UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
20-F
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
For the transition period from to
Commission file number:
001-38269
FinVolution Group
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
Building G1, No. 999 Dangui Road
Pudong New District,
Shanghai
201203
The People’s Republic of China
(Address of principal executive offices)
iayuan Xu, Chief Financial Officer
Phone: +86 21 8030 3200
Email: xujiayuan@xinye.com
Building G1, No. 999 Dangui Road
Pudong New District, Shanghai 201203
The People’s Republic of China
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
American depositary shares | FINV | New York Stock Exchange | ||
Class A ordinary shares, par value US$0.00001 per | New York Stock Exchange |
| * | Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
As of December 31, 2020,2021, there were 1,405,164,5991,433,791,404 ordinary shares outstanding, consisting of 824,164,599854,591,404 Class A ordinary shares and 581,000,000 outstanding579,200,000 Class B ordinary shares, both with a par value of US$0.00001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒
No☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
☐ No ☒Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation(§ (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐S-T
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2
of the Exchange Act. (Check one):| Large accelerated filer | Accelerated filer | Non-accelerated filer | ☐ | |||||||
| Emerging growth company | ☐ | |||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ☒ | International Financial Reporting Standards as issued | Other ☐ | ||||||
| by the International Accounting Standards Board | ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
TABLE OF CONTENTS
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ITEM 16I. | 168 | |||||
| 169 | ||||||
ITEM 17. | ||||||
ITEM 18. | ||||||
ITEM 19. | ||||||
i
INTRODUCTION
Unless otherwise indicated or the context otherwise requires in this annual report on Form
20-F:
“ADSs” refers to our American depositary shares, each of which represents five Class A ordinary shares;
“average rate of transaction service fees” for a given period is computed by dividing the total amount of transaction service fees we received during the period by the total volume of loans originated on our platform during the same period. For loans funded by individual investors, the transaction service fee was collected from borrowers for our services in matching them with investors and for other services we provided over the loans’ lifecycle. For loans funded by institutional funding partners, the transaction service fee is collected from third party guarantee companies and, if applicable, the institutional funding partners for our services in borrower introduction and preliminary credit assessment, as well as other services we provide over the loans’ lifecycle;
“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;
“delinquency rate” refers to 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 of a date as a percentage of the total outstanding balance of principal for the loans on our platform as of such date. Loans that are delinquent for 180 days or more are typically considered
charged-off
and are not included in the delinquency rate calculation;“individual investors” refers to the individual investors who invested through our platform historically. We have ceased facilitating new loans with funding from individual investors on our platform since October 2019;
“investment transactions” for a given period refers to the total number of investments executed by investors on our platform. An investor’s investment in a loan is counted as one investment transaction;
number of “unique borrowers” at a certain point in time refers to the cumulative number of borrowers whose loans on our platform had been funded before such point in time;
number of “unique borrowers” in a given period refers to the total number of borrowers whose loans on our platform were funded during such period;
“outstanding loan balance” in the China market as of a given date refers to the balance of outstanding loans delinquent within 180 days from such date;
“outstanding loan balance of the overseas markets” as of a given date refers to the balance of outstanding loans delinquent within 30 days from such date;
“ordinary shares” refers to our Class A and Class B ordinary shares, par value US$0.00001 per share;
“overseas markets” refers to our overseas markets outside China, including the Philippines, Indonesia, Vietnam and Singapore;
“RMB” and “Renminbi” refer to the legal currency of China;
“US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States;
“vintage delinquency rate” refers to (i) the total amount of principal for all the 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 then divided by (iii) the total amount of initial principal for all loans in such vintage. For purpose of this annual report, loans facilitated during a specified time period are referred to as a vintage. Loans that are delinquent for 180 days or more are included in the calculation of vintage delinquency rate; and
1
“we,” “us,” “our company,” “our” and “FinVolution” refer to FinVolution Group, its subsidiaries, and, in the context of describing our operations and consolidated financial information, the consolidated variable interest entities in China, including Beijing Paipairongxin Investment Consulting Co., Ltd., Shanghai Zihe Information Technology Group Co., Ltd., and Shanghai Ledao Technology Co., Ltd. and their respective subsidiaries, if any.subsidiaries.
Our reporting currency is the Renminbi because our business is mainly conducted in China and substantially all of our revenues are denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this annual report is based on the rate certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at RMB6.5250RMB6.3726 to US$1.00, the noon buying rate on December 31, 202030, 2021 set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 23, 2021,22, 2022, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB 6.4945RMB6.5010 to US$1.00.
2
FORWARD-LOOKING STATEMENTS
This annual report on Form
20-F
contains forward-looking statements that reflect our current expectations and views of future events. Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
our mission and strategies;
our future business development, financial condition and results of operations;
the expected growth of the online consumer finance platform market in China;
our expectations regarding demand for and market acceptance of our products and services;
our expectations regarding our relationships with institutional funding partners and borrowers;
competition in our industry;
general economic and business condition in China and elsewhere; and
relevant government policies and regulations relating to our industry.
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. You should thoroughly read this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. In addition, the rapidly changing nature of the online consumer finance industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
3
PART I
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 3. | KEY INFORMATION |
Our Holding Company Structure and Contractual Arrangements with the Consolidated Variable Interest Entities
FinVolution Group is not an operating company in China but a Cayman Islands holding company with no equity ownership in the consolidated statementsvariable interest entities. We conduct our operations in China through (i) our PRC subsidiaries, (ii) the consolidated variable interest entities with which we have maintained contractual arrangements, and (iii) the subsidiaries of comprehensive income/(loss)the consolidated variable interest entities. PRC laws and regulations restrict and impose conditions on foreign investment in value-added telecommunications services business, such as the internet content provision services and online data processing and selectedtransaction processing services. Accordingly, we operate these businesses in China through the consolidated cash flows datavariable interest entities and their respective subsidiaries, and rely on contractual arrangements among our PRC subsidiaries, the consolidated variable interest entities and their respective shareholders to control the business operations of the consolidated variable interest entities and their respective subsidiaries. Revenues contributed by the consolidated variable interest entities and their respective subsidiaries accounted for the years ended December 31, 2018,96.3%, 92.5% and 88.0% of our total revenues for 2019, and 2020 and selected consolidated balance sheets data as of December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere2021, respectively. As used in this annual report, beginning on pageF-1.“we,” “us,” “our company” and “our” refer to FinVolution Group, its subsidiaries, and, in the context of describing our operations and consolidated financial information, the consolidated variable interest entities and their respective subsidiaries in China, including but not limited to (i) Beijing Paipairongxin Investment Consulting Co., Ltd., or Beijing Paipairongxin, which was established in June 2012; (ii) Shanghai PPDai Financial Information Service Co., Ltd., or Shanghai PPDai, a subsidiary of Beijing Paipairongxin, which was established in January 2011 and operates our ppdai.com website and PPDai mobile application and used to engage in our historical business of online lending information intermediary; (iii) Heifei PPDai Information Service Co., Ltd., or Hefei PPDai, a subsidiary of Shanghai PPDai, which was established in December 2016 and holds the value-added telecommunication business operation license, or the VATS License, for operation of call center services; (iv) Shanghai Erxu Information Technology Co., Ltd., or Shanghai Erxu, a subsidiary of Shanghai Zihe, which was established in April 2018 and primarily engages in the business of introducing borrowers to institutional funding partners to match transactions; (v) Chengdu Yougao Information Technology Co., Ltd., or Chengdu Yougao, a subsidiary of Shanghai Zihe, which was established in December 2019 and holds the VATS License for the content provision services (excluding internet content provision services); and (vi) Shanghai Ledao Technology Co., Ltd., or Shanghai Ledao, which was established in January 2019 and currently does not engage in any business operations. Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest in the consolidated variable interest entities and their subsidiaries.
However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the consolidated variable interest entities and we may incur substantial costs to enforce the terms of the arrangements. In addition, these agreements have not been tested in China courts. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations, and such contractual arrangements may not be as effective as direct ownership in providing operational control” and “—The following table presentsshareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our selected consolidated statements of comprehensive income/(loss) data for the years ended December 31, 2016, 2017, 2018, 2019business and 2020.financial condition.”
Year Ended December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 (1) | 2019 | 2020 (2) | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except for share, per share and per ADS data) | ||||||||||||||||||||||||
Selected Consolidated Statements of Comprehensive Income/(Loss) Data: | ||||||||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||
Loan facilitation service fees | 911,448 | 2,843,287 | 2,919,234 | 3,310,875 | 1,908,851 | 292,544 | ||||||||||||||||||
Post-facilitation service fees | 126,823 | 668,819 | 922,797 | 1,200,373 | 672,981 | 103,139 | ||||||||||||||||||
Guarantee income | — | — | — | — | 3,386,032 | 518,932 | ||||||||||||||||||
Net interest income (3) | 41,789 | 31,377 | 256,108 | 1,106,669 | 1,113,337 | 170,626 | ||||||||||||||||||
Other revenue | 170,403 | 491,400 | 376,915 | 344,840 | 481,886 | 73,852 | ||||||||||||||||||
Changes in expected discretionary payment to IRF investors | — | (107,660 | ) | 68,619 | — | — | — | |||||||||||||||||
Net revenues | 1,250,463 | 3,927,223 | 4,543,673 | 5,962,757 | 7,563,087 | 1,159,093 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Origination and servicing expenses | (349,852 | ) | (890,160 | ) | (875,905 | ) | (1,164,716 | ) | (1,315,496 | ) | (201,609 | ) | ||||||||||||
Origination and servicing expenses-related party | (38,297 | ) | (84,362 | ) | (109,666 | ) | (43,494 | ) | (10,104 | ) | (1,549 | ) | ||||||||||||
Sales and marketing expenses | (352,952 | ) | (788,291 | ) | (710,754 | ) | (720,333 | ) | (482,859 | ) | (74,001 | ) | ||||||||||||
4
Year Ended December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 (1) | 2019 | 2020 (2) | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except for share, per share and per ADS data) | ||||||||||||||||||||||||
General and administrative expenses | (123,160 | ) | (423,795 | ) | (383,388 | ) | (435,816 | ) | (461,116 | ) | (70,669 | ) | ||||||||||||
Research and development expenses | (114,648 | ) | (164,869 | ) | (317,965 | ) | (390,585 | ) | (370,175 | ) | (56,732 | ) | ||||||||||||
Credit losses for quality assurance commitment | — | — | — | — | (2,007,968 | ) | (307,735 | ) | ||||||||||||||||
Provision for loan receivable (3) | (34,705 | ) | (46,586 | ) | (192,749 | ) | (299,504 | ) | (463,175 | ) | (70,985 | ) | ||||||||||||
Provision for accounts receivable and other receivables | — | — | (106,652 | ) | (261,882 | ) | (144,661 | ) | (22,170 | ) | ||||||||||||||
Total operating expenses | (1,013,614 | ) | (2,398,063 | ) | (2,697,079 | ) | (3,316,330 | ) | (5,255,554 | ) | (805,450 | ) | ||||||||||||
Other income/(expenses) (4) | 312,908 | (171,542 | ) | 774,063 | 210,053 | 116,469 | 17,850 | |||||||||||||||||
Profit before income tax expenses | 549,757 | 1,357,618 | 2,620,657 | 2,856,480 | 2,424,002 | 371,493 | ||||||||||||||||||
Income tax expense | (48,267 | ) | (274,711 | ) | (151,206 | ) | (481,962 | ) | (455,421 | ) | (69,796 | ) | ||||||||||||
Net profit | 501,490 | 1,082,907 | 2,469,451 | 2,374,518 | 1,968,581 | 301,697 | ||||||||||||||||||
Less: Net profit/(loss) attributable to non-controlling interest shareholders | — | (76 | ) | 377 | 1,668 | (4,119 | ) | (631 | ) | |||||||||||||||
Accretion on Series A, B and C convertible redeemable preferred shares to redemption value | (562,022 | ) | (3,073,471 | ) | — | — | — | — | ||||||||||||||||
Net (loss)/profit attributable to FinVolution Group’s ordinary shareholders | (60,532 | ) | (1,990,488 | ) | 2,469,074 | 2,372,850 | 1,972,700 | 302,328 | ||||||||||||||||
Total comprehensive income attributable to FinVolution Group | 440,992 | 1,182,917 | 2,512,367 | 2,384,960 | 1,897,238 | 290,763 | ||||||||||||||||||
Weighted average number of ordinary shares used in computing net income per share | ||||||||||||||||||||||||
Basic | 665,000,000 | 779,804,270 | 1,498,780,165 | 1,525,814,189 | 1,477,162,991 | 1,477,162,991 | ||||||||||||||||||
Diluted | 665,000,000 | 779,804,270 | 1,599,592,231 | 1,552,423,060 | 1,491,325,420 | 1,491,325,420 | ||||||||||||||||||
Net income/(loss) per share attributable to ordinary shareholders | ||||||||||||||||||||||||
Net (loss)/income per share – Basic | (0.09 | ) | (2.55 | ) | 1.65 | 1.56 | 1.34 | 0.20 | ||||||||||||||||
Net (loss)/income per share – Diluted | (0.09 | ) | (2.55 | ) | 1.54 | 1.53 | 1.32 | 0.20 | ||||||||||||||||
Net income/(loss) per ADS (5) | ||||||||||||||||||||||||
Net (loss)/income per ADS – Basic | (0.46 | ) | (12.76 | ) | 8.24 | 7.78 | 6.68 | 1.02 | ||||||||||||||||
Net (loss)/income per ADS – Diluted | (0.46 | ) | (12.76 | ) | 7.72 | 7.64 | 6.61 | 1.01 | ||||||||||||||||
There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with the consolidated variable interest entities and their shareholders. It is uncertain whether any new PRC laws or regulations relating to consolidated variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the consolidated variable interest entities is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. 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 the 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.”
Our corporate structure is subject to risks associated with our contractual arrangements with the consolidated variable interest entities. If the PRC government deems that our contractual arrangements with the 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 or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the consolidated variable interest entities and their respective subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and our company as a whole. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings and oversight on cybersecurity and data privacy, as well as the lack of inspection by the Public Company Accounting Oversight Board, or the PCAOB, on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, please refer to risks disclosed under “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China.” PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations, including data security related regulations, in this nature may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.” Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “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” and “ —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.” |
5
Permissions Required from the PRC Authorities for Our Operations |
Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries and consolidated variable interest entities and their respective subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company and the consolidated variable interest entities in China, except that Shanghai PPDai has not obtained any VATS License. Due to the lack of regulatory authorities’ final interpretation of the applicable laws, there still exists uncertainties on which category of VATS License that may be applicable to Shanghai PPDai as the operator of our ppdai.com website and PPDai mobile application, and therefore Shanghai PPDai has not obtained any VATS License. We cannot rule out the possibility that Shanghai PPDai may be deemed by certain regulatory authorities as operating our ppdai.com website and PPDai mobile application without an appropriate VATS License and we may be subject to regulatory penalties, including, but not limited to, rectification orders and warnings, fines, confiscation of illegal gains, and suspension or termination of operating of our website and mobile application. In addition, given the rapid evolving of the online consumer finance industry and the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For example, when Shanghai Erxu provides the service of introducing borrowers to our institutional funding partners to match transactions, it also provides the preliminary credit assessment services to our institutional funding investors for the borrowers referred by it, and if the preliminary credit assessment services provided by Shanghai Erxu to our institutional funding partners are deemed by the regulatory authorities as the credit reference business or information provision activities, Shanghai Erxu may be required to obtain a license for individual credit reference business, or alternatively, pursue cooperation with licensed credit reference agencies and submit the relevant cooperation agreement with the People’s Bank of China, or the PBOC or its provincial branches. If we cannot obtain the regulatory approval or complete the filing in a timely manner, we may be deemed as violating the applicable laws and regulations of credit reference services and subject to regulatory penalties, including cessation of business operations, confiscation of illegal gains, fines from RMB50,000 to RMB500,000, and even criminal liability. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—The laws and regulations governing online consumer 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” and “ —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.”
Year Ended December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Other income/(expenses) | ||||||||||||||||||||||||
Gain from quality assurance | 99,961 | 5,885 | 510,894 | 98,405 | — | — | ||||||||||||||||||
Realized gain/(loss) from financial guarantee derivatives | 31,999 | 169,103 | (157,244 | ) | 31,444 | — | — | |||||||||||||||||
Fair value change of financial guarantee derivatives | 146,653 | (383,061 | ) | 272,057 | (56,287 | ) | — | — | ||||||||||||||||
Gain from disposal of subsidiary | 20,611 | — | — | — | — | — | ||||||||||||||||||
Other income, net | 13,684 | 36,531 | 148,356 | 136,491 | 116,469 | 17,850 | ||||||||||||||||||
Total other income/(expenses) | 312,908 | (171,542 | ) | 774,063 | 210,053 | 116,469 | 17,850 | |||||||||||||||||
However, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of and filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.”
As of December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Selected Consolidated Balance Sheets Data: | ||||||||||||||||||||||||
Cash and cash equivalents | 404,678 | 1,891,131 | 1,616,164 | 2,324,542 | 2,632,174 | 403,398 | ||||||||||||||||||
Restricted cash (1) | 802,887 | 2,392,573 | 3,677,557 | 3,686,203 | 3,484,227 | 533,981 | ||||||||||||||||||
Short-term investments | 260,000 | 1,958,910 | 1,694,660 | 114,560 | 1,970,958 | 302,063 | ||||||||||||||||||
Quality assurance receivable | 286,812 | 1,152,769 | 2,064,366 | 3,649,642 | 1,121,554 | 171,886 | ||||||||||||||||||
Investments | 2,428 | 12,234 | 167,501 | 952,833 | 950,515 | 145,673 | ||||||||||||||||||
Contract assets | — | — | 112,103 | 20,555 | — | — | ||||||||||||||||||
Financial guarantee derivative assets | 167,291 | — | 56,287 | — | — | — | ||||||||||||||||||
Total assets | 2,147,291 | 8,603,663 | 13,142,467 | 18,304,456 | 14,882,185 | 2,280,795 | ||||||||||||||||||
6
As of December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Payable to platform customers | 421,659 | 1,113,966 | 905,034 | 684,630 | 103,453 | 15,855 | ||||||||||||||||||
Quality assurance payable | 473,704 | 2,062,844 | 3,819,379 | 4,776,153 | — | — | ||||||||||||||||||
Deferred revenue | 162,896 | 265,094 | — | — | — | — | ||||||||||||||||||
Expected credit losses for quality assurance commitment | — | — | — | — | 2,390,501 | 366,360 | ||||||||||||||||||
Deferred guarantee income | — | — | — | — | 1,259,396 | 193,011 | ||||||||||||||||||
Provision for payment to investor reserve fund investor | — | 107,660 | — | — | — | — | ||||||||||||||||||
Contract liabilities | — | — | 165,469 | 55,728 | 3,447 | 528 | ||||||||||||||||||
Financial guarantee derivative liabilities | — | 215,770 | — | — | — | — | ||||||||||||||||||
Total liabilities | 1,375,069 | 4,921,475 | 7,156,729 | 10,292,976 | 6,451,855 | 988,790 | ||||||||||||||||||
Total mezzanine equity | 1,210,645 | — | — | — | — | — | ||||||||||||||||||
Total shareholders’ equity/(deficit) | (438,423 | ) | 3,682,188 | 5,985,738 | 8,011,480 | 8,430,330 | 1,292,005 | |||||||||||||||||
Cash and Asset Flows through Our Organization
As of December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Restricted cash: | ||||||||||||||||||||||||
Quality assurance commitment and quality assurance fund | 329,549 | 1,058,617 | 2,414,449 | 1,473,749 | 1,671,785 | 256,212 | ||||||||||||||||||
Investor reserve funds | 51,679 | 175,215 | 17,971 | 41,958 | — | — | ||||||||||||||||||
Cash received from investors and borrowers | 421,659 | 1,113,966 | 905,034 | 684,630 | 103,453 | 15,854 | ||||||||||||||||||
Cash received via consolidated trust that has not yet been distributed | — | 44,775 | 303,667 | 799,646 | 482,285 | 73,913 | ||||||||||||||||||
Collateral for short-term borrowings | — | — | 26,000 | 251,853 | — | — | ||||||||||||||||||
Escrow accounts | — | — | 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 | ||||||||||||||||||
Total restricted cash | 802,887 | 2,392,573 | 3,677,557 | 3,686,203 | 3,484,227 | 533,981 | ||||||||||||||||||
Under PRC laws and regulations, our PRC subsidiaries and the consolidated variable interest entities are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to examination by the banks designated by SAFE. The amounts restricted include theinclude restrictedDoing Business in China—We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and restrictedfinancing 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.”
paid-up
capital and the statutory reserve funds of our PRC subsidiaries and the net assets of the consolidated variable interest entities in which we have no legal ownership, totaling RMB4.6 billion, RMB6.3 billion and RMB7.8 billion (US$1.2 billion) as of December 31, 2019, 2020 and 2021, respectively. For risks relating to the fund flows of our operations in China, see “Item 3. Key Information—D. Risk Factors—Risks Related to Under PRC law, FinVolution Group may provide funding to our PRC subsidiaries only through capital contributions or loans, and to our PRC consolidated variable interest entities only through loans, subject to satisfaction of applicable government registration and approval requirements.
Our board of directors declared dividends in March 2019, March 2020, March 2021 and March 2022. In addition, in March 2022, our board of directors approved an annual cash equivalents. The following table presentsdividend policy, pursuant to which we will declare and distribute a recurring cash dividend at an amount of no less than 10% of our selected restated consolidated cash flow data fornet income after tax in the years ended December 31, 2016, 2017, 2018, 2019previous fiscal year in the future. See “Item 8. Financial Information—A. Consolidated Statements and 2020.Other Financial Information—Dividend Policy.” For PRC and United States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”
7
As of December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Summary Consolidated Cash Flows Data: | ||||||||||||||||||||||||
Net cash provided by/(used in) operating activities | 1,088,227 | 3,409,451 | 1,884,956 | (215,522 | ) | 2,206,909 | 338,224 | |||||||||||||||||
Net cash (used in)/provided by investing activities | (684,112 | ) | (2,450,800 | ) | (1,447,013 | ) | (828,219 | ) | 1,041,496 | 159,616 | ||||||||||||||
Net cash provided by/(used in) financing activities | 438,701 | 2,132,933 | 530,097 | 1,749,512 | (3,091,279 | ) | (473,759 | ) | ||||||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2,493 | (15,445 | ) | 41,977 | 11,253 | (51,470 | ) | (7,889 | ) | |||||||||||||||
Net increase in cash, cash equivalents and restricted cash | 845,309 | 3,076,139 | 1,010,017 | 717,024 | 105,656 | 16,192 | ||||||||||||||||||
Cash, cash equivalents and restricted cash at beginning of year | 362,256 | 1,207,565 | 4,283,704 | 5,293,721 | 6,010,745 | 921,187 | ||||||||||||||||||
Cash, cash equivalents and restricted cash at end of year | 1,207,565 | 4,283,704 | 5,293,721 | 6,010,745 | 6,116,401 | 937,379 | ||||||||||||||||||
Financial Information Related to the Consolidated Variable Interest Entities
The following table presents the condensed consolidating schedule of financial position for the consolidated variable interest entities and other entities as of the dates presented.
