Pursuant to this agreement, Shanghai Ledao and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Shanghai Ledao and its shareholders further agree that, without prior written consent of Shanghai Manyin, Shanghai Ledao will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Shanghai Ledao’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin. Power of AttorneyAttorney. . Through a power of attorney dated January 14, 2019, each shareholder of Shanghai Ledao irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or her to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Shanghai Ledao, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Shanghai Ledao. Equity Pledge AgreementAgreement. . Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao entered into an equity pledge agreement on January 14, 2019. Pursuant to the equity pledge agreement, each shareholder of Shanghai Ledao has pledged all of his equity interest in Shanghai Ledao to Shanghai Manyin to guarantee the performance by such shareholder and Shanghai Ledao of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive option agreement and the exclusive technology consulting and service framework agreement. If Shanghai Ledao or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Shanghai Ledao agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Ledao.Manyin. The equity pledge agreement will remain effective until Shanghai Ledao and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law.
Agreement that allows us to receive economic benefits from Shanghai Ledao Exclusive Technology Consulting and Service Framework AgreementAgreement. . Shanghai Manyin, and Shanghai Ledao entered into an exclusive technology consulting and service framework agreement on January 14, 2019. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Shanghai Ledao with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Shanghai Ledao shall not accept any technical support and services covered by this agreement from any third party. The service fees Shanghai Ledao is going to pay to Shanghai Manyin shall be determined on a basis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Shanghai Ledao generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Shanghai Ledao, Shanghai Ledao has no right to unilaterally terminate this agreement.
Agreement that provides us with the option to purchase the equity interest in Shanghai Ledao Exclusive Option Agreement. Shanghai Manyin, Shanghai Ledao, and the shareholders of Shanghai Ledao entered into an exclusive option agreement on January 14, 2019. Pursuant to the exclusive option agreement, the shareholders of Shanghai Ledao have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Shanghai Ledao at the lowest price permitted by the PRC laws. The shareholders of Shanghai Ledao will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Shanghai Ledao agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Shanghai Ledao shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Shanghai Ledao also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Shanghai Ledao to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Contractual Arrangements with Shanghai Nianqiao The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our variable interest entity, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao. Agreements that provide us with effective control over Shanghai Nianqiao . Shanghai Manyin entered into a loan agreement with each of the shareholders of Shanghai Nianqiao, namely Mr. Zhouhao Gu and Mrs. Xiumeng Chen on November 29, 2018. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB50.0 million to the shareholders of Shanghai Nianqiao solely for the capital contributions to Shanghai Nianqiao. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Shanghai Nianqiao from the proceeds received by transferring their equity interests in Shanghai Nianqiao to Shanghai Manyin pursuant to the terms and conditions of the exclusive option agreement among Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao. If the proceeds received by the shareholders of Shanghai Nianqiao from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity.
Business Operation AgreementAgreement. . Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao entered into a business operation agreement on November 29, 2018. Pursuant to this agreement, Shanghai Nianqiao and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Shanghai Nianqiao and its shareholders further agree that, without prior written consent of Shanghai Manyin, Shanghai Nianqiao will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Shanghai Nianqiao’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin. Power of AttorneyAttorney. . Through a power of attorney dated November 29, 2018, each shareholder of Shanghai Nianqiao irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or her to exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Shanghai Nianqiao, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Shanghai Nianqiao.
Equity Pledge AgreementAgreement. . Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao entered into an equity pledge agreement on November 29, 2018. Pursuant to the equity pledge agreement, each shareholder of Shanghai Nianqiao has pledged all of his equity interest in Shanghai Nianqiao to Shanghai Manyin to guarantee the performance by such shareholder and Shanghai Nianqiao of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive option agreement and the exclusive technology consulting and service framework agreement. If Shanghai Nianqiao or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Shanghai Nianqiao agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Nianqiao.Manyin. The equity pledge agreement will remain effective until Shanghai Nianqiao and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law. Agreement that allows us to receive economic benefits from Shanghai Nianqiao Exclusive Technology Consulting and Service Framework AgreementAgreement. . Shanghai Manyin, and Shanghai Nianqiao entered into an exclusive technology consulting and service framework agreement on November 29, 2018. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Shanghai Nianqiao with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Shanghai Nianqiao shall not accept any technical support and services covered by this agreement from any third party. The service fees Shanghai Nianqiao is going to pay to Shanghai Manyin shall be determined on a basis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Shanghai Nianqiao generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Shanghai Nianqiao, Shanghai Nianqiao has no right to unilaterally terminate this agreement.
Agreement that provides us with the option to purchase the equity interest in Shanghai Nianqiao Exclusive Option AgreementAgreement. . Shanghai Manyin, Shanghai Nianqiao, and the shareholders of Shanghai Nianqiao entered into an exclusive option agreement on November 29, 2018. Pursuant to the exclusive option agreement, the shareholders of Shanghai Nianqiao have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Shanghai Nianqiao at the lowest price permitted by the PRC laws. The shareholders of Shanghai Nianqiao will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Shanghai Nianqiao agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Shanghai Nianqiao shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Shanghai Nianqiao also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Shanghai Nianqiao to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Contractual Arrangements with Chengdu Yougao The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shanghai Manyin, our variable interest entity, Chengdu Yougao, and the shareholders of Chengdu Yougao. 102Agreements that provide us with effective control over Chengdu Yougao
. Shanghai Manyin entered into a loan agreement with each of the shareholders of Chengdu Yougao, namely Mr. Yining Xu and Mr. Fei Miao September 15, 2020. Under the loan agreements, Shanghai Manyin has granted an interest-free loan of RMB10.0 million to the shareholders of Chengdu Yougao solely for the capital contributions to Chengdu Yougao. Upon written notice by Shanghai Manyin, the loan shall be repaid by the shareholders of Chengdu Yougao from the proceeds received by transferring their equity interests in Chengdu Yougao to Shanghai Manyin pursuant to the terms and conditions of the exclusive option agreement among Shanghai Manyin, Chengdu Yougao, and the shareholders of Chengdu Yougao. If the proceeds received by the shareholders of Chengdu Yougao from such transferring is higher than the principal of the loan, the amount exceeding the principal shall be deemed as cost for using the principal and shall be paid, to the extent permitted by laws, to Shanghai Manyin together with the principal. Shanghai Manyin has the right to request repayment of the loan before maturity. Business Operation Agreement . Shanghai Manyin, Chengdu Yougao, and the shareholders of Chengdu Yougao entered into a business operation agreement on September 15, 2020. Pursuant to this agreement, Chengdu Yougao and its shareholders agree that to the extent permitted by law, they will accept and strictly execute instructions from Shanghai Manyin on business operations, such as appointment of directors and senior management. Chengdu Yougao and its shareholders further agree that, without prior written consent of Shanghai Manyin, Chengdu Yougao will not take any action that may have material effects on its assets, businesses, human resources, rights, obligations, or business operations. This agreement also requires each of Chengdu Yougao’s shareholders to issue an irrevocable power of attorney authorizing Shanghai Manyin or any person(s) designated by Shanghai Manyin to execute shareholders’ rights on behalf of such shareholder. Unless terminated in advance pursuant this agreement, this agreement will remain effective for 30 years, renewable upon advance written notice by Shanghai Manyin.. Through a power of attorney dated September 15, 2020, each shareholder of Chengdu Yougao irrevocably authorizes Shanghai Manyin or any person(s) designated by Shanghai Manyin to act as his or herto exercise all of such shareholder’s voting and other rights associated with the shareholder’s equity interest in Chengdu Yougao, such as the right to call a shareholders’ meeting, join a shareholders’ meeting and sign any shareholders resolutions; the right to nominate and appoint legal representative, directors, supervisors, general manager, chief financial officer and other officers, as well as all rights a shareholder may have as a shareholder under laws and constitutional documents. The power of attorney will remain in force and irrevocable during the term each shareholder remains as a shareholder of Chengdu Yougao.
. Shanghai Manyin, Chengdu Yougao, and the shareholders of Chengdu Yougao entered into an equity pledge agreement on September 15, 2020. Pursuant to the equity pledge agreement, each shareholder of Chengdu Yougao has pledged all of his equity interest in Chengdu Yougao to Shanghai Manyin to guarantee the performance by such shareholder and Chengdu Yougao of their respective obligations under the loan agreement, the business operation agreement (including the power of attorney), the exclusive option agreement and the exclusive technology consulting and service framework agreement. If Chengdu Yougao or any of its shareholders breaches any obligations under these agreements, Shanghai Manyin, as pledgee, will be entitled to dispose of the pledged equity and have priority to be compensated by the proceeds from the disposal of the pledged equity. Each of the shareholders of Chengdu Yougao agrees that before his obligations under the contractual arrangements are discharged, he will not dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests, or take any action which may result in the change of the pledged equity that may have material adverse effects on the pledgee’s rights under this agreement without the prior written consent of Shanghai Manyin. The equity pledge agreement will remain effective until Chengdu Yougao and its shareholders discharge all their obligations under the contractual arrangements and the pledgee consents such discharge in writing. We have completed the registration of the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law. Agreement that allows us to receive economic benefits from Chengdu Yougao Exclusive Technology Consulting and Service Framework Agreement . Shanghai Manyin, and Chengdu Yougao entered into an exclusive technology consulting and service framework agreement on September 15, 2020. Pursuant to this agreement, Shanghai Manyin or its designated party has the exclusive right to provide Chengdu Yougao with technical support, consulting services and other services. Without prior written consent from Shanghai Manyin, Chengdu Yougao shall not accept any technical support and services covered by this agreement from any third party. The service fees Chengdu Yougao is going to pay to Shanghai Manyin shall be determined on abasis based on the content of technology consulting and service, level of difficulty and complexity, time spend by Shanghai Manyin and its employees, the commercial value of the technology consulting and service to be provided by Shanghai Manyin and the revenue Chengdu Yougao generates due to the technology consulting and service provided by Shanghai Manyin. Shanghai Manyin shall own the intellectual property rights arising out of the provisions of services under this agreement. Unless Shanghai Manyin terminates this agreement in advance, this agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. Although this agreement can be terminated by mutual agreement between Shanghai Manyin and Chengdu Yougao, Chengdu Yougao has no right to unilaterally terminate this agreement.Agreement that provides us with the option to purchase the equity interest in Chengdu Yougao Exclusive Option Agreement . Shanghai Manyin, Chengdu Yougao, and the shareholders of Chengdu Yougao entered into an exclusive option agreement on September 15, 2020. Pursuant to the exclusive option agreement, the shareholders of Chengdu Yougao have irrevocably granted Shanghai Manyin or any third party designated by Shanghai Manyin an exclusive option to purchase all of their respective equity interests in Chengdu Yougao at the lowest price permitted by the PRC laws. The shareholders of Chengdu Yougao will immediately gift Shanghai Manyin or any third party designated by Shanghai Manyin with the purchase price after Shanghai Manyin or any third party designated by Shanghai Manyin exercises the option. The shareholders of Chengdu Yougao agree that without their separate consent, Shanghai Manyin may transfer all or part of its option under this agreement to a third party. Without prior written consent from Shanghai Manyin or its designated third party, Chengdu Yougao shall not, among other things, amend its articles of association, increase or decrease the registered capital, sell, dispose of or set any encumbrance on its assets, business or revenue outside the ordinary course of business, enter into any material contract, merge with any other persons or make any investments, distribute dividends, or enter into any transactions which have material adverse effects on its business. The shareholders of Chengdu Yougao also jointly and severally undertake that they will not transfer, gift or otherwise dispose of their equity interests in Chengdu Yougao to any third party or create or allow any encumbrance on their equity interests within the term of this agreement. This agreement will remain effective for 30 years, renewable upon Shanghai Manyin’s advance written notice. In the opinion of Jingtian & Gongcheng Law Firm (Shanghai), our PRC counsel: the ownership structures of Shanghai Guangjian and Beijing Paipairongxin are in compliance with PRC laws or regulations currently in effect;
the ownership structures of Shanghai Manyin and Shanghai Zihe are in compliance with PRC laws or regulations currently in effect; the ownership structures of Shanghai Manyin and Shanghai Nianqiao are in compliance with PRC laws or regulations currently in effect; the ownership structures of Shanghai Manyin and Shanghai Ledao are in compliance with PRC laws or regulations currently in effect; the ownership structures of Shanghai Manyin and Chengdu Yougao are in compliance with PRC laws or regulations currently in effect; the contractual arrangements among Shanghai Guangjian, Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), Beijing Paipairongxin, the shareholders of Beijing Paipairongxin and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only) governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect; the contractual arrangements among Shanghai Manyin, Shanghai Zihe and the shareholders of Shanghai Zihe governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect; the contractual arrangements among Shanghai Manyin, Shanghai Nianqiao and the shareholders of Shanghai Nianqiao governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect; and the contractual arrangements among Shanghai Manyin, Shanghai Ledao and the shareholders of Shanghai Ledao governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect.effect; and the contractual arrangements among Shanghai Manyin, Chengdu Yougao and the shareholders of Chengdu Yougao governed by PRC law are valid, binding and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. For example, on March 15, 2019, the National People’s Congress enacted the Foreign Investment Law of the PRC , or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law , the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law , together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. On December 26, 2019, the State Council promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However, the Implementation Regulations on the Foreign Investment Law still does not explicitly define whether contractual arrangement would be deemed as a form of foreign investment. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC counsel. If the PRC government finds that the agreements that establish the structure for operating our online consumer finance platform business do not comply with PRC government restrictions on foreign investment in value-added telecommunications services business, such as the internet content provision services, we could be subject to severe penalties, including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entities and their subsidiaries do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations,operations.,” “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.”
| Property, Plants and Equipment |
Our corporate headquarters is located in Shanghai, where we lease office space with an area of approximately 23,54820,393.21 square meters as of the date of this annual report. For our customer services and loan collection services, we lease an area of approximately 2,070 square meters in Wuxi, approximately 3,352 square meters in Changsha, approximately 9,5286,715 square meters in Hefei, and approximately 2,6651,332 square meters in Zhengzhou. We also lease office space in Beijing, Hainan, Indonesia, Singapore, Vietnam and Indonesia.Philippines. We lease our premises from unrelated third parties under operating lease agreements. The lease term varies from one year to five years. Our servers are primarily hosted at internet data centers owned by major domestic internet data center providers. We believe that our existing facilities are generally adequate to meet our current needs, but we expect to seek additional space as needed to accommodate future growth. | UNRESOLVED STAFF COMMENTS |
| OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion of our financial condition and results of operations is based upon, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See “Forward-Looking Statements” on page 3 of this annual report. In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties. We are a leading online consumer finance in China with strong brand recognition. Launched in 2007, we are a pioneer in China’s online consumer finance platform industry connecting borrowers, whose needs are unserved or underserved by traditional financial institutions, with investors and financial institutions. As of December 31, 2019,2020, we had over 105.9116.1 million registered users.
We strategically focus on serving borrowers between the ages of 20 and 40, the young generation that is typically more receptive to internet financial services and many of whom have very limited or no credit record. We primarily offer short-term loans to our borrowers to meet their immediate credit needs while allowing them to gradually establish their credit history through activities on our platform. We provide individual investors and institutional funding partners with an opportunity to invest inconnect with an emerging asset class—consumer loans—through a variety of investmentproduct options. We offer attractive risk-adjusted returns supported by a set of comprehensive risk management procedures and different investor protection mechanisms to control and mitigate investors’ risk exposure.
We generate revenues primarily by collecting transaction service fees. For loans funded by individual investors, we collect transaction service fees from borrowers for our services in matching them with investors and for other services we provide over the loans’ lifecycle. For loans funded by institutional funding partners, we collect transaction service fees primarily from institutional funding partners for our services provided to them such as borrower introduction and preliminary credit assessment, as well as other services we provide along the lifecycle of loans. Historically, for loans funded by individual investors, we collected transaction service fees from borrowers for our services in matching them with investors and for other services we provided over the loans’ lifecycle. Our operating revenues grew from RMB3.9 billion in 2017 to RMB4.5 billion in 2018 to RMB6.0 billion in 2019, and further to RMB6.0RMB7.6 billion (US$856.5 million)1.2 billion) in 2019.2020. A substantial portion of our operating revenues for these periods were attributable to fees collected from borrowers.borrowers, third party guarantee companies and institutional funding partners. Our net profit increased from RMB1.1 billion in 2017 towas RMB2.5 billion in 2018, and RMB2.4 billion in 2019 and RMB2.0 billion (US$341.1301.7 million) in 2019.2020. Our total assets as of December 31, 20172018, 2019 and 2018 and 20192020 were RMB8.6 billion, RMB13.1 billion, and RMB18.3 billion and RMB14.9 billion (US$2.62.3 billion), respectively. General Factors Affecting Our Results of Operations Our business and results of operations are affected by general factors affecting China’s online consumer finance industry, which include, among other things: China’s overall economic growth, impact and development of theCOVID-19 pandemic, per capita disposable income, fluctuation of interest rates, development of regulatory environment for the China’s online consumer finance industry, and growth of mobile internet penetration, including the popularity of smart mobile devices. Unfavorable changes in any of these general industry conditions could negatively affect demand for our services. For example, in August 2017, the Shanghai financial regulatory authorities required Shanghai PPDai to provide certain undertakings with respect to its “business scale.” Accordingly, Shanghai PPDai has undertaken to ensure that its “business scale” (which we understand, based on our communication with the authorities, refers to the outstanding balance of loans invested by individual investors facilitated by our Shanghai operations) does not exceed the total outstanding balance of loans invested through our platform as of June 30, 2017 which amounted to RMB20.6 billion, until March 31, 2018 or as otherwise specified by relevant regulatory authorities in the future, which we believe to be the completion of registration with Shanghai financial regulatory authorities. Circular 175 further requires that normal intermediaries, which are defined as large-scale online lending information intermediaries that are strictly in compliance with relevant laws and regulations and have not demonstrated any high-risk characteristics, shall strictly control and manage the business scale and the number of investors. As of March 31,In early 2020, in response to intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining and otherwise treating individuals in China who had the COVID-19, asking China residents to remain at home and to avoid gathering in public, and other actions. The COVID-19 has had also resulted in temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories across China. In response to the pandemic, we made remote working arrangements and suspended business travels to ensure the safety and health of our employees. All of the above measures reducereduced our business operation capacity and negatively affectaffected our operating results. The outbreak of COVID-19 also caused an increase in default of the loans on our platform as the extension of the Chinese New Year holiday and suspension of business activities across various sectors are likely to hurt income of the borrowers on our platform. As a result, the provision for loans receivable, accounts receivable and quality assurance payable increased which negatively impacted our earnings in the firsthalf quarter of 2020. AsAlso, as a result of the sharp slowdown in consumption activities and the increase in default by borrowers on our platform, our loan volume also experienced a decline in the first quarterhalf of 2020 compared to the first quarterhalf of 2019 and the fourth quarter of 2019 due to our adoption of a more prudent approach in facilitating new loans, which negatively impacted our revenue for the three months ended March 31, 2020.loans. In addition, normal economic life throughout China was sharply curtailed during the outbreak of COVID-19 and opportunities for discretionary consumption were extremely limited. Our results of operations could be adversely affected to the extent that any of these pandemicstheCOVID-19 pandemic harms the Chinese economy in general. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to COVID-19 outbreaks, other health epidemics and outbreaks and natural disasters, which could significantly disrupt our operations” for more information.
Specific Factors Affecting Our Results of Operations While our business is exposed to general factors affecting the online consumer finance industry in China, we believe our results of operations are more directly affected by company specific factors, including the following major factors. Ability to Maintain and Expand our Borrower Base in a Cost-Effective Manner Our revenues are dependent on our ability to acquire new borrowers and retain and increase engagement of existing borrowers. In 2017, 2018, 2019 and 2019,2020, we served approximately 8.7 million, 6.8 million, 6.7 million and 6.73.5 million borrowers, respectively. We use various means, including mobile app stores, search engine marketing, online advertising and online partnerships, to attract new borrowers. We are continuously seeking to improve and optimize user experience to achieve a high level of borrower satisfaction, which helps to attract and retain borrowers. We will also continue to develop new loan products to enhance engagement of our borrowers.
Our results of operations and ability to sustain and increase loan volumes will depend, in part, on the effectiveness of our sales and marketing efforts. Our sales and marketing expenses were 20.1%15.6%, 15.6%12.1% and 12.1%6.4% of our total operating revenues in 2017, 2018, 2019 and 2019,2020, respectively. The significant decrease in our sales and marketing expenses as a percentage of our total operating revenues was attributable to our efforts to optimize effectiveness of borrower acquisition, an increase in revenues contribution by existing borrowers and in 2018, the decline in online customer acquisition expenses. We intend to continuously dedicate significant resources to borrower acquisition and improve the effectiveness of these efforts. Ability to Maintain and Expand our Investor Base Our revenues are also dependent on the growth in our investor base. The number of individual investors who invested through our platform was over 307,000 in 2017, over 249,000 in 2018 and over 160,000 in 2019. We have also had increased investments from institutional funding partners. As of December 31, 2019,2020, we had over 3037 institutional funding partners active on our platform. Going forward, we will continue to retain existing institutional funding partners and attract new institutional funding partners by offering attractive returns and providing enhanced tools to meet their needs. Maintenance of Effective Risk Management Our ability to effectively segment borrowers into appropriate risk profiles impacts our ability to attract and retain borrowers and investorsinstitutional funding partners as well as our ability to offer investors attractive risk-adjusted returns, both of which directly relate to users’ confidence in our platform. We intend to optimize our fraud detection capabilities, improve accuracy of our credit scoring model and enhance our collection effectiveness on a continuing basis through the combination of our big-data analytical capabilities and the increasing amount of data we accumulate through our operations. Furthermore, we have established a quality assurance fund mechanism to protect individual investors from potential losses resulting from delinquent loans. Historically, we also had several investor reserve funds to protect individual investors from underperformance
For our institutional funding partners, we provide our institutional funding partners with quality assurance commitments either through our own financing guarantee subsidiary or through third-party financing guarantee companies/insurance companies for a substantial majority of the loans funded by our institutional funding partners. See “Item 4. Information on the Company—B. Business Overview—Investor Protection.” As a result, we are subject to credit risk for such loans. Our ability to accurately estimate loan delinquency rates and our ability to collect delinquent loans have an impact on the amount we need to pay to third-party financing guarantee companies or insurance companies and our own financial condition, which have an impact on our consolidated statements of comprehensive income/(loss). See “—Critical Accounting Policies, Judgments and Estimates—Quality Assurance Payable and Receivable,” “—Critical Accounting Policies, Judgments and Estimates—Financial Guarantee Derivative,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Limitations on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding”funding.” Historically, we established a quality assurance fund mechanism to protect individual investors from potential losses resulting from delinquent loans, and we also had several investor reserve funds to protect individual investors from underperformance of investment programs. See “Item 4. Information on the Company—B. Business Overview—Investor Protection.” We determined the contributions to these funds based on the estimated loan delinquency rates. Ability to Price Accurately Our profitability largely depends on our ability to reasonably price the loans facilitated through our platform. We implement segmented pricing for our standard loan products, which contributed a majority of our revenues in the periods presented in this annual report. Prospective borrowers for our standard loan products are divided into eight segments based on our proprietary credit scoring model: Level I applicants have the lowest risk of default whereas Level VIII loan applicants, whose applications will be rejected, have the highest risk of default. The transaction service fee rate that we collected from borrowers for standard loan products varies depending on their respective credit levels and duration of the underlying loan.
Our growth to date has depended on, and our future success will depend in part on, successfully meeting borrower and investorinstitutional funding partner demand for new loan products and innovative investment options.services. We have made and intend to continue to make substantial investments to develop loan products and investment optionsimprove services for borrowers and investors.institutional funding partners. For borrowers, we plan to introduce new features and products that meet their evolving financial needs at different stages of their lives. For our institutional funding partners, we will continue to expand our products and services to meet their needs for target returns, risk preferences, investment horizon and liquidity requirements. Failure to continue to successfully develop and offer innovative products could adversely affect our operating results and we may not recoup the costs of launching and marketing new products. In addition, our success to date is largely attributable to our ability to seamlessly integrate the use of technologies into provision of financial services. We have been focusing on leveraging our big-data analytics and machine learning capabilities to increase the automation level of our platform and optimize our operational efficiency in various aspects. As our business grows, we will continue to invest in strengthening our technology infrastructure, which may result in the increase of our research and development expenses, and origination and servicing expenses. Ability to Compete Effectively We compete for both borrowers and investorsinstitutional funding partners with a variety of players in the consumer finance industry, ranging from traditional financial institutions to emerging online finance providers and marketplaces. We must compete effectively in order to grow our platform and increase our revenues. We intend to continue to invest in product development, technology infrastructure and our sales and marketing capabilities to address the competition we face. Delinquency Rate by Balance We define delinquency rate as the balance of the outstanding principal for loans that were 15 to 29, 30 to 59, 60 to 89, 90 to 119, 120 to 149 and 150 to 179 calendar days past due as a percentage of the total outstanding balance of principal for the loans on our platform as of a specific date. Loans that are delinquent for 180 days or more are typically considered charged-off and are not included in the delinquency rate calculation. The following table provides the delinquency rates for all outstanding loans on our platform as of the respective dates indicated. Since the origination amount of our standard loan products accounted for the vast majority of the total amount of loans facilitated through our platform for the periods presented, the delinquency information below mainly reflects the performance of our standard loan products. The delinquency rates in late 20172019 and early 2020 were relatively higher than previous delinquency rates primarily due to a sudden adverse changedecrease in market conditions.loan origination volume during the period and the outbreak of the COVID-19 in early 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.87 | % | | | 2.10 | % | | | 2.43 | % | | | 3.83 | % | | | 2.29 | % | | | 1.89 | % | | | | 0.83 | % | | | 1.21 | % | | | 1.05 | % | | | 0.98 | % | | | 1.60 | % | | | 2.03 | % | | | | 1.03 | % | | | 1.77 | % | | | 1.49 | % | | | 1.29 | % | | | 1.06 | % | | | 1.02 | % | | | | 0.92 | % | | | 1.63 | % | | | 1.41 | % | | | 1.45 | % | | | 1.44 | % | | | 1.34 | % | | | | 0.80 | % | | | 1.61 | % | | | 1.45 | % | | | 1.29 | % | | | 1.31 | % | | | 1.20 | % | | | | 0.86 | % | | | 1.42 | % | | | 1.37 | % | | | 1.19 | % | | | 1.26 | % | | | 1.21 | % | | | | 0.90 | % | | | 1.50 | % | | | 1.35 | % | | | 1.31 | % | | | 1.17 | % | | | 1.20 | % | | | | 1.34 | % | | | 2.40 | % | | | 1.86 | % | | | 1.76 | % | | | 1.62 | % | | | 1.53 | % | | | | 1.34 | % | | | 3.03 | % | | | 2.33 | % | | | 2.44 | % | | | 2.64 | % | | | 2.17 | % | | | | 0.71 | % | | | 1.36 | % | | | 1.70 | % | | | 2.00 | % | | | 2.75 | % | | | 2.38 | % | | | | 0.46 | % | | | 0.72 | % | | | 0.74 | % | | | 0.90 | % | | | 1.07 | % | | | 1.43 | % | | | | 0.35 | % | | | 0.55 | % | | | 0.48 | % | | | 0.52 | % | | | 0.49 | % | | | 0.55 | % |
Delinquency Rate by Vintage We refer to loans facilitated during a specified time period as a vintage. We define vintage delinquency rate as (i) the total amount of principal for all loans in a vintage that become delinquent, less (ii) the total amount of recovered past due principal for all loans in the same vintage, and divided by (iii) the total amount of initial principal for all loans in such vintage. Loans that have been considered charged-off are included in the calculation of vintage delinquency rates. In the first quarter of 2020, we adjusted the definition of 30-day plus past due delinquent loans in a vintage to better present delinquency rate by vintage. Under the adjusted definition, a loan is 30-day plus past due after 30 days pass its actual due date, while under our previous definition, a loan was 30-day plus past due after 30 days passed the presumed due date, which was one-month after the loan’s funding date. The following chart and table display the historical cumulative 30-day plus past due delinquency rates by loan origination vintage for all continuing loan products facilitated through our online platform under the adjusted definition of 30-day plus past due delinquent loans.
(1) | Our vintage delinquency rate for loans facilitated during 2017 was 6.82%, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(2) | Our vintage delinquency rate for loans facilitated during 2018 was 7.04%, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(2) | Our vintage delinquency rate for loans facilitated during 2019 was 6.68%, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage. |
(3) | As of December 31, 2019,2020, our vintage delinquency rate for loans facilitated during the first three quarters was 4.43%2.17%, calculated as the volume weighted average of the quarterly vintage delinquency rates as of December 31, 2019.2020. As loans facilitated during 20182020 continue to age, the delinquency rate for the 20192020 vintage, calculated as the volume weighted average of the quarterly vintage delinquency rates at the end of the 12th month following the inception of each loan in an applicable vintage, may be different from the vintage delinquency rate of 4.43%2.17% as of December 31, 2019.2020. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1.37 | | | | 2.20 | | | | 2.99 | | | | 3.67 | | | | 4.32 | | | | 4.86 | | | | 5.23 | | | | 5.50 | | | | 5.66 | | | | 5.74 | | | | 5.77 | | | | | 1.87 | | | | 3.12 | | | | 4.39 | | | | 5.46 | | | | 6.33 | | | | 6.99 | | | | 7.47 | | | | 7.80 | | | | 7.99 | | | | 8.08 | | | | 8.13 | | | | | 1.45 | | | | 2.51 | | | | 3.53 | | | | 4.39 | | | | 5.09 | | | | 5.59 | | | | 5.97 | | | | 6.28 | | | | 6.50 | | | | 6.64 | | | | 6.72 | | | | | 1.43 | | | | 2.49 | | | | 3.55 | | | | 4.42 | | | | 5.18 | | | | 5.76 | | | | 6.20 | | | | 6.54 | | | | 6.81 | | | | 7.01 | | | | 7.16 | | | | | 1.34 | | | | 2.38 | | | | 3.45 | | | | 4.36 | | | | 5.13 | | | | 5.75 | | | | 6.22 | | | | 6.65 | | | | 6.99 | | | | 7.25 | | | | 7.43 | | | | | 1.33 | | | | 2.34 | | | | 3.31 | | | | 4.18 | | | | 5.05 | | | | 5.82 | | | | 6.44 | | | | 6.98 | | | | 7.34 | | | | 7.50 | | | | 7.52 | | | | | 1.02 | | | | 2.16 | | | | 3.42 | | | | 4.55 | | | | 5.64 | | | | 6.45 | | | | 6.92 | | | | 7.13 | | | | 7.20 | | | | 7.20 | | | | 7.15 | | | | | 0.83 | | | | 2.07 | | | | 3.37 | | | | 4.45 | | | | 5.12 | | | | 5.50 | | | | 5.68 | | | | 5.79 | | | | 5.83 | | | | 5.80 | | | | 5.73 | | | | | 0.81 | | | | 1.73 | | | | 2.46 | | | | 2.97 | | | | 3.35 | | | | 3.59 | | | | 3.71 | | | | 3.78 | | | | — | | | | — | | | | — | | | | | 0.44 | | | | 0.92 | | | | 1.34 | | | | 1.65 | | | | 1.90 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 0.41 | | | | 0.81 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
The following table sets forth a summary of our consolidated results of operations for the periods presented, both in absolute amount and as a percentage of our total operating revenues for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our future trends. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Post-facilitation service fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Changes in expected discretionary payment to investors protected by investor reserve funds | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination and servicing expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Origination and servicing expenses-related party | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Sales and marketing expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | General and administrative expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Research and development expenses | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Provision for loans receivable (2) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | Provision for accounts receivable | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income/(expenses) (3) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before income tax expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loan facilitation service fees | | | 2,919,234 | | | | 64.2 | | | | 3,310,875 | | | | 55.5 | | | | 1,908,851 | | | | 292,544 | | | | 25.2 | | Post-facilitation service fees | | | 922,797 | | | | 20.3 | | | | 1,200,373 | | | | 20.1 | | | | 672,981 | | | | 103,139 | | | | 8.9 | | | | | — | | | | — | | | | — | | | | — | | | | 3,386,032 | | | | 518,932 | | | | 44.8 | | | | | 256,108 | | | | 5.6 | | | | 1,106,669 | | | | 18.6 | | | | 1,113,337 | | | | 170,626 | | | | 14.7 | | | | | 376,915 | | | | 8.3 | | | | 344,840 | | | | 5.8 | | | | 481,886 | | | | 73,852 | | | | 6.4 | | Changes in expected discretionary payment to investors protected by investor reserve funds | | | 68,619 | | | | 1.5 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,543,673 | | | | 100.0 | | | | 5,962,757 | | | | 100.0 | | | | 7,563,087 | | | | 1,159,093 | | | | 100.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination and servicing expenses | | | (875,905 | ) | | | (19.3 | ) | | | (1,164,716 | ) | | | (19.5 | ) | | | (1,315,496 | ) | | | (201,609 | ) | | | (17.4 | ) | Origination and servicing expenses-related party | | | (109,666 | ) | | | (2.4 | ) | | | (43,494 | ) | | | (0.7 | ) | | | (10,104 | ) | | | (1,549 | ) | | | (0.1 | ) | Sales and marketing expenses | | | (710,754 | ) | | | (15.6 | ) | | | (720,333 | ) | | | (12.1 | ) | | | (482,859 | ) | | | (74,001 | ) | | | (6.4 | ) | General and administrative expenses | | | (383,388 | ) | | | (8.4 | ) | | | (435,816 | ) | | | (7.3 | ) | | | (461,116 | ) | | | (70,669 | ) | | | (6.1 | ) | Research and development expenses | | | (317,965 | ) | | | (7.0 | ) | | | (390,585 | ) | | | (6.6 | ) | | | (370,175 | ) | | | (56,732 | ) | | | (4.9 | ) | Credit losses for quality assurance commitment | | | — | | | | — | | | | — | | | | — | | | | (2,007,968 | ) | | | (307,735 | ) | | | (26.5 | ) | Provision for loans receivable (2) | | | (192,749 | ) | | | (4.2 | ) | | | (299,504 | ) | | | (5.0 | ) | | | (463,175 | ) | | | (70,985 | ) | | | (6.1 | ) | Provision for accounts receivable and other receivables | | | (106,652 | ) | | | (2.3 | ) | | | (261,882 | ) | | | (4.4 | ) | | | (144,661 | ) | | | (22,170 | ) | | | (1.9 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,697,079 | ) | | | (59.4 | ) | | | (3,316,330 | ) | | | (55.6 | ) | | | (5,255,554 | ) | | | (805,450 | ) | | | (69.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 774,063 | | | | 17.0 | | | | 210,053 | | | | 3.5 | | | | 116,469 | | | | 17,850 | | | | 1.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before income tax expenses | | | 2,620,657 | | | | 57.7 | | | | 2,856,480 | | | | 47.9 | | | | 2,424,002 | | | | 371,493 | | | | 32.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (151,206 | ) | | | (3.3 | ) | | | (481,962 | ) | | | (8.1 | ) | | | (455,421 | ) | | | (69,796 | ) | | | (6.0 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,469,451 | | | | 54.3 | | | | 2,374,518 | | | | 39.8 | | | | 1,968,581 | | | | 301,697 | | | | 26.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | On January 1, 2018,2020, we adopted new revenue guidancethe ASC Topic 606, “Revenue from Contracts with Customers,”326, Measurement of Credit Losses on Financial Instruments or “CECL”, using thea modified retrospective method applied to those contracts the performance of which was not completed as of January 1, 2018. Results for reportingwith prior periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting method undermethod. Upon adoption of ASC Topic 605.326, expected credit losses related to guarantee contracts be recorded separately from and in addition to the stand ready guarantee liability accounted for in accordance with ASC Topic 460. The stand ready component of the guarantee contract is recognized systematically as guarantee income when we’re released from the underlying risk. |
(2) | We historically presented interest income, interest expenses and provision for loan receivablesloans receivable within the financial statement line item “net interest income (expense) and loan provision losses.” In 2019, we reclassified provision for loan receivablesloans receivable amounting RMB299.5 million from “net interest income (expense) and loan provision losses” in operating revenue to “provision for loan receivables”loans receivable” in operating expenses. The amount of provision for loan receivablesloans receivable that havehas been reclassified to conform to the current period financial statement presentation were RMB46.6 million andwas RMB192.7 million for the year ended December 31, 2017 and 2018, respectively.2018. |
(3) | The following table sets forth the breakdown of our other income/(expenses):income: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain from quality assurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Realized gain/(loss) from financial guarantee derivatives | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | Fair value change of financial guarantee derivatives | | | | ) | | | | ) | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other income/(expenses) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain from quality assurance | | | 510,894 | | | | 11.2 | | | | 98,405 | | | | 1.6 | | | | — | | | | — | | | | — | | Realized gain/(loss) from financial guarantee derivatives | | | (157,244 | ) | | | (3.5 | ) | | | 31,444 | | | | 0.5 | | | | — | | | | — | | | | — | | Fair value change of financial guarantee derivatives | | | 272,057 | | | | 6.0 | | | | (56,287 | ) | | | (0.9 | ) | | | — | | | | — | | | | — | | | | | 148,356 | | | | 3.3 | | | | 136,491 | | | | 2.3 | | | | 116,469 | | | | 17,850 | | | | 1.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 774,063 | | | | 17.0 | | | | 210,053 | | | | 3.5 | | | | 116,469 | | | | 17,850 | | | | 1.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Our operating revenues include loan facilitation service fees, post-facilitation service fees, net interest income and other revenues. We generate revenues primarily by collecting transaction service fees from borrowers for loans funded by individual investors and primarily from institutional funding partners for loans funded by such institutional funding partners.