Condensed Consolidated Statements of Income Information
For the Year Ended December 31, 2021 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousands) | ||||||||||||||||||||||||
Third-party revenues | — | 1,132,093 | 4,057 | 8,333,978 | — | 9,470,128 | ||||||||||||||||||
Inter-company revenues (1) | — | 2,545,816 | 16,400 | 796,071 | (3,358,287 | ) | — | |||||||||||||||||
Net revenues | — | 3,677,909 | 20,457 | 9,130,049 | (3,358,287 | ) | 9,470,128 | |||||||||||||||||
Third-party expenses | (18,617 | ) | (892,810 | ) | (18,850 | ) | (3,441,504 | ) | — | (4,371,781 | ) | |||||||||||||
Inter-company expenses (1) | — | (812,471 | ) | — | (2,545,816 | ) | 3,358,287 | — | ||||||||||||||||
Related party expenses | — | — | — | (7,503 | ) | — | (7,503 | ) | ||||||||||||||||
Provision for accounts receivable and contract assets | — | (4,288 | ) | — | (134,938 | ) | — | (139,226 | ) | |||||||||||||||
Provision for loans receivable | — | (406,560 | ) | — | 32,317 | — | (374,243 | ) | ||||||||||||||||
Credit losses for quality assurance commitment | — | — | — | (1,963,609 | ) | — | (1,963,609 | ) | ||||||||||||||||
Total operating expenses | (18,617 | ) | (2,116,129 | ) | (18,850 | ) | (8,061,053 | ) | 3,358,287 | (6,856,362 | ) | |||||||||||||
Income (loss) from subsidiaries and VIEs (2) | 2,526,062 | 1,015,784 | 2,369,387 | (448 | ) | (5,910,785 | ) | — | ||||||||||||||||
Income from operations | 2,507,445 | 2,577,564 | 2,370,994 | 1,068,548 | (5,910,785 | ) | 2,613,766 | |||||||||||||||||
Other income, net | 1,502 | 26,847 | 345 | 93,674 | — | 122,368 | ||||||||||||||||||
Profit before income tax expenses | 2,508,947 | 2,604,411 | 2,371,339 | 1,162,222 | (5,910,785 | ) | 2,736,134 | |||||||||||||||||
Income tax expenses | — | (92,428 | ) | (3,927 | ) | (144,463 | ) | — | (240,818 | ) | ||||||||||||||
Net profit | 2,508,947 | 2,511,983 | 2,367,412 | 1,017,759 | (5,910,785 | ) | 2,495,316 | |||||||||||||||||
Net loss attributable to non-controlling interest shareholders | — | 14,079 | — | — | (448 | ) | 13,631 | |||||||||||||||||
Net profit attributable to FinVolution Group’s ordinary shareholders | 2,508,947 | 2,526,062 | 2,367,412 | 1,017,759 | (5,911,233 | ) | 2,508,947 | |||||||||||||||||
8
Condensed Consolidated Statements of Income Information
For the Year Ended December 31, 2020 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousands) | ||||||||||||||||||||||||
Third-party revenues | — | 533,106 | 36,882 | 6,993,099 | — | 7,563,087 | ||||||||||||||||||
Inter-company revenues (1) | — | 1,098,946 | 48,303 | 159,319 | (1,306,568 | ) | — | |||||||||||||||||
Net revenues | — | 1,632,052 | 85,185 | 7,152,418 | (1,306,568 | ) | 7,563,087 | |||||||||||||||||
Third-party expenses | (20,720 | ) | (581,725 | ) | (26,690 | ) | (2,000,511 | ) | — | (2,629,646 | ) | |||||||||||||
Inter-company expenses (1) | — | (159,319 | ) | (18,086 | ) | (1,129,163 | ) | 1,306,568 | — | |||||||||||||||
Related party expenses | — | — | — | (10,104 | ) | — | (10,104 | ) | ||||||||||||||||
Provision for accounts receivable and contract assets | — | (28,274 | ) | — | (116,387 | ) | — | (144,661 | ) | |||||||||||||||
Provision for loans receivable | — | (160,932 | ) | — | (302,243 | ) | — | (463,175 | ) | |||||||||||||||
Credit losses for quality assurance commitment | — | — | — | (2,007,968 | ) | — | (2,007,968 | ) | ||||||||||||||||
Total operating expenses | (20,720 | ) | (930,250 | ) | (44,776 | ) | (5,566,376 | ) | 1,306,568 | (5,255,554 | ) | |||||||||||||
Income (loss) from subsidiaries and VIEs (2) | 1,991,262 | 1,395,376 | 2,036,131 | (2,372 | ) | (5,420,397 | ) | — | ||||||||||||||||
Income from operations | 1,970,542 | 2,097,178 | 2,076,540 | 1,583,670 | (5,420,397 | ) | 2,307,533 | |||||||||||||||||
Other income, net | 2,158 | 13,162 | 319 | 100,830 | — | 116,469 | ||||||||||||||||||
Profit before income tax expenses | 1,972,700 | 2,110,340 | 2,076,859 | 1,684,500 | (5,420,397 | ) | 2,424,002 | |||||||||||||||||
Income tax expenses | — | (125,569 | ) | (10,152 | ) | (319,700 | ) | — | (455,421 | ) | ||||||||||||||
Net profit | 1,972,700 | 1,984,771 | 2,066,707 | 1,364,800 | (5,420,397 | ) | 1,968,581 | |||||||||||||||||
Net loss attributable to non-controlling interest shareholders | — | 6,491 | — | — | (2,372 | ) | 4,119 | |||||||||||||||||
Net profit attributable to FinVolution Group’s ordinary shareholders | 1,972,700 | 1,991,262 | 2,066,707 | 1,364,800 | (5,422,769 | ) | 1,972,700 | |||||||||||||||||
9
Condensed Consolidated Statements of Income Information
For the Year Ended December 31, 2019 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousands) | ||||||||||||||||||||||||
Third-party revenues | — | 218,433 | 1,456 | 5,742,868 | — | 5,962,757 | ||||||||||||||||||
Inter-company revenues (1) | — | 1,811,586 | 49,546 | 27,033 | (1,888,165 | ) | — | |||||||||||||||||
Net revenues | — | 2,030,019 | 51,002 | 5,769,901 | (1,888,165 | ) | 5,962,757 | |||||||||||||||||
Third-party expenses | (25,590 | ) | (447,653 | ) | (24,765 | ) | (2,213,442 | ) | — | (2,711,450 | ) | |||||||||||||
Inter-company expenses (1) | — | (24,011 | ) | (27,033 | ) | (1,837,121 | ) | 1,888,165 | — | |||||||||||||||
Related party expenses | — | — | — | (43,494 | ) | — | (43,494 | ) | ||||||||||||||||
Provision for accounts receivable and contract assets | — | (3,811 | ) | — | (258,071 | ) | — | (261,882 | ) | |||||||||||||||
Provision for loans receivable | — | (42,241 | ) | — | (257,263 | ) | — | (299,504 | ) | |||||||||||||||
Total operating expenses | (25,590 | ) | (517,716 | ) | (51,798 | ) | (4,609,391 | ) | 1,888,165 | (3,316,330 | ) | |||||||||||||
Income (loss) from subsidiaries and VIEs (2) | 2,390,542 | 1,046,664 | 2,277,941 | (1,128 | ) | (5,714,019 | ) | — | ||||||||||||||||
Income from operations | 2,364,952 | 2,558,967 | 2,277,145 | 1,159,382 | (5,714,019 | ) | 2,646,427 | |||||||||||||||||
Other income, net | 7,898 | 28,976 | 67,182 | 32,435 | — | 136,491 | ||||||||||||||||||
Gain from quality assurance | — | — | — | 98,405 | — | 98,405 | ||||||||||||||||||
Realized gain from financial guarantee derivatives | — | — | — | 31,444 | — | 31,444 | ||||||||||||||||||
Fair value change of financial guarantee derivatives | — | — | — | (56,287 | ) | — | (56,287 | ) | ||||||||||||||||
Profit before income tax expenses | 2,372,850 | 2,587,943 | 2,344,327 | 1,265,379 | (5,714,019 | ) | 2,856,480 | |||||||||||||||||
Income tax expenses | — | (196,861 | ) | (16,597 | ) | (268,504 | ) | — | (481,962 | ) | ||||||||||||||
Net profit | 2,372,850 | 2,391,082 | 2,327,730 | 996,875 | (5,714,019 | ) | 2,374,518 | |||||||||||||||||
Net profit attributable to non-controlling interest shareholders | — | (540 | ) | — | — | (1,128 | ) | (1,668 | ) | |||||||||||||||
Net profit attributable to FinVolution Group’s ordinary shareholders | 2,372,850 | 2,390,542 | 2,327,730 | 996,875 | (5,715,147 | ) | 2,372,850 | |||||||||||||||||
10
Condensed Consolidated Balance Sheets Information
As of December 31, 2021 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents | 38,231 | 2,199,438 | 3,877 | 2,176,581 | — | 4,418,127 | ||||||||||||||||||
Restricted cash | — | 381,582 | — | 3,691,832 | — | 4,073,414 | ||||||||||||||||||
Short-term investments | — | 31,378 | — | 1,173,523 | — | 1,204,901 | ||||||||||||||||||
Accounts receivable and contract assets | — | 85,767 | — | 1,805,079 | — | 1,890,846 | ||||||||||||||||||
Quality assurance receivable | — | — | — | 931,798 | — | 931,798 | ||||||||||||||||||
Property, equipment and software, net | — | 69,156 | — | 43,241 | — | 112,397 | ||||||||||||||||||
Intangible assets | — | 63,760 | — | 35,187 | — | 98,947 | ||||||||||||||||||
Loans and receivables, net of credit loss allowance for loans receivables | — | 285,781 | — | 1,696,495 | — | 1,982,276 | ||||||||||||||||||
Investments | — | 150,510 | — | 820,607 | — | 971,117 | ||||||||||||||||||
Investment in subsidiaries and VIEs (3) | 10,574,557 | 6,108,415 | 9,984,072 | 70,578 | (26,737,622 | ) | — | |||||||||||||||||
Deferred tax assets | — | 112,247 | — | 343,494 | — | 455,741 | ||||||||||||||||||
Prepaid expenses and other assets | 2,795 | 220,173 | 3,816 | 1,672,654 | — | 1,899,438 | ||||||||||||||||||
Amounts due from Group companies (4) | 694,123 | 3,534,245 | 744,700 | 2,200,275 | (7,173,343 | ) | — | |||||||||||||||||
Right of use assets | — | 197 | — | 48,941 | — | 49,138 | ||||||||||||||||||
Goodwill (9) | — | 50,411 | — | — | — | 50,411 | ||||||||||||||||||
Total assets | 11,309,706 | 13,293,060 | 10,736,465 | 16,710,285 | (33,910,965 | ) | 18,138,551 | |||||||||||||||||
Payable to platform customers | — | — | — | 81,150 | — | 81,150 | ||||||||||||||||||
Deferred guarantee income | — | — | — | 1,089,503 | — | 1,089,503 | ||||||||||||||||||
Expected credit losses for quality assurance commitment | — | — | — | 3,188,561 | — | 3,188,561 | ||||||||||||||||||
Payroll and welfare payable | — | 102,032 | 4,189 | 146,697 | — | 252,918 | ||||||||||||||||||
Taxes payable | — | 143,411 | — | 57,237 | — | 200,648 | ||||||||||||||||||
Funds payable to investors of consolidated trusts | — | — | — | 1,795,640 | — | 1,795,640 | ||||||||||||||||||
Contract liability | 1,610 | — | — | 6,826 | — | 8,436 | ||||||||||||||||||
Amounts due to Group companies (4) | 647,199 | 2,221,430 | 299,662 | 4,005,052 | (7,173,343 | ) | — | |||||||||||||||||
Amounts due to related party | — | — | — | 2,265 | — | 2,265 | ||||||||||||||||||
Deferred tax liabilities | — | 91,976 | — | 45,656 | — | 137,632 | ||||||||||||||||||
Accrued expenses and other liabilities | 5,647 | 34,544 | 71 | 598,570 | — | 638,832 | ||||||||||||||||||
Leasing liabilities | — | 172 | — | 33,184 | — | 33,356 | ||||||||||||||||||
Total liabilities | 654,456 | 2,593,565 | 303,922 | 11,050,341 | (7,173,343 | ) | 7,428,941 | |||||||||||||||||
Total FinVolution Group shareholders’ equity (3) | 10,655,250 | 10,574,557 | 10,432,543 | 5,659,944 | (26,667,044 | ) | 10,655,250 | |||||||||||||||||
Non-controlling interest | — | 124,938 | — | — | (70,578 | ) | 54,360 | |||||||||||||||||
Total shareholders’ equity | 10,655,250 | 10,699,495 | 10,432,543 | 5,659,944 | (26,737,622 | ) | 10,709,610 | |||||||||||||||||
Total liabilities and shareholders’ equity | 11,309,706 | 13,293,060 | 10,736,465 | 16,710,285 | (33,910,965 | ) | 18,138,551 | |||||||||||||||||
11
Condensed Consolidated Balance Sheets Information
As of December 31, 2020 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents | 28,435 | 941,996 | 1,194 | 1,660,549 | — | 2,632,174 | ||||||||||||||||||
Restricted cash | — | 307,428 | — | 3,176,799 | — | 3,484,227 | ||||||||||||||||||
Short-term investments | — | — | — | 1,970,958 | — | 1,970,958 | ||||||||||||||||||
Accounts receivable | — | 178,350 | — | 685,556 | — | 863,906 | ||||||||||||||||||
Quality assurance receivable | — | — | — | 1,121,554 | — | 1,121,554 | ||||||||||||||||||
Property, equipment and software, net | — | 26,866 | — | 67,010 | — | 93,876 | ||||||||||||||||||
Intangible assets | — | 63,760 | — | 35,187 | — | 98,947 | ||||||||||||||||||
Loans and receivables, net of credit loss allowance for loans receivables | — | 247,045 | — | 2,107,837 | — | 2,354,882 | ||||||||||||||||||
Investments | — | 62,434 | — | 888,081 | — | 950,515 | ||||||||||||||||||
Investment in subsidiaries and VIEs (3) | 7,949,999 | 5,076,480 | 7,534,510 | 48,147 | (20,609,136 | ) | — | |||||||||||||||||
Deferred tax assets | — | 6,247 | — | 149,511 | — | 155,758 | ||||||||||||||||||
Prepaid expenses and other assets | 1,247 | 42,967 | 2,932 | 1,002,863 | — | 1,050,009 | ||||||||||||||||||
Amounts due from Group companies (4) | 1,302,606 | 1,766,747 | 502,970 | — | (3,572,323 | ) | — | |||||||||||||||||
Right of use assets | — | 583 | — | 54,385 | — | 54,968 | ||||||||||||||||||
Goodwill (9) | — | 50,411 | — | — | — | 50,411 | ||||||||||||||||||
Total assets | 9,282,287 | 8,771,314 | 8,041,606 | 12,968,437 | (24,181,459 | ) | 14,882,185 | |||||||||||||||||
Payable to platform customers | — | — | — | 103,453 | — | 103,453 | ||||||||||||||||||
Deferred guarantee income | — | — | — | 1,259,396 | — | 1,259,396 | ||||||||||||||||||
Expected credit losses for quality assurance commitment | — | — | — | 2,390,501 | — | 2,390,501 | ||||||||||||||||||
Payroll and welfare payable | — | 79,040 | 8,994 | 132,955 | — | 220,989 | ||||||||||||||||||
Taxes payable | — | 100,846 | — | 53,552 | — | 154,398 | ||||||||||||||||||
Funds payable to investors of consolidated trusts | — | — | — | 1,661,841 | — | 1,661,841 | ||||||||||||||||||
Contract liability | 3,447 | — | — | — | — | 3,447 | ||||||||||||||||||
Amounts due to Group companies (4) | 882,963 | 485,461 | 51,958 | 2,151,941 | (3,572,323 | ) | — | |||||||||||||||||
Amounts due to related party | — | — | — | 1,984 | — | 1,984 | ||||||||||||||||||
Deferred tax liabilities | — | 36,331 | — | 67,217 | — | 103,548 | ||||||||||||||||||
Accrued expenses and other liabilities | 32,571 | 3,945 | 40 | 472,446 | — | 509,002 | ||||||||||||||||||
Leasing liabilities | — | 521 | — | 42,775 | — | 43,296 | ||||||||||||||||||
Total liabilities | 918,981 | 706,144 | 60,992 | 8,338,061 | (3,572,323 | ) | 6,451,855 | |||||||||||||||||
Total FinVolution Group shareholders’ equity (3) | 8,363,306 | 7,949,999 | 7,980,614 | 4,630,376 | (20,560,989 | ) | 8,363,306 | |||||||||||||||||
Non-controlling interest | — | 115,171 | — | — | (48,147 | ) | 67,024 | |||||||||||||||||
Total shareholders’ equity | 8,363,306 | 8,065,170 | 7,980,614 | 4,630,376 | (20,609,136 | ) | 8,430,330 | |||||||||||||||||
Total liabilities and shareholders’ equity | 9,282,287 | 8,771,314 | 8,041,606 | 12,968,437 | (24,181,459 | ) | 14,882,185 | |||||||||||||||||
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Condensed Consolidated Cash Flows Information
For the Year Ended December 31, 2021 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousand) | ||||||||||||||||||||||||
Cash used in operating activities under service agreements for Intercompany (5) | — | (534,943 | ) | (45 | ) | (2,313,224 | ) | 2,848,212 | — | |||||||||||||||
Cash provided by operating activities under service agreements for Intercompany (5) | — | 2,290,805 | 22,419 | 534,988 | (2,848,212 | ) | — | |||||||||||||||||
Net cash provided by (used in) operating activities for Third-party | (45,587 | ) | (716,930 | ) | (19,691 | ) | 1,412,435 | — | 630,227 | |||||||||||||||
Net cash provided by (used in) operating activities | (45,587 | ) | 1,038,932 | 2,683 | (365,801 | ) | — | 630,227 | ||||||||||||||||
Capital contribution to Group companies (6) | — | — | — | (22,432 | ) | 22,432 | — | |||||||||||||||||
Collection of loans from Group companies (7) | 846,737 | 186,283 | 256,537 | 389,043 | (1,678,600 | ) | — | |||||||||||||||||
Cash paid as loans extended to Group companies (8) | (238,254 | ) | (2,296,392 | ) | (92,801 | ) | (2,328,235 | ) | 4,955,682 | — | ||||||||||||||
Other investing activities | — | 326,328 | — | 1,668,517 | — | 1,994,845 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 608,483 | (1,783,781 | ) | 163,736 | (293,107 | ) | 3,299,514 | 1,994,845 | ||||||||||||||||
Capital contribution from Group companies (6) | — | 22,432 | — | — | (22,432 | ) | — | |||||||||||||||||
Repayment of loans to Group companies (7) | (839,719 | ) | (285,119 | ) | (389,043 | ) | (164,719 | ) | 1,678,600 | — | ||||||||||||||
Cash received as loans from Group companies (8) | 603,955 | 2,341,182 | 225,307 | 1,785,238 | (4,955,682 | ) | — | |||||||||||||||||
Other financing activities | (310,221 | ) | 967 | — | 69,454 | — | (239,800 | ) | ||||||||||||||||
Net cash (provided by) used in financing activities | (545,985 | ) | 2,079,462 | (163,736 | ) | 1,689,973 | (3,299,514 | ) | (239,800 | ) | ||||||||||||||
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Condensed Consolidated Cash Flows Information
For the Year Ended December 31, 2020 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousand) | ||||||||||||||||||||||||
Cash used in operating activities under service agreements for Intercompany (5) | — | (101,577 | ) | (36,047 | ) | (2,143,205 | ) | 2,280,829 | — | |||||||||||||||
Cash provided by operating activities under service agreements for Intercompany (5) | — | 2,088,211 | 54,994 | 137,624 | (2,280,829 | ) | — | |||||||||||||||||
Net cash provided by (used in) operating activities for Third-party | (6,282 | ) | (105,519 | ) | (96,939 | ) | 2,415,649 | — | 2,206,909 | |||||||||||||||
Net cash provided by (used in) operating activities | (6,282 | ) | 1,881,115 | (77,992 | ) | 410,068 | — | 2,206,909 | ||||||||||||||||
Collection of loans from Group companies (7) | 557,936 | — | — | — | (557,936 | ) | — | |||||||||||||||||
Other investing activities | — | (263,706 | ) | 36,545 | 1,268,657 | — | 1,041,496 | |||||||||||||||||
Net cash provided by (used in) investing activities | 557,936 | (263,706 | ) | 36,545 | 1,268,657 | (557,936 | ) | 1,041,496 | ||||||||||||||||
Repayment of loans to Group companies (7) | — | (557,936 | ) | — | — | 557,936 | — | |||||||||||||||||
Other financing activities | (636,936 | ) | (167,381 | ) | — | (2,286,962 | ) | — | (3,091,279 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | (636,936 | ) | (725,317 | ) | — | (2,286,962 | ) | 557,936 | (3,091,279 | ) | ||||||||||||||
For the Year Ended December 31, 2019 | ||||||||||||||||||||||||
FinVolution Group | Company Subsidiaries | Primary Beneficiary of Consolidated Variable Interest Entities | Consolidated Variable Interest Entities and Their Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||
(RMB in thousand) | ||||||||||||||||||||||||
Cash used in operating activities under service agreements for Intercompany (5) | — | (10,178 | ) | (16,047 | ) | (239,476 | ) | 265,701 | — | |||||||||||||||
Cash provided by operating activities under service agreements for Intercompany (5) | — | 156,745 | 82,731 | 26,225 | (265,701 | ) | — | |||||||||||||||||
Net cash provided by (used in) operating activities for Third-party | 8,474 | (401,085 | ) | (32,800 | ) | 209,889 | — | (215,522 | ) | |||||||||||||||
Net cash provided by (used in) operating activities | 8,474 | (254,518 | ) | 33,884 | (3,362 | ) | — | (215,522 | ) | |||||||||||||||
Collection of loans from Group companies (7) | 86,471 | — | — | — | (86,471 | ) | — | |||||||||||||||||
Cash paid as loans extended to Group companies (8) | — | (31,920 | ) | — | — | 31,920 | — | |||||||||||||||||
Other investing activities | — | 189,964 | (36,545 | ) | (981,638 | ) | — | (828,219 | ) | |||||||||||||||
Net cash provided by (used in) investing activities | 86,471 | 158,044 | (36,545 | ) | (981,638 | ) | (54,551 | ) | (828,219 | ) | ||||||||||||||
Repayment of loans to Group companies (7) | — | (86,471 | ) | — | — | 86,471 | — | |||||||||||||||||
Cash received as loans from Group companies (8) | — | — | — | 31,920 | (31,920 | ) | — | |||||||||||||||||
Other financing activities | (401,400 | ) | 150,001 | — | 2,000,911 | — | 1,749,512 | |||||||||||||||||
Net cash provided by (used in) financing activities | (401,400 | ) | 63,530 | — | 2,032,831 | 54,551 | 1,749,512 | |||||||||||||||||
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For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future according to our dividend policy:
(i) Statutory Tax and StandardRates | ||||
Hypothetical pre-tax earnings | 100 | % | ||
Tax on earnings at statutory rate of 25% (iii) | (25 | )% | ||
Net earnings available for distribution | 75 | % | ||
Withholding tax at standard rate of 10% (iv) | (7.5 | )% | ||
Net distribution to Parent/Shareholders | 67.5 | % | ||
Notes:
| (ii) | Under the terms of contractual arrangements, our PRC subsidiaries may charge the consolidated variable interest entities for services provided to the consolidated variable interest entities. These fees shall be recognized as expenses of the consolidated variable interest entities, with a corresponding amount as service income by our PRC subsidiaries and eliminate in consolidation. For income tax purposes, our PRC subsidiaries and the consolidated variable interest entities file income tax returns on a separate company basis. The fees paid are recognized as a tax deduction by the consolidated variable interest entities and as income by our PRC subsidiaries and are tax neutral. |
| (iii) | Certain of our subsidiaries and consolidated variable interest entities qualify for a preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective. |
| (iv) | The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the foreign invested enterprise’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied. |
The table above has been prepared under the assumption that all profits of the consolidated variable interest entities will be distributed as fees to our PRC subsidiaries under tax neutral contractual arrangements. If, in the future, the accumulated earnings of the consolidated variable interest entities exceed the fees paid to our PRC subsidiaries (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), the consolidated variable interest entities could, as a matter of last resort, make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash in the consolidated variable interest entities. This would result in such transfer being non-deductible expenses for the consolidated variable interest entities but still taxable income for the PRC subsidiaries. Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that this scenario would happen.