Loan facilitation service fees For each loan facilitated on our platform, we collect transaction service fees and allocate such fees between loan facilitation services and post-facilitation services that we provide. Loan facilitation service fees are the portion of transaction service fees collected in relation to the work we perform through our platform in connecting borrowers with individual investors or institutional funding partners and facilitating the origination of loan transactions. Loan facilitation service fees decreased by 42.3% to RMB1,908.9 million (US$292.5 million) in 2020 from RMB3,310.9 million in 2019, primarily due to the decline in loan origination volume and decrease in the average rate of transaction service fees. The total origination amount of loans decreased from approximately RMB82.2 billion in 2019 to RMB64.1 billion (US$9.8 billion) in 2020. The decrease in the loan origination amount was primarily due to our business model transformation for transitioning our investor base from individual investors to institutional funding partners and the impact ofCOVID-19 on the Chinese economy in general. The percentage of loan volume generated by repeat borrowers who have successfully borrowed on our platform before increased from 78.1% in 2019 to 88.2% in 2020. . Loan facilitation service fees increased by 13.4% to RMB3,310.9 million (US$475.6 million) in 2019 from RMB2,919.2 million in 2018, primarily due to the increase in the total origination amount of loans facilitated through our platform, offset by the decrease in the average rate of transaction service fees as a result of the shift in funding on the platform from individual investors to institutional funding partners, which typically have a lower rate of transaction service fees. The total origination amount of loans increased from approximately RMB61.5 billion in 2018 to RMB82.2 billion (US$11.8 billion) in 2019. The increase in the loan origination amount was primarily driven by the increase in borrowing from repeat borrowers, which typically have higher loan outstanding amounts than new borrowers. The percentage of loan volume generated by repeat borrowers who have successfully borrowed on our platform before increased from 73.6% in 2018 to 78.1% in 2019. . Loan facilitation service fees increased by 2.7% to RMB2,919.2 million in 2018 from RMB2,843.3 million in 2017, primarily due to the old revenue recognition standard ASC 605 used in 2017. Under ASC 605, transaction service fees collected on a monthly basis are considered contingent and therefore not allocable until received. Under ASC 606, all transaction price is allocated to the performance obligations in the arrangement irrespective of whether additional goods or services need to be provided before the transaction service fee is paid. The average rate of transaction service fees collected from borrowers for loans funded by individual investors was 6.77% in 2018, compared with 6.5% in 2017.Post-facilitation service fees Post-facilitation service fees are the portion of transaction service fees collected in relation to services we provide after loan origination, such as repayment facilitation and loan collection. Post-facilitation service fees decreased by 43.9% to RMB673.0 million (US$103.1 million) in 2020 from RMB1,200.4 million in 2019, primarily due to the decline in the total amount of outstanding loans served by us and the rolling impact of deferred transaction fees. 2019 Compared to 20182018. . Post-facilitation service fees increased by 30.1% to RMB1,200.4 million (US$172.4 million) in 2019 from RMB922.8 million in 2018, primarily due to the rolling impact of deferred transaction service fees. . Post-facilitation service fees increased by 38.0% to RMB922.8 million in 2018 from RMB668.8 million in 2017, primarily due to (i) the rolling impact of deferred transaction service fees, and (ii) the adoption of ASC 606 effective January 1, 2018, pursuant to which we reallocated loan collection fees of RMB125.2 million recorded previously under other revenue to post-facilitation service fees.
Liabilities of quality assurance commitment are released as guarantee income systematically over the term of the loans subject to quality assurance commitment due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Our guarantee income was RMB3,386.0 million (US$518.9 million) in 2020. Other revenue mainly includes collection fees charged to borrowers, management fees charged to investors who subscribe to investment programs that invest in loans protected by the quality assurance fund, customer referral fees and services fees charged to investors for selling loans over our secondary loan market. . Other revenue increased by 39.8% to RMB481.9 million (US$73.9 million) in 2020 from RMB344.8 million in 2019, primarily due to the increase in customer referral fees collected from third-party service providers.
. Other revenue decreased by 8.5% to RMB344.8 million (US$49.5 million) in 2019 from RMB376.9 million in 2018, primarily due to the decrease in management fees from investment programs that invest in loans protected by the quality assurance fund due to the winding down of our investment programs in the fourth quarter of 2019 as a result of our decision to discontinue our online lending information intermediary business. . Other revenue decreased by 23.3% to RMB376.9 million in 2018 from RMB491.4 million in 2017, primarily due to the adoption of ASC 606 effective January 1, 2018, pursuant to which we reallocated loan collection fees recorded previously under other revenue to loan facilitation fees and post-facilitation fees. This was partially offset by an increase in management fees we received from investment programs that invest in loans protected by the quality assurance fund.Changes in expected discretionary payment to investors protected by investor reserve funds Expected discretionary payment to investors protected by investor reserve funds represents a one-off voluntary provision we made in December 2017 to compensate investors who invested in investment programs we offered before January 1, 2018 for potential differences between the lower limits of estimated rates of return of the investment programs they invested in and the expected returns of the underlying loans corresponding to those investment programs. In 2018, due the changes in the market environment, we experienced improved loan performance in investment programs protected by investor reserve funds. As the actual default rate was lower than previously expected, RMB68.6 million of discretionary payment provision was reversed to reflect expected future payout in 2018. In 2019 and 2020, the changes in expected discretionary payment to investors protected by investor reserve funds waswere zero as the related investment programs matured. In 2020, we recorded RMB1,341.7 million (US$205.6 million) interest income and RMB228.3 million (US$35.0 million) interest expenses, compared to RMB1,342.3 million interest income and RMB235.6 million interest expenses in 2019. A substantial portion of our interest income and interest expenses in 2020 was related to the trusts we set up in collaboration with trust management companies. In order to provide more flexibilities and access a broader range of investors, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts and therefore consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. See note 3 to our consolidated financial statements attached hereto for more details of those trusts. In 2019, we recorded RMB1,342.3 million (US$192.8 million) interest income and RMB235.6 million (US$33.8 million) interest expenses, compared to RMB316.2 million interest income and RMB60.1 million interest expenses in 2018. In 2019, loan provision losses was reclassified as provision for loan receivables as a separate item under operating expenses with comparative figures also reclassified to conform to current year presentation. In 2019, provision for loan receivables was RMB299.5 million, (US$43.0 million), compared to loan provision losses of RMB192.7 million in 2018. See note 2(ai) to our consolidated financial statements on pageF-46
for further details.A substantial portion of our interest income and interest expenses in 2019 was related to the trusts we set up in collaboration with trust management companies. In order to provide more flexibilities and access a broader range of investors, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts under U.S. GAAP. We haveand therefore consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. See note 43 to our consolidated financial statements attached hereto for more details of those trusts. In 2018, we recorded RMB316.2 million interest income, RMB60.1 million interest expenses and RMB192.7 million loan provision losses, compared to RMB47.0 million interest income, RMB15.6 million interest expenses and RMB46.6 million loan provision losses in 2017.
A substantial portion of our interest income, interest expenses and loan provision losses in 2018 was related to the trusts we set up in collaboration with trust management companies. Since September 2016, as part of our efforts to develop new products offerings, we have collaborated with third-party trust management companies to set up numerous trusts. Those trusts are administered by third-party trust management companies. We are considered the primary beneficiary of those trusts under U.S. GAAP. We have consolidated the financial results of those trusts in our consolidated financial statements in accordance with U.S. GAAP. In 2017, we recorded total interest income of RMB45.0 million, total interest expense of RMB14.4 million, and a total loan provisions loss of RMB44.4 million in relation to trusts. See note 4 to our consolidated financial statements attached hereto for more details of those trusts.
Our operating expenses consist of origination and servicing expenses, sales and marketing expenses and general and administrative expenses, research and development expenses, provision for accounts receivable and provision for loans receivable.
Origination and servicing expenses Origination and servicing expenses consist primarily of expenses for credit assessment, loan origination, salaries and benefits for the personnel who work on credit checking, data processing and analysis, loan origination, customer service and loan collection. Our origination and servicing expenses increased by 12.9% to RMB1,315.5 million (US$201.6 million) in 2020 from RMB1,164.7 million in 2019, primarily due to the increase in fees paid to third-party service providers. 2019 Compared to 20182018. . Our origination and servicing expenses increased by 33.0% to RMB1,164.7 million (US$167.3 million) in 2019 from RMB875,9RMB875.9 million in 2018, primarily due to an increase in fees paid to third parties for loan collection services as a result of the increased volume of loans serviced by us. . Our origination and servicing expenses decreased by 1.6% to RMB875,9 million in 2018 from RMB890.2 million in 2017, primarily due to an increase in fees paid to third parties for loan collection services, which was largely offset by (i) a decrease in salaries and benefits as a result of a decrease in headcount particularly for consumption loan products, and (ii) a decrease in referral fees paid to third parties for successful loan originations.Origination and servicing expenses-related party Origination and servicing expenses-related party was reclassified separately from general and administrative expenses in 2019, which consists of expenses for data collection service provided by PPcredit Data Service (Shanghai) Co., Ltd., or PPcredit, a related party controlled by our founders, for its data collection services. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions with PPcredit.” Our origination and servicing expenses expenses-related party decreased by 76.8% to RMB10.1 million (US$1.5 million) in 2020 from RMB43.5 million in 2019, primarily due to decreased data collection service from related party. 2019 Compared to 20182018. . Our origination and servicing expenses expenses-related party decreased by 60.3% to RMB43.5 million (US$6.2 million) in 2019 from RMB109.7 million in 2018, primarily due to decreased data collection service from related party.. Our origination and servicing expenses expenses-related party increased by 30.0% to RMB109.7 million in 2018 from RMB84.4 million in 2017, primarily due to increased data collection service from related party. Sales and marketing expenses Sales and marketing expenses consist primarily of advertising and online marketing promotion expenses. Our sales and marketing expenses decreased by 33% to RMB482.9 million (US$74.0 million) in 2020 from RMB720.3 million in 2019, primarily due to a decrease in online customer acquisition expenses from RMB466.3 million in 2019 to RMB429.7 million (US$65.9 million) in 2020. Our online customer acquisition expenses primarily include expenses paid to internet marketing channels for online advertising and search engine marketing as well as to certain websites that enable us to reach quality borrowers. The decrease in expenses associated with online customer acquisition was primarily due to the decrease in online advertising on social media channels. Our sales and marketing expenses as a percentage of our total operating revenues decreased from 12.1% to 6.4% during the same period, primarily attributable to the increase in revenue contribution by existing borrowers. 2019 Compared to 20182018. . Our sales and marketing expenses increased by 1.3% to RMB720.3 million (US$103.5 million) in 2019 from RMB710.8 million in 2018, primarily due to an increase in online customer acquisition expenses from RMB430.2 million in 2018 to RMB466.3 million (US$67.0 million) in 2019. Our online customer acquisition expenses primarily include expenses paid to internet marketing channels for online advertising and search engine marketing as well as to certain websites that enable us to reach quality borrowers. The increase in expenses associated with online customer acquisition was primarily due to the increase in online advertising on social media channels. Our sales and marketing expenses as a percentage of our total operating revenues decreased from 15.6% to 12.1% during the same period, primarily attributable to the increase in revenue contribution by existing borrowers.
. Our sales and marketing expenses decreased by 9.8% to RMB710.8 million in 2018 from RMB788.3 million in 2017, primarily due to a decline in online customer acquisition expenses from RMB482.6 million in 2017 to RMB430.2 million in 2018. Our online customer acquisition expenses primarily include expenses paid to internet marketing channels for online advertising and search engine marketing as well as to certain websites that enable us to reach quality borrowers. The decline in expenses associated with online customer acquisition was primarily due to the decrease in the number of new borrowers from 6.8 million in 2017 to approximately 3.9 million in 2018. Our sales and marketing expenses as a percentage of our total operating revenues decreased from 20.1% to 15.6% during the same period, primarily attributable to the decline in online customer acquisition expenses and an increase in revenue contribution by existing borrowers.General and administrative expenses General and administrative expenses consist primarily of salaries and benefits for general management, finance and administrative personnel, rental, professional service fees and other expenses. Our general and administrative expenses increased by 5.8% to RMB461.1 million (US$70.7 million) in 2020 from RMB435.8 million in 2019, primarily due to the increase in expenditures for employees benefits. General and administrative expenses for the period included share-based compensation of RMB18.1 million (US$2.8 million). Our general and administrative expenses as a percentage of our total operating revenues decreased from 7.3% to 6.1% during the same period, primarily because of the rapid growth in total operating revenues in 2020.