| (1) | It represents the intercompany services eliminated at the consolidation level, including technical development services and technical support services. |
| (2) | It represents the elimination of the income from investment among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries. |
| (3) | It represents the elimination of the investment among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries. |
| (4) | It represents the elimination of intercompany balances among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries. |
| (5) | It represents the cash received and cash paid for intercompany services, including technical development services and technical support services. |
| (6) | Capital contribution at intercompany level. |
| (7) | Collection of loans from group companies, and repayment of loans to group companies. |
| (8) | Cash paid as loans extended to group companies, and cash received as loans from group companies. |
| (9) | In October 2017, one equity subsidiary and one consolidated variable interest entity’s subsidiary of FinVolution Group entered into a series of share purchase agreements with shareholders of HB micro lending company (“HB”). After the transactions, the Group was able to control HB. Goodwill and non-controlling interest were recognized in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations.” In this consolidated variable interest entity’s consolidating schedule, HB’s financial information was recorded in the Equity Subsidiaries. The Group applied equity method in accounting for the investment of consolidated variable interest entity’s subsidiary in HB due to it can exercise significant influence but does not have control. Total assets for HB were RMB256,405 and RMB256,390 as of December 31, 2020 and 2021. Total liabilities for HB were RMB158,799 and RMB92,145 as of December 31, 2020 and 2021. |
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Transfers of Cash within the Group
The following is a summary of cash transfers that have occurred between our subsidiaries and the consolidated variable interest entities:
For the Year Ended December 31, | ||||||||||||
2019 | 2020 | 2021 | ||||||||||
(RMB in thousand) | ||||||||||||
Cash paid by the variable interest entities to our subsidiaries under service agreements | (239,476 | ) | (2,143,205 | ) | (2,313,224 | ) | ||||||
Cash received by the variable interest entities from our subsidiaries under service agreements | 26,225 | 137,624 | 534,988 | |||||||||
Collection of loans by the variable interest entities from our subsidiaries for intra-group investing | — | — | 389,043 | |||||||||
Cash paid as loans by the variable interest entities to our subsidiaries for intra-group investing | — | — | (2,328,235 | ) | ||||||||
Repayment of loans by the variable interest entities to our subsidiaries for intra-group financing | — | — | (164,719 | ) | ||||||||
Cash received as loans by the variable interest entities from our subsidiaries for intra-group financing | 31,920 | — | 1,785,238 | |||||||||
Summary Risk Factors
Investing in our ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our ADSs. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Item 3. Key Information—D. Risk Factors.”
Risks Related to Our Business
We operate in China’s online consumer finance platform market, an emerging and evolving industry, which makes it difficult to evaluate our future prospects.
We change our business model for improvement from time to time, which may not be successful ultimately.
The laws and regulations governing online consumer 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.
Our cooperation with institutional funding partners may expose us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners.
Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
We collaborate with third-party trust management companies to set up trusts with other investors to extend loans through these trusts to borrowers introduced by us. We may be deemed to be an illegal financial institution under such trust arrangement, which may materially and adversely affect our business and financial condition.
If we are unable to retain existing borrowers or institutional funding partners or attract new borrowers or institutional funding partners, or if we are unable to maintain or increase the volume of loans facilitated through our platform, our business and results of operations will be adversely affected.
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.
Any failure to comply with any existing or future laws and regulations related to data protection, may subject usdata security, cybersecurity or personal information protection could lead to civil liabilities, administrative penalties or even criminal penalties.
other regulatory actions, which could negatively affect our operating results and business.If our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.
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 information and misappropriation of funds of our borrowers and institutional funding partners, subject us to liabilities, cause reputational harm and adversely impact our results of operations and financial condition.Risks Related to Our Corporate Structure
We are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities and we conduct our operations in China primarily through (i) our subsidiaries in China, (ii) the consolidated variable interest entities with which we have maintained contractual arrangements, and (iii) the subsidiaries of the consolidated variable interest entities. Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest in the consolidated variable interest entities and their subsidiaries. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the consolidated variable interest entities and their respective subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and our company as a whole.
If the PRC government deems that the contractual arrangements in relation to ourthe 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.
We rely on contractual arrangements with ourthe consolidated variable interest entities for a significant portion of our business operations, and such contractual arrangements may not be as effective as direct ownership in providing operational control.
Any failure by the board of directors of our consolidated variable interest entities, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance of obligations under the contractual arrangements by our consolidated variable interest entities, shareholders of our consolidated variable interest entities, and other parties to the contractual arrangements to exercise control over our consolidated variable interest entities. The shareholders of our consolidated variable interest entities may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated variable interest entities. Although we have the right to replace any shareholder of our consolidated variable interest entities under the contractual arrangements, if any of these shareholders are uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings, the outcome of which will be subject to uncertainties. See “—Any failure by our consolidated variable interest entities, shareholders of our consolidated variable interest entities or other parties to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with our consolidated variable interest entities and shareholders of our consolidated variable interest entities may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
The shareholders of ourthe consolidated variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.
A severe or prolonged downturn in the Chinese or global economy could reduce the demand for consumer loans and investments, which could materially and adversely affect our business and financial condition.
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs.
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.
The PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline.
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Risks Related to Our American Depositary Shares
The market price for our ADSs may be volatile.
17
A. | [Reserved] |
B. | Capitalization and Indebtedness |
Not applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
D. | Risk Factors |
Risks Related to Our Business
We operate in China’s online consumer finance platform market, an emerging and evolving industry, which makes it difficult to evaluate our future prospects.
China’s online consumer finance industry is new and may not develop as expected. The regulatory framework for this industry is also evolving and may remain uncertain for the foreseeable future. China’s online consumer finance industry in general remains at a rather preliminary development stage and may not develop at the anticipated growth rate. It is possible that the PRC laws and regulations may change in ways that do not favor our development. If that happens, there may not be adequate loans facilitated on our platform and our current business model may be negatively affected. As a new industry, there are very few established players whose business models we can follow or build upon. Potential borrowers and institutional funding partners may not be familiar with this new industry and may have difficulty distinguishing our services from those of our competitors. Attracting and retaining borrowers and institutional funding partners is critical to increasing the volume of loans facilitated through our platform. The emerging and evolving online consumer finance market makes it difficult to effectively assess our future prospects. In addition, our business has grown substantially in recent years, but our past growth rates may not be indicative of our future growth.
18
You should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving industry. These risks and challenges include our ability to, among other things:
navigate an evolving regulatory environment;
expand the base of borrowers and institutional funding partners served on our platform;
maintain our credit standards;
enhance our risk management capabilities;
improve our operational efficiency;
continue to scale our technology infrastructure to support the growth of our platform and higher transaction volume;
broaden our loan product offerings;
operate without being adversely affected by the negative publicity about the industry in general and our company in particular;
maintain the security of our platform and the confidentiality of the information provided and utilized across our platform;
cultivate a vibrant consumer finance ecosystem;
attract, retain and motivate talented employees; and
defend ourselves in litigation, and against regulatory, intellectual property, privacy or other claims.
If the market for our platform does not develop as we expect, if we fail to educate potential borrowers and institutional funding partners about the value of our platform and services, or if we fail to address the needs of our target customers, our reputation, business and results of operations will be materially and adversely affected.
We change our business model for improvement from time to time, which may not be successful ultimately.
We have 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 funding sources from individual investors to institutional funding partners. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office and other regulatory authorities jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors.
In connection with this improvement, our business operations went through considerable changes, such as offering new products and services, adjusting our business process and model, hiring new employees and building up new departments, and collaborating with new business partners. We may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during the transitional period. Additionally, it is uncertain whether these efforts will eventually bring us benefits as we anticipated. If we fail to achieve some or all of the expected benefits of this business transformation, our competitive position, business, financial condition and results of operations could be materially and adversely affected.
19
Even if our business model transformation is implemented successfully as we planned, the actual costs incurred in this process may be substantially higher than we anticipated. There might also be other issues and negative consequences arising from our business transformation such as loss of borrower base, internal control issues, changes in employee structure as well as other unexpected consequences, any of which may have a material adverse effect on our competitive position, business, financial condition and results of operations.
The laws and regulations governing online consumer 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.
We started our business as an online lending information intermediary. In August 2016, the China Banking Regulatory Commission, or the CBRC, together with three other PRC regulatory agencies jointly issued the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, or the Interim Measures. The Interim Measures, among other things, defined online lending information intermediaries as financial information intermediary companies that facilitate loans online between persons, including individual, companies and other organizations. The Interim Measures further introduced a record-filing and licensing regime and provided general obligations and certain prohibited activities of the online lending information intermediaries. Pursuant to the Interim Measures, local financial regulatory authorities may conduct onsite inspections or inquiries from time to time and instruct us to rectify our business operations that are deemed not to be in compliance with the Interim Measures.
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 reiterates 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.
In November 2019, we noticed that several internet media reported that the National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Guidance on Pilot Transforming Online Lending Information Intermediaries into Micro Lending Companies, or the Pilot Transforming Guidance, pursuant to which the qualified online lending information intermediaries may apply to be transformed into micro-lending companies, with operations nationwide or in a single province only. In order to be qualified for being transformed into a micro-lending company with nationwide operations, an online lending information intermediary must, among other requirements, (i) have a registered capital of no less than RMB1.0 billion, (ii) have no material violation in the existing and unsettled business, (iii) have good financial conditions, (iv) have a custodian bank system that has handled all transfers of funds between the investors and the borrowers in the past one year, (v) have no material administrative or criminal penalty imposed on it, its controlling shareholders or its principal executives in the past two years, and (vi) have good financial technology capabilities. Furthermore, the companies that have had ceased the online lending information intermediary business are unqualified for being transformed into micro-lending companies. We are unable to verify the authenticity and accuracy of those media reports. If those media reports are authentic and accurate in terms of the content of the Pilot Transforming Guidance and we decide to transform from an online lending information intermediary into a micro-lending company, Shanghai PPDai will have to make adjustments its business operations to comply with the Pilot Transforming Guidance. In addition, even if we were to make adjustments our business operations to comply with the Pilot Transforming Guidance, we could not rule out the possibility that the regulatory authorities would deny our application and Shanghai PPDai could not be transformed into a micro-lending company as expected.
In addition, the 13
th
National People’s Congress approved the Civil Code of the PRC on 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 had been abolished and replaced, while their provisions are generally incorporated into the Civil Code of the PRC with certain changes and supplements. It remains unclear with respect to the relevant interpretations and implementations of certain provisions of the Civil Code of the PRC and how these provisions of the Civil Code of the PRC will apply to our business operations. For example, pursuant to the Civil Code of the PRC, usurious loans are explicitly banned, but a clear definition or interpretation of “usurious loans” is not provided. We cannot rule out the possibility that certain of our operation activities would be deemed to violate or not fully comply with the Civil Code of the PRC If that happens, our business, results of operations and financial condition would be materially and adversely affected.20
Due to changes of laws and regulations governing online consumer finance, we have 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 funding sources from individual investors to institutional funding partners. In 2019 and 2020, in order to reduce the outstanding balance of loans invested by the individual investors and improve our business model, we used our quality assurance fund, which was historically set aside as a protection mechanism for the individual investors when borrowers defaulted in principal and interest repayments, to repay the outstanding loans to individual investors who were covered by the quality assurance fund before the respective maturity dates. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office and other regulatory authorities jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors.
In addition, on January 21, 2013, the State Council promulgated the Stipulations for Regulating Credit Reference, which 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 September 27, 2021, the PBOC issued the Measures for Regulating Credit Reference, which came into effect on January 1, 2022 and stipulates that, among others (i) the credit information refers to the following information that should be legally collected and used for financial activities: basic information, loan information, other relevant information and analysis and evaluation information generated from the foregoing information of enterprises and individuals for identifying their credit status; and the credit reference business refers to the activities of collecting, sorting, storing and processing the credit information of enterprises and individuals, and providing them to the information users; (ii) a license for individual credit reference business issued by the PBOC is required for engaging in the individual credit reference business, and the licensed credit reference agency shall report to the PBOC with respect to its cooperation with any information provider for collecting, sorting, storing and analyzing individual credit information; (iii) the financial institutions are not allowed to cooperate with any commercial entity that does not hold a credit reference license to obtain credit reference service; and (iv) any persons that engage in the individual credit reference business without a license for individual credit reference business will be given an
18-month
grace period starting from January 1, 2022 to complete the necessary compliance rectification. Currently, we provide borrower referral and preliminary credit assessment services to our institutional funding partners, and the information shared by us with such institutional funding partners with due authorization may be deemed as the credit information. If the preliminary credit assessment services provided by us to our institutional funding partners would be deemed by the regulatory authorities as the credit reference business, we may be required to obtain a license for individual credit reference business from the competent regulatory authorities or change our business model, pursue cooperation with the licensed credit reference agencies and filing of the relevant cooperation agreement with the PBOC or its provincial branches. If we cannot obtain the regulatory approval or find licensed credit reference agencies to cooperate with or complete the cooperation agreement filing in a timely manner, we may be deemed as violating the applicable laws and regulations of credit reference services, which may subject us to penalties, including cessation of business operations, confiscation of illegal gains, imposing fines from RMB50,000 to RMB500,000, and even criminal liability, and we may cease to share borrowers’ personal information directly with the institutional funding partners, which may materially and adversely affect our business, financial condition and results of operations. As of the date of this annual report, we have not been subject to any penalties from the PBOC or any of its branches related to our cooperation with the institutional funding partners. Our origination, servicing expenses and other cost of revenue may increase or we may change our current business model if we start to cooperate with licensed credit reference agencies, which may affect our financial performance and results of operations. Furthermore, we rely on certain data partners to collect credit information of borrowers for credit scoring and fraud detections. If these data partners’ business is deemed as credit reference and they are unable to obtain the regulatory approval or complete the filing, we cannot assure you that we will be able to find an alternative in a timely and cost-efficient manner, or at all. Any of these occurrences could result in reputational damage, regulatory intervention and diminished ability to operate our business, which could adversely impact our business, financial condition and results of operations.21
The laws, regulations, rules and governmental policies are expected to continue to evolve in our industry. We are unable to predict with certainty the impact, if any, that future legislation, judicial interpretations or regulations relating to the online consumer finance industry will have on our business, financial condition and results of operations. To the extent that we are not able to fully comply with any new laws or regulations when they are promulgated, our business, financial condition and results of operations may be materially and adversely affected.
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.
The National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Notice on Regulating and Rectifying “Cash Loan” Business, or the Circular 141, in December 2017, outlining general requirements on the “cash loan” business conducted by various institutions. The Circular 141 specifies the features 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, including but 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 and
cooling-off
period; (iii) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model; (iv) all institutions are prohibited from extending any loans to any persons without repayment source or repayment capacity, or loans with no designated use of proceeds; (v) funds from banks cannot be used for “cash loan” or “campus loan”; and (vi) in the case where a financial institution participates in the “cash loan” business, any third parties are not allowed to charge borrowers any interests or fees. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on lending activities.”In the operation of our consumer finance platform, borrowers on our platform are required to specify their uses of loan proceeds. To ensure a full compliance with existing laws, regulations, rules and governmental policies relating to the online consumer finance industry, we have implemented various policies and procedures to conduct our business and operations. For instance,
for the loan portfolios funded by our institutional funding partners, such as commercial banks, we discontinued to charge any fees from the borrowers directly. Instead, we started to collect fees mainly from third-party guarantee companies and, if applicable, our institutional funding partners for our services;
we require the borrowers to select their loan applications one of the specified permissible uses of loan proceeds, such as consumer finance, travelling, medical expenses, house improvements; and
we adopted several measures to identify college students and try to prevent them borrowing money from our platform. However, we cannot assure that those measures are able to identify all college students on our platform.
However, due to the lack of detailed implementation rules and interpretations by the local authorities, we cannot be certain that our past and existing practices would not be deemed to violate any laws, rules and regulations that are applicable to our business. For instance,
our calculation of the aggregate borrowing cost of the loans on our platform might be challenged by relevant government authorities and be deemed to be incompliant with relevant rules and regulations; and
our cooperation with institutional funding partners through Shanghai Erxu, a subsidiary of one of the consolidated variable interest entities, has exposed us to and may continue to expose us to additional regulatory uncertainties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our cooperation with institutional funding partners may expose us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.”
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Due to the lack of interpretation and implementation rules and the fact that the laws and regulations are rapidly evolving, even if we have implemented above measures, we cannot assure you that we will be in full compliance with existing and future laws and regulations, nor can we assure you that we would not be required by regulatory authorities to make further rectifications to our business in the future. As of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations, including those governing the online consumer finance industry in China. If our practice is deemed to violate any laws, regulations and rules, we may face, among others, regulatory warning, correction order, condemnation, fines and criminal liability. If such situations occur, our business, financial condition, results of operations and prospects would be materially and adversely affected.
Our cooperation with institutional funding partners may expose us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners.
In 2019, 2020 and 2021, the loan origination volume funded by institutional funding partners on our platform in China was RMB51.0 billion, RMB64.1 billion and RMB133.6 billion (US$21.0 billion), representing 62.0%, 100.0% and 100.0% of our total loan origination volume in the same year. Due to the lack of a comprehensive and effective regulatory framework and clear and unambiguous application and interpretation of relevant laws and regulations, our cooperation with institutional funding partners has exposed us to regulatory uncertainties. We carry out our cooperation with institutional funding partners through Shanghai Erxu, a subsidiary of one of the consolidated variable interest entities, Shanghai Zihe. Shanghai Erxu primarily provides services to our institutional funding partners, such as borrower referral and preliminary credit assessment, and facilitate their participation in our online lending business.
The current laws and regulations do not explicitly require any regulatory approval, record-filing, or financial license for the type of business activities conducted by Shanghai Erxu. However, we cannot assure you that the regulatory authorities will hold the same view as ours or the business practice of Shanghai Erxu will be deemed to be in full compliance with all applicable laws and regulations. For example, if the preliminary credit assessment services provided by Shanghai Erxu to our institutional funding partners are deemed by the regulatory authorities as the credit reference business or information provision activities, Shanghai Erxu may be required to obtain a license for individual credit reference business, or alternatively, pursue cooperation with licensed credit reference agencies and submit the relevant cooperation agreement with the PBOC or its provincial branches. See “Item 3. Key Information—D. Risk Factors—The laws and regulations governing online consumer 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.” Given the evolving regulatory environment of the consumer finance industry, the regulatory authorities may issue new regulatory requirements, introducing a new licensing regime to regulate the type of business activities that Shanghai Erxu has been carrying out. If such new regulatory rules are promulgated, we cannot assure you that we would be able to obtain such new license or other regulatory approval in a timely manner, or at all, which would materially and adversely affect our business and our ability to continue our operations. As of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations, including those governing the online consumer finance industry in China. However, if the governmental authorities adopt a stringent regulatory framework on the online consumer finance industry in the future which may subject Shanghai Erxu or any of our PRC subsidiaries to additional requirements, such as
paid-up
capital requirements, record-filing with the relevant regulators or license requirements, our business may be materially and adversely affected. It can be costly to comply with relevant laws and regulations and if our business practice is deemed to violate any existing or future laws and regulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well.In addition, Circular 141 further provides that financial institutions cooperating with third parties to engage in lending businesses (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 guarantees, including credit enhancement service in the form of a commitment to assume default risks, (iii) should comply with the judicial interpretations by the Supreme People’s Court of the PRC 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 fees from borrowers. To comply with relevant regulatory requirements, Shanghai Erxu has taken various measures in cooperating with our institutional funding partners. For example, Shanghai Erxu (i) does not collect service fees directly from the borrowers of the loans recommended to the licensed institutional funding partners; (ii) makes sure that the aggregate borrowing cost does not exceed 36%; (iii) involves licensed guarantee companies to provide guarantee to institutional funding partners for certain loans; and (iv) introduces borrowers and provides preliminary credit assessment services, as opposed to core lending business operations, to our institutional funding partners. If a borrower passes our preliminary credit assessment, we will introduce such borrower to our institutional funding partners. Borrower’s loan will be funded directly by our institutional funding partners if they decide to extend loans to such borrower after their independent credit review.