2019 Compared to 20182018. . Our general and administrative expenses increased by 13.7% to RMB435.8 million (US$62.6 million) in 2019 from RMB383.4 million in 2018, primarily due to an increase in fees paid to third parties for trust management. General and administrative expenses for the period included share-based compensation of RMB36.4 million (US$5.2 million).million. Our general and administrative expenses as a percentage of our total operating revenues decreased from 8.4% to 7.3% during the same period, primarily because of the rapid growth in total operating revenues in 2019. . Our general and administrative expenses decreased by 9.5% to RMB383.4 million in 2018 from RMB423.8 million in 2017, primarily due to the recognition of share-based compensation expenses of RMB106.2 million related to employee options granted historically with a performance target contingent upon IPO in 2017. General and administrative expenses for the period included share-based compensation of RMB50.3 million. Our general and administrative expenses as a percentage of our total operating revenues decreased from 10.8% to 8.4% during the same period, primarily because of the rapid growth in total operating revenues in 2018.Research and development expenses Research and development expenses was reclassified separately from general and administrative expenses in 2019. Research and development expenses decreased by 5.2% to RMB370.2 million (US$56.7 million) in 2020 from RMB390.6 million in 2019 due to a more streamlined workforce in technology-related departments. Research and development expenses in 2020 included the share-based compensation expenses of RMB16.5 million (US$2.5 million). Our research and development expenses as a percentage of our total operating revenues decreased from 6.6% to 4.9%. 2019 Compared to 20182018. . Research and development expenses increased by 22.8% to RMB390.6 million (US$56.1 million) in 2019 from RMB318.0 million in 2018 as we continue to invest in technology. Our research and development expenses as a percentage of our total operating revenues decreased from 7.0% to 6.6%. 2018 ComparedCredit losses for quality assurance commitment
Credit losses for quality assurance commitment was accounted for in addition to 2017and separately from the guarantee liabilities accounted for under ASC 460 due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. . Research and development expenses increased by 92.9% to RMB318.0Credit losses for quality assurance commitment were RMB2,008.0 million (US$307.7 million) in 2018 from RMB164.9 million in 2017 as we continue to invest in technology. Our research and development expenses as a percentage of our total operating revenues increased from 4.2% to 7.0% during the same period, primarily because of an increase of technology investments in 2018.2020. Provision for loans receivable Our provision for loans receivables increased by 54.7% to RMB463.2 million (US$71.0 million) in 2020 from RMB299.5 million in 2019, primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, which requires us to recognize the life time credit losses upon initial recognition and change in loan portfolio mix in 2020. 2019 Compared to 20182018. . Our provision for loans receivables increased by 55.4% to RMB299.5 million (US$43.0 million) in 2019 from RMB192.7 million in 2018, primarily due to the increased number of consolidated trusts in 2019. 2018Provision for accounts receivable and other receivables
2020 Compared to 2017.2019. Our provision for loansaccounts receivables increasedand other receivables decreased by 313.7%44.8% to RMB192.7RMB144.7 million (US$22.2 million) in 2020 from RMB261.9 million in 2018 from RMB46.6 million in 2017,2019, primarily due to the increased number of consolidated trustsdecline in 2018. loan origination volume and the improvement in delinquency rates.Provision for accounts receivable
2019 Compared to 20182018. . Our provision for accounts receivables and other receivables increased by 145.5% to RMB261.9 million (US$37.6 million) in 2019 from RMB106.7 million in 2018, primarily due to the increase in loan origination volume.
2020 Compared to 20172019. . Our provision for accounts receivables increasedWe recorded other income of RMB116.5 million (US$17.9 million) in 2020, compared to RMB106.7income of RMB210.1 million in 20182019. We recorded other income in 2020 primarily because we had other income of RMB116.5 million (US$17.9 million) from government subsidies and investment income from financial assets held for trading. Gain from quality assurance was nil in 2017, primarily2020 due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Realized gain (loss) from financial guarantee derivatives and fair value change of financial guarantee derivatives was nil in 2020 due to the increasewinding down of our investment programs in accounts receivables in 2018. the fourth quarter of 2019 as a result of our decision to discontinue our online lending information intermediary business.2019 Compared to 20182018. . We recorded other income of RMB210.1 million (US$30.2 million) in 2019, compared to income of RMB774.1 million in 2018. We recorded other income in 2019 primarily because we had (i) a gain of RMB98.4 million (US$14.1 million) from quality assurance commitment and quality assurance fund due to the growth of the loans facilitated by us that are protected by the quality assurance commitment and quality assurance fund, (ii) a realized gain of RMB31.4 million (US$4.5 million) from financial guarantee derivatives due to the maturity of certain investment programs during the period, and (iii) other income of RMB136.5 million (US$ 19.6 million) from government subsidies and investment income from financial assets held for trading, which were partially offset by a loss of RMB56.3 million (US$8.1 million) from fair value change of financial guarantee derivatives. . We recorded other income of RMB774.1 million in 2018, compared to a loss of RMB171.5 million in 2017. We recorded other income in 2018 primarily because we had (i) a gain of RMB510.9 million from quality assurance commitment and quality assurance fund due to the growth of the loans facilitated by us that are protected by the quality assurance commitment and quality assurance fund, and (ii) a gain of RMB272.1 million from the fair value change of financial guarantee derivatives due to an improvement in the default rate for the underlying loans of our investment programs protected by investor reserve funds, which were partially offset by a realized loss of RMB157.2 million from financial guarantee derivatives due to the maturity of certain investment programs during the period.Our income tax expenses decreased from RMB482.0 million in 2019 to RMB455.4 million (US$69.8 million) in 2020, primarily due to the decrease inpre-tax profit and change in effective tax rate due to change in revenue contribution from different subsidiaries. 2019 Compared to 20182018. . Our income tax expenses increased from RMB151.2 million in 2018 to RMB482.0 million (US$69.2 million) in 2019, primarily due to the non-recurrence of accrued income tax write-back for 2018, amounting to RMB136.4 million for 2017, as one of our subsidiaries in China enjoyed a preferential tax treatment in 2018 as a result of our “software enterprise” status recognized by relevant PRC government authorities. Our income tax expenses decreased from RMB274.7 million in 2017 to RMB151.2 million in 2018, primarily due to the write-back of accrued income tax for 2017, amounting to RMB136.4 million, as one of our subsidiaries in China enjoyed a preferential tax treatment in 2018 as a result of our “software enterprise” status recognized by relevant PRC government authorities.As a result of the foregoing, our net profit increased from RMB1,082.9 million in 2017, towas RMB2,469.5 million in 2018, and decreased to RMB2,374.5 million in 2019 and RMB1,968.6 million (US$341.1301.7 million) in 2019.2020. We are incorporated in the Cayman Islands. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. The Cayman Islands does not impose a withholding tax on payments of dividends to shareholders. Our subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax at a rate of 16.5%. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends.
Generally, our PRC subsidiaries, variable interest entities and their respective subsidiaries, which are considered PRC resident enterprises under PRC tax law, are subject to enterprise income tax on their worldwide taxable income as determined under PRC tax laws and accounting standards at a rate of 25%. A “high and new technology enterprise” is entitled to a favorable statutory tax rate of 15% and such qualification is reassessed by relevant governmental authorities every three years. Besides, a company is qualified as a “software enterprise,” that company is entitled to an exemption of income tax for the first two fiscal years and a favorable tax rate of 12.5% from the third to the fifth year. Such qualification is reassessed by relevant governmental authorities annually. In 2019, four2020, two of our PRC subsidiaries were qualified as high and new technology enterprises and are entitled to a preferential income tax rate of 15%. In 2018, another2020, two of our PRC subsidiary wassubsidiaries were recognized as a “software enterprise.”, which has been renewed in 2019. As such, it isthey are entitled to enjoy an income tax exemption in 2017 and 2018 andor a 50% reduction for 2019 through 2021.2020.
We are subject to value added tax, or VAT, at a rate of 6% on the services we provide to borrowers and investors,institutional funding partners, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. VAT has been phased in since May 2012 to replace the business tax that was previously applicable to the services we provide. During the periods presented, we were not subject to business tax on the services we provide. Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.” If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.” Discussion of Certain Balance Sheet Items The following table sets forth selected information from our consolidated balance sheet as of December 31, 2017, 2018, 2019 and 2019.2020. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance receivable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial guarantee derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | �� | | | | | | | | | | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Payable to platform customers | | | 1,113,966 | | | | 905,034 | | | | 684,630 | | | | 98,341 | | Quality assurance payable | | | 2,062,844 | | | | 3,819,379 | | | | 4,776,153 | | | | 686,051 | | Deferred revenue | | | 265,094 | | | | — | | | | — | | | | — | | Provision for payment to investor reserve fund investor | | | 107,660 | | | | — | | | | — | | | | — | | Contract liabilities | | | — | | | | 165,469 | | | | 55,728 | | | | 8,005 | | Financial guarantee derivative liabilities | | | 215,770 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Total liabilities | | | 4,921,475 | | | | 7,156,729 | | | | 10,292,976 | | | | 1,478,494 | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 3,682,188 | | | | 5,985,738 | | | | 8,011,480 | | | | 1,150,774 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 1,616,164 | | | | 2,324,542 | | | | 2,632,174 | | | | 403,398 | | | | | 3,677,557 | | | | 3,686,203 | | | | 3,484,227 | | | | 533,981 | | | | | 1,694,660 | | | | 114,560 | | | | 1,970,958 | | | | 302,063 | | Quality assurance receivable | | | 2,064,366 | | | | 3,649,642 | | | | 1,121,554 | | | | 171,886 | | | | | 167,501 | | | | 952,833 | | | | 950,515 | | | | 145,673 | | | | | 112,103 | | | | 20,555 | | | | — | | | | — | | Financial guarantee derivative assets | | | 56,287 | | | | — | | | | — | | | | — | | Account receivable, net of credit loss allowance for accounts receivable | | | 812,042 | | | | 882,305 | | | | 863,906 | | | | 132,399 | | | | | 13,142,467 | | | | 18,304,456 | | | | 14,882,185 | | | | 2,280,795 | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payable to platform customers | | | 905,034 | | | | 684,630 | | | | 103,453 | | | | 15,855 | | Quality assurance payable | | | 3,819,379 | | | | 4,776,153 | | | | — | | | | — | | Deferred guarantee income | | | — | | | | — | | | | 1,259,396 | | | | 193,011 | | Expected credit losses for quality assurance commitment | | | — | | | | — | | | | 2,390,501 | | | | 366,360 | | | | | 165,469 | | | | 55,728 | | | | 3,447 | | | | 528 | | Funds payable to investors of consolidated trusts | | | 1,505,909 | | | | 3,660,483 | | | | 1,661,841 | | | | 254,688 | | | | | 7,156,729 | | | | 10,292,976 | | | | 6,451,855 | | | | 988,790 | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 5,985,738 | | | | 8,011,480 | | | | 8,430,330 | | | | 1,292,005 | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents Our cash and cash equivalents decreased by 14.5% from RMB1.9 billion as of December 31, 2017 to RMB1.6 billion as of December 31, 2018, primarily due to an increase in investments by us in newly established trusts during the period, funds used for share repurchases in the open market, and reduced cash receipts from transaction service fees due to the change in December 2017 from collection of transaction service fees upfront to collection in monthly installments. Our cash and cash equivalents increased by 43.8% from RMB1.6 billion as of December 31, 2018 to RMB2.3 billion as of December 31, 2019, primarily due to the maturity of some of the wealth management products we purchased previously. Our cash and cash equivalents increased by 13.2% from RMB2.3 billion as of December 31, 2019 to RMB2.6 billion (US$403.4 million) as of December 31, 2020, primarily due to an increase in the operating cash flows.
Restricted cash mainly included cash under the quality assurance commitment and in the quality assurance fund, cash in investor reserve funds, cash received from investors and borrowers that has yet to be disbursed, cash received via consolidated trust that has not been distributed, cash held as collateral for short-term borrowings and cash held in escrow accounts. The following table sets forth a breakdown of our restricted cash as of December 31, 2017, 2018, 2019 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance commitment and quality assurance fund | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash received from investors and borrowers | | | | | | | | | | | | | | | | | Cash received via consolidated trust that has not yet been distributed | | | | | | | | | | | | | | | | | Collateral for short-term borrowings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Designated accounts for security deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quality assurance commitment and quality assurance fund | | | 2,414,449 | | | | 1,473,749 | | | | 1,671,785 | | | | 256,212 | | | | | 17,971 | | | | 41,958 | | | | — | | | | — | | Cash received from investors and borrowers | | | 905,034 | | | | 684,630 | | | | 103,453 | | | | 15,854 | | Cash received via consolidated trust that has not yet been distributed | | | 303,667 | | | | 799,646 | | | | 482,285 | | | | 73,913 | | Collateral for short-term borrowings | | | 26,000 | | | | 251,853 | | | | — | | | | — | | | | | 10,436 | | | | 44,367 | | | | 701,673 | | | | 107,536 | | Designated accounts for security deposits | | | — | | | | 390,000 | | | | — | | | | — | | Cash received from borrower to be distributed to funding partners | | | — | | | | — | | | | 225,031 | | | | 34,488 | | Cash held in capital verification account | | | — | | | | — | | | | 300,000 | | | | 45,978 | | | | | | | | | | | | | | | | | | | | | | 3,677,557 | | | | 3,686,203 | | | | 3,484,227 | | | | 533,981 | | | | | | | | | | | | | | | | | | |
Restricted cash increased by 53.7% from RMB2.4 billion as of December 31, 2017 to RMB3.7 billion as of December 31, 2018, primarily due to an increase of RMB1.4 billion in cash under quality assurance commitment and in the quality assurance fund resulting from the increase in loans facilitated by us that are protected by quality assurance commitment and quality assurance fund in 2018.
Restricted cash was flat at RMB3.7 billion as of December 31, 2018 and December 31, 2019, primarily due to (i) an increase of RMB496.0 million in cash received via consolidated trust that has not yet been distributed resulting from the expansion in the outstanding loan balances of consolidated trusts, (ii) an increase of RMB225.9 million in cash under collateral for short-term borrowings resulting from the increase in short-term borrowings in 2019, (iii) an increase of RMB390.0 million in cash held in designated account as a security deposit for an institutional funding partner, which was largely offset by an decrease of RMB940.7 million in cash under quality assurance commitment and quality assurance fund resulting from the discontinuation of our investment programs in 2019. Restricted cash decreased by 5.5% from RMB3.7 billion as of December 31, 2019 to RMB3.5 billion (US$534.0 million) as of December 31, 2020, primarily due to (i) a decrease of RMB581.2 million (US$89.1 million) in cash received from investors or borrowers due to a settlement time lag, (ii) a decrease of RMB317.4 million (US$48.6 million) in cash received via consolidated trusts that has not yet been distributed resulting from the decrease in the outstanding loan balances of consolidated trusts, (iii) a decrease of RMB251.9 million (US$38.6 million) in cash held as collateral for short-term borrowings due to a decrease in short-term borrowings, (iv) a decrease of RMB390.0 million (US$59.8 million) in cash held in designated account, and (v) a decrease of RMB42.0 million (US$6.4 million) in cash held in investor reserve funds, which was largely offset by (i) an increase of RMB300.0 million (US$46.0 million) in cash held in capital verification account under the name of a newly formed subsidiary of us as thepaid-in capital, (ii) an increase of RMB225.0 million (US$34.5 million) in cash received from borrowers that has not yet been disbursed to institutional funding partners due to a settlement time lag, (iii) an increase of RMB198.0 million (US$30.4 million) in cash in quality assurance due to improvement in asset quality, and (iv) an increase of RMB657.3 million (US$38.6 million) in cash held in escrow accounts.
Short-term investments mainly consist of investments in time deposits placed with banks with original maturities between three months and one year and investments in short-term wealth management products. Our short-term investments decreased by 13.5% from RMB2.0 billion as of December 31, 2017 to RMB1.7 billion as of December 31, 2018, primarily due to the maturity of some of the wealth management products we purchased previously. Our short-term investments decreased by 93.2% from RMB1.7 billion as of December 31, 2018 to RMB114.6 million (US$16.5 million) as of December 31, 2019, primarily due to the maturity of some of the wealth management products we purchased previously. Our short-term investments increased significantly from RMB114.6 million as of December 31, 2019 to RMB1,971.0 million (US$302.1 million) as of December 31, 2020, primarily due to our purchase of wealth management products.Contract assets mainly consist
Quality Assurance Receivable Quality assurance receivable increased by 79.1%76.8% from RMB1.2 billion as of December 31, 2017 to RMB2.1 billion as of December 31, 2018 and further increased by 76.8% to RMB3.6 billion (US$524.2 million) as of December 31, 2019, primarily due to the growth of loans facilitated by us that are protected by quality assurance commitment and quality assurance fund. Quality assurance receivable decreased by 69.3% from RMB3.6 billion as of December 31, 2019 to RMB1.1 billion (US$171.9 million) as of December 31, 2020, primarily due to the discontinuation of our investment programs in 2020.Provision for Payment to Investor Reserve Fund Investor
See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—ResultsContract assets Contract assets mainly consist of Operations—Revenues—Changesinvestment management fees for investment programs. Contract assets decreased from RMB112.1 million in expected discretionary payment2018 to investors protected by investor reserve funds.”RMB20.6 million in 2019, mainly due to the discontinuation of our investment programs in 2019. Contract assets decreased from RMB20.6 million in 2019 to nil in 2020, mainly due to the discontinuation of our investment programs in 2020. Financial Guarantee Derivative We recorded anil of financial guarantee derivative asset of RMB0 as of December 31, 2019 and 2020 primarily due to the maturity of related investment programs. We recorded a financial guarantee derivative asset Accounts Receivable and Related Provision Accounts receivable primarily consists of RMB56.3transaction service fees for facilitation and post facilitation services. Provision for credit loss allowance mainly consist of provision for accounts receivable for loan facilitation and post facilitation services. Accounts receivable increased by 19.2% to RMB1.0 billion in 2019 from RMB862.6 million as of December 31,in 2018, primarilymainly due to improvementthe increase in default ratesloan origination volume in 2019. Provision for credit loss allowance increased from RMB50.5 million in 2018 to RMB145.7 million in 2019, mainly due to the increase in accounts receivable. Accounts receivable increased by 2.4% to RMB1.1 billion (US$161.3 million) in 2020 from RMB1.0 billion in 2019, mainly due to the increase in loan origination volume in the underlying loansfourth quarter of the investment programs that were protected by investor reserve funds, and the maturity2020. Provision for credit loss allowance increased from RMB145.7 million in 2019 to RMB188.7 million (US$28.9 million) in 2020, mainly due to our adoption of such investment programs.ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Payable to Platform Customers Payable to platform customers primarily represents the amount payable to investors or borrowers but was temporarily held by us due to a settlement time lag. Payable to platform customers decreased by 18.8% from RMB1.1 billion as of December 31, 2017 to RMB905.0 million as of December 31, 2018, primarily due to a decrease in loans facilitated on our platform. Payable to platform customers decreased by 24.4% from RMB905.0 million as of December 31, 2018 to RMB684.6 million (US$98.3 million) as of December 31, 2019, primarily due to a decrease in loans facilitated by individual investors on our platform. Payable to platform customers decreased by 84.9% from RMB684.6 million as of December 31, 2019 to RMB103.5 million (US$15.9 million) as of December 31, 2020, primarily due to a decrease in outstanding loans facilitated by individual investors on our platform as we ceased facilitating new loans with funding from individual investors in October 2019.Quality Assurance Payable Quality assurance payable increased by 85.2%25.1% from RMB2.1 billion as of December 31, 2017 to RMB3.8 billion as of December 31, 2018 and further increased by 25.1% to RMB4.8 billion (US$686.1 million) as of December 31, 2019 primarily due to the growth of loans facilitated by us that are protected by quality assurance commitment and quality assurance fund. Quality assurance payable was nil as of December 31, 2020, primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020.Deferred Revenue/guarantee income Deferred guarantee income was RMB1.3 billion (US$193.0 million) as of December 31, 2020 compared to nil as of December 31, 2019, primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Expected credit losses for quality assurance commitment Expected credit losses for quality assurance commitment was RMB2.4 billion (US$366.4 million) as of December 31, 2020 compared to nil as of December 31, 2019, primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020.