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However, other relevant laws and regulations are also expected to continuously evolve in this newly emerging industry in which we operate. It remains uncertain how the regulatory authorities are going to interpret and enforce these rules. We cannot assure you that our existing cooperation with the institutional funding partners will not be deemed to violate Circular 141 or any other applicable laws, rules and regulations. For example, the regulatory environment concerning the online lending information intermediary industry has been tightening. Several provincial regulatory authorities have ordered online lending information intermediaries in those provinces to exit the market. Historically, our institutional funding partners included third-party online lending information intermediaries. These third-party online lending information intermediaries generally matched the borrowers introduced by us with their investors on their platform. We cannot assure you that our cooperation with third-party online lending information intermediaries in the past would not be deemed to be a violation of relevant regulatory requirements in these provinces. Due to such regulatory uncertainties, we have ceased facilitating new loans for the third-party online lending information intermediaries since November 2019.
Furthermore, on July 12, 2020, the China Banking and Insurance Regulatory Commission, or 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 financing 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 technology and loan collection. However, when collaborating with third parties for online lending businesses, 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 at least once a year and terminate the cooperation if any incompetency is identified. Further, on February 19, 2021, the CBIRC further issued the 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 online 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 from outsourcing the material procedures of loan management, and local commercial banks from engaging in an online loan business outside the territory of their registered place. The requirements on the limit of 30% for the joint lending loans and the cross-regional prohibition came into effect on January 1, 2022. Thenon-conforming
legacy loans that extended before the promulgation of Circular 24 may be settled on their relative maturity dates. With certain limited exceptions, the Interim 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 operation results would be adversely and materially affected. Furthermore, we act as an intermediary between institutional funding partners and borrowers, and we cannot assure you that all the institutional funding partners we cooperate with have been and will be in strict compliance with the Interim Measures for Banks and Circular 24.24
On December 31, 2021, the PBOC, the CBIRC and five other regulatory authorities jointly published the Administrative Measures for Online Offering of Financial Products (Draft for Comments), or the Draft Offering Measures, which stipulates that, among others, (i) except otherwise explicitly stipulated by the laws or regulations, a financial institution cannot authorize other organizations to offer its financial products; (ii) without approval from the competent financial regulatory authorities, any third-party internet platform cannot get involved, or get involved in a disguised form, in the online offering of financial products, including but not limited to, procedures of interactive consultant with the consumer, know-your-customer, sales contract conclusion, or fund transferring. The third-party internet platform cannot participate, or participate in a disguised form, in sharing the revenue generated from the financial business; (iii) the third-party internet platform cannot illegally crack, hold, nor store customer information and business data; (iv) the “online offering” is defined as commercial promotion and recommendation activities of the financial products on the internet platform, including but not limited to exhibiting the financial product information and the financial institution’s brand name or logo, providing sales channel for consumers to purchase financial products. The “financial products” includes deposit products, loan products, asset management products, etc. that are designed, developed, or sold by financial institutions; and (v) a transition period of 6 months would be given to the existing
non-compliance
activities before the effectiveness of the draft. As uncertainties remain regarding when the Draft Offering Measures would be adopted and become effective, and to what extent we would be subject to the Draft Offering Measures, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. If we cannot rectify our business model in a timely manner, or at all, the regulatory authorities may levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
Pursuant to Circular 141, a bank, a trust management company, or a consumer financial company participating in loan facilitation transactions may not accept credit enhancement services and similar services, such as committing to assume default risks, provided by a third party which has not been licensed or approved to provide such services. In addition, pursuant to the Regulations on the Supervision and Administration of Financing Guarantee Companies promulgated by the State Council on August 2, 2017, or the Financing Guarantee Rules, any entity operating “financing guarantee business” is required to obtain an approval from the local regulatory authorities. If any entity operates financing guarantee business without such approval, it may be subject to penalties, including termination or suspension of business, fines ranging from 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 law. In October 2019, the CBIRC, together with eight other regulatory agencies jointly promulgated the 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.
In our collaboration with institutional funding partners, we introduce borrowers to our institutional funding partners and provide our institutional funding partners with our preliminary credit assessment on the creditworthiness of such borrowers. Our institutional funding partners independently review such borrowers’ loan requests and decide whether to extend loans to such borrowers and, if yes, the maximum amount of credit available for such borrowers.
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We have engaged licensed third-party financing guarantee companies to provide financing guarantees to a majority of the loans funded by our institutional funding partners. If any borrower defaults, a third-party financing guarantee company is obligated to repay the full overdue amount to the corresponding institutional funding partner. After the financing guarantee company repays the full overdue amount, we are 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 through third-party financing guarantee companies for loans funded by certain institutional funding partners as an additional quality assurance commitment. Apart from licensed third-party financing guarantee companies, we also cooperate with third-party insurance companies to provide quality assurance commitments to our institutional funding partners. Under this arrangement, if any borrower 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 the insurance coverage, the remaining overdue amount will be repaid by the third-party guarantee companies engaged by us.
Despite our efforts to reduce regulatory risks, we cannot assure you that relevant regulatory authorities would not interpret or view the quality assurance commitments we provided to our institutional funding partners as an operation of financing guarantee business without approval. If relevant government authorities take the view that the quality assurance commitments we provided to our institutional funding partners is a provision of financing guarantee business without approval, we would be subject to fines and/or other administrative penalties mentioned above. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services.” As a result, our liquidity, business, financial condition and results of operations will be materially and adversely affected. If we do not provide quality assurance commitments to our institutional funding partners due to regulatory restrictions, we may not be able to maintain our institutional funding partner base and our cooperation with third-party guarantee companies, and our liquidity, business, financial condition and results of operations will be materially and adversely affected.
We have incorporated three financing guarantee subsidiaries, Fujian Zhiyun Financing Guarantee Company, or Fujian Zhiyun, Zhiyun (Tianjin) Financing Guarantee Company, or Tianjin Zhiyun, and Hainan Shenxin Financing Guarantee Company, or Hainan Shenxin, in 2019 and 2020. In some cases, one of our own financing guarantee subsidiaries provides financing guarantee services directly to our institutional funding partners for the loans funded by them. Under the Financing Guarantee Regulations, the maximum amount of outstanding guarantee liabilities of a financing guarantee company may not exceed ten times of its net assets. As of March 31, 2022, the net assets of Fujian Zhiyun, Tianjin Zhiyun and Hainan Shenxin were RMB1,504.1 million (US$236.0 million), RMB757.8 million (US$118.9 million) and RMB271.9 million (US$42.7 million), respectively.It is obvious that the maximum amount of outstanding guarantee liabilities that can be provided by our own guarantee companies cannot meet the needs of all of our institutional funding partners. We will have to continue to engage properly licensed third-party guarantee companies to provide quality assurance commitments to our institutional funding partners. As a result, the above regulatory risks still exist.
On December 31, 2021, the PBOC published the Regulations on the Local Financial Supervision and Administration (Draft for Comments), or the Draft Local Financial Regulation, which stipulates that, among others, (i) the local financial organizations should primarily serve their local clients; (ii) the guidance for local financial organizations to carry out business outside provinces where they are registered should be made by the State Council or financial regulatory authorities designated by the State Council; (iii) six types of financial organizations, including financing guarantee companies and micro-lending companies, are deemed as local financial organizations; (iv) transition period will be given to the organizations carrying out business outside provinces before the effectiveness of the draft by the relevant financial regulatory authorities; and (v) organization carrying out business outside provinces without approval of the competent provincial regulatory authorities may be subject to penalties, including correction orders, confiscation of illegal gains or fines, cessation of business operations, and revocation of business license. Currently both the third-party guarantee companies engaged by us and our own guarantee companies provide services to the borrowers nationwide. As uncertainties remain regarding when the Draft Local Financial Regulation would be adopted and become effective, and to what extent we would be subject to the Draft Local Financial Regulation, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities.
As of the date of this annual report, we have not been subject to any administrative penalties due to cooperating with our institutional funding partners.
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We collaborate with third-party trust management companies to set up trusts with other investors to extend loans through these trusts to borrowers introduced by us. We may be deemed to be an illegal financial institution under such trust arrangement, which may materially and adversely affect our business and financial condition.
We collaborate with third-party trust management companies to set up trusts with other investors to extend loans to borrowers introduced by us. In some cases, we invest in subordinate tranches and other investors invest in senior tranches. 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 and the operation of financial business should be subject to the approval of the People’s Bank of China, or the PBOC. 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. Although the trust management companies that administrate the trusts have been licensed and approved by the financial regulatory authorities to extend loans and we believe that the trust management companies are the lenders of the loans, 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 deemed to be a lender under this trust arrangement. As a result of such trust arrangement, we may be deemed to be an illegal financial institution or operating illegal financial business, 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, or the 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.
If we are unable to retain existing borrowers or institutional funding partners or attract new borrowers or institutional funding partners, or if we are unable to maintain or increase the volume of loans facilitated through our platform, our business and results of operations will be adversely affected.
The loan origination volume on our platform in China was RMB82.2 billion in 2019, RMB64.1 billion in 2020 and RMB133.6 billion (US$21.0 billion) in 2021. To maintain the growth momentum of our platform, we must continuously increase the volume of loans by retaining current participants and attracting more users whose financing needs can be met on our platform. If there are insufficient qualified loan requests, institutional funding partners may not be able to deploy their capital or their investors’ capital in a timely or efficient manner and may seek other investment opportunities. If there are insufficient funding commitments, borrowers may not be able to obtain capital through our platform and may turn to other sources for their borrowing needs. If we are unable to attract qualified borrowers and sufficient funding commitments or if borrowers and institutional funding partners do not continue to participate in our platform at the current rates due to any change we may be required to make to the way we conduct our business to ensure compliance with existing or new PRC laws and regulations or due to other business or regulatory reasons, we might not be able to increase our loan transaction volume and revenues as we expect, and our business and results of operations may be adversely affected. Normally the borrowers find us by downloading our mobile applications from application stores or from the
pre-installed
mobile applications or submitting loan requests on our website. In response to the general regulatory environment, the operators of application stores or mobile application distributing channels may adjust their application exhibition policies or even remove our mobile applications from their application stores or distribution channels, which may materially and adversely affect our ability to engage new borrowers.27
We have ceased facilitating new loans with funding from the individual investors on our platform since October 2019 and improve our business model through acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partners. Currently, our institutional funding partners primarily include commercial banks, private banks, consumer finance companies, micro-loan companies and trust management companies. Historically, a small portion of the loans on our platform were funded by some third-party online lending information intermediaries. Considering the regulatory uncertainties faced by third-party online lending information intermediaries, we have ceased facilitating new loans for third-party online lending information intermediaries since November 2019. If we are unable to retain our existing institutional funding partners or attract new institutional funding partners, or if regulatory authorities promulgated new laws and regulations to regulate, limit, or even prohibit our collaboration with the institutional funding partners, our business, results of operations and financial condition will be adversely affected. As of December 31, 2021, we had cumulatively cooperated with 63 institutional funding partners in China. The loans funded by the institutional funding partners typically have fixed terms from six to twelve months.
Our success is dependent upon our ability to maintain and expand our cooperation with institutional funding partners on reasonable commercial terms. If the governmental authorities further tighten the regulations on the online consumer finance industry, our institutional funding partners would become more selective in choosing partners for referring borrowers and facilitating loans for them. The competition we face would become even more intensely. Our cooperation with institutional funding partners is not on an exclusive basis. If we fail to continuously meet their requirements or needs, our financial institution partners may stop cooperating with us and turn to our competitors, which may also materially and adversely affect our business, financial condition and results of operations.
If our existing and new products and services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.
We have devoted significant resources to, and will continue to emphasize on, upgrading and marketing our existing products and services and enhancing their market awareness. We also incur expenses and expend resources upfront to develop, acquire and market new products and services that incorporate additional features, improve functionality or otherwise make our platform more desirable to borrowers and institutional funding partners. New products and services must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.
Our existing and new products and services could fail to attain sufficient market acceptance for many reasons, including:
borrowers may not find terms of our products, such as costs and credit limit, competitive or appealing;
our failure to predict market demand accurately and provide products and services that meet this demand in a timely fashion;
borrowers and institutional funding partners using our platform may not like, find useful or agree with, any changes;
defects, errors or failures on our platform;
negative publicity about our loan products or our platform’s performance or effectiveness;
views taken by regulatory authorities that the new products, services or platform changes do not comply with PRC laws, regulations or rules applicable to us; and
the introduction or anticipated introduction of competing products by our competitors.
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If our existing and new products and services do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.
Our international expansion may expose us to additional risks.
Our business currently primarily focuses on the PRC market. We are currently also expanding our business in the overseas market. In December 2018 and June 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, which has received a license for Technology and Information Based Financial Lending Institutionlending license) from the Financial Services Authority of Indonesia. In January 2020, our subsidiary in 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.
(peer-to-peer
Our overseas business operations are subject to increasing regulatory scrutiny, in particular the areas of data privacy protection, interest rate cap and collection practices. While we strive to comply with all applicable laws and regulations and work closely with the regulatory authorities in the regions that we operate, we have limited experience in these markets and differences in interpretation of relevant laws, regulations, and/or policies. As a result, we may incur substantial compliance costs attributed to compliance costs, such as investigation, caseation of operation and administrative measures and penalties.
Our overseas business operations subject us to additional risks and uncertainties. While our income from international operations is not yet material to our company as a whole, our current or future international expansion may expose us to additional risks, including general economic and political conditions internationally and the changes of global macroeconomic environment. In addition, we will face complex local regulatory environment that we are not familiar with. As a result, we may incur substantial compliance costs to carry out our business operations in the overseas market and still be subject to potential litigations, regulatory proceedings, penalties or incur other costs. As we have very limited experience in operating our business in the overseas market, our products may not be accepted by users in the overseas market, we may be unable to attract a sufficient number of users, fail to anticipate competitive conditions or face difficulties in operating effectively in the overseas market. In addition, trade barriers, such as import and export restrictions, customs duties and other taxes, competition law regimes and other trade restrictions, as well as other risks such as political instability may also expose us to additional risks and uncertainties if we expand our business in the overseas market.
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.
The
all-in
borrowing cost, including the interest rate and the total expense paid by the borrower for the borrowing, is highly regulated by the Supreme People’s Court and different regulatory authorities. According to 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, in the context of lending activities between individuals, entities or other organizations that are not licensed financial institutions, (i) if the interest rate of a loan exceeds 36% per annum, the exceeding part of the interest rate is invalid and void, and (ii) if the interest rate of a loan exceeds 24% per annum but is no more than 36% per annum, the exceeding part will be treated as natural obligation—valid but not enforceable in the PRC judicial system, while the enforceability of the 24% per annum part will not be affected.On August 4, 2017, the Supreme People’s Court promulgated the Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases, which provides, among others, that the claim of a 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 should be supported by the PRC courts. For loans facilitated at annual rate between 24% and 36% historically or in the future, if any of such loans become delinquent, we will not be able to enforce part of the interest that exceed 24% through PRC judicial system. As a result, our institutional funding partners may suffer losses, which would damage our reputation and harm our business. Were these to happen, our reputation, results of operations and financial condition would be adversely affected.
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According to the 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. When Circular 141 was promulgated, the then effective upper limit on interest rate of private lending was 24% per annum as judicially protected by the court, while the range of 24% to 36% per annum was deemed as natural obligation and the exceeding part of 36% per annum was deemed as illegal.
On August 20, 2020, the Supreme People’s Court issued the Decision on Amending the Provisions on Several Issues Concerning Laws Applicable to Trials 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. According to the Private Lending Judicial Interpretation Amendment, the upper limit of interest rate forBased on the latest Quadruple LPR Limit, the ceiling would be lowered to 14.8% from 24% under the previous judicial interpretation in 2015. We cannot assure you that the
one-year
private loan would be capped at four times that of the loan prime rate at the time of the establishment of the agreement, or the Quadruple LPR Limit. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on lending activities” for more details. The aforementionedone-year
loan prime rate refers to theone-year
loan market quoted interest rate issued by the National Bank Interbank Funding Center on the 20th
of each month starting from August 20, 2019, and theone-year
loan market quoted interest rate issued by the National Bank Interbank Funding Center on April 20, 2022 was 3.7%.one-year
loan market quoted interest rate and the Quadruple LPR Limit will not decrease further in the future.According to the Private Lending Judicial Interpretation Amendment, (i) in terms of lending activities between individuals, entities or other organizations that are not licensed financial institutions, if the interest rate of a loan exceeds the Quadruple LPR Limit, the exceeding part will not be supported and enforceable in the PRC judicial system; and (ii) the Quadruple LPR Limit does not apply to the disputes arising out of loans funded by financial institutions or its branches which are licensed by financial regulatory authorities.
On January 21, 2021, 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, or the Supreme Court’s Response Letter, further clarifies that seven types of financial organizations, including micro-loan lending companies and financing guarantee companies, are deemed as financial institutions licensed by the financial administrative authorities, and any disputes arising out of their financial business activities should 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. In that case, for loans facilitated at or above the Quadruple LPR limit become delinquent, we may not be able to collect parts of the interest that exceed the Quadruple LPR limit through the PRC judicial enforcement. As a result, our institutional funding partners may suffer losses, which would damage our reputation, results of operations and financial condition. According to the Supreme Court’s Response Letter, we believe that the Quadruple LPR Limit stipulated in the Private Lending Judicial Interpretation Amendment does not apply to the financial institutions. However, we cannot assure you that the regulatory authorities share the same view as ours. Currently, substantially all of our institutional funding partners that we cooperate with for funding new loans origination on our platform are financial institutions licensed by financial regulatory authorities.
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. It is our view that the implementation of PBOC No. 3 Announcement is not retrospective.
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We have certain loans facilitated on our platform with an interest rate over 24% per annum. Before the promulgation of PBOC No. 3 Announcement, no rules or regulations explicitly defined the calculation method for the maximum interest rates permitted by the relevant laws. Upon the promulgation of No. 3 Announcement, we have changed our calculation method for the interest rate to the annualIt is our belief that our calculation for the interest rate is in line with the requirements in the PBOC No. 3 Announcement. However, we cannot assure you that our historical or current calculation method for the interest rate would be deemed to be in full compliance with the PBOC No. 3 Announcement. As the PBOC No. 3 Announcement is relatively new, there still exists great uncertainties with respect to its interpretation and application. We will maintain communication with the relevant authorities and closely monitor its enforcement.
all-in
borrowing cost as a percentage of the outstanding principal after deducting all installments that have been repaid. We have also explicitly disclosed the calculation method for the interest rate of the loans on our platform to our borrowers. As of December 31, 2021, the outstanding balance of loans facilitated on our platform in China with an interest rate over 24% was RMB16.4 billion (US$ 2.6 billion), representing 33% of the outstanding loan balance as of the same date. These loans had the terms ranging from one month to 24 months. In the event that any of such loans become delinquent, we may not be able to collect the portion of interests that exceed 24% per annum through PRC judicial enforcement. Furthermore, the portion of interest rate that exceeds 24% per annum may be determined to be invalid by the regulatory authorities, and we may have to adjust the interest rate accordingly, which may adversely and materially affect our results of operations and financial condition. Were these to happen, our reputation, results of operations and financial condition would be adversely affected.Our introduction of new products and services may expose us to new challenges and more risks.
In 2020, we started displaying products of third-party online consumer finance partners on our platform, and the borrowers on our platform can submit loan applications and information authorization for these products through our platform. The third-party online consumer finance partners then can assess the borrowers’ creditworthiness and credit limits and match the borrowers with their own institutional funding partners or use their own funds to fund the loans if they are regulatorily competent to do so. We require the third-party online consumer finance partners to fully comply with all applicable laws and regulations, and the third-party online consumer finance partners should be fully responsible for any of their misconducts. However, as we have very limited control over those third-party online consumer finance partners, we cannot ensure their operations will be in full compliance with all applicable laws and regulations. If those third-party online consumer finance partners do not comply with any applicable laws and regulations and the borrowers are dissatisfied with their products displayed on our platform, our reputation and operation results could be adversely affected.
We operate in a market where the credit infrastructure is still at an early stage of development.
China’s credit infrastructure is still at an early stage of development. The Credit Reference Center established by the PBOC in 2002 has been the only credit reporting system in China. This centrally managed nationwide credit database operated by the Credit Reference Center only records limited credit information, such as tax payments, civil lawsuits, foreclosure and bankruptcy. Currently, this credit database is accessible to banks and market players authorized by the Credit Reference Center. In 2015, the PBOC announced that it would open the credit reporting market to private sectors with a view to spurring competition and innovation, but it may be a long-term process to establish a widely-applicable, reliable and sophisticated credit infrastructure in the market we operate. Currently, as an intermediary between institutional funding partners and borrowers, we do not have access to the Credit Reference Center. Our institutional funding partners decide at their own discretion if to check any borrower’s credit status at the Credit Reference Center as they conduct credit assessment independently. In general, the borrowers on our platform give general authorization to the institutional funding partners to check the borrowers’ credit status from and report the borrowers’ defaults to the Credit Reference Center. We have started data sharing with a credit reference agency licensed by the PBOC to provide individual credit reference service. However, the licensed credit reference agencies in China are newly established companies. Whether it can efficiently aggregate data from all different types of online databases with accuracy remains to be proven.
We are subject to credit cycle and the risk of deterioration of credit profiles of borrowers.
Our business is subject to credit cycle associated with the volatility of general economy. If economic conditions deteriorate, we may face increased risk of default or delinquency of borrowers, which will result in lower returns or losses. In the event that the creditworthiness of our borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be subsequently rendered ineffective. This in turn may lead to higher default rates and adverse impacts on our reputation, business, results of operations and financial positions. We cooperate with institutional funding partners through both capital heavy model and capital light model. Under the capital heavy model, we provide credit enhancement services to institutional funding partners through third-party guarantee companies or our financing guarantee subsidiaries. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.” As our financing guarantee subsidiaries provide guarantee for certain amount of loans funded by institutional funding partners and the amount of payments payable by us to third-party guarantee companies depends on the amount of default loans, we are subject to credit risks for those loans funded by our institutional funding partners to our borrowers. If we are unable to accurately assess the creditworthiness of the borrowers on our platform or if we fail to accurately anticipate and manage the delinquency rates of the loans funded by our institutional funding partners, we will not be able to maintain our credit risk exposure within acceptable parameters. If we are unable to effectively collect these delinquent loans, our liquidity, business operations, financial condition and results of operations would be materially and adversely affected.
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We rely on our proprietary credit-scoring model in assessing the creditworthiness of our borrowers and the risks associated with loans. If our credit-scoring model is flawed or ineffective, or if we otherwise fail or are perceived to fail to manage the default risks of loans facilitated through our platform, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations.