As of December 31, 2017, we had deferred revenue of RMB265.1 million. Deferred revenue was reclassified as contract liability under ASC 606, which we adopted on January 1, 2018. Contract liabilities deceased from RMB165.5 million as of December 31, 2018 to RMB55.7 million (US$8.0 million) as of December 31, 2019, primarily due to the change from collection of transaction service fees in three installments over the loan period in 2018 to collection in monthly installments in 2019.
Total mezzanine equity was nil Contract liabilities deceased from RMB55.7 million as of December 31, 2017,2019 to RMB3.4 million (US$0.5 million) as our preferred shares had been converted into ordinary shares upon our initial public offering. As of December 31, 2018 and 2019, we recorded nil mezzanine equity2020, primarily due to the same reason.
Accounts receivable and related provision
Accounts receivable primarily consists of transaction servicechange in fees for facilitation and post facilitation services. Provision for doubtful accounts mainly consist of provision for accounts receivable for loan facilitation and post facilitation services. Accounts receivable increased by 19.2% to RMB1.0 billion (US$147.6 million) in 2019 from RMB862.6 million in 2018, mainly due to the increase in loan origination volume in 2019. Provision for doubtful accounts increased from RMB50.5 million in 2018 to RMB145.7 million (US$20.9 million) in 2019, mainly due to the increase in accounts receivable. The Company maintains a provision for doubtful accounts to reserve for potentially uncollectible receivable amounts.collection model.
Funds payable to investors of consolidated trusts Funds payable to investors of consolidated trusts increaseddecreased by 143.1%54.6% to RMB1,661.8 million (US$254.7 million) in 2020 from RMB3,660.5 million (US$525.8 million) in 2019, from RMB1,505.9 million in 2018, mainly due to the increasedecrease in the volume of consolidated trusts as a result of our increased efforts in attracting institution funding partners to meet the borrowing demand on our platform.trusts. Critical Accounting Policies, Judgments and Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. The use of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management. On January 1, 2018, we adopted new revenue guidance ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), using the modified retrospective transition approach under which our prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under ASC Topic 605. Upon adoption, we recognized a cumulative effect of approximately RMB176.5 million as an increase to the opening balance of retained earnings. For the year ended December 31, 2018, the adoption of ASC Topic 606 resulted in an increase in operating revenue of RMB511.1 million, primarily due to earlier recognition of revenue related to transaction service fees collectible in monthly installments The transaction service fees collected as part of monthly repayment were considered contingent and were not allocable to different deliverables until the contingency was resolved (i.e. upon cash receipt of transaction service fee) under ASC Topic 605. Under ASC Topic 606, as the borrowers are required to pay the transaction service fees in full in the event of early repayment, the monthly transaction service fee is considered a fixed consideration and was included in the total consideration that was allocable to different performance obligations.
We operate an online consumer finance platform that matches borrowers with investors (including both individual investors and institutional funding partners). Typically, we provided quality assurance service (including quality assurance fund and quality assurance commitment), loan facilitation services and post-facilitation services to the borrowers and investors.institutional funding partners. The quality assurance service is within the scope of ASC Topic 460 Guarantees, and recorded at fair value at the inception of the loans. We have assessed and concluded that the loan facilitation and post-facilitation services are distinct and therefore are separate performance obligations. The remaining consideration is allocated to loan facilitation and post-facilitation services based on their standalone selling price. As there is no direct observable standalone selling price for the loan facilitation and post-facilitation services, we typically used an expected cost plus a profit margin approach to determine the standalone selling price. We describe our revenue recognition policies in our consolidated financial statements.
Quality Assurance Payable and ReceivableObligations In certain circumstances, borrowers of our online consumer finance platform may elect to or are required to make contributions to the quality assurance fund. In other certain circumstances, weWe are required by our institutional funding partners to provide quality assurance commitment in the event of the default of the borrowers referred by us. We recordIn the past we also provide quality assurance fund obligation and theservice to individual investors that was discontinued in 2019. We record such quality assurance commitmentobligations provided to institutional funding partners and individual investors in accordance with ASC Topic 460, Guarantees. Accordingly,Before adoption of ASC Topic 326, the liabilities are measured at their fair value at inception. Subsequently, the liabilities are measured at the greater of the amount determined based on ASC Topic 460 and the amount determined based on ASC Topic 450. As the risk of the quality assurance commitment and quality assurance fundobligations reduced, the liability is reduced, it is recognized into the income statement by a systematic and rational amortization method within the “gain from quality assurance” line item of the income statement. ForUpon adoption of ASC Topic 326, deferred guarantee income represents the years ended December 31, 2017, 2018 and 2019,stand ready component of the amountguarantee contracts that are determined in accordance with ASC Topic 460 while expected credit losses for quality assurance commitment represents the contingent component of gainsthe guarantee contract that are determined in accordance with ASC Topic 326. Subsequently, deferred guarantee income is released as guarantee income in revenue in the consolidated statement of comprehensive income while expected credit losses related to guarantee contracts are recorded were RMB5.9 million, RMB510.9 million and RMB98.4 million (US$14.1 million), respectively.as provision for quality assurance commitment in the consolidated statement of comprehensive income.
A quality assurance receivable is recognized at loan inception at its fair value on a basis. At each reporting date, we estimate the future cash flows and assesses whether there is any indicator ofcredit impairment losses to any individual underlying loan of the quality assurance receivable. We describe our quality assurance payable and receivableobligations policies in our consolidated financial statements. Financial Guarantee Derivative
Historically, we set up investor reserve funds for certain investors of certain investment programs. The investor reserve fund is accounted for in accordance with ASC Topic 815, Derivatives and Hedging. Derivative assets and liabilities within the scope of ASC 815 are required to be recorded at fair value at inception andre-measured
at fair value on an ongoing basis in accordance with ASC Topic 820, Fair Value Measurement. We use a discounted cash flow method to determine the fair value of the derivative.We describe our financial guarantee derivative policies in our consolidated financial statements.
We account for various types of share-based awards granted to the employees and directors of our company in accordance with ASC Topic 718, Compensation — Stock Compensation. Under the fair value recognition provision of this guidance, compensation for share-based awards granted, including share options and RSUs, is measured at the grant date, based on the fair value of the awards and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award. Share-based compensation expense is recorded net of estimated forfeitures in our consolidated income statements. We estimate the forfeiture rate based on historical forfeitures of share-based awards and adjust the rate to reflect changes when necessary. Determining the fair value of share-based awards requires significant judgment. We estimate the fair value of share options using the binomial option pricing model, which requires inputs such as the fair value of our ordinary shares, expected volatility, risk-free interest rate, exercise multiple, expected dividend yield and expected term.
The fair value of RSUs is determined based on the fair value of our ordinary shares. The market price of our publicly traded ADSs is used as an indicator of fair value for our ordinary shares.
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities by applying enacted statutory tax rates that will be in effect in the period in which the temporary differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in our consolidated financial statements in the period of change. In accordance with the provisions of ASC 740, we recognize in our financial statements the benefit of a tax position if the tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. We estimate our liability for unrecognized tax benefits which are periodically assessed and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements in the period in which the audit is concluded. Additionally, in future periods, changes in facts, circumstances and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. As of December 31, 2017, 2018, 2019 and 2019,2020, we did not have any significant unrecognized uncertain tax positions. Allowance for Credit Losses We have the following types of financial assets that are subject to credit losses of borrowers: accounts receivable, quality assurance receivable and loans receivable. We assessedUpon adoption of ASC Topic 326 in 2020, we perform a quarterly evaluation of the adequacy of credit losses of borrowersloss allowance for loan receivables primarily based on expectations of lifetime credit losses based on historical default experience, known or inherit risks in the portfolio, current economic conditions and macroeconomic forecasts as well as other factors surrounding the credit risk of borrowers. When forecasting macroeconomic factors, management primarily considered gross domestic product, consumer price index and other pertinent factors such as money supply wherein M1 money supply was determined to be the most relevant to our business. The allowance is calculated at portfolio-level since the loan portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment. Before the adoption of ASC Topic 326, we determine the incurred credit losses based on past loan loss history, on our platform, known and inherent risks in eachthe portfolio, of customers, adverse situations that may affect the borrower’s ability to repay, composition of borrowers with different credit levels,the loan portfolio, current economic conditions and other relevant factors. The credit losses is calculated at portfolio-level since the portfolio is typically of smaller homogenous borrowers group and is collectively evaluated for credit losses. In estimating the probable loss of the each portfolio, we also consider qualitative factors such as current economic conditions and or events in specific industries and geographical areas, including unemployment levels, trends in real estate values, peer comparisons, and other pertinent factors such as regulatory guidance.
For each portfolio of borrowers, the provision is calculated based on delinquency status of the respective financial assets: current, 1 to 89, 90 to 119, 120 to 149, 150 to 179 calendar days past due. The probable incurredrespective loss rate of the specific delinquency status category within each portfolio of borrowers will be applied to the applicable outstanding balances of respective financial assets to determine the provision for credit losses for each reporting period. Recent Accounting Pronouncements See note 2 to the consolidated financial statements on page F-1F-15
for details on recent accounting pronouncements and our adoption of certain accounting rules. To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2017, 2018, 2019 and 20192020 were increases of 1.8%1.9%, 1.9%4.5% and 4.5%0.2%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future.
| Liquidity and Capital Resources |
Cash Flows and Working Capital To date, we have financed our operations primarily through cash generated by operating activities. As of December 31, 20172018, 2019 and 2018 and 2019,2020, we had RMB1.9 billion, RMB1.6 billion, and RMB2.3 billion and RMB2.6 billion (US$333.9403.4 million), respectively, in cash and cash equivalents. In November 2017, we completed our initial public offering in which we issued and sold an aggregate of 17,000,000 ADSs, representing 85,000,000 class A ordinary shares, resulting in net proceeds to us of approximately US$205.0 million. Concurrently with our initial public offering, we sold 19,230,769 ordinary shares to Sun Hung Kai & Co. Limited in a private placement, resulting in net proceeds to us of approximately US$49.5 million. Our cash and cash equivalents primarily consist of cash on hand and short-term bank demand deposits. We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the next 12 months. We may, however, need additional capital in the future to fund our continued operations. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that might restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Although we consolidate the results of Beijing Paipairongxin oneand Shanghai Zihe, two of our variable interest entities, and itstheir subsidiaries, we only have access to the assets or earnings of Beijing Paipairongxin, Shanghai Zihe, and itstheir subsidiaries through our contractual arrangements with Beijing Paipairongxin, Shanghai Zihe and itstheir shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.” Substantially all of our future revenues are likely to continue to be in the form of RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the price of our ADSs.” On January 1, 2018, we adopted ASU 2016-18, which requires us to retrospectively restate the statement of cash flows to include restricted cash and restricted cash equivalents. The following table sets forth a summary of our restated cash flows for the periods presented: | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary Consolidated Cash Flows Data: | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | | | | | | | | | | ) | | | | ) | Net cash used in investing activities | | | | ) | | | | ) | | | | ) | | | | ) | Net cash provided by financing activities | | | | | | | | | | | | | | | | | Net increase in cash, cash equivalents and restricted cash | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at beginning of year | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of year | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary Consolidated Cash Flows Data: | | | | | | | | | | | | | | | | | Net cash provided by/(used in) operating activities | | | 1,884,956 | | | | (215,522 | ) | | | 2,206,909 | | | | 338,224 | | Net cash (used in)/provided by investing activities | | | (1,447,013 | ) | | | (828,219 | ) | | | 1,041,496 | | | | 159,616 | | Net cash provided by/(used in) financing activities | | | 530,097 | | | | 1,749,512 | | | | (3,091,279 | ) | | | (473,759 | ) | Net increase in cash, cash equivalents and restricted cash | | | 1,010,017 | | | | 717,024 | | | | 105,656 | | | | 16,192 | | Cash, cash equivalents and restricted cash at beginning of year | | | 4,283,704 | | | | 5,293,721 | | | | 6,010,745 | | | | 921,187 | | Cash, cash equivalents and restricted cash at end of year | | | 5,293,721 | | | | 6,010,745 | | | | 6,116,401 | | | | 937,379 | |
Net cash provided by operating activities was RMB2.2 billion (US$338.2 million) in 2020. In 2020, the difference between our net cash provided by operating activities and our net profit of RMB2.0 billion (US$$301.7 million) resulted mainly from a decrease in quality assurance receivable of RMB2.5 billion (US$382.1 million), a provision for loans receivable of RMB463.2 million (US$71.0 million), a decrease in prepaid expenses and other assets of RMB353.4 million (US$54.2 million), a net gain from investment in loans of RMB1.1 billion (US$170.6 million), and a decrease in payable to platform customers of RMB581.2 million (US$89.1 million). The decrease in quality assurance receivable was primarily due to the discontinuation of our investment programs in 2020. The provision for loans receivable was primarily due to the recognition of the life time credit losses upon initial recognition after our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The decrease in prepaid expenses and other assets was primarily due to decreased amount of deposits required by institutional funding partners. The decrease in quality assurance payable was primarily due to our adoption of ASC 326, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The gain from investment in loans was primarily due to the interest income from loans held by consolidated trusts. The decrease in payable to platform customers was primarily due to a decrease in outstanding loans facilitated by individual investors on our platform as we ceased facilitating new loans with funding from individual investors in October 2019. Net cash used in operating activities was RMB215.5 million (US$31.0 million) in 2019. In 2019, the difference between our net cash used in operating activities and our net profit of RMB2.4 billion (US$341.1 million) resulted mainly from an increase in quality assurance receivable of RMB1.6 billion, (US$227.7 million), a gain in investment in loans of RMB1.1 billion, (US$159.0 million), an increase in prepaid expenses and other assets of RMB1.1 billion, (US$156.7 million), which was partially offset by an increase in quality assurance payable of RMB956.8 million (US137.4 million).million. The increasesincrease in quality assurance receivable was primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund and discontinuation of our investment programs in 2019. The gain in investment in loans was primarily due to the interest income from loans held by consolidated trusts. The increase in prepaid expenses and other assets was primarily due to increased amount of deposits as a result of transitioning to fully funded through institutional funding partners in 2019. The increasesincrease in quality assurance payable was primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund. Net cash provided by operating activities was RMB1.9 billion in 2018. In 2018, the difference between our net cash provided by operating activities and our net profit of RMB2.5 billion resulted mainly from an increase in quality assurance payable of RMB1.8 billion, which was partially offset by an increase in quality assurance receivable of RMB911.6 million, an increase in accounts receivable of RMB746.8 million, an increase in financial guarantee derivative assets and discretionary payment of RMB379.7 million, and a gain in investment in loans of RMB256.1 million. The increases in quality assurance payable and receivable were primarily due to the growth of loans facilitated on our platform that are protected by the quality assurance fund. The increase in accounts receivable was primarily due to the increase in receivables on transaction service fees collected from borrowers as we changed to collecting transaction service fees on a monthly basis in late 2017 from an upfront collection model previously. The increase in financial guarantee derivative assets was primarily due to improvement in default rates in the underlying loans of the investment programs that were protected by investor reserve funds, and the maturity of such investment programs. The gain in investment in loans was primarily due to the interest income from loans held by consolidated trusts. Net cash provided by operating activities was RMB3.4 billion in 2017. In 2017, the difference between our net cash provided by operating activities and our net profit of RMB1.1 billion resulted mainly from an increase in payable to platform customers of RMB692.3 million, an increase in financial guarantee derivative assets and discretionary payment of RMB490.7 million, an increase in quality assurance payable of RMB1,589.1 million, which was partially offset by an increase in quality assurance receivable of RMB866.0 million, an increase in taxes payable of RMB171.9 million, an increase in accrued expenses and other liabilities of RMB108.4 million, share-based compensation of RMB106.2 million, and an increase in deferred revenue of RMB102.2 million, which were partially offset by an increase in prepaid expenses and other assets of RMB70.7 million, and a decrease in deferred tax assets of RMB112.6 million. The increase in financial guarantee derivative assets and discretionary payment was due to an upward adjustment in the expected default rate for underlying loans of certain investment programs that are protected by the investor reserve funds and aone-off
voluntary provision we made in December 2017 to compensate investors who invested in investment programs that are protected by the investor reserve funds we offered previously for potential difference between the lower limits of estimated rates of return of the investment programs they invested in and the expected returns of the underlying loans corresponding to those investment programs. The increase in accrued expenses and other liabilities was due to the increase in accrued marketing expenses. The share-based compensation was related to employee options granted historically with a performance target contingent upon IPO and cancellation of the share based compensation plan of a subsidiary company. The increase in deferred revenue was primarily due to the increase in fees related to post-facilitation services owing to the significant increase in loans facilitated on our platform.Net cash provided by investing activities was RMB1.0 billion (US$159.6 million) in 2020, which was mainly attributable to proceeds from investment in loans originated and held by us in an amount of RMB12.8 billion(US$2.0 billion), and proceeds from short-term investments in an amount of RMB6.2 billion (US$946.8 million) from maturity of wealth management products, which were partially offset by cash paid for investment in loans originated and held by us in an amount of RMB9.8 billion (US$1.5 billion), and cash paid for purchase of short-term investments(mainly wealth management products) in an amount of RMB8.0 billion (US$1.2 billion). Net cash used in investing activities was RMB828.2 million (US$119.0 million) in 2019, which was mainly attributable to cash paid for investment in loans originated and held by us in an amount of RMB12.1 billion, (US$1.7 billion), and cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB3.9 billion, (US$560.5 million), and cash paid for purchase of investments in an amount of RMB803.7 million, (US$115.4 million), which were partially offset by proceeds from investment in loans originated and held by us in an amount of RMB10.5 billion, (US$1.5 billion), and proceeds from short-term investments in an amount of RMB5.5 billion (US$794.7 million) from maturity of wealth management products.