Our ability to attract borrowers and institutional funding partners to, and build trust in, our platform is significantly dependent on our ability to effectively evaluate borrowers’ credit profiles and likelihood of default. To conduct this evaluation, we utilize our proprietary credit assessment model, or the Magic Mirror Model, which is built based on data from multiple sources, including credit reference agency, and strengthened by our sophisticated artificial intelligence and advanced machine learning techniques. The Magic Mirror Model categorizes borrowers into different credit ratings according to their risk profiles, based on which our risk pricing system assigns them appropriate interest rates, credit limits and loan durations. However, the Magic Mirror Model may not effectively predict future loan losses. Subject to credit assessment result for each loan application, a borrower is allowed to take out multiple loans at a time on our platform if his or her existing loans are not in default and the total outstanding balance is within the approved credit limit for the type of loan the borrower applies for. Credit limits are set by loan products, and thus a borrower may have a credit limit for each type of loans on our platform. A borrower’s credit limit for a particular type of loan is determined considering a range of factors, including (i) the borrower’s credit level based on his or her Magic Mirror score—borrowers with better Magic Mirror credit scores are generally given higher credit limits, (ii) the borrower’s credit needs, such as the type of loans being applied for, (iii) the borrower’s credit limits and credit performance for other types of loans on our platform, and (iv) overall investment demand from investors. 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. As such, it is possible that borrowers may take out new loans on our platform to pay off their other existing loans facilitated by us or for other purposes. Given the practical difficulty in tracking and controlling the usage of borrowed funds, we are not able to effectively prevent borrowers from “rolling over” their loans on our platform. Although the Magic Mirror Model looks less favorably upon borrowers who have high credit line utilization ratios, it may not be able to timely and accurately adjust down the credit rating assigned to a borrower if such borrower masks his or her deteriorating creditworthiness by refinancing existing loans with new loans on our platform. If we are unable to effectively classify borrowers into the relative risk categories, we may be unable to offer attractive interest rates for borrowers and returns for investors and effectively manage the default risks of loans facilitated through our platform. We continuously refine the algorithms, data processing and machine learning used by the Magic Mirror Model, but if any of these decision-making and scoring systems contain programming or other errors, are ineffective or the data provided by borrowers or third parties are incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans.
For loans funded by our institutional funding partners, the institutional funding partners will review borrowers’ applications and may rely on our preliminary credit assessment we provide to them and then decide if to extend loans to such borrower as well as the credit limit after their independent credit review. If any data provided by borrowers or third parties are incorrect or stale or our preliminary credit assessment service is not effective, our cooperation with institutional funding partners could be negatively affected. In addition, we bear credit risks for a substantial majority of the loans funded by institutional funding partners to borrowers introduced by us. If our ability to provide preliminary credit assessment is not as effective or efficient as expected, our liquidity, financial conditions and results of operations may be materially and adversely affected.
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In addition, if a borrower’s financial condition deteriorates after his or her loan application is approved, we may not be able to take measures to prevent such borrower’s default and thereby maintain a reasonably low default rate for loans facilitated through our platform.
Credit and other information that we receive from prospective borrowers and third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.
For the purpose of credit assessment, we obtain from prospective borrowers and third parties certain information of the prospective borrowers, which may not be complete, accurate or reliable. A credit score assigned to a borrower may not reflect that particular borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate borrower information. Additionally, once we have obtained a borrower’s information, the borrower may subsequently (i) become delinquent in the payment of an outstanding obligation; (ii) default on ato each other and the borrower may choose to make payments to other creditors rather than to investors on our platform.
pre-existing
debt obligation; (iii) take on additional debt; or (iv) sustain other adverse financial events, making the information we have previously obtained inaccurate. To better assess borrowers creditworthiness, we joined the credit and information sharing system set up by the National Internet Finance Association of China. A participant of this sharing system can obtain a borrower’s credit information shared by other participants. However, this sharing system is still at the primary stage of development and there are a limited number of participants and limited amount information in this sharing system. As a result, we cannot determine whether borrowers have outstanding loans through other consumer finance marketplaces not participating in this sharing system at the time they obtain a loan from us. This creates the risk that a borrower may borrow money through our platform in order to pay off loans on other consumer finance marketplaces and vice versa. If a borrower incurs additional debt before fully repaying any loan such borrower takes out on our platform, the additional debt may impair the ability of that borrower to make payments on his or her loan and the investor’s ability to receive investment returns associated with such loan. In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress or insolvency of the borrower. To the extent that a borrower has or incurs other indebtedness and cannot repay all of his or her indebtedness, the obligations under the loans will rankpari passu
Such inaccurate or incomplete borrower information could compromise the accuracy of our credit assessment and adversely affect the effectiveness of our risk management, which could in turn harm our reputation, and as a result our business and results of operations could be materially and adversely affected.
Loss of or failure to maintain relationship with our strategic partners may materially and adversely affect our business and results of operations.
We currently rely on a number of strategic partners in various aspects of our business. For example, in terms of user acquisition, we acquire a significant portion of our borrowers through a limited number of online channels from a limited number of our strategic partners. We rely on certain data partners to collect credit information of borrowers for credit scoring and fraud detections. We anticipate that we will continue to leverage strategic relationships with existing strategic partners to grow our business while pursuing new relationships with additional strategic partners.
Pursuing, establishing and maintaining relationships with strategic partners require significant time and resources as does integrating third-party data and services with our system. Our current agreements with partners generally do not prohibit them from working with our competitors or from offering competing services. Our competitors may be more effective in providing incentives to our partners to favor their products or services, which may in turn reduce the volume of loans facilitated through our platform. Certain types of partners may devote more resources to support their own competing businesses. In addition, these partners may not perform as expected under our agreements with them, and we may have disagreements or disputes with them, which could adversely affect our brand and reputation. If we cannot successfully enter into and maintain effective strategic relationships with strategic partners, our business will be harmed.
In addition, if any of our partners fails to perform properly, we cannot assure you that we will be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers and institutional funding partners, inability to attract borrowers and institutional funding partners, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.
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We have obligations to verify information relating to borrowers and detecting fraud. If we fail to perform such obligations to meet the requirements of relevant laws and regulations, we may be subject to liabilities.
Our business of connecting institutional funding partners and borrowers constitutes an intermediary service, and our contracts with institutional funding partners and borrowers are intermediation contracts under the Civil Code of the PRC, an intermediary that intentionally conceals any material information or provides false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s interests may not claim for any service fee for its intermediary services, and is liable for any damage incurred by the client.
We refer borrowers to our institutional funding partners. The institutional funding partners will review the borrower’s application and our preliminary credit assessment, and then decide if to extend loans to such borrower as well as the credit limit after their independent credit review. Our agreements with these institutional funding partners and borrowers may be deemed as intermediary contracts under the Civil Code of the PRC. Therefore, if we fail to provide material information to institutional funding partners and are found to be at fault, for failure or deemed failure to exercise proper care, to conduct adequate information verification or supervision, we could be subject to liabilities as an intermediary under the Civil Code of the PRC. We leverage a large database of past fraud accounts information and sophisticated rule-based detection technology in detecting fraudulent behaviors. Based on new data collected and fraudulent behaviors detected during our daily business operations, we update our database on an
as-needed
basis. As the laws, regulations, rules and governmental policies governing the online consumer finance industry are relatively new, it is still unclear to what extent online consumer finance platform should exercise care in detecting fraud. Although we believe that as an information intermediary, we should not bear the credit risk for institutional funding partners as long as we take reasonable measures to detect fraudulent behaviors, we cannot assure you that we would not be subject to any liabilities under the current laws, regulations, rules and governmental policies governing the online consumer finance industry if we fail to detect any fraudulent behavior. If that were to occur, our results of operations and financial condition could be materially and adversely affected.We may be deemed to use our own fund to finance certain loans and therefore subject us to regulatory risks.
The Interim Measures prohibits online finance information intermediaries from investing in loans using their own funds unless otherwise stipulated by laws and regulations. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on online lending information intermediaries.” In 2019 and 2020, in order to reduce the outstanding balance of the loans funded by individual investors on our platform and improve our business model, we used quality assurance fund, which was historically set aside by us as a protection mechanism for the individual investors when the borrowers defaulted in principal and interest repayments, to repay outstanding balance of loans to individual investors on our platform who were protected by the quality assurance fund before the respective maturity dates. After repaying the outstanding balance of those loans, the borrowers continued to repay the remaining installments of principal and interest to our quality assurance fund. Such business practice might be regarded by relevant government authorities as investing in loans using our own funds, and therefore subject us to fines, penalties or other liabilities, which could materially and adversely affect our business, financial condition and prospects.
In addition, pursuant to the Measures for Illegal Financial Institutions, extending loans without the PBOC’s permission is deemed to be an illegal operation of financial business and the entity extending loans without the PBOC’s permission is deemed to be an illegal financial institution. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on illegal financial institutions and intermediaries.” In connection with our quality assurance commitments provided through third-party financing guarantee companies, we purchase creditors’ rights from third-party financing guarantee companies after these financing guarantee company repay the full overdue amounts to our institutional funding partners. After such purchase of creditors’ rights, the borrowers will continue to repay the remaining installments of principal and interest to us. We cannot rule out the possibility that relevant regulatory authorities may take the view that our such business practice constitutes an illegal operation of financial business without the PBOC’s permission and we may be deemed to be an illegal financial institution. If we were to find to violate the Measures for Illegal Financial Institutions, we would be subject to fines, penalties or other liabilities, which could materially and adversely affect our business, financial condition and prospects.
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Our failure to compete effectively could adversely affect our results of operations and market share.
The online consumer finance industry in China is competitive and evolving. We compete with financial products and companies that attract borrowers, investors, and institutional funding partners. We primarily compete with leading online consumer finance companies in China. In addition, with respect to borrowers, we also compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers and other consumer finance companies; with respect to institutional funding partners, our product offerings also compete with other products and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes.
Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have more extensive borrower or funding sources, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. Any of the foregoing could adversely affect our business, results of operations, financial condition and future growth.
In addition, our competitors may be better at developing new products, responding faster to new technologies and undertaking more extensive marketing campaigns. When new competitors seek to enter our target market, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or terms prevalent in that market, which could adversely affect our market share or ability to exploit new market opportunities. Also, since the online consumer finance industry in China is relatively new and fast evolving, potential institutional funding partners and borrowers may not fully understand how our platform works and may not be able to fully appreciate the additional customer protections and features that we have invested in and adopted on our platform as compared to others. Our pricing and terms could deteriorate if we fail to act to meet these competitive challenges. Furthermore, to the extent that our competitors are able to offer more attractive terms to our cooperation partners, such cooperation partners may choose to terminate their relationships with us. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our platform could stagnate or substantially decline, we could experience reduced revenues or our platform could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.
If we fail to promote and maintain our brand in a cost-efficient way, our business and results of operations may be harmed.
We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers and institutional funding partners to our platform. This depends largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our platform. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers and institutional funding partners in a cost-effective manner or convert potential borrowers and institutional funding partners into active borrowers and institutional funding partners on our platform.
Our efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
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Any negative publicity with respect to us, the online consumer finance industry in general and our third party partners may materially and adversely affect our business and results of operations.
Reputation of our brand is critical to our business and competitiveness. Factors that are vital to our reputation include but are not limited to our ability to:
maintain the quality and reliability of our platform;
provide borrowers and institutional funding partners with a superior experience on our platform;
enhance and improve our credit assessment and risk-pricing models;
effectively manage and resolve borrower and institutional funding partner complaints; and
effectively protect personal information and privacy of borrowers and institutional funding partners.
Any malicious or negative allegation made by the media or other parties about the foregoing or other aspects of our company, including but not limited to our management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely compromise our reputation and harm our business and operating results.
As the online consumer finance industry is a new industry in China and the regulatory framework for this industry is also evolving, negative publicity about this industry may arise from time to time. Negative publicity about China’s online consumer finance industry in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities. The PRC government has instituted specific rules, including the Interim Measures, Circular 141, the Interim Measures for Banks and its supplement, to develop a more transparent regulatory environment for the online consumer finance industry. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services.” Any players in China’s online consumer finance industry who are not in compliance with these regulations may adversely impact the reputation of the industry as a whole. Furthermore, any negative development in, or negative perception of, the online consumer finance industry as a whole, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on our ability to attract new borrowers and institutional funding partners. Negative developments in the online consumer finance industry, such as widespread borrower defaults, fraudulent behavior and/or the closure of other online consumer finance platforms, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by online consumer finance platforms like us. In 2019 and 2020, there were a number of reports of business failures of online lending information intermediary platforms in China, including some reputable ones. Furthermore, several criminal cases were reported to be charged against certain online lending information intermediary platforms. Although the market exits of these companies may result in more healthy and stable development of the online consumer finance industry, to the extent borrowers or institutional funding partners associate our company with these companies, they may be less willing to participate on our platform.
In addition, negative publicity about our partners, outsourced service providers or other counterparties, such as negative publicity about their loan collection practices and any failure by them to adequately protect the information of our borrowers, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.
Fraudulent activity on our platform could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease.
We are subject to the risk of fraudulent activity both on our platform and associated with borrowers, institutional funding partners and other third parties handling borrower information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, result in losses suffered by the investors, reduce the volume of loans facilitated through our platform and lead us to take additional steps to reduce fraud risk, which could increase our costs and expenses. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing were to occur, our results of operations and financial condition could be materially and adversely affected.
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Our current level of fee rates may decline in the future. Any material reduction in our fee rates could reduce our profitability.
We earn a substantial majority of our revenues from the service fees that we collect from the third-party guarantee companies or our institutional funding partners on the loans facilitated through our online marketplace and the fees that we charge from the borrowers as the guarantee fees. The fee rates may vary from different business models and third-party guarantee companies or institutional funding partners. Any material reduction in our fee rates could have a material adverse effect on our business, results of operations and financial condition.
Fluctuations in interest rates could negatively affect transaction volume facilitated through our platform.
All loans facilitated through our platform are issued with fixed interest rates. We determine the interest rates of the loans on our platform primarily based on the market conditions and the general interest rate environment rather than by referencing to a specific benchmark rate such as LIBOR. The fluctuation of interest rates may affect the demand for loan services on our platform. For example, a decrease in interest rates may cause potential borrowers to seek lower-priced loans from other channels. A high interest rate environment will likely increase the funding costs for our institutional funding partners, which may lead to a higher rate of return required by such institutional funding partners and thereby dampen their desire to fund borrowers on our platform. If we fail to respond to the fluctuations in interest rates in a timely manner and adjust our loan products offering, the potential and existing investors may lose potential interest returns in our platform and products and delay or reduce future loan investments, and the potential and existing borrowers may show less interest in our loan products and marketplace. As a result, fluctuations in the interest rate environment may discourage institutional funding partners and borrowers from participating in our platform, which may adversely affect our business.
We may not be able to obtain additional capital on favorable terms or at all.
We need to make continued investments in facilities, hardware, software, technology systems and to retain talents to remain competitive. Due to the unpredictable nature of the capital markets and our industry, we cannot assure you that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited, which would adversely affect our business, financial condition and results of operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing shareholders.
Misconduct, errors and failure to function by our employees and third-party service providers could harm our business and reputation.
We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-party service providers. Our business depends on our employees and third-party service providers to interact with potential borrowers and institutional funding partners, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and institutional funding partners through our platform is governed by various PRC laws. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and institutional funding partners, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability. In addition to our own collecting team, we also use certain third-party service providers for loan collection services. Aggressive practices or misconduct by any of our third-party service providers in the course of collecting loans could damage our reputation.
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Any failure to comply with existing or future laws and regulations related to data protection, data security, cybersecurity or personal information protection could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating results and business.
The regulatory framework on data collection, using, storage, and processing is relatively new and rapidly evolving, and some of them are ambiguous. In recent years, the PRC governmental authorities have strengthened the regulation of data collection, using, storage, and processing, especially for the personal data from internet websites and mobile applications. As the regulations regarding data protection, data security, cybersecurity and personal information protection are quickly evolving in China and globally, we may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal information that could affect how we store, process and share data with our borrowers.
For example, in December 2012, the Standing Committee of the PRC National People’s Congress promulgated the Decision on Strengthening Network Information Protection, or the Network Information Protection Decision, to enhance the legal protection of information security and privacy on the internet. The Network Information Protection Decision also requires internet operators to take measures to ensure confidentiality of information of users. In July 2013, the Ministry of Industry and Information Technology, or the MIIT, promulgated the Provisions on Protection of Personal Information of Telecommunication and Internet Users to regulate the collection and use of users’ personal information in the provision of telecommunication service and internet information service in China. In August 2015, the Standing Committee of the National People’s Congress promulgated the Ninth Amendment to the Criminal Law, which became effective in November 2015 and amended the standards of crime of infringing citizens’ personal information and reinforced the criminal culpability of unlawful collection, transaction, and provision of personal information. It further provides that any internet content provider that fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders will be subject to criminal liability. In November 2016, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law, which requires, among others, that network operators take security measures to protect the network from unauthorized interference, damage and unauthorized access and prevent data from being divulged, stolen or tampered with. Network operators are also required to collect and use personal information in compliance with the principles of legitimacy, properness and necessity, and strictly within the scope of authorization by the subject of personal information unless otherwise prescribed by laws or regulations. Significant capital, managerial and human resources are required to comply with legal requirements, enhance information security and to address any issues caused by security failures. The Civil Code promulgated in 2020 also provides specific provisions regarding the protection of personal information.
On January 23, 2019, the CAC, the MIIT, the MPS, and the State Administration for Market Regulation, or the SAMR, jointly promulgated the Notice on Rectification of Illegal Collection of Personal Information on Application, or the Notice on Illegal Collection, 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, the Measures on Identifying Illegality of Personal Information Collection Conducts on Application was promulgated on November 28, 2019.
On May 1, 2021, the Regulations on the Scope of Necessary Personal Information Collected by the Frequently Used Mobile Applications, or the Scope of Necessary Personal Information, jointly promulgated by the CAC, the MIIT, the MPS and the SAMR came into effect, 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. The different governmental authorities, including the MIIT, have been inspecting various mobile applications on the market on the enforcement of data protection and may continue to do so in the future, even with more stringent scrutiny. In 2021, the MIIT and its local branch decided that our PPDai mobile application, which is operated by Shanghai PPDai, was collecting users’ personal information in a
non-compliance
way. We had taken remedial measures in a timely manner and reported our rectification measures to the relevant governmental authorities. The authorities did not take any furtherfollow-up
inquiries or investigations into the identified issues after our adoption of remedial measures. If the authorities identify any newnon-compliance
issues related to data protection in the future, they may further order us to make additional rectifications, and if our then remedial measures are not satisfactory to them, our PPDai mobile application may be removed from the relevant mobile application store, which may materially and adversely affect our business and operating results.38
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect in September 2021. The Data Security Law, among others, provides for a security review procedure for the data activities that may affect national security. Furthermore, the Measures for Cybersecurity Review, which became effective on June 1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provided that critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national security shall be subject to a cybersecurity review. On July 30, 2021, the state council promulgated the Regulations on Protection of Critical Information Infrastructure, which became effective on September 1, 2021. Pursuant to the Regulations on Protection of Critical Information Infrastructure, critical information infrastructure shall mean any important network facilities or information systems of the important industry or field such as public communication and information service, energy, transportation, water conservation, finance, public services,
e-government
affairs and national defense science, which may endanger national security, people’s livelihood and public interest in case of damage, function loss or data leakage. In addition, relevant administration departments of each critical industry and sector, or Protection Departments, shall be responsible to formulate eligibility criteria and determine the critical information infrastructure operator in the respective industry or sector. The operators shall be informed about the final determination as to whether they are categorized as critical information infrastructure operators. As of the date of this annual report, no detailed rules or implementation has been issued by any authority and we have not been informed as a critical information infrastructure operator, nor as a network platform operator processing data that may affect national security by any government authorities. Furthermore, the exact scope of “critical information infrastructure operators” under the current regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws. Therefore, it is uncertain whether we would be deemed as a critical information infrastructure operator under PRC law. If we are deemed as a critical information infrastructure operator under the PRC cybersecurity laws and regulations, we must fulfill certain obligations as required under the PRC cybersecurity laws and regulations, including, among others, storing personal information and important data collected and produced within the PRC territory during our operations in China, which we have fulfilled in our business, and we may be subject to review when purchasing internet products and services.On July 30, 2021, the state council promulgated the Regulations on Protection of Critical Information Infrastructure, which became effective on September 1, 2021. Pursuant to the Regulations on Protection of Critical Information Infrastructure, “critical information infrastructure” shall mean any important network facilities or information systems of the important industry or field such as public communication and information service, energy, transportation, water conservancy, finance, public services,
e-government
affairs and national defense science, which may endanger national security, people’s livelihood and public interest in the case of damage, function loss or data leakage. In addition, relevant administration departments of each critical industry and sector, or Protection Departments, shall be responsible to formulate eligibility criteria and identify the “critical information infrastructure operator” in the respective industry or sector. The operators shall be informed about the final determination as to whether they are categorized as “critical information infrastructure operators.”On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. Our mobile apps and websites only collect user personal information that we believe is necessary to provide the corresponding services. We update our privacy policies from time to time to meet the latest regulatory requirements of the CAC and other authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless, the Personal Information Protection Law raises the protection requirements for processing personal information, and many specific requirements of the Personal Information Protection Law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. If the CAC or the relevant governmental authorities deem us as collecting excessive personal information, including the sensitive personal information, that beyond the necessity to provide the corresponding services, we may be required to make further adjustments to our business practices to comply with the personal information protection laws and regulations. See “Item 4.B. Information on the Company—Business Overview—Regulations.”
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On October 29, 2021, the CAC published the Measures for Security Assessment of Cross-border Data Transfer (Draft for Comments), or the Draft Data Security Regulations, which stipulates that if the cross-border data transfer to be conducted by a “data processor” has any of the following circumstances, the “data processor” shall apply to the national cyberspace administration authority for security assessment via the provincial cyberspace administration authority in the place where the said “data processor” is located: (i) any personal information and important data collected and generated by a “critical information infrastructure operator” is involved; (ii) the data to be provided overseas contains any important data; (iii) any personal information will be provided overseas by a personal information processor who has processed the personal information of one million individuals or above; (iv) the personal information of more than 100,000 individuals or the sensitive personal information of more than 10,000 individuals has been provided overseas on a cumulative basis; (v) other circumstances where the security assessment is required as prescribed by the national cyberspace administration authority. The Draft Data Security Regulations were also released for public comment only, and its provisions and the anticipated adoption or effective date may be subject to change with substantial uncertainty.
On November 14, 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Draft Data Security Regulations. The Draft Data Security Regulations provide that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. In accordance with the Draft Data Security Regulations, data processors shall apply for a cybersecurity review for the following activities: (i) merger, reorganization or division of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests to the extent that affects or may affect national security; (ii) listing abroad of data processors which process over one million users’ personal information; (iii) the listing of data processors in Hong Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect national security. However, there have been no clarifications from the authorities as of the date of this annual report as to the standards for determining such activities that “affects or may affect national security.” See “Item 4.B. Information on the Company—Business Overview—Regulations.” As of the date of this annual report, the Draft Data Security Regulations were released for public comment only, and their respective provisions and the anticipated adoption or effective date may be subject to change with substantial uncertainty. The Draft Data Security Regulations remain unclear on whether the relevant requirements will be applicable to companies that have been listed in the United States, such as us. We cannot predict the impact of the Draft Data Security Regulations, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the Draft Data Security Regulations mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange, such as us, we face uncertainties as to whether such clearance can be timely obtained, or at all.
On January 4, 2022, the CAC, the NDRC, the MIIT, and several other administrations jointly published the amended Measures for Cybersecurity Review, or the Amended Measures for Cybersecurity Review, which became effective on February 15, 2022. The Amended Measures for Cybersecurity Review further restates and expands the applicable scope of the cybersecurity review. Pursuant to the Amended Measures for Cybersecurity Review, (i) when the purchase of network products and services by a critical information infrastructures operator or the data processing activities conducted by a network platform operator affect or may affect national security, a cybersecurity review shall be conducted pursuant to the Review Measures. The operators shall file for a cybersecurity review with Cybersecurity Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for cybersecurity review shall be made by an issuer who is a network platform operator holding personal information of more than one million users before such issuer applies to list its securities on a foreign stock exchange; and (iii) the relevant PRC governmental authorities may initiate cybersecurity review if such governmental authorities determine that the issuer’s network products or services, or data processing activities affect or may affect national security. The Amended Measures for Cybersecurity Review was promulgated recently, and there are substantial uncertainties on the interpretation and application of the Amended Measures for Cybersecurity Review. As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC on such basis. In anticipation of the strengthened implementation of cybersecurity laws and regulations and the continued expansion of our business, we face potential risks if we are deemed as a critical information infrastructure operator, or if our data processing activities raise “national security” concern under the Amended Measures for Cybersecurity Review. In such case, if we are not able to comply with the cybersecurity and network data security requirements in a timely manner, or at all, we may be subject to government enforcement actions and investigations, fines, penalties, suspension of our
non-compliant
operations, or removal of our app from the relevant application stores, among other sanctions, which could materially and adversely affect our business and results of operations. In addition to the cybersecurity review, the Draft Data Security Regulations requires that data processors processing “important data” or listed overseas shall conduct an annual data security assessment by itself or commission a data security service provider to do so and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. If a final version of the Draft Data Security Regulations is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing.40
On April 2, 2022, the CSRC solicits public comments on Revision to the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Revised Provisions, which was jointly revised by the CSRC, Ministry of Finance of the PRC, National Administration of State Secrets Protection, and National Archives Administration of China. The Draft Revised Provisions, among others, provides that: (i) a domestic company that seeks to offer and list its securities in an overseas market, either via direct offering or indirect offering, and the securities companies and securities service providers that undertake relevant securities business, shall strictly abide by applicable laws and regulations of the PRC, enhance legal awareness of keeping state secrets and strengthening archives administration, institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. They shall not divulge any state secret or harm national security and public interest; (ii) a domestic company that plans to, either directly or through its overseas listed entity, publicly disclose or provide to relevant entities or individuals including securities companies, securities service providers, and overseas regulators, documents and materials that contain state secrets or government work secrets, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level. Where there is ambiguity or dispute over the identification of a state secret, a request shall be submitted to the competent secrecy administrative department for determination; where there is ambiguity or dispute over the identification of a government work secret, a request shall be submitted to the competent government authority for determination; (iii) a domestic company that plans to, either directly or through its overseas listed entity, publicly disclose or provide to relevant entities or individuals including securities companies, securities service providers, and overseas regulators, other documents and materials that, if divulged, will jeopardize national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations; (iv) archives, including working papers, that have been produced in the Chinese mainland by securities companies and securities service providers for overseas securities offering and listing by domestic companies shall be retained in the Chinese mainland, and, without prior approval by competent authorities, must not be brought, mailed or otherwise transferred to outside the Chinese mainland, or transmitted to any institutions or individuals outside the Chinese mainland through any methods including via the use of information technologies. Where archives or copies of archives that have important conservation value to the nation and the society need to be transferred or transmitted to outside the Chinese mainland, relevant approval procedures stipulated by national regulations shall be followed; and (v) overseas securities regulators and competent overseas authorities may request to investigate, including to collect evidence for investigation purpose, or inspect a domestic company that has been listed or offered securities in an overseas market or securities companies and securities service providers that undertake securities business for such domestic companies. Such investigation and inspection shall be conducted under a cross-border regulatory cooperation mechanism, and the CSRC and competent authorities of the Chinese government will provide necessary assistance pursuant to bilateral and multilateral cooperation mechanisms. Before cooperating with the investigation and inspection by, or providing documents and materials to overseas securities regulators or other competent overseas authorities, such domestic companies, securities companies and securities service providers shall report to the CSRC or other competent authorities. If a final version of the Draft Revised Provisions is adopted, we may be subject to review the procedure of identifying and protecting state/government work secrets and archive administration and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in confidentiality of state/government work secrets and archive administration. The Cyber Security Law, the Data Security Law, and the Amended Measures for Cybersecurity Review are relatively new and subject to interpretation by the regulators. Although we believe that we only gain access to user information that is necessary for, and relevant to, the services provided, the data we obtain and use may include information that is deemed as “personal information”, “network data” or “important data” under the relevant laws and regulations. As such, we have adopted a series of measures to ensure that we comply with relevant laws and regulations in the collection, use, disclosure, sharing, storage, and security of user information and other data. The Data Security Law also stipulates that the relevant authorities will formulate the catalogues for important data and strengthen the protection of important data, and state core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key livelihood and major public interests, shall be subject to stricter management system. “Item 4.B. Information on the Company—Business Overview—Regulations.” The exact scopes of important data and state core data remain unclear and may be subject to further interpretation. If any data that we are in possession of constitutes important data or state core data, we may be required to adopt stricter measures for protection and management of such data.
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We also face indirect technology, cybersecurity and operational risks relating to the third parties upon whom we rely to facilitate or enable our business activities, including, among others, third-party online payment service providers who manage accounts for certain borrower and institutional funding partner funds. As a result of increasing consolidation and interdependence of technology systems, a technology failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material impact on its counterparties. Although our agreements with third-party payment service providers provide that each party is responsible for the cybersecurity of its own systems, any cyber-attack, computer viruses, physical or electronic
break-ins
or similar disruptions of such third-party payment service providers could, among other things, adversely affect our ability to serve our users, and could even result in misappropriation of funds of our borrowers and institutional funding partners. If that were to occur, both we and third-party payment service providers could be held liable to borrowers and institutional funding partners who suffer losses from the misappropriation.Our business depends on our employees and third-party service providers to interact with potential borrowers and institutional funding partners, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information. Compliance with applicable data protection laws and regulations is a rigorous and time-intensive process. We have established a comprehensive administrative mechanism and standardized employee training system for stringent information security management, and we have received both the APP Security Certification and the APP Information Security Certification with level 3 rating, the highest rating level in security evaluation standard, from China National Computer Virus Emergency Response Center. We have also been deploying innovative technologies to promote user data protection. For example, we launched a Smart Finance Institute in 2018 for research and development in the field of artificial intelligence that can be applied in various aspects of financial services. In addition, we are also a member of the National Information Security Standardization Technical Committee, maintaining up to date knowledge and compliant regarding the latest cyber-security regulatory requirements. For the purpose of credit assessment, we also collaborate with third-party data providers to obtain the borrowers’ credit and behavior data, with general consents from the borrowers. Although we require the third-party data providers guarantee that the data provided to us is lawfully collected and legally authorized and their collaboration with us will not violate any applicable laws and regulations, we cannot assure you that the third-party data providers would strictly comply with the applicable laws and regulation during their process of data collection, using, storage, and processing. If any of our third-party data providers fails to comply with applicable data protection laws and regulations, our reputation could suffer and we could become subject to regulatory intervention. Furthermore, our collaboration with third-party data providers may subject us to significant civil or criminal penalties and negative publicity or result in the delayed or halted processing of personal data that we need to undertake to carry on our business, which could have a material adverse effect on our business, financial condition and results of operations. See “—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 information and misappropriation of funds of our borrowers and institutional funding partners, subject us to liabilities, cause reputational harm and adversely impact our results of operations and financial condition.”If our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.
We primarily rely on our
in-house
collection team to handle the collection of delinquent loans. We also engage certain third-party collection service providers to assist us with payment collection. If our or third party agencies’ primary collection methods, such as phone calls, text messages, legal letters and legal proceedings, are not as effective as they were and we fail to respond quickly and improve our collection methods, our delinquent loan collection rate may decrease and our investors may suffer loss. In addition, we bear credit risks for a substantial majority of the loans funded by our institutional funding partners to borrowers introduced by us. If our ability to collect delinquent loans is not as effective or efficient as expected, our liquidity, financial conditions and results of operations could be materially and adversely affected.42
Moreover, according to the Circular 141, delinquent loans shall not be collected by means of violence, intimidation, insult, defamation, or harassment. 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, be ordered to cease business operations, and even criminal liabilities. If the collection methods we use in collecting delinquent loans are viewed by the borrowers or regulatory authorities as harassments, threats or other illegal conducts, we may be subject to lawsuits initiated by the borrowers or prohibited by the regulatory authorities from using certain collection methods. If this were to happen and we fail to adopt alternative collection methods in a timely manner or the alternative collection methods are proven not effective, we might not be able to maintain our delinquent loan collection rate and the investors’ confidence in our platform may be negatively affected. Furthermore, the MPS 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. In 2019, several public security authorities in different provinces took actions against some loan collection outsourcing companies, and even criminal cases were reported to be charged against some of them. We have established strict implementation policies to ensure that our collection personnel and third-party collection service providers do not engage in aggressive practices. However, our
in-house
collection team is large and we cannot assure each of them would strictly comply with our policies. Furthermore, we have no direct control over the management of third-party collection service providers. If any practices by ourin-house
collection team members or our third-party collection service providers were deemed by the governmental authorities as aggressive collection or soft violence, our reputation and business would be materially and adversely affected. If any of the foregoing takes place and impairs our ability to collect delinquent loans, the transaction volumes on our platform will decrease and our business and results of operations could be materially and adversely affected. On August 31, 2020, the MIIT published the Administrative Provisions for Text Message and Voice Call Service (Draft) for public comments, which provides that no organization is allowed to send commercial text messages or make commercial calls to users without explicit consents of users, and the organization should no longer send messages or make calls to users if explicitly required by users. In case of violation, the relevant governmental authorities may impose penalties, including orders for rectifications, public warnings, fines from RMB10,000 to 30,000, revocation of telecommunication licenses and cessation of phone number resources.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 information and misappropriation of funds of our borrowers and institutional funding partners, subject us to liabilities, cause reputational harm and adversely impact our results of operations and financial condition.Our computer system and data storage facilities, the networks we use, the networks of other third parties with whom we interact, are potentially vulnerable to physical or electronic computer
break-ins,
viruses and similar disruptive problems or security breaches. A party that is able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of the information we transmit over the internet and mobile network or cause interruptions in our operations. We or our service providers may be required to invest significant resources to protect against the threat of security breaches or to alleviate problems caused by any breaches.In addition, our platform collects, stores, and processes certain personal and other sensitive data from our borrowers. The data that we have processed and stored makes us or third-party service providers who host our servers a target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic
break-ins
or similar disruptions. While we have taken steps to protect the confidential information that we have access to and put in place internal reporting procedures relating to cybersecurity incidents, our security measures could be breached. As of the date of this annual report, we have not experienced any material cyber security incidents. However, we cannot assure you that our security measures will not be breached in the future. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our platform could cause confidential borrower and institutional funding partner information to be stolen and used for criminal purposes.43
We also face indirect technology, cybersecurity and operational risks relating to the third parties upon whom we rely to facilitate or enable our business activities, including, among others, third-party online payment service providers who manage accounts for certain borrower and institutional funding partner funds. As a result of increasing consolidation and interdependence of technology systems, a technology failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material impact on its counterparties. Although our agreements with third-party payment service providers provide that each party is responsible for the cybersecurity of its own systems, any cyber-attack, computer viruses, physical or electronic
break-ins
or similar disruptions of such third-party payment service providers could, among other things, adversely affect our ability to serve our users, and could even result in misappropriation of funds of our borrowers and institutional funding partners. If that were to occur, both we and third-party payment service providers could be held liable to borrowers and institutional funding partners who suffer losses from the misappropriation.Security breaches or unauthorized access to or sharing of confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. In addition, leakages of confidential information may be caused by third-party service providers or business partners. If security measures are breached because of third-party action, employee misconduct or error, failure in information security management, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with borrowers, institutional funding partners and business partners could be severely damaged, we may become susceptible to future claims if our borrowers, institutional funding partners or business partners suffer damages, and could incur significant liability, and our business and operations could be adversely affected.
We are subject to governmental regulation and other legal obligations related to the protection of personal data, privacy and information security in the regions where we do business, and there has been and may continue to be a significant increase in such laws that restrict or control the use of personal data. See “—Any failure to comply with existing or future laws and regulations related to data protection, data security, cybersecurity or personal information protection could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating results and 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.
If any of our institutional funding partners fails to comply with applicable anti-money laundering laws and regulations, it could become subject to regulatory intervention or sanction and its business may be adversely effected, which could further have a material adverse effect on our reputation, business financial condition and results of operations.
Currently, we rely on our third-party service providers, in particular payment companies, that handle the transfer of funds between borrowers and institutional funding partners, to have their own appropriate anti-money laundering policies and procedures. The payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. If any of our third-party service providers fails to comply with applicable anti-money laundering laws and regulations, our reputation could suffer and we could become subject to regulatory intervention, which could have a material adverse effect on our business, financial condition and results of operations.
In October 2018, the PBOC, the CBIRC, and the CSRC, jointly issued the 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. To comply with the Anti-money Laundering and Anti-terrorism Measures, we are formulating policies, including internal controls and “know-your-customer” procedures and accessing the Monitor Platform. We cannot assure you that we will be able to establish and maintain effective anti-money laundering and anti-terrorism financing policies and procedures to 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 in compliance with applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Interim Measures.
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If we fail to maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. As we are no longer an emerging growth company, we are subject to the requirement that an independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e)
under the Exchange Act) and internal control over financial reporting (as defined in Rule13a-15(f)
under the Exchange Act) as of the end of the period covered by this annual report, as required by Rule13a-15(b)
through (c) under the Exchange Act. Based upon that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2021. Our independent registered public accounting firm, PricewaterhouseCooper Zhong Tian LLP, also attested and reported our internal control over financial reporting. See the attestation report on page F-2 issued by our independent registered public accounting firm for further details. However, if we fail to maintain effective internal control over financial reporting in the future, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.Our operations depend on the performance of the internet infrastructure and telecommunications networks in China.
Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.
In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.
Any significant disruption in service on our platform, in our computer systems or third party service providers’ systems, including events beyond our control, could prevent us from processing or posting loans on our platform, reduce the attractiveness of our platform and result in a loss of borrowers or investors.
In the event of a platform outage and physical data loss, our ability to perform our servicing obligations, process loan applications or make funds available on our platform would be materially and adversely affected. The satisfactory performance, reliability and availability of our platform and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to retain existing and attract new borrowers and institutional funding partners. Much of our system hardware is hosted in a leased facility located in Shanghai that is operated by our IT staff. We also maintain a real-time backup system in the same facility and a remote backup system at a separate facility also located in Shanghai. Our operations depend on our ability to protect our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to our leased facilities in Shanghai, we could experience interruptions and delays in our service and may incur additional expense in arranging new facilities.
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Any interruptions or delays in our service, whether as a result of third-party or our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our borrowers and institutional funding partners and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on loans, damage our brand and reputation, divert our employees’ attention, subject us to liability and cause borrowers and institutional funding partners to abandon our platform, any of which could adversely affect our business, financial condition and results of operations.
Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and institutional funding partners using our platform, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower or investor data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers or investors or liability for damages, any of which could adversely affect our business, results of operations and financial condition.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, domain names,
know-how,
proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment andnon-compete
agreements with our employees and others to protect our proprietary rights. See also “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.It is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and
non-compete agreements
may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in relatedknow-how
and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights,
know-how
or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights,know-how
or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.46
Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights,
know-how
or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.We may be held liable for information or content displayed on, retrieved from or linked to our mobile applications, which may materially and adversely affect our business and operating results.
In addition to our website, we also offer consumer finance products through our mobile applications, which are regulated by, or the APP Provisions, promulgated by the CAC on June 28, 2016 and effective on August 1, 2016. According to the APP Provisions, the providers of mobile applications shall not create, copy, publish or distribute information and content that is prohibited by laws and regulations. We have implemented internal control procedures screening the information and content on our mobile applications to ensure their compliance with the APP Provisions. However, we cannot assure that all the information or content displayed on, retrieved from or linked to our mobile applications complies with the requirements of the APP Provisions at all times. If our mobile applications were found to be violating the APP Provisions, we may be subject to administrative penalties, including warning, service suspension or removal of our mobile applications from the relevant mobile application store, which may materially and adversely affect our business and operating results.
the Administrative Provisions on Mobile Internet Applications Information Services
We may from time to time be subject to claims, controversies, lawsuits and legal proceedings, which could have a material adverse effect on our financial condition, results of operations, cash flows and reputation.
We may from time to time become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. For example, we once received a claim from an individual asserting that he has an equity ownership in us pursuant to an alleged agreement, dated February 27, 2008, concerning Shanghai Daifeng, our then-operating entity, which involved, among other things, a contemplated sale of 27% of beneficial ownership of Shanghai Daifeng to an investor represented by the individual for US$189,000. The alleged agreement was not executed by Shanghai Daifeng and was never implemented. The contemplated sale never took place. We believe the claim is without merit.
However, claims, lawsuits, and litigations are subject to inherent uncertainties, and we are uncertain whether the foregoing claim would develop into a lawsuit. Lawsuits and litigations may cause us to incur defense costs, utilize a significant portion of our resources and divert management’s attention from ouroperations, any of which could harm our business. Any settlements or judgments against us could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, negative publicity regarding claims or judgments made against us may damage our reputation and may result in material adverse impact on us.
day-to-day
From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.
We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our platform and better serve borrowers and institutional funding partners. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
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Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:
difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, rights, platforms, products and services of the acquired business;
inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
difficulties in retaining, training, motivating and integrating key personnel;
diversion of management’s time and resources from our daily operations;
difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
difficulties in retaining relationships with customers, employees and suppliers of the acquired business;
risks of entering markets in which we have limited or no prior experience;
regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary
pre-closing
or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;
failure to successfully further develop the acquired technology;
liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;
potential disruptions to our ongoing businesses; and
unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.
We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.
Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.
Our business operations depend on the continued services of our senior management, particularly the executive officers named in this annual report. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and
non-competition
agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.48
Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training new employees, and the quality of our services and our ability to serve borrowers and institutional funding partners could diminish, resulting in a material adverse effect to our business.
Increases in labor costs in the PRC may adversely affect our business and results of operations.
The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase.Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.
We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of
non-compliance.
We are subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange Commission, which is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China and the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
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We do not have any business insurance coverage.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
We face risks related to
COVID-19
outbreaks, other health epidemics and outbreaks and natural disasters, which could significantly disrupt our operations.We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures,
break-ins,
war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our platform.Our business had been adversely affected by the effects of
COVID-19
outbreaks. In early 2020, in response to intensifying efforts to contain the spread ofCOVID-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 contracted theCOVID-19,
asking China residents to remain at home and to avoid gathering in public, and other actions. TheCOVID-19
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 reduced our business operation capacity, impaired our ability to collect delinquent loans, and negatively affected our operating results. The outbreak ofCOVID-19
also caused an increase in default of the loans on our platform as the extension of the Chinese New Year holiday in 2020 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 first half of 2020. Also, 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 half of 2020 compared to the first half of 2019 and the fourth quarter of 2019 due to our adoption of a more prudent approach in facilitating new loans.Since the second half of 2020, many of the quarantine measures within China and our overseas markets have been relaxed, and we have resumed normal operations since the second half of 2020. However, relaxation of restrictions on economic and social activities may lead to new cases which may lead to
re-imposed
restrictions. China has experienced upticks in cases that have prompted selective restrictions in affected regions. For example, in the spring of 2022, there was an uptick in cases in Shanghai, attributed to the highly contagious Omicron variant. The outbreak in Shanghai spread to many other provinces and cities in China. Certain travel restrictions and other limitations were imposed in various places in response to these new cases. In response to the uptick in cases in Shanghai, we made remote working arrangements and suspended business travels to ensure the safety and health of our employees, which may reduce our business operation capacity and negatively affected our operating results.Furthermore, normal economic life throughout China was curtailed during the outbreak of
COVID-19
and opportunities for discretionary consumption were limited. Our results of operations could be adversely affected to the extent that theCOVID-19
pandemic harms the Chinese economy in general.The extent to which
COVID-19
impacts our results of operations will depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable.In addition, our business could also be adversely affected by the effects of Ebola virus disease, Zika virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected or even temporarily closed.