Net cash used in investing activities was RMB1.4 billion in 2018, which was mainly attributable to cash paid for purchase of short-term investments (mainly wealth management products) in an amount of RMB12.8 billion, and cash paid for investment in loans originated and held by us in an amount of RMB4.3 billion, which were partially offset by proceeds from short-term investments in an amount of RMB13.1 billion from maturity of wealth management products. Net cash used in investingfinancing activities was RMB2.5RMB3.1 billion (US$$473.8 million) in 2017,2020, which was mainly attributable to cash paid for purchase of short-term investments (mainly wealth management products)to our institutional funding partners that invested in our consolidated trusts in an amount of RMB8.1RMB3.0 billion and cash paid for investment in loans originated and held by us(US$458.7 million), the repurchase of our ADSs in an amount of RMB1.0 billion,RMB380.0 million (US$58.2 million), dividends payout in amount of RMB263.6 million (US$40.4 million), and repayment of short-term borrowing in amount of RMB235 million (US$36.0 million), which werewas partially offset by proceedscash received from short-term investmentsour institutional funding partners that invested in our consolidated trusts in an amount of RMB6.5 billion from maturity of wealth management products. RMB766.2 million (US$117.4 million). Net cash provided by financing activities was RMB1.7 billion (US$251.3 million) in 2019, which was mainly attributable to cash received from our institutional funding partners that invested in our consolidated trusts in an amount of RMB3.4 billion, (US$493.7 million), and cash received from short-term borrowings in an amount of RMB235.0 million, (US$33.8 million), which was partially offset by cash paid to our institutional funding partners that invested in our consolidated trusts in an amount of RMB1.5 billion, (US$213.8 million), and dividends payout in amount of RMB390.7 million (US$56.1 million).million. Net cash provided by financing activities was RMB530.1 million in 2018, which was mainly attributable to the RMB1.2 billion cash we received from our institutional funding partners that invested in our consolidated trusts, which was partially offset by proceeds used for the repurchase of our ADSs in an amount of RMB452.3 million. Net cash provided by financing activities was RMB2.1 billion in 2017, which was mainly attributable to proceeds from issuance of ordinary shares in an amount of RMB1.7 billion in connection with our IPO.
We made capital expenditures of RMB90.9 million, RMB83.6 million and RMB48.7 million and RMB11.0 million (US$7.01.7 million) in 2017, 2018, 2019 and 2019,2020, respectively. In these periods, our capital expenditures were mainly used for purchases of property, equipment and software. Our capital expenditures for 20202021 are expected to be approximately RMB32.7RMB83.7 million (US$4.712.8 million), primarily due to the optimizations of server units and IT infrastructure. Holding Company Structure FinVolution Group is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries, four variable interest entities and their subsidiaries in China. As a result, FinVolution Group’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and variable interest entities is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our subsidiaries may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our variable interest entities may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries haveare not paidable to pay dividends out of China and will not be able to do so until they generate accumulated profits and meet the requirements for statutory reserve funds. In 2020, Shanghai Guangjian, one of our PRC subsidiaries, had paid dividends of RMB79.5 million (US$12.2 million) out of China.
| Research and Development, Patents, and Licenses, etc. |
See “Item 4. Information On the Company—B. Business Overview—Technology” and “Item 4. Information On the Company—B. Business Overview—Intellectual Property.” Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 20192020 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions. | Off-Balance Sheet Arrangements |
For the loans funded by our institutional funding partners, we provide cash deposit to certain institutional funding partners with our own funds at an amount equal to a certain percentage of their total investment and, in some cases, are required to replenish such deposit from time to time to compensate such investors’ potential loss due to potential loan delinquency. In addition, we are obligated under our agreements with institutional funding partners to repay the full overdue amount to institutional funding partners if a borrower defaults. Under each of these arrangements, we bear credit risks of the loans we facilitate and record quality assurance commitment liability accordingly. See “Item 4. Information on the Company—B. Business Overview—Investor Protection—Quality Assurance Commitment for Institutional Funding Partners” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies, Judgments and Estimates—Quality assurance payable and receivable.” We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us. | Tabular Disclosure of Contractual Obligations |
The following table sets forth our contractual obligations as of December 31, 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease obligations | | | 45,282 | | | | 6,940 | | | | 34,203 | | | | 5,242 | | | | 11,079 | | | | 1,698 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Our operating lease obligations relate to our leases of office premises. We lease our office premises under non-cancelable operating lease arrangements. Rental expenses under operating leases for 20182019 and 20192020 were RMB62.1RMB57.9 million and RMB57.9RMB55.9 million (US$ 8.38.6 million). Other than those shown above, we did not have any significant capital and other commitments, or long-term obligations, or guarantees as of December 31, 2019. See note 5 to the consolidated financial statements on page F-52 for details of a guarantee we granted to a third party.2020. See “Forward-Looking Statements” on page 3 of this annual report. |
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| Directors and Senior Management |
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
| | | | | | | Directors and Executive Officers | | | | | | | | | | 42 | | Chairman of the Board, Chief Innovation Officer | | | | | 36 | | Vice Chairman of the Board, Chief Strategy Officer | | | | | | | | | | | | 43 | | | | | 43 | | | | | 47 | | | | | | | 64 | | | | | | | 58 | | | | | | | 45 | | | Simon Tak Leung HoJiayuan Xu
| | | | 40 | | | | | | | 41 | | Chief Technology Officer and Chief Product Officer | | | | | | | Chief Risk Officer and Chief Data Officer
| | | | | | | Senior Vice President for Finance
|
is one of our four co-founders and has been serving as our director since April 2009, chief innovation officer since March 2019 and chairman of our board of directors since March 2020. Mr. Gu served as our strategy adviser from December 2016 to March 2019, chief strategy officer from August 2014 to December 2016, chief technology officer from January 2011 to August 2014 and chief executive officer from 2007 to 2011. Prior to founding Paipaidai,our company, Mr. Gu was the founder and the chief executive officer of Shanghai Jufei Internet Technology Co., Ltd. (Podlook), a startup running podcast aggregation business, from 2005 to 2007. Prior to founding Podlook, Mr. Gu served as a technical lead of Microsoft Corporation from 2000 to 2005. Mr. Gu received his bachelor’s degree in communication science and engineering from Shanghai Jiaotong University in China. is one of our four co-founders and has been serving as our president since May 2020, vice chairman of the board since September 2018, aand director since March 2015, and2015. Mr. Li also served as our chief strategy officer sincefrom July 2017. Mr. Li also served as2017 to April 2020, our chief operating officer from April 2015 to July 2017 and our chief risk officer from January 2011 to April 2015. Prior to founding Paipaidai,our company, Mr. Li served as a risk manager at China Minsheng Banking Corporation Limited from 2006 to 2011. Mr. Li received his bachelor’s degree in civil engineering from Shanghai Jiaotong University in China and FMBA degree from China Europe International Business School in China. is one of our fourco-founders
and has been serving as our president since January 2011 and director since September 2011. Prior to founding Paipaidai, Mr. Hu worked in the legal industry as a lawyer and a senior partner at several PRC law firms from 2001 to 2009. From 2000 to 2001, Mr. Hu served as a loan officer in Shanghai Branch of Industrial and Commercial Bank of China Limited. Mr. Hu received his bachelor’s degree in economics from Shanghai Jiaotong University in China and master’s degree in economics from Fudan University in China.is one of our four co-founders and has been serving as our director since September 2011 and our advisor since March 2020. Mr. Zhang was our chairman of our board of directors from December 2016 to March 2020, co-chief executive officer from September 2018 to March 2020 and chief executive officer from January 2011 to September 2018. Mr. Zhang served as the operation manager at Wicresoft, a provider of “Internet +” transition service jointly founded by Microsoft Corporation and Shanghai Alliance Investment Limited, from October 2008 to July 2010. Prior to that, Mr. Zhang served as a technical lead of Microsoft Global Technical Engineering Center since 2001. Prior to that, Mr. Zhang worked at Shanghai Online E-Biz Co., Ltd. as a coder and programmer from 2000 to 2001. Mr. Zhang received his bachelor’s degree in communication science and engineering and master’s degree in industrial engineering from Shanghai Jiaotong University in China. is one of our fourco-founders and has been serving as our director since September 2011. Mr. Hu served as our president from January 2011 to May 2020. Prior to founding our company, Mr. Hu worked in the legal industry as a lawyer and a senior partner at several PRC law firms from 2001 to 2009. From 2000 to 2001, Mr. Hu served as a loan officer in Shanghai Branch of Industrial and Commercial Bank of China Limited. Mr. Hu received his bachelor’s degree in economics from Shanghai Jiaotong University in China and master’s degree in economics from Fudan University in China.
Mr.Mr. Ronald Cao Simon Tak Leung Ho
has been serving as our director since February 2014.November 2020. Mr. Cao is the founder and managing partner of Sky9 Capital, a China-focused technology venture capital firm established in 2016. Mr. Cao alsoco-founded
Lightspeed China Partners and has been a managing partners for its Fund I and II since 2011.Ho served as our chief financial officer from September 2016 to November 2020. Prior to that,joining us, Mr. CaoHo served as thevarious positions at Citigroup Global Markets Asia Limited from 2008 to 2016 including managing director and China chief representativehead of Lightspeed Venture Partners and as managing director of KLM Capital.Asian financials research. Mr. Cao currently serves on the boards of a number of privately-owned portfolio companies and was selected as a Young Global Leader by the World Economic Forum in 2013. Mr. CaoHo received his bachelor of science degree and master of engineering degree in electrical engineering and computer science from Massachusetts InstituteNorthwestern University, Illinois. Mr. Ho is also a Chartered Financial Analyst.
has been serving as our independent director since November 2017. Mr. Lai currently serves as the chief financial officer of Acepodia, a leading cell therapy biotech company. Mr. Lai served as the chief financial officer of China Online Education Group, a leading online education platform in China listed on the NYSE, from June 2015 to December 2018. Prior to joining China Online Education Group in 2015, Mr. Lai served as the chief financial officer for several companies, including Chukong Technologies Corp., a leading mobile entertainment platform company in China, from 2013 to 2015, Gamewave Corporation, a leading webgame company in China, from 2011 to 2013, Daqo New Energy Corp., an NYSE-listed company and a leading polysilicon manufacturer based in China, from 2009 to 2011, Linktone Ltd., a NASDAQ-listed company and a leading provider of wireless interactive entertainment services to consumers in China, from 2008 to 2009 and Palm Commerce Holdings, a leading information technology solution provider for the China lottery industry, from 2006 to 2008. Prior to that, Mr. Lai served as an associate vice president of investor relations at Semiconductor Manufacturing International Corporation, a company listed on the NYSE and the Main Board of the Hong Kong Stock Exchange, from 2002 to 2006, and as a controller and director of financial planning at AMX Corporation from 1997 to 2001. Mr. Lai received his MBA from the University of Texas at Dallas and his bachelor’s degree in statistics from the National Cheng Kung University in Taiwan. Mr. Lai is a certified public accountant licensed in the State of Texas. has been serving as our independent director since November 2017. Mr. Xiang currently serves as an independent director of multiple public companies listed on the Hong Kong Stock Exchange, including Sinolink Worldwide Holdings Limited and Longfor Properties Co. Ltd. Mr. Xiang is the founding dean of the Cheung Kong Graduate School of Business and has been a professor there since 2002. Prior to that, Mr. Xiang was a professor, a PhD advisor and the director of EMBA at Guanghua School of Management, Peking University, from 1999 to 2001. He has also taught at Chinese University of Hong Kong, China Europe International Business School, Hong Kong University of Science and Technology and the University of Calgary. Mr. Xiang received his bachelor’s degree in mechanical engineering from Xi’an Jiaotong University and a PhD degree in finance and accounting from the University of Alberta. has been serving as our chief executive officer since March 2020. Mr. Zhang also served as our co-chief executive officer from September 2018 to March 2020, chief operating officer from July 2017 to September 2018 and chief risk officer from April 2015 to July 2017. Prior to joining us, Mr. Zhang held various positions including analyst, senior analyst, manager, senior manager, head of yield management, and senior director at Capital One Financial Services, a diversified bank that offers a broad array of financial products and services, from 2003 to 2015. Mr. Zhang received his bachelor’s degree in computer science from Tsinghua University, master’s degree in computer science from Chinese Academy of Science, master’s degree in computer science from Virginia Tech, and MBA degree from Duke University, The Fuqua School of Business. has been serving as our chief financial officer since September 2016.December 2020. Mr. Xu served as our senior vice president for finance and head of financial institutions department since March 2018 to November 2020. Mr. Xu served as the vice president for finance from June 2016 to March 2018. Mr. Xu joined us as our financial controller in June 2015. Prior to joining us, Mr. HoXu served various positions at Citigroup Global Markets Asia Limitedas the head of financial management department of Nanyang Commercial Bank (China) Co., Ltd. from 2008 to 2016 including managing director and head of Asian financials research.2015. Mr. HoXu was an audit manager at PricewaterhouseCoopers Zhong Tian LLP from 2003 to 2008. Mr. Xu received his bachelor of engineeringbachelor’s degree in international trade and finance from Shanghai Jiaotong University in and FMBA degree from Northwestern University, Illinois.China Europe International Business School. Mr. HoXu is also a Chartered Financial Analyst.member of Chinese Institute of Certified Public Accountants.has been serving as our chief technology officer since 2019 and our chief product officer since June 2015. Prior to joining us, Mr. Wang served as the vice president of product at Opera Software ASA, a Norwegian software company, from 2013 to 2015. Mr. Wang worked at Baidu.com as a product head of Baidu mobile browser from 2012 to 2013. Mr. Wang served as the product director at TeleNav, a company providing location-based services including navigation, from 2009 to 2012. Prior to that, Mr. Wang served as a senior product manager at MiTAC Research (Shanghai) Ltd., an electronics company, from 2002 to 2009. Mr. Wang received his bachelor’s degree in communication engineering from Jiangsu University, in China and his master’s degree in software engineering from Fudan University in China.
has been serving as our chief data officer since February 2017 and chief risk officer since July 2017. Mr. Gu joined us in April 2014 and served various positions before serving as our chief data officer. Prior to joining us, Mr. Gu worked at Opera Solutions, a company providingbig-data
analytics and data services to clients in the financial sector, as an analytics manager from January 2010 to April 2014. Mr. Gu received his bachelor’s degree in computer science from Grinnell College, Iowa and PhD degree in computation and neural systems from California Institute of Technology.has been serving as our senior vice president for finance since March 2018. Mr. Xu served as the vice president for finance from June 2016 to March 2018. Mr. Xu joined us as our financial controller in June 2015. Prior to joining us, Mr. Xu served as the head of financial management department of Nanyang Commercial Bank (China) Co., Ltd. from 2008 to 2015. Mr. Xu was an audit manager at PricewaterhouseCoopers Zhong Tian LLP from 2003 to 2008. Mr. Xu received his bachelor’s degree in international trade and finance from Shanghai Jiaotong University in China and FMBAEMBA degree from China Europe International Business School. Mr. Xu is also a member of Chinese Institute of Certified Public Accountants.For the fiscal year ended December 31, 2019,2020, we paid an aggregate of approximately RMB23.5RMB25.4 million (US$3.43.9 million) in cash to our directors and officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries and our variable interest entities are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
Employment Agreements and Indemnification Agreements We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month advance written notice. Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets. In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent. We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
In June 2013, our board of directors approved our stock option plan, as amended, or the 2013 Plan, to provide incentives to employees, directors and consultants and promote the success of our business. The maximum number of ordinary shares that may be issued under the 2013 Plan is 221,917,800. As of the completion of our initial public offering, options to purchase 134,455,800 Class A ordinary shares had been granted and outstanding but no ordinary shares underlying those options are issued and outstanding due to the exercisability restriction before the initial public offering of our ordinary shares. As of March 31, 2020,2021, options to purchase 128,947,730127,448,390 Class A ordinary shares were granted (excluding those cancelled, forfeited or expired) under the 2013 Plan and 104,272,265121,031,510 Class A ordinary shares underlying those options were issued. The following paragraphs describe the principal terms of the 2013 Plan. The 2013 Plan permits the awards of options.