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Our headquarters are located in Shanghai, where most of our directors and management and a large majority of our employees currently reside. In addition, most of our system hardware and
back-up
systems are hosted in leased facilities located in Shanghai. Consequently, we are highly susceptible to factors adversely affecting Shanghai. If any of the abovementioned natural disasters, health epidemics or other outbreaks were to occur in Shanghai, our operation may experience material disruptions, such as temporary closure of our offices and suspension of services, disruption of communications between our headquarters and overseas operations, which may materially and adversely affect our business, financial condition and results of operations.Risks Related to Our Corporate Structure
If the PRC government deems that the contractual arrangements in relation to the 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 ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, except otherwise provided, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except for
e-commerce,
domestic multi-party communication, storage and forwarding and call center) in accordance with the Special Administrative Measures for Foreign Investment Access, the Negative List (2021), which was promulgated by the MOFCOM and the NDRC on December 27, 2021 and became effective on January 1, 2022. Foreign direct investment in telecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises, which was promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, February 6, 2016, and April 7, 2022. These regulations require that the foreign investors may acquire up to 50% equity interests the foreign-invested value-added telecommunications enterprises in China. PRC regulations impose sanctions for engaging in commercial internet information services, which is asub-set
of value-added telecommunication business, without a value-added telecommunication service license for internet content provider, or the ICP License, and sanctions for engaging in the operation of online data processing and transaction processing, which is anothersub-set
of value-added telecommunication business, without a value-added telecommunication service license for online data processing and transaction processing, or the ODPTP License. These sanctions include rectification orders and warnings from the PRC communication administrations, fines, confiscation of illegal gains, and suspension or termination of operating of the websites and mobile applications in question.We are a Cayman Islands company and our PRC subsidiaries are considered foreign invested enterprises. Before the Interim Measures was published in August 2016, there was no clear official guidance or interpretation 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. However, we believe the online consumer finance services offered through our online platform constitute a type of value-added telecommunication services that foreign ownership and investment is restricted and therefore we should operate our online platform through a consolidated variable interest entity to ensure compliance with the relevant PRC laws and regulations. We have entered into the following four separate sets of contractual arrangements: (i) among Shanghai Guangjian, Shanghai Shanghu (with respect to the business operation agreement and the exclusive technology consulting and service agreement only), Beijing Paipairongxin, Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only), a subsidiary of Beijing Paipairongxin, and the shareholders of Beijing Paipairongxin to conduct our online lending information intermediary business in the past; (ii) among Shanghai Manyin, Shanghai Zihe and the shareholders of Shanghai Zihe to provide services to our institutional funding partners; and (iii) among Shanghai Manyin, Shanghai Ledao and the shareholders of Shanghai Ledao for new business we plan to operate in the future. For a detailed description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” As a result of these contractual arrangements, we have obtained control over Beijing Paipairongxin, Shanghai Zihe, Shanghai Ledao and their subsidiaries and consolidate their operating results in our financial statements under U.S. GAAP. Shanghai PPDai has been operating our online lending information intermediary business, including, among others, operations of our www.ppdai.com website and PPDai mobile application. Shanghai PPDai had made applications for value-added telecommunication business license with the relevant local telecommunication regulatory authority before the Interim Measures was promulgated. Due to the lack of detailed rules regulating the online consumer finance service and clarification of the nature of this innovative business model, the local telecommunication regulatory authority had tentatively put our applications on hold.
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We have ceased facilitating new loans with funding from individual investors on our platform since October 2019 and improve the business model through the acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partners. However, the interpretation of laws and regulations in the context of online consumer finance industry still remains uncertain, and it is unclear whether the online consumer finance service providers like Shanghai PPDai and Shanghai Erxu, are required to obtain the ICP License or the ODPTP License, or any other kind of VATS License. The regulatory regime of online consumer finance industry evolves rapidly. The regulatory authorities in the future may explicitly require any of our VIEs or subsidiaries of our VIEs to obtain additional ICP Licenses, ODPTP Licenses, or issue new laws to institute a new kind of VATS License. We cannot assure you that we would be able to obtain the additional ICP License, the ODPTP License, or any new VATS License on a timely manner, or at all, which would subject us to the sanctions and materially and adversely affect our business, financial condition, results of operation and prospects.
In the opinion of our PRC counsel, Hui Ye Law Firm,our current ownership structure, the ownership structure of Shanghai Guangjian, Shanghai Shanghu, Beijing Paipairongxin and its subsidiaries, the ownership structure of Shanghai Manyin and Shanghai Zihe, the ownership structure of Shanghai Manyin and Shanghai Ledao, 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, Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only) and the shareholders of Beijing Paipairongxin, the contractual arrangements among Shanghai Manyin, Shanghai Zihe and the shareholders of Shanghai Zihe, and the contractual arrangements among Shanghai Manyin, Shanghai Ledao and the shareholders of Shanghai Ledao, are not in violation of existing PRC laws, regulations and rules; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect.
However, we are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities and we conduct our operations in China primarily through the consolidated variable interest entities with which we have maintained contractual arrangements. Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest in the consolidated variable interest entities and their subsidiaries. If the PRC government deems that our contractual arrangements with the 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 or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. We may not be able to repay the notes and other indebtedness, and our shares may decline in value or become worthless, if we are unable to assert our contractual control rights over the assets of our PRC subsidiaries, which contribute to 88% of our revenues in 2021. Our holding company in the Cayman Islands, the consolidated variable interest entities, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and our company as a group.
However, our PRC counsel, Hui Ye Law Firm, has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel. 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. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions promulgated by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.52
Although we believe we, our PRC subsidiaries and the consolidated variable interest entities comply with current PRC laws and regulations, we cannot assure you that the PRC government would agree that our contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. The PRC government has broad discretion in determining rectifiable or punitive measures for
non-compliance
with or violations of PRC laws and regulations. If the PRC government determines that we or the consolidated variable interest entities do not comply with applicable law, it could revoke the consolidated variable interest entities’ business and operating licenses, require the consolidated variable interest entities to discontinue or restrict the consolidated variable interest entities’ operations, restrict the consolidated variable interest entities’ right to collect revenues, block the consolidated variable interest entities’ websites, require the consolidated variable interest entities to restructure our operations, impose additional conditions or requirements with which the consolidated variable interest entities may not be able to comply, impose restrictions on the consolidated variable interest entities’ business operations or on their customers, or take other regulatory or enforcement actions against the consolidated variable interest entities that could be harmful to their business. Any of these or similar occurrences could significantly disrupt our or the consolidated variable interest entities’ business operations or restrict the consolidated variable interest entities from conducting a substantial portion of their business operations, which could materially and adversely affect the consolidated variable interest entities’ business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of any of the consolidated variable interest entities that most significantly impact its economic performance, or our failure to receive the economic benefits from any of the consolidated variable interest entities, we may not be able to consolidate these entities in our consolidated financial statements in accordance with U.S. GAAP.We rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations, and such contractual arrangements may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with the consolidated variable interest entities, namely, Beijing Paipairongxin, Shanghai Zihe, and Shanghai Ledao and, to operate our online consumer finance platform business, including the operation of www.ppdai.com website and PPDai mobile application and the provision of services to institutional funding partners, as well as certain other complementary businesses. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over the consolidated variable interest entities. For example, consolidated variable interest entities and shareholders of consolidated variable interest entities as well as other parties to the contractual arrangements may fail to fulfill their contractual obligations to us, such as failure to maintain our website and use the domain names and trademarks in a manner as stipulated in the contractual arrangements, or taking other actions that are detrimental to our interests.
If we had direct ownership of the consolidated variable interest entities, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the consolidated variable interest entities, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance of obligations under the contractual arrangements by the consolidated variable interest entities, shareholders of the consolidated variable interest entities, and other parties to the contractual arrangements to exercise control over the consolidated variable interest entities. The shareholders of the consolidated variable interest entities may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with the consolidated variable interest entities. Although we have the right to replace any shareholder of the consolidated variable interest entities under the contractual arrangements, if any of these shareholders are uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings, the outcome of which will be subject to uncertainties. See “—Any failure by the consolidated variable interest entities, shareholders of the consolidated variable interest entities or other parties to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with the consolidated variable interest entities and shareholders of the consolidated variable interest entities may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
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Any failure by the consolidated variable interest entities, shareholders of the consolidated variable interest entities or other parties to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
We have entered into a series of contractual arrangements with the consolidated variable interest entities and shareholders of the consolidated variable interest entities as well as other parties. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” If the consolidated variable interest entities fail to perform their respective obligations under the contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of the consolidated variable interest entities were to refuse to transfer their equity interests in the consolidated variable interest entities to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over the consolidated variable interest entities and their respective subsidiaries, and our ability to conduct our business may be negatively affected. See “—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.”
The shareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The equity interests of the consolidated variable interest entities are held by Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng Gu, our
co-founders
and shareholders, as well as a few of their family relatives and our employees. Their interests in the consolidated variable interest entities may differ from the interests of our company as a whole. These shareholders may breach, or cause the consolidated variable interest entities to breach, the existing contractual arrangements we have with them and our consolidated variable interest entity, which would have a material adverse effect on our ability to effectively control the consolidated variable interest entities and their subsidiaries and receive economic benefits from them. For example, the shareholders of Beijing Paipairongxin, one of the consolidated variable interest entities, may be able to cause our agreements with Beijing Paipairongxin and Shanghai PPDai, a major subsidiary of Beijing Paipairongxin, to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.54
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the call option agreement with these shareholders to request them to transfer all of their equity interests in the consolidated variable interest entities to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of the consolidated variable interest entities, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements in relation to the consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or the consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition and the price of our ADSs.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among the consolidated variable interest entities, shareholders of the consolidated variable interest entities and us as well as other parties were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust the consolidated variable interest entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by the consolidated variable interest entities for PRC tax purposes, which could in turn increase their tax liabilities without reducing our tax expenses. In addition, if we request the shareholders of the consolidated variable interest entities to transfer their equity interests in the consolidated variable interest entities at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject us to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on the consolidated variable interest entities for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if the consolidated variable interest entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.
We may lose the ability to use and enjoy assets held by the consolidated variable interest entities that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
The consolidated variable interest entities hold certain assets that are material to the operation of our business, including, among others, intellectual properties, hardware and software. Under the contractual arrangements, the consolidated variable interest entities may not, and the shareholders of the consolidated variable interest entities may not cause them to, in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without our prior consent. However, in the event that the shareholders of the consolidated variable interest entities breach the these contractual arrangements and voluntarily liquidate the consolidated variable interest entities, or the consolidated variable interest entities declare bankruptcy and all or part of their assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If the consolidated variable interest entities undergo a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.
Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.
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The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. The growth rate of the Chinese economy has gradually slowed since 2010, and the impact of
COVID-19
on the Chinese economy in 2020 was severe. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.A severe or prolonged downturn in the Chinese or global economy could reduce the demand for consumer loans and investments, which could materially and adversely affect our business and financial condition.
The2020.2021. The conflict in Ukraine and the imposition of broad economic sanctions on Russia could raise energy prices and disrupt global markets. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may reduce the demand for consumer loans and investments, and materially and adversely affect our business, results of operations and financial condition.
COVID-19
had a severe and negative impact on the Chinese and the global economy in 2020. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak ofCOVID-19,
the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.
The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
In particular, PRC laws and regulations concerning the online consumer finance industry are developing and evolving. Although we have taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC, and avoid conducting any
non-compliant
activities under the applicable laws and regulations, such as illegal fund-raising, forming capital pool or providing guarantee to investors, the PRC government authority may promulgate new laws and regulations regulating the online consumer finance industry in the future. We cannot assure you that our practice would not be deemed to violate any new PRC laws or regulations relating to online consumer finance. Moreover, developments in the online consumer finance industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may limit or restrict online consumer finance platforms like us, which could materially and adversely affect our business and operations.56
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
PRC government has significant oversight over the conduct of our business and it has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
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.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We only have contractual control over our website and mobile applications. We do not directly own the website nor mobile applications due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including internet information provision services. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.
The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the CAC, (with the involvement of the State Council Information Office, the MIIT, and the MPS). The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.
Our online marketplace, operated by Shanghai PPDai, a subsidiary of Beijing Paipairongxin, one of ourthe consolidated variable interest entities, may be deemed to be providing commercial internet informationcontent provision service or online data processing or transaction processing services, which would require Shanghai PPDai to obtain certain value-added telecommunications business license. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Internet Companies—Regulations on value-added telecommunication services.” Furthermore, it is uncertain if Beijing Paipairongxin, Shanghai Zihe and their subsidiaries will be required to obtain a separate operating license with respect to our mobile applications in addition to the value-added telecommunications business license.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.
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The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.
We conduct our business primarily in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the conduct of our business, and may influence our operations as the government deems appropriate to advance regulatory and societal goals and policy positions. Historically, the PRC government had published new regulations and policies that significantly affected our industries. For example, we ceased facilitating new loans with funding from individual investors in October 2019 in response to new regulations onlending. Also, interest rates of certain of our loan products are subject to the restrictions on maximum interest rates on private lending permitted by the relevant laws, regulations, policies or guidance. We cannot rule out the possibility that the PRC government will release additional regulations or policies in the future that directly or indirectly affect our industry or require us to seek additional permission to continue our operations, which could result in a material adverse change in our operation and/or the value of our ADSs. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
peer-to-peer
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.
We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiaries to adjust its taxable income under the contractual arrangements it currently has in place with Beijing Paipairongxin and its shareholders and Shanghai PPDai (with respect to the exclusive technology consulting and service agreement only), Shanghai Zihe, Shanghai Nianqiao, Shanghai Ledao Chengdu Yougao and their respective shareholders in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—Contractual arrangements in relation to ourthe consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or ourthe consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition and the price of our ADSs.” Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated
after-tax
profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulatedafter-tax
profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of itsafter-tax
profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.In response to the persistent capital outflow and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the PBOC and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures over recent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the PBOC issued, or the PBOC Circular 306, on November 22, 2016, which provides that offshore RMB loans provided by a domestic enterprise to offshore enterprises that it holds equity interests in shall not exceed 30% of such equity interests. The PBOC Circular 306 may constrain our PRC subsidiaries’ ability to provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “—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
the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB Loans Provided by Domestic Enterprises
non-PRC
shareholders or ADS holders.”58
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.
Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, or FICMIS, and registration with other governmental authorities in China. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE, or its local branches, and (ii) each of our PRC subsidiaries may not procure loans which exceed the difference between its registered capital and its total investment amount as recorded in FICMIS. Any medium or long term loan to be provided by us to a consolidated variable interest entity of our company must be recorded and registered by the National Development and Reform Committee and SAFE or its local branches. We may not complete such recording or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to complete such recording or registration, our ability to use the proceeds of our initial public offering and the concurrent private placement and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
In 2008, SAFE promulgated, or SAFE Circular 142, which used to regulate the conversion by foreign-invested enterprises of foreign currency into Renminbi by restricting the usage of converted Renminbi. On March 30, 2015, SAFE promulgated, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditures beyond their business scopes. On June 9, 2016, SAFE promulgated, or SAFE Circular 16. SAFE Circular 19 and SAFE Circular 16 continue 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
the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises,
the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises,
the Circular on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange,
non-affiliated
enterprises or constructing or purchasing real estate not forself-use.
On October 23, 2019, SAFE promulgated, or SAFE Circular 28. SAFE Circular 28 provides that, or SAFE Circular 8. 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 and SAFE Circular 8. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer to and use in China the proceeds we receive from our offshore financing activities, which may adversely affect our business, financial condition and results of operations.
the Notice of the Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment,
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 Negative List and other relevant PRC laws and regulations. On April 10, 2020, SAFE issuedthe Notice on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business,
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the PBOC. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
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Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive into Renminbi to pay our operating expenses, appreciation of Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. In 2020,2021, we did not enter into hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk” for more details. While we may decide to enter into more hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the price of our ADSs.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company in the Cayman Islands relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions 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. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But 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 expenses such as the repayment of loans denominated in foreign currencies.
In light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
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.
Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Companies operating in China are also required to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. We have not made adequate employee benefit payments for some employees.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, 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. With respect to the underpaid employee benefits, we may be required to make supplemental contributions for these plans as well as pay late fees and fines. With respect to the underwithheld individual income tax, we may be required to make up sufficient withholding and pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits and underwithheld individual income tax, our financial condition and results of operations may be adversely affected.
the Reform Plan of the State Tax and Local Tax Collection Administration System
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The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors,
change-of-control
the Anti-Monopoly Law
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.
SAFE promulgated, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC residents or entities, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
the Circular on Relevant Issues Relating to PRC Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles,
SAFE Circular 37 is issued to replace, or SAFE Circular 75.
the Circular on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments through Overseas Special Purpose Vehicles,
If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
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 who are known to us as being PRC 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 previously known to us 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 update the registration in accordance with SAFE Circular 37.
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However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with the requirements of SAFE Circular 37. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37. Failure by such shareholders or beneficial owners to comply with SAFE Circular 37, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
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.
Pursuant to SAFE Circular 37, PRC residents who participate in stock incentive plans in overseas, promulgated by SAFE in 2012, or 2012 SAFE Notices. Pursuant to 2012 SAFE Notices, PRC citizens and
non-publicly-listed
companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose vehicles. In the meantime, our directors, executive officers and other employees who are PRC citizens, subject to limited exceptions, and who have been granted stock options by us, may followthe Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company,
non-PRC
citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted stock options are subject to these regulations. Failure to complete the SAFE registrations may subject them to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange—Regulations on employee stock incentive plans of overseas publicly-listed company.” The State Administration of Taxation, or SAT, has issued certain circulars concerning employee stock options and restricted shares. Under these circulars, our employees working in China who exercise stock options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options or restricted shares 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. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange—Regulations on employee stock incentive plans of overseas publicly-listed company.”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.Underand its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the SAT issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of aoperational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
the PRC Enterprise Income Tax Law
PRC-controlled
enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of theday-to-day
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We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation.” However, the tax resident 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 substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that FinVolution Group or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then FinVolution Group or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ADSs or ordinary shares may be subject to PRC tax, at a rate of 10% in the case of
non-PRC
enterprises or 20% in the case ofnon-PRC
individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whethernon-PRC
shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on the investment in our ADSs.We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary.
We are a holding company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to, or the Double Tax Avoidance Arrangement, and Circular 81 issued by the SAT, such withholding tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise for at least 12 consecutive months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and requirements under the Double Tax Avoidance Arrangement and other applicable PRC laws. Furthermore, under, which became effective in August 2015, the
the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income,
the Administrative Measures for
Non-Resident
Enterprises to Enjoy Treatments under Tax Treaties,non-resident
enterprises shall determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file relevant report and materials with the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. See “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation.” We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant PRC tax authority or we will be able to complete the necessary filings with the relevant PRC tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to FinVolution HK and Bluebottle Limited, our Hong Kong subsidiaries.We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their
non-PRC
holding companies.Pursuant to, or SAT Circular 698, issued by the SAT in 2009 with retroactive effect from January 1, 2008, where a
the Circular on Strengthening Administration of Enterprise Income Tax for Share Transfers by
Non-PRC
Resident Enterprises,non-resident
enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, thenon-resident
enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.63
On February 3, 2015, the SAT issued, or SAT Public Notice 7. SAT Public Notice 7 supersedes the rules with respect to the Indirect Transfer under SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698, which remain in force. SAT Public Notice 7 has introduced a new tax regime that is significantly different from the previous one under SAT Circular 698 (Article V and Article VI). SAT Public Notice 7 extends its tax jurisdiction to not only the indirect transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a
a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by
Non-Resident
Enterprises,non-resident
enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, thenon-resident
enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferor should be subject to withholding of applicable taxes, currently at a rate of 10%. Both the transferor and the PRC entity that directly owns the taxable assets, or the Withholding Agent, may be subject to penalties under PRC tax laws if the Withholding Agent fails to withhold the taxes and the transferor fails to pay the taxes.We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed or subject to withholding obligations in such transactions, under SAT Circular 698 and SAT Public Notice 7. For transfer of shares in our company by investors that are
non-PRC
resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Circular 698 and SAT Public Notice 7. As a result, we may be required to expend valuable resources to comply with SAT Circular 698 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Holding Foreign Companies Accountable ActM&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC persons or entities to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and our offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the PCAOB is unableapproval could be rescinded. Any failure to inspect auditors who are locatedobtain or delay in China. The delistingobtaining the CSRC approval for any of our ADSs,offshore offerings, or a rescission of such approval if obtained by us, would subject us to sanctions imposed by the threatCSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of their being delisted,China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.
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On July 6, 2021, the valuerelevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of your investment. Additionally,relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. On December 24, 2021, the CSRC published the Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Draft Administrative Provisions, and the Measures for the Overseas Issuance and Listing of Securities Record-filings by Domestic Companies (Draft for Comments), or the Draft Measures for Record-filing. Pursuant to these drafts, PRC domestic companies that directly or indirectly offer or list their securities in an overseas market, which include (i) any PRC company limited by shares, and (ii) any offshore company that conducts its business operations primarily in China and contemplates to offer or list its securities in an overseas market based on its onshore equities, assets or similar interests, are required to file with the CSRC within three business days after submitting their listing application documents to the relevant regulator in the place of intended listing. Failure to complete the record-filing under the Draft Administrative Provisions may subject a PRC domestic company to a warning or a fine of RMB1 million to RMB10 million. If the circumstances are serious, the PRC domestic company may be ordered to suspend its business or suspend its business until rectification, or its permits or businesses license may be revoked. On the press conference held by the CSRC on December 24, 2021, a CSRC officer expressed that the record-filing requirement would be imposed starting from the new listing and new financing activities and the sufficient transition period would be given for the existing public companies offering their securities on the oversea stock exchanges before the effectiveness of these drafts. As a
follow-up,
on December 24, 2021, the State Council issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Provisions, and the CSRC issued a draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Administration Measures, for public comments.The Draft Provisions and the Draft Administration Measures propose to establish a new filing-based regime to regulate overseas offerings and listings by domestic companies. According to the Draft Provisions and the Draft Administration Measures, an overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. Specifically, the examination and determination of an indirect offering and listing will be conducted on a substance-over-form basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic company if the issuer meets the following conditions: (i) the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC. According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC for its initial public offering,
follow-on
offering and other equivalent offering activities. Particularly, the issuer shall submit the filing with respect to its initial public offering and listing within three business days after its initial filing of the listing application, and submit the filing with respect to itsfollow-on
offering within three business days after completion of thefollow-on
offering. Failure to comply with the filing requirements may result in fines to the relevant domestic companies, suspension of their businesses, revocation of their business licenses and operation permits and fines on the controlling shareholder and other responsible persons. The Draft Administration Measures also sets forth certain regulatory red lines for overseas offerings and listings by domestic enterprises. For more details of the Draft Provisions and the Draft Administration Measures, please refer to “Regulation—Regulations Relating to Overseas Listing and M&A.”As of the date of this annual report, the Draft Provisions and the Draft Administration Measures were released for public comment only. There are uncertainties as to whether the Draft Provisions and the Draft Administration Measures would be further amended, revised or updated. Substantial uncertainties exist with respect to the enactment timetable and final content of the Draft Provisions and the Draft Administration Measures. As the CSRC may formulate and publish guidelines for filings in the future, the Draft Administration Measures does not provide for detailed requirements of the substance and form of the filing documents. In a Q&A released on its official website, the respondent CSRC official indicated that the proposed new filing requirement will start with new companies and the existing companies seeking to carry out activities like
follow-on
financing. As for the filings for the existing companies, the regulator will grant adequate transition period and apply separate arrangements. The Q&A also addressed the contractual arrangements and pointed out that if relevant domestic laws and regulations have been observed, companies with compliant consolidated variable interest entity structure may seek overseas listing after completion of the CSRC filings. Nevertheless, it does not specify what qualify as compliant consolidated variable interest entity structures and what relevant domestic laws and regulations are required to be complied with. Given the substantial uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot assure you that we will be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all.65
In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us. If it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the Amended Measures for Cybersecurity Review, are required for our offshore offerings, it is uncertain whether we can or how long it will take us to obtain such approval or complete such filing procedures and any such approval or filing could be rescinded or rejected. Any failure to obtain or delay in obtaining such approval or completing such filing procedures for our offshore offerings, or a rescission of any such approval or filing if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC approval or filing or other government authorization for our offshore offerings. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our listed securities. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our listed securities.