The 2013 Plan will be administered by our board of directors or by the compensation committee, which will be authorized by our board. The plan administrator has the power and authority to determine the persons who are eligible to receive awards, the number of awards, as well as other terms and conditions of awards. Any award granted under the 2013 Plan is evidenced by an award agreement that sets forth terms, conditions and limitations for such award, which may include the number of options awarded, the exercise price, the provisions applicable in the event of the grantee’s employment or service terminates, among other provisions. The plan administrator may amend the terms of any award, prospectively or retroactively; provided that no such amendment shall impair the rights of any participant without his or her consent. We may grant awards to directors, officers, employees and consultants of our company or any of our subsidiaries. Except as otherwise approved by the plan administrator and subject to forfeiture and arrangement on termination of employment or service, 25% of the shares subject to the option shall become vested on the first anniversary of the vesting commencement date, with the remaining 75% to vest annually thereafter in three equal installments. If a change of control event occurs, such participant’s options will be immediately vested and exercisable. Vested options will become exercisable after an initial public offering of our ordinary shares, subject to other terms and conditions provided in the relevant award agreements. Once all the preconditions are met, a participant may exercise options in whole or in part by giving written notice of exercise to us specifying information such as the number of shares to be purchased, as well as making full payment of the aggregate exercise price of the shares so purchased. The plan administrator will determine the term of each option and provide it in the relevant award agreement, but no option shall be exercisable more than five or six years after the grant date, as the case may be. Except under the laws of descent and distribution or otherwise permitted by the plan administrator, the participant will not be permitted to sell, transfer, pledge or assign any option. In principle, all options shall be exercisable only by the participants. However, a participant may also transfer one or more options to a trust controlled by him or her for estate planning purposes. Termination and amendment of the 2013 Plan . Our board of directors may amend, alter or discontinue the 2013 Plan, but no amendment, alteration or discontinuation shall be made if such amendment, alteration or discontinuation would impair the rights of a participant under any award without such participant’s consent.
In October 2017, we adopted our 2017 Share Incentive Plan, or the 2017 Plan, which allows us to offer a variety of share-based incentive awards to employees, officers, directors and individual consultants who render services to us. The plan permits the grant of three types of awards: options, restricted shares and restricted share units. The maximum number of our shares that may be issued pursuant to all awards under the 2017 Plan is 1,000,000,000 ordinary shares after giving effect to the share split effected by us in October 2017. As of March 31, 2020,2021, options to purchase 6,455,0006,885,045 Class A ordinary shares had been granted (excluding those cancelled, forfeited or expired) under the 2017 Plan and 687,5002,955,235 Class A ordinary shares underlying those options were issued and outstanding. As of March 31, 2020, 16,023,3452021, 82,472,620 restricted share units had been granted (excluding those cancelled, forfeited or expired) and 4,396,6858,103,505 Class A ordinary shares underlying these restricted share units were issued.
The following paragraphs summarize the terms of the 2017 Plan: Our board of directors, or a committee designated by our board of directors, will administer the plan. The committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of each option grant. Options and other awards granted under the plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant, which may include the term of the award and the provisions applicable in the event of the grantee’s employment or service terminates. The exercise price of granted options may be amended or adjusted in the absolute discretion of our board of directors, or a committee designated by our board of directors, without the approval of our shareholders or the recipients of the options. We may grant awards to employees, directors and consultants of our company or any of our affiliates, which include our parent company, subsidiaries and any entities in which our parent company or a subsidiary of our company holds a substantial ownership interest. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement. Acceleration of Awards upon Change in Control . If a corporate transaction occurs, the plan administrator may, in its sole discretion, provide for (i) all awards outstanding to terminate at a specific time in the future and give each participant the right to exercise the vested portion of such awards during a specific period of time, or (ii) the purchase of any award for an amount of cash equal to the amount that could have been attained upon the exercise of such award, or (iii) the replacement of such award with other rights or property selected by the plan administrator in its sole discretion, or (iv) payment of award in cash based on the value of ordinary shares on the date of the corporate transaction plus reasonable interest. The term of each option grant shall be stated in the award agreement, provided that the term shall not exceed ten years from the date of the grant. Subject to certain exceptions, awards may not be transferred by the recipient, except as otherwise provided by applicable laws or the award agreement. Unless terminated earlier, the plan will terminate automatically in 2027. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law. However, no such action may impair the rights of any award recipient unless agreed by the recipient.
The following table summarizes, as of March 31, 2020,2021, the options granted (excluding those cancelled, forfeited or expired) under the 2013 Plan and 2017 Plan to our directors, executive officers and other grantees. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0.126 | | March 21, 2016 | | | | | | | | | | | | * | | 0.007 | | January 29, 2014 | | January 28, 2019 | | | * | | 0.030 | | April 1, 2015 | | March 31, 2020 | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | * | | 1.4 | | February 1, 2018 | | January 31, 2023 | | | * | | 0.654 | | January 28, 2019 | | January 27, 2024 | | | * | | | | January 29, 2014 | | January 28, 2019 | | | * | | 0.030 | | April 1, 2015 | | March 31, 2020 | | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | | | | 0.320 | | February 1, 2017 | | January 31, 2022 | | | | * | | 1.4 | | 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | * | | 0.007 | | January 29, 2014 | | January 28, 2019 | | | | * | | 0.126 | | March 21, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | * | | 0.126 | | September 7, 2016 | | September 6, 2022 | | | * | | 1.4 | | February 1, 2018 | | January 31, 2023 | | | | * | | 0.330 | | | | 2020 | | | | | | | | | | | | | | | | April 6, 2022 | | | * | | 0.028 | | May 24, 2015 | | May 23, 2020 | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | * | | 0.320 | | February 1, 2017 | | January 31, 2022 | | | * | | 0.030 | | May 5, 2015 | | May 4, 2020 | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | | * | | 0.320 | | February 1, 2017 | | January 31, 2022 | | | | | | 0.330 | | April 6, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | April 5, 2025 | | | * | | 0.030 | | June 15, 2015 | | June 14, 2020 | | | * | | 0.126 | | March 21, 2016 | | March 20, 2021 | | | | * | | 0.320 | | | | February 1, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other grantees as a group | | | 62,376,525 | | From 0.0001 to 1.4 | | | | | | From July 1, 2012 to January 28, 2019 April 6, 2020 | | | | From June 30, 2018 to January 27, 2024 | April 5, 2025 |
* | Less than 1% of our total outstanding shares. |
The following table summarizes, as of March 31, 2020,2021, the restrict share units granted under the 2017 Plan to our directors and executive officers and other grantees. | | | | | | | | | | | | | | | Class A Ordinary Shares Underlying Restricted Share Units Awarded | | | | | | | | | * | | October 6, 2020 | | October 5, 2025 | | | * | | February 1, 2018 | | January 31, 2023 | | | * | | January 28, 2019 | | January 27, 2024 | | | * | | April 6, 2020 | | April 5, 2025 | | | * | | October 6, 2020 | | October 5, 2025 | | | * | | February 1, 2018 | | January 31, 2023 | | | * | | January 28, 2019 | | January 27, 2024 | | | * | | April 6, 2020 | | April 5, 2025 | | | * | | October 6, 2020 | | October 5, 2025 |
| | | | | | | | | Class A Ordinary Shares Underlying Restricted Share Units Awarded | | February 1, 2018 Date of Grant
| | | | January 31, 2023 Date of Expiration
| | | | | | | | | | | | | | | | | * | | February 1, 2018 | | January 31, 2023 | | | * | | January 28, 2019 | | January 27, 2024 | | | | * | | April 6, 2020 | | April 5, 2025 | | | | | | October 6, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | October 5, 2025 | Other grantees as a group | | | 57,769,660 | | | | From February 1, 2018 to December 5, 2019 March 2, 2021 | | | | From January 31, 2023 to December 4, 2024 | March 1, 2026 |
* | Less than 1% of our total outstanding shares. |
Our board of directors consists of seven directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract or arrangement notwithstanding that he may be interested therein, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered, provided (a) such director, if his interest (whether direct or indirect) in such contract or arrangement is material, has declared the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service. Committees of the Board of Directors We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below. Audit CommitteeCommittee. . Our audit committee consists of Jimmy Y. Lai and Bing Xiang. Jimmy Y. Lai is the chairman of our audit committee. We have determined that both Jimmy Y. Lai and Bing Xiang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934. We rely on the exemption provided by Rule 10A-3(b)(1)(iv)(A) under the Securities Exchange Act of 1934, which allows a minority of the members of our audit committee not to be independent for one year from November 9, 2017, the date of effectiveness of our registration statement on Form F-1. In addition, we have determined that Jimmy Y. Lai qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things: appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; reviewing with the independent auditors any audit problems or difficulties and management’s response; discussing the annual audited financial statements with management and the independent auditors; reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures;
reviewing and approving all proposed related party transactions; meeting separately and periodically with management and the independent auditors; and monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. . Our compensation committee consists of Jimmy Y. Lai and Bing Xiang. Jimmy Y. Lai is the chairman of our compensation committee. We have determined that Jimmy Y. Lai and Bing Xiang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things: reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. Nominating and Corporate Governance Committee . Our nominating and corporate governance committee consists of Jimmy Y. Lai and Bing Xiang. Jimmy Y. Lai is the chairperson of our nominating and corporate governance committee. We have determined that Jimmy Y. Lai and Bing Xiang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things: selecting and recommending nominees for election by the shareholders or appointment by the board; reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain limited exceptional circumstances have the right to seek damages in our name if a duty owed by the directors is breached.
Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our board of directors include, among others: convening shareholders’ annual and extraordinary general meetings; declaring dividends and distributions; appointing officers and determining the term of office of the officers; exercising the borrowing powers of our company and mortgaging the property of our company; and approving the transfer of shares in our company, including the registration of such shares in our register of members. Terms of Directors and Officers Our directors may be elected by a resolution of our board of directors, or by a special resolution of our shareholders. Our directors are not subject to a term of office (unless this is expressly set out in the director’s appointment) and hold office until such time as they are removed from office by special resolution of the shareholders. A director will cease to be a director if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board of directors.
We had 3,8833,064 employees as of December 31, 2019.2020. As of December 31, 2019, 1,9482020, 1,495 of our employees were located in Shanghai 410while the remaining employees were located in Wuxi, 809 in Hefei, 35 in Beijing, 477 in Changsha, 192 in Zhengzhou, and 12 in Indonesia.other regions. The following table sets forth the numbers of our employees categorized by function as of December 31, 2019.2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | % | | | | | | | | | % | | | | | | | | | % | General and Administration | | | | | | | | % | | | | | | | | | % | | | | | | | | | | Total number of employees | | | | | | | | % | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 847 | | | | 27.7 | % | | | | 736 | | | | 24.0 | % | | | | 674 | | | | 22.0 | % | | | | 568 | | | | 18.5 | % | General and Administration | | | 239 | | | | 7.8 | % | | | | | | | | | | Total number of employees | | | 3,064 | | | | 100.0 | % | | | | | | | | | |
As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including, among other things, housing, pension, medical insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.
We typically enter into standard employment, confidentiality and non-compete agreements with our senior management and core personnel. These contracts include a standard non-compete covenant that prohibits the employee from competing with us, directly or indirectly, during his or her employment and for two years after the termination of his or her employment, provided that we pay compensation equal to 30% of the employee’s salary during the restriction period. We believe that we maintain a good working relationship with our employees, and we have not experienced any labor disputes. None of our employees are represented by labor unions. Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 20202021 by: each of our directors and executive officers; and each of our principal shareholders who beneficially own more than 5% of our total outstanding ordinary shares. We have adopted a dual class ordinary share structure. The calculations in the table below are based on 1,528,723,7591,416,881,784 outstanding ordinary shares (consisting of 942,723,759835,881,784 Class A ordinary shares and 586,000,000581,000,000 Class B ordinary shares) as of March 31, 2020.2021.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days. These shares, however, are not included in the computation of the percentage ownership of any other person. | | | | | | | | | | | | | | | | | | | Ordinary Shares Beneficially Owned as of March 31, 2020 | | | | | | | | | | | | | | | Directors and Executive Officers**: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All directors and executive officers as a group | | | | | | | | | | | | % | | | | % | Principal and Selling Shareholders: | | | | | | | | | | | | | | | | | PPD Investment Limited (6) | | | | | | | | | | | | % | | | | % | Seahawk China Dynamic Fund (7) | | | | | | | | | | | | % | | | | % | Lightspeed China Partner I, L.P. and its affiliate (8) | | | | | | | | | | | | % | | | | % | Metallica Holding Limited (9) | | | | | | | | | | | | % | | | | % | Sequoia Capital 2010 CV Holdco, Ltd. (10) | | | | | | | | | | | | % | | | | % | SIG China Investments Master Fund III, LLLP (11) | | | | | | | | | | | | % | | | | % | Emma & Oliver Holding Limited (12) | | | | | | | | | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | Ordinary Shares Beneficially Owned as of March 31, 2021 | | | | | | | | | |
| | |
| | Directors and Executive Officers**: | | | | | | | | | | | | | | | | | | | | 22,109,660 | | | | 394,818,900 | | | | 29.4 | % | | | 63.6 | % | | | | 9,165,650 | | | | 27,987,900 | | | | 2.6 | % | | | 4.6 | % | | | | 11,866,000 | | | | 77,009,800 | | | | 6.3 | % | | | 12.5 | % | | | | 8,600,000 | | | | 54,883,400 | | | | 4.5 | % | | | 8.9 | % | | | | * | | | | — | | | | * | | | | * | | | | | — | | | | — | | | | — | | | | — | | | | | — | | | | — | | | | — | | | | — | | | | | * | | | | — | | | | * | | | | * | | | | | * | | | | — | | | | * | | | | * | | | | | * | | | | — | | | | * | | | | * | | All directors and executive officers as a group | | | 76,451,385 | | | | 554,700,000 | | | | 44.4 | % | | | 89.6 | % | Principal and Selling Shareholders: | | | | | | | | | | | | | | | | | PPD Investment Limited (5) | | | 22,109,660 | | | | 394,818,900 | | | | 29.4 | % | | | 63.6 | % | Seahawk China Dynamic Fund (6) | | | 109,287,130 | | | | — | | | | 7.7 | % | | | 0.9 | % | Metallica Holding Limited (7) | | | 8,550,000 | | | | 77,009,800 | | | | 6.0 | % | | | 12.4 | % | SIG China Investments Master Fund III, LLLP (8) | | | 85,691,995 | | | | — | | | | 6.0 | % | | | 0.7 | % | Emma & Oliver Holding Limited (9) | | | 8,600,000 | | | | 54,883,400 | | | | 4.5 | % | | | 8.9 | % |
* Less than 1% of our total outstanding shares.
** | Except for Ronald Cao, Jimmy Y. Lai, and Bing Xiang, the business address for our directors and executive officers is Building G1, No. 999 Dangui Road, Pudong New District, Shanghai 201203, People’s Republic of China. The business address of Ronald Cao is 1133 Changning Road, Suite 1807, Office Tower 1, Raffles City Changning, Shanghai, China. The business address of Jimmy Y. Lai is 4521 Turnberry Ct. Plano, Texas, 75024, USA. The business address of Bing Xiang is Floor 20th, Tower East II, Dongfang Square, Dongcheng District, Beijing, China. |
† | For each person and group included in this column, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the total number of shares outstanding and the number of shares such person or group has the right to acquire upon exercise of option, warrant or other right within 60 days after March 31, 2020.2021. The total number of ordinary shares outstanding as of March 31, 2020 is 1,528,723,759,2021 was 1,417,427,284, consisting of (i) 942,723,759836,427,284 Class A ordinary shares, and (ii) 586,000,000581,000,000 Class B ordinary shares. |
†† | For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled to twenty votes per share on all matters submitted to them for vote. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a basis. |
(1) | Represents (i) 394,818,900 Class B ordinary shares directly held by PPD Investment Limited, a company incorporated in the British Virgin Islands, and (ii) 2,027,6954,421,932 ADSs, representing 10,138,47522,109,660 Class A ordinary shares, directly held by PPD Investment Limited. Mr. Shaofeng Gu is the sole shareholder and the sole director of PPD Investment Limited. The registered office address of PPD Investment Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(2) | Represents (i) 27,987,900 Class B ordinary shares directly held by Happyariel Holding Limited, a company incorporated in the British Virgin Islands, (ii) 1,728,130 ADSs, representing 8,640,650 Class A ordinary shares directly held by Happyariel Holding Limited, and (iii) 975,000525,000 Class A ordinary shares that Mr. TiezhangTiezheng Li may purchase upon exercise of options within 60 days after March 31, 2020.2021. Mr. Tiezheng Li is the sole shareholder and the sole director of Happyariel Holding Limited. The registered office address of Happyariel Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(3) | Represents (i) 59,883,40077,009,800 Class B ordinary shares directly held by Metallica Holding Limited, a company incorporated in the British Virgin Islands, (ii) 1,550,000 ADSs, representing 7,750,000 Class A ordinary shares, directly held by Metallica Holding Limited, (iii) 663,200 ADSs, representing 3,316,000 Class A ordinary shares, directly held by Mr. Jun Zhang, and (iv) 800,000 Class A ordinary shares that Metallica Holding Limited may purchase upon exercise of options within 60 days after March 31, 2021. Mr. Jun Zhang is the sole shareholder and the sole director of Metallica Holding Limited. The registered office address of Metallica Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(4) | Represents (i) 54,883,400 Class B ordinary shares directly held by Emma & Oliver Holding Limited, a company incorporated in the British Virgin Islands, and (ii) 900,0001,720,000 ADSs, representing 4,500,0008,600,000 Class A ordinary shares, directly held by Emma & Oliver Holding Limited. Mr. Honghui Hu is the sole shareholder and the sole director of Emma & Oliver Holding Limited. The registered office address of Emma & Oliver Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(4) | Represents (i) 77,009,800 Class B ordinary shares directly held by Metallica Holding Limited, a company incorporated in the British Virgin Islands, (ii) 1,550,000 ADSs, representing 7,750,000 Class A ordinary shares, directly held by Metallica Holding Limited, (iii) 663,200 ADSs, representing 3,316,000 Class A ordinary shares directly held by Mr. Jun Zhang, (iv) 2,250,000 Class A ordinary shares that Metallica Holding Limited may purchase upon exercise of options within 60 days after March 31, 2020, and (v) 300,000 Class A ordinary shares that Mr. Jun Zhang may purchase upon exercise of options within 60 days after March 31, 2020. Mr. Jun Zhang is the sole shareholder and the sole director of Metallica Holding Limited. The registered office address of Metallica Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(5) | Represents (i) 89,218,150 Class A ordinary shares directly held by Lightspeed China Partner I, L.P. and (ii) 12,200,720 Class A ordinary shares directly held by Lightspeed China PartnerI-A,
L.P. Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. are Cayman Island limited partnerships. Lightspeed China Partners I GP, LLC, a Cayman limited liability company, is the general partner of both Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. Ronald Cao and James Qun Mi each owns 50% of the ownership of Lightspeed China Partners I GP, LLC. Both Ronald Cao and James Qun Mi disclaim beneficial ownership of their shares held by Lightspeed funds, except to the extent of their pecuniary interest therein. The registered office address of Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. is P.O. Box 309, Ugland House, Grand Cayman,KY1-1104,
Cayman Islands. |
(6) | Represents (i) 394,818,900 Class B ordinary shares directly held by PPD Investment Limited, a company incorporated in the British Virgin Islands, and (ii) 2,027,6954,421,932 ADSs, representing 10,138,47522,109,660 Class A ordinary shares, directly held by PPD Investment Limited. Mr. Shaofeng Gu is the sole shareholder and the sole director of PPD Investment Limited. Mr. Shaofeng Gu is the sole shareholder and the sole director of PPD Investment Limited. The registered office address of PPD Investment Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(7)(6) | Represents 21,208,57021,857,426 ADSs, representing 106,042,850109,287,130 Class A ordinary shares directly held by Seahawk China Dynamic Fund. Gold Dragon Worldwide Asset Management Limited is the investment manager for Seahawk China Dynamic Fun pursuant to an investment management agreement and, as such, has discretionary authority to vote and dispose of the 106,042,850109,287,130 Class A ordinary shares. The registered office of the Seahawk China Dynamic Fund is 89 Nexus Way, Camana Bay, Grand Cayman, KY1-9009, Cayman Islands. The business address of Gold Dragon Worldwide Asset Management Limited is Unit 4004-05, 40/F, COSCO Tower, 183 Queen’s Road, Central, Hong Kong. |
(8)(7) | Represents (i) 89,218,150 Class A ordinary shares directly held by Lightspeed China Partner I, L.P. and (ii) 12,200,720 Class A ordinary shares directly held by Lightspeed China PartnerI-A,
L.P. Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. are Cayman Island limited partnerships. Lightspeed China Partners I GP, LLC, a Cayman limited liability company, is the general partner of both Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. Ronald Cao and James Qun Mi each owns 50% of the ownership of Lightspeed China Partners I GP, LLC. Both Ronald Cao and James Qun Mi disclaim beneficial ownership of their shares held by Lightspeed funds, except to the extent of their pecuniary interest therein. The registered office address of Lightspeed China Partner I, L.P. and Lightspeed China PartnerI-A,
L.P. is P.O. Box 309, Ugland House, Grand Cayman,KY1-1104,
Cayman Islands. |
(9) | Represents (i) 77,009,800 Class B ordinary shares directly held by Metallica Holding Limited, a company incorporated in the British Virgin Islands, (ii) 2,250,0001,550,000 ADSs, representing 7,750,000 Class A ordinary shares, directly held by Metallica Holding Limited, and (iii) 800,000 Class A ordinary shares that Metallica Holding Limited may purchase upon exercise of options within 60 days after March 31, 2020, (iii) 1,550,000 ADSs, representing 7,750,000 Class A ordinary shares directly held by Metallica Holding Limited.2021. Mr. Jun Zhang is the sole shareholder and the sole director of Metallica Holding Limited. The registered office address of Metallica Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
(10)(8) | Represents 17,386,3642,044,179 ADSs, representing 86,931,82010,220,895 Class A ordinary shares, directly held by Sequoia Capital 2010 CV Holdco, Ltd., a Cayman Islands limited liability company. Sequoia Capital 2010 CV Holdco, Ltd. is wholly owned by Sequoia Capital China Venture 2010 Fund, L.P. The general partner of Sequoia Capital China Venture 2010 Fund, L.P. is SC China Venture 2010 Management, L.P., the general partner of which is SC China Holding Limited, a company incorporated in the Cayman Islands. SC China Holding Limited is wholly owned by SNP China Enterprises Limited, a company wholly owned by Mr. Neil Nanpeng Shen. The address of Sequoia Capital 2010 CV Holdco, Ltd. is Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman,KY1-1111,
Cayman Islands. |
(11) | Represents 80,471,100and 75,471,100 Class A ordinary shares directly held by SIG China Investments Master Fund III, LLLP, a Delaware limited liability partnership. SIG Asia Investment, LLLP, a Delaware limited liability limited partnership, is the investment manager for SIG China Investments Master Fund III, LLLP pursuant to an investment management agreement and, as such, has discretionary authority to vote and dispose of the 80,471,10085,691,995 Class A ordinary shares. In addition, Heights Capital Management, Inc., a Delaware corporation, is the investment manager for SIG Asia Investment, LLLP pursuant to an investment management agreement and, as such, has discretionary authority to vote and dispose of the 80,471,10085,691,995 Class A ordinary shares. Arthur Dantchik, in his capacity as the president of SIG Asia Investment, LLLP, and vice president of Heights Capital Management, Inc. may also be deemed to have investment discretion over the shares held by SIG China Investments Master Fund III, LLLP. Mr. Dantchik disclaims any such investment discretion or beneficiary ownership with respect to these shares. The registered office address of SIG China Investments Master Fund III, LLLP is One Commerce Center, 1201 N. Orange Street, Suite 715 in the City of Wilmington, State of Delaware, USA. |
(12)(9) | Represents (i) 59,883,40054,883,400 Class B ordinary shares directly held by Emma & Oliver Holding Limited, a company incorporated in the British Virgin Islands, and (ii) 900,0001,720,000 ADSs, representing 4,500,0008,600,000 Class A ordinary shares, directly held by Emma & Oliver Holding Limited. Mr. Honghui Hu is the sole shareholder and the sole director of Emma & Oliver Holding Limited. The registered office address of Emma & Oliver Holding Limited is Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands. |
As of March 31, 2020,2021, a total of 80,471,10075,471,100 Class A ordinary shares arewere held of record by one of our shareholders in the United States, representing approximately 5.3% of our total outstanding shares. Noneshares, and none of our outstanding Class B ordinary shares arewere held by record holders in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.” | Related Party Transactions |
PRC laws and regulations currently restrict foreign ownership and investment in value-added telecommunications services in China. As a result, we operate our relevant business through Beijing Paipairongxin, Shanghai Zihe, Shanghai Nianqiao, and Shanghai Ledao, our variable interest entities, and their subsidiaries based on series of contractual arrangements. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” We entered into our second amended and restated shareholders’ agreement on February 9, 2015 with our then shareholders, which provided for certain shareholders’ rights, including registration rights. Upon the completion of our initial public offering, all the shareholders’ rights under the shareholders agreement automatically terminated, except the registration rights. Set forth below is a description of those registration rights: Demand Registration Rights . At any time after the earlier of (i) February 8, 2020 or (ii) the date that is twelve months after the completion of our initial public offering, holders of 20% or more of the ordinary shares issued upon the conversion of the preferred shares have the right to request us effect a registration for at least 20% of their shares or any lesser percentage if the anticipated gross proceeds from the offering exceed US$5.0 million. Except for certain circumstanced where we are entitled to defer a filing, upon receiving a notice of demand registration, we should promptly give a written notice to all other than preferred shareholders and make best efforts to register the shares requested to be registered. We shall not be obligated to effect more than two demand registrations that have been declared and ordered effective.
Form F-3 Registration Rights . Any holders of ordinary shares issued upon the conversion of preferred shares may request us to file an unlimited number of registration statements on Form F-3 so long as such registration offerings are in excess of US$0.5 million. Within 60 days of receiving such request, we shall effect the registration of the securities on Form F-3. We shall not be obligated to effect more than two registrations that have been declared and ordered effective within any twelve-month period. Piggyback Registration Rights.Rights . If we propose to file a registration statement for a public offering of our securities, we must afford holders of ordinary shares issued upon the conversion of preferred shares an opportunity to participate in that offering. We have the right to terminate or withdraw any registration initiated by us under the piggyback registration rights prior to the effectiveness of such registration. In case of an underwritten offering, the underwriters have the right to exclude up to 75% of the shares requested to be registered by the holders of piggyback registration rights, subject to certain preconditions. Employment Agreements and Indemnification Agreements See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements and Indemnification Agreements.” See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.” Transactions with PPcredit We use data collection services from PPcredit, a company controlled by our founders, based on arm’s length transaction terms and conditions. In 2020, we and PPcredit agreed to extend the term of the original service agreement for another year. In 2018, 2019 and 2019,2020, we incurred RMB109.7 million, and RMB43.5 million and RMB10.1 million (US$6.21.5 million) expenses for such services. In April As of December 31, 2018, 2019 and November 2016, Shanghai PPDai extended aone-year
non-interest
bearing loan of RMB6.02020, the amount due to PPcredit was nil, RMB4.3 million and RMB5.0RMB2.0 million respectively, to PPcredit for general corporate purposes, respectively. The loan was settled in January 2017.
In 2018, we entered into an agreement with PPcredit to provide PPcredit with human resources and accounting services based on arm’s length transaction terms and conditions at a consideration of RMB3.3 million. As of December 31, 2018, 2019 we had receivedand 2020, the full amount of the payment. due from PPcredit was RMB2.8 million, nil and nil.C. | C. Interests of Experts and Counsel |
| Consolidated Statements and Other Financial Information |
Consolidated Financial Statements We have appended consolidated financial statements filed as part of this annual report. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Starting in September 2018, our company and certain of our current and former officers and directors, the underwriters of our company’s initial public offering in November 2017, and our agent for the service of process in the U.S. have been named as defendants in putative securities class actions captioned Yizhong Huang v. PPDAI Group Inc., et al. ,
Case No. 654482/2018 (New York County of the Supreme Court of the State of New York, filed on September 10, 2018) (the “Huang Case”); Ravindra Vora v. PPDAI Group Inc., et al., , Case No. 654777/2018 (New York County of the Supreme Court of the State of New York, filed on September 27, 2018) (the “Vora Case”); Lai v. PPDAI Group Inc., et al. Case No. (U.S. District Court for the Eastern District of New York, filed on November 26, 2018) (the “Lai Case”); and Goyal v. PPDAI Group Inc., et al. Case No. (U.S. District Court for the Eastern District of New York, filed on January 9, 2019) (the “Goyal Case”). These actions allege that defendants made misstatements and omissions in connection with our initial public offering in November 2017 in violation of the Securities Act of 1933. The Lai Case also advances claims under the Securities Exchange Act of 1934. On October 16, 2018, the Supreme Court of the State of New York consolidated the two state court lawsuits (the Huang Case and the Vora Case) under the caption In re PPDAI Group Securities Litigation, , No. 654482/2018 (the “New York State Action”). On December 17, 2018, the plaintiffs in the New York State Action filed a consolidated amended complaint, which the Company and certain other defendants moved to dismiss. On July 31, 2019, Company and certain other defendants filed a motion to dismiss the New York State Action. On February 26, 2020, the Court in the New York State Action granted in part and denied in part the motion to dismiss. The Company and certain other defendants have appealed the partial denial of their motion, and that appeal is in the process of being briefed. On February 21, 2019, the U.S. District Court for the Eastern District of New York consolidated the two federal court lawsuits (the Lai Case and the Goyal Case) under the caption In re PPDAI Group Inc. Securities Litigation, , No. -JO (the “Federal Court Action”), appointed lead plaintiffs of the Federal Court Action, and approved a scheduling stipulation for the filing of the plaintiffs’ amended complaint and the defendants’ responsive pleadings. On April 22, 2019, plaintiffs in the Federal Court Action filed a second amended complaint. Defendants filed a motion to dismiss the Federal Court Action, which was fully briefed as of January 17, 2020. On December 9, 2020, and remains pending.the parties notified both courts that they reached an agreement in principle to settle both lawsuits. The parties are in the process of finalizing the settlement, which will then be subject to court approval. In light of the pending settlement, on March 26, 2021, the federal court terminated the pending motion to dismiss with leave to renew if the settlement is not approved. Both the New York State Action and the Federal Court Action otherwise remain in their preliminary stages. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention. Our board of directors declared dividends in March 2019, March 2020 and March, 2020.2021. We may continue to declare and pay dividends in the future if our operating conditions allow. Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Dividend Distribution” and “Item 10. Additional Information—Taxation—People’s Republic of China Taxation.” If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Item 12. Description of Securities Other Than Equity Securities—Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report. | Offer and Listing Details |
Our ADSs, each representing five of our Class A ordinary shares, have been listed on the NYSE since November 10, 2017. Our ADSs trade under the symbol “FINV.” Our ADSs have been listed on the NYSE since November 10, 2017 under the symbol “PPDF.” We changed our symbol from “PPDF” to “FINV” in November 2019. | Memorandum and Articles of Association |
We are a Cayman Islands exempted company with limited liability and our corporate affairs are governed by our memorandum and articles of association, as amended from time to time and the Companies Law (2020Act (2021 Revision) of the Cayman Islands, which we refer to as the Companies LawAct below, and the common law of the Cayman Islands.
The following are summaries of material provisions of our currently effective memorandum and articles of association and of the Companies Law,Act, insofar as they relate to the material terms of our ordinary shares. . Under our currently effective memorandum and articles of association, the objects of our company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands. . Our ordinary shares are issued in registered form and are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares. . The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may by an ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, our company may declare and pay a dividend only out of funds legally available therefor, namely out of either profit or our share premium account, provided that in no circumstances may we pay a dividend if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.
. In respect of all matters subject to a shareholders’ vote, each holder of Class A ordinary share is entitled to one vote for each Class A ordinary share registered in his or her name on our register of members, and each holder of Class B ordinary share is entitled to twenty votes for each Class B ordinary share registered in his or her name on our register of members. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together on all resolutions submitted to a vote of the members. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any shareholders present in person or by proxy. A quorum required for a meeting of shareholders consists of one or more shareholders present and holding shares which represent, in aggregate, not less than one-third of the votes attaching to the issued and outstanding voting shares in our company. Shareholders may be present in person or by proxy or, if the shareholder is a legal entity, by its duly authorized representative. Shareholders’ meetings may be convened by the chairman of our board of directors or a majority of our directors or upon a request to the directors by shareholders holding shares which represent, in aggregate, no less than one-third of the votes attaching to the issued and outstanding shares that as at the date of the deposit of the shareholder’s requisition carry the right to vote at general meetings of our company. Advance notice of at least seven days is required for the convening of our annual general shareholders’ meeting and any other general shareholders’ meeting. An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attached to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes attached to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting. Both ordinary resolutions and special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies LawAct and our amended and restated memorandum and articles of association. A special resolution will be required for important matters such as a change of name or making changes to our amended and restated memorandum and articles of association. Holders of the ordinary shares may, among other things, divide or combine their shares by ordinary resolution. . Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by a shareholder to any person who is not an affiliate of such shareholder, or upon a change of ultimate beneficial ownership of any Class B ordinary share to any person who is not an affiliate of the registered shareholder of such share, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. Transfer of Ordinary Shares . Subject to the restrictions set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless: the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; the instrument of transfer is in respect of only one class of shares; the instrument of transfer is properly stamped, if required; in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and
a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our board may determine. |
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