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus,annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently not inspected by the PCAOB.
Our ADSs will be prohibited from trading in the United States under the HFCA Act in 2024 if the PCAOB announcedis unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The HFCA Act was signed into law on December 18, 2020. The HFCA Act states if the SEC determines that it had entered intowe have filed audit reports issued by a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the partiesregistered public accounting firm that has not been subject to inspection for the production andPCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange of audit documents relevant to investigations undertaken by the PCAOBor in the PRC or by the CSRC or the PRC Ministry of Financetrading market in the United States. The PCAOB continuesOn December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCA Act, pursuant to be in discussions withwhich the CSRC andSEC will identify an issuer as a “Commission Identified Issuer” if the PRC Ministry of Finance to permit joint inspections in the PRC ofissuer has filed an annual report containing an audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
over-the-counter
Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Formconflict betweennumber of factors out of our, and our auditor’s, control. If our shares and ADSs are prohibited from trading in the United States, and Chinese law. Specifically,there is no certainty that we will be able to list on acertainour shares will develop outside of the United States listed companies operating and audited in mainland China, the SECStates. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the PCAOB soughtrisk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to obtain from the Chinese accounting firms accessraise capital on terms acceptable to their audit work papersus, or at all, which would have a material adverse impact on our business, financial condition, and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the United States regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.
prospects.20-F
for the year ending December 31, 2023 which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a non-U.S.
exchange or that a market for non-inspection
years required for triggering the prohibitions under the non-inspection
years required for triggering the Risks Related to ourOur American Depositary Shares
The market price for our ADSs may be volatile.
The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in their trading prices. The trading performances of other Chinese companies’ securities after their offerings, including internet and
e-commerce
companies, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material adverse effect on the market price of our ADSs.In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:
conditions in the online consumer finance industries;
announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;
changes in the economic performance or market valuations of other online consumer finance platforms;
actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
changes in financial estimates by securities research analysts;
announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;
additions to or departures of our senior management;
detrimental negative publicity about us, our management or our industry;
fluctuations of exchange rates between the RMB and the U.S. dollar;
release or expiry
of
lock-up
or other transfer restrictions on our outstanding ordinary shares or ADSs; andsales or perceived potential sales of additional ordinary shares or ADSs.
67
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our ADSs or publish inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.
Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.
Sales of our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of March 31, 2021, we had 835,881,784 Class A ordinary shares and 581,000,000 Class B ordinary shares outstanding. Among these Class A ordinary shares, 744,624,055 Class A ordinary shares were represented by ADS. All our ADSs are freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares outstanding will be available for sale, upon the expiration of the
180-day
lock-up
period beginning from the date of our initial public offering, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of thelock-up
period at the discretion of the representatives of the underwriters of our initial public offering. To the extent shares are released before the expiration of thelock-up
period and sold into the market, the market price of our ADSs could decline.Certain holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to the
180-day
lock-up
period in connection with our initial public offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying Class A ordinary shares which are represented by your ADSs.
As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class A ordinary shares which are represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as the holder of the underlying Class A ordinary shares which are represented by your ADSs. Upon receipt of your voting instructions, the depositary will endeavor to vote the underlying Class A ordinary shares in accordance with your instructions in the event voting is by poll, and in accordance with instructions received from a majority of holders of ADSs who provide instructions in the event voting is by show of hands. The depositary will not join in demanding a vote by poll. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. Under our amended and restated memorandum and articles of association that is currently effective, the minimum notice period required to be given by our company to our registered shareholders for convening a general meeting is seven (7) days. When a general meeting is convened, you may not receive sufficient advance notice to enable you to withdraw the underlying shares which are represented by your ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general meeting or to vote directly with respect to any specific matter or resolution which is to be considered and voted upon at the general meeting. In addition, under our amended and restated memorandum and articles of association that is currently effective, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying shares which are represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will, if we request, and subject to the terms of the deposit agreement, endeavor to notify you of the upcoming vote and to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying shares which are represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct the voting of the underlying shares which are represented by your ADSs, and you may have no legal remedy if the underlying shares are not voted as you requested.
Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not instruct the depositary how to vote such shares, which could adversely affect your interests.
Under the deposit agreement for our ADSs, the depositary will give us (or our nominee) a discretionary proxy to vote our Class A ordinary shares underlying your ADSs at shareholders’ meetings if you do not give voting instructions to the depositary as to how to vote the Class A ordinary shares underlying your ADSs at any particular shareholders’ meeting, unless:
we have failed to timely provide the depositary with our notice of meeting and related voting materials;
we have instructed the depositary that we do not wish a discretionary proxy to be given;
we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
a matter to be voted on at the meeting may have a material adverse impact on shareholders; or
voting at the meeting is made on a show of hands.
The effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary as to how to vote the Class A ordinary shares underlying your ADSs at any particular shareholders’ meeting, you cannot prevent our Class A ordinary shares underlying your ADSs from being voted at that meeting, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.
Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement and the deposit agreement may be amended or terminated without your consent.
Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted by you in a state or federal court in the city of New York and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding instituted by any person. Also, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. See “Item 12. Description of Securities Other Than Equity Securities —D. American Depositary Shares” for more information.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.
69
You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
There is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands is not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without anyof the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment is final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
re-examination of
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our director and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (2021 Revision)(As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our current amended and restated memorandum and articles of association, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Our dual-class share structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
We have adopted a dual-class share structure. Our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share in respect of matters requiring the votes of shareholders, while holders of Class B ordinary shares are entitled to twenty votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Due to the disparate voting powers associated with our two classes of ordinary shares, the holders of our Class B ordinary shares beneficially own 93.3%93.2% of the aggregate voting power of our company as of March 31, 2021.2022. As a result, the existing holders of our Class B ordinary shares will have considerable influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price or the opportunity to receive a premium for their shares as part of a sale of our company. These shareholders may also take actions that are not in the best interest of us or our other shareholders even if they are opposed by our other shareholders, including holders of our ADSs. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated entities, see “Item 6. Directors, Senior Management and Employees—E. Share Ownership.” Our memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us and adversely affect the rights of holders of our ordinary shares and ADSs.
Our memorandum and articles of association contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADS holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
We have granted, and may continue to grant, share incentive awards, which may result in increased share-based compensation expenses.
We first adopted our stock option plan, or the 2013 Plan, in June 2013 for purposes of granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. The 2013 Plan was later amended and restated several times. We account for compensation costs for all share options using a fair-value based method and recognize expenses in our consolidated statements of comprehensive income in accordance with U.S. GAAP. Under the 2013 Plan, we are authorized to grant options to purchase ordinary shares of our company. The maximum number of Class A ordinary shares which may be issued pursuant to all awards under the 2013 Plan is 221,917,800. As of March 31, 2021,2022, options to purchase 127,448,390127,415,885 Class A ordinary shares were granted (excluding those cancelled, forfeited or expired) under the 2013 Plan and 121,031,510126,415,885 Class A ordinary shares underlying those options were issued and outstanding.
In October 2017, we adopted another share incentive plan, or the 2017 Plan. Under the 2017 Plan, we are authorized to grant options, restricted shares, and restricted share units to employees, officers, directors and individual consultants who render services to us. The maximum number of Class A ordinary shares which may be issued pursuant to all awards under the 2017 Plan is 1,000,000,000. As of March 31, 2021,2022, options to purchase 6,885,045 Class A ordinary shares had been granted and were outstanding under the 2017 Plan and 2,955,2353,333,515 Class A ordinary shares underlying those options were issued and outstanding. As of March 31, 2021, 82,472,6202022, 93,816,715 restricted share units had been granted (excluding those cancelled, forfeited or expired) and 8,103,50523,313,910 Class A ordinary shares underlying these restricted share units had been issued.
As a result, we incurred RMB42.2RMB95.2 million (US$6.514.9 million) share-based compensation expenses relating to options granted under the 2013 Plan and the 2017 Plan in 2020.2021. We believe the granting of share incentive awards is of significant importance to our ability to attract and retain employees, and we will continue to grant share incentive awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form
10-Q
or current reports on Form8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We will be required to file an annual report on Form
20-F
within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form6-K.
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However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards. For example, we are not required to (i) have a majority of independent directors in our board of directors, (ii) have a compensation committee composed entirely of independent directors, (iii) have a minimum of three members in our audit committee, and (iv) hold annual shareholders meetings. See “Item 16G. Corporate governance.” Since we have chosen to follow certain home country practice, our shareholders may be afforded less protection than they otherwise would enjoy under the NYSE corporate governance listing standards applicable to U.S. domestic issuers.
We believe that we were likely a passive foreign investment company, or PFIC, for United States federal income tax purposes for the taxable year ended December 31, 2020,2021, which could subject United States investors in our ADSs or ordinary shares to significant adverse United States federal income tax consequences.
We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (generally determined on the basis of a quarterly average) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat our consolidated variable interest entities (including their respective subsidiaries, if any) as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Based upon the nature and composition of our income and assets, and the market price of our ADSs, we believe that we were likely a PFIC for United States federal income tax purposes for the taxable year ended December 31, 2020,2021, and we will likely be a PFIC for our current taxable year unless the market price of our ADSs increases and/or we invest a substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of active income.
If we are a PFIC in any taxable year, a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States federal income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or ordinary shares. For more information see “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”
We have incurred increased costs as a result of being a public company, particularly after we ceased to qualify as an “emerging growth company.”
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NYSE, impose various requirements on the corporate governance practices of public companies. We ceased to qualify as an “emerging growth company” pursuant to the JOBS Act as we became a large accelerated filer as defined in Exchange Act Rule
12b-2
in our last fiscal year, and we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.73
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
ITEM 4. | INFORMATION ON THE COMPANY |
A. | 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 ZhangjiangHi-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 call 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 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 Boxi 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, ana call 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 Group Co., Ltd., formerly known as 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.74
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 February 2022, our contractual arrangements with Shanghai Nianqiao and the shareholders of Shanghai Nianqiao were terminated and all equity interests in Shanghai Nianqiao had been transferred to Shanghai Zihe.
In August 2018, Hainan Shanghu Information Technology Co., Ltd. was incorporated as a subsidiary ultimately and wholly owned by Shanghai Manyin to operate technology service business.
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“
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. In January 2022, our contractual arrangements with Chengdu Yougao and the shareholders of Chengdu Yougao were terminated and all equity interests in Chengdu Yougao had been transferred to Shanghai Zihe.
In January 2020, our Singapore subsidiary received the Capital Markets Services License from the Monetary Authority of Singapore to conduct regulated activities in dealing in capital markets products in Singapore.
Corporate Information
Our principal executive offices are located at Building G1, No. 999 Dangui Road, Pudong New District, Shanghai 201203, the People’s Republic of China. Our telephone number at this address is +86 21 8030 3200. Our registered office in the Cayman Islands is located at the offices of PO Box 309, Ugland House, Grand Cayman,
KY1-1104,
Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd Avenue, Suite 403, New York, NY 10017. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.75
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on. You can also find information on our website. The information contained on our website or other information contained on the SEC website is not a part of this annual report.
www.sec.gov
https://ir.finvgroup.com/
B. | Business Overview |
We are a leading online consumer financefintech 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.investors. Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. As of December 31, 2020,2021, we had over 116.1131.2 million registered users.users in China.
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 2019, 2020 and 2020,2021, the average principal amount of loans originated on our platform had an average principal amount ofin China was RMB3,267, RMB3,983 and RMB3,983RMB4,982 (US$610)782), respectively, andwith an average term of 8.7 months, 8.3 months and 8.38.4 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 2019, 2020 and 2020,2021, 78.1%, 88.2% and 88.2%80.0% of the total loan origination volume originated on our platform in China was generated from repeat borrowers who had at least one drawdown before, respectively.before.
We had ceased facilitating new loans with fundingfunded from individual investors on our platform since October 2019 and improveimproved our business model through acquisition of better quality borrowers and transition of our investor basefunding sources from individual investors to institutional funding partners. Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. Our platform appeals to institutional funding partners by offering a wide spectrum of loan products. We provide our institutional funding partners with an opportunity to connect with an emerging asset class—consumer loans—and achieve attractive returns. 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 firsthandcredit 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
through-the-cycle
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 applybig-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 arehave also been expanding our business in the overseas markets, including the Philippines, Indonesia and Indonesia.Vietnam. For example, in December 2018 and June 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, which has received a license for Technology and Information Based Financial Lending Institutionlending license) from the Financial Services Authority of Indonesia. In January 2020, our subsidiary in 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. Our loan origination volume in the overseas markets increased from RMB0.3 billion in 2019 to RMB1.0 billion in 2020 and further to RMB3.7 billion (US$0.6 million) in 2021, and our loan origination volume in China increased from RMB82.2 billion in 2019 to RMB64.1 billion in 2020 and further to RMB133.6 billion (US$21.0 million) in 2021. The number of cumulative registered users in the overseas markets increased from 1.3 million as of December 31, 2019 to 4.0 million as of December 31, 2020 and further to 9.0 million as of December 31, 2021, and the number of cumulative registered users in China increased from 105.9 million as of December 31, 2019 to 116.1 million as of December 31, 2020 and further to 131.2 million as of December 31, 2021.As of December 31, 2020, we have only generated little revenues from2021, the outstanding loan balance of the overseas markets.markets was RMB330.0 million (US$51.8 million).
(peer-to-peer
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We generate revenues primarily by collecting transaction service fees. 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 RMB4.5 billion in 2018 to RMB6.0 billion in 2019 to RMB7.6 billion in 2020 and further to RMB7.6RMB9.5 billion (US$1.21.5 million) in 2020.2021. A substantial portion of our operating revenues for these periods were attributable to fees collected from borrowers, third party guarantee companies and institutional funding partners. Our net profit was RMB2.5 billion in 2018, RMB2.4 billion in 2019, and RMB2.0 billion in 2020 and RMB2.5 billion (US$301.7391.6 million) in 2020.
2021.
Our Users
Borrowers
Since our inception and up to December 31, 2020,2021, we had facilitated loans connecting over 18.922.0 million borrowers from 97%100% of the cities and counties in China with investors. In 2019 and 2020,2021, over 84%78.3% of our borrowers in China were 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 our unique borrowers in China were approximately 6.8 million in 2018, 6.7 million in 2019, and 3.5 million in 2020.
2020 and 5.6 million in 2021.
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. OutIn China, 78.1%, 88.2% and 80.0% of the total loan volume facilitated through our platform in 2018, 2019, 2020 and 2020, 73.6%, 78.1% and 88.2%, respectively,2021 was generated from repeat borrowers who had successfully borrowed on our platform before.
Investors
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 2020,2021, over 91.8%81.2% 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 – 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 3624 months.The average loan amount for our standard loan products was RMB3,266 in 2018, RMB3,250 in 2019, RMB3,983 and RMB3,983RMB4,982 (US$610)782) in 2020. 2021.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 institutional funding partners and, under certain circumstances, 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 2018, 2019, 2020 and 2020,2021, the originationtotal amount of our standard loan products totaled RMB60.4 billion,originated on our platform in China was RMB81.5 billion, and RMB64.1 billion and RMB133.5 billion (US$9.820.9 billion), representing 98.3%99.1%, 99.1%99.9% and 100.0%, respectively,99.9% of the total amount ofloan origination volume on our platform in China in the loans that were made through our platform.same year.
Standard loan products – products—small business loan products
We started to offer loans products to small business owners in 2020. Small business owners are able tocan apply for small business loan products using either mobile or PC devices by providing basic information, including business license for their 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 small business loan products varies in the range from RMB500 to RMB100,000. Small business loan products could haveRMB104,000, with a term ranging from one month to twelve24 months. In 2020,2021, we facilitated the borrowingsserved approximately 826,000 small business owners on our platform for approximately 220,000 small business ownersin China and the total loan origination amount of our small business loan products was RMB3.7RMB27.0 billion (US$0.64.2 billion).
Other loan products
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 2018, 2019, 2020 and 2020,2021, the total loan origination amounts of our other loan products totaled RMB1.1 billion,was RMB0.7 billion, and RMB37.0 million accounting for 1.7%and RMB138.6 million (US$21.7 million), representing 0.9%, 0.1% and 0.1%, respectively, of the total amount of the loans facilitatedloan origination volume on our platform.platform in China in the same year. 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, micro-loan 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.
Since 2020, all new loans facilitated on our platform in China were funded by institutional funding partners. In 2021, the loan origination volume funded by institutional funding partners on our platform in China was RMB133.6 billion (US$21.0 billion).
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. Historically, our investment programs enabled individual investors to enjoy investment returns while minimizing the time needed to manage their investments.
We ceased to offer new investment services to individual investors on our platform in October 2019. As of March 31, 2021, the outstanding balance ofSince 2020, all new loans invested by individual investorsfacilitated on our platform was nil.in China were funded by institutional funding partners. Our platform appeals to institutional funding partners by offering a wide spectrum of loan products. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office, and other regulatory authorities, jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors.
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 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 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 helps 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 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.
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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 2020,2021, among all the loan applications approved on our platform, 99.3%99.6% went through the automated process. The remaining 0.7%0.4% 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 institutional funding partners can be categorized into direct lending model and trust arrangement model.
Direct lending model
Our institutional funding partners that are commercial banks and consumer finance companies 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.
We cooperate with institutional funding partners through both capital heavy model and capital light model. Under the capital heavy model, we
pre-determine
a fixed rate of service fees with our institutional funding partners. Under the capital light model, we provide our institutional funding partners with either no credit enhancement service or a limited credit enhancement service. Under the limited credit enhancement service, we negotiate with each institutional funding partner for a fixed upper limit of guarantee amount that we will be liable for. If the accumulated defaulted loan amount exceeds the agreed upper limit, the excess portion will be borne by the institutional funding partners. In 2021, approximately 13.0% of our total loan origination volume was facilitated through the capital light model.Historically, we also collaborated with third-party online lending information under this direct lending model. Third-party online lending information intermediaries generally matched qualified borrowers introduced by us with investors on their platforms. Loans were 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 ceased offering new loans to third-party online lending information intermediaries since December 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.”
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Trust arrangement model
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.
Step 4: Loan Servicing and Collection
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 600700 employees as of December 31, 20202021 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 firstlate payment penaltyoverdue interests and the collection fee charged to the borrower.
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 the90-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 Risk Management
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.
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Data Aggregation
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 amassive 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:
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 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;loans;
personal identity information maintained by an organization operated under the MPS;
background information, such as income level, education level and marital status, collected from prospective borrowers;
personal credit information maintainedin a form of credit ranking score provided by the Credit Reference Center underlicensed institution and our own micro-lending company, subject to the PBOC, which is authorizedauthorization by the borrowers to our platform to access;borrowers; 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.
Fraud Detection
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.
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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
education
consumption behavior
credit reports
fraudulent records
third-party supplementary data
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.
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.
Investor Protection
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 in the past: quality assurance fund and investor reserve fund. The following is a summary of the latest features of our quality assurance commitments, quality assurance fund and investor reserve funds.
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 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.”
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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.
Quality Assurance Fund
Under our previous quality assurance mechanism, we provided 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, 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 were protected by the New QAF Program, and relevant borrowers were required to contribute to a quality assurance fund managed by Sino Guarantee under rules that were substantially the same as those applicable to the previous quality assurance fund. Sino Guarantee made payouts based on the relevant rules set out by us. After the launch of the New QAF Program, we continued 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 became delinquent for one day in repaying an installment of principal and interest of a loan, we withdrew an amount from the dedicated account to repay the delinquent installment of principal and interest to the corresponding individual investors. The repayments were made in succession according to the age of the delinquency—the earliest delinquent installment was repaid first. We adjusted our quality assurance fund contribution policy from time to time based on our monitoring of market risks. We determined 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.
Investor Reserve Funds
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.
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Technology
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 ourtechnology include:
state-of-the-art
Data Science
Security
Stability
Scalability
Automation
Intellectual Property
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 March 31, 2021,2022, we have (i) registered 1220 patents in China including our proprietary facial recognition technology used for fraud detection and applied for 125150 additional patents with the PRC State Intellectual Property Office, (ii) registered 171189 software copyrights with the PRC National Copyright Administration, (iii) registered 179201 domain names, including ppdai.com, and (iv) registered 245252 trademarks, including our “FINV,” “PPDAI,” “信也”, “拍拍贷” and “魔镜” trademarks.
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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 developnon-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.”Sales and Marketing
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 various protection mechanisms lead to strongpromotion, which drives awareness of our brand among our users and business partners.
word-of-mouth
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:
Online Advertising
Online Partnerships
Search Engine Marketing
Offline Direct Sales Team
Competition
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 intensive 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. 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.
Seasonality
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 morecooperate with 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.
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Regulation
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. The PRC government and relevant regulatory authorities have issued various laws and regulations governing the online consumer finance industry in the past few years.
Regulations on online lending information intermediaries
On July 18, 2015, the, or the Guidelines, were promulgated by ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC. The Guidelines define onlinelending and borrowing as direct loans between lenders and borrowers through an online platform, which is under the supervision of the CBRC, and governed by the Contract Law of the PRC, the General Principles of the 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.
Guidelines on Promoting the Healthy Development of Online Finance Industry,
peer-to-peer
On August 17, 2016, the CBRC, the MIIT, the MPS and the CAC jointly issued the, or the Interim Measures. The Interim Measures also define the online lending information service providers as financial information intermediaries.
Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries,
Pursuant to the Interim Measures, online lending information service providersintermediaries 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 providersintermediaries 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.
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$4,597.7)4,708), and criminal liabilities if the act constitutes a criminal offense.
In December 2018, the National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the, 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.
Guidance on the Classification and Disposal of Risks of Online Lending Information Intermediaries and Risk Prevention,
Pursuant to the aforementioned changes of laws and regulations governing online consumer finance, we have 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 basefunding sources from individual investors to institutional funding partners. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office, and other regulatory authorities jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors.
Regulations on lending 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 13Pursuant 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 on 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-yearor 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 deemed to violate or not fully comply with the Civil Code of the PRC. If that happens, our business, results of operations and financial condition would be materially and adversely affected.
th
National People’s Congress approved the Civil Code of the PRC on 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 have been abolished and replaced, while their provisions are generally incorporated into the Civil Code of the PRC with certain changes and supplements. It remains unclear with respect to the relevant interpretations and implementations of certain provisions of the Civil Code of the PRC and how these provisions of the Civil Code of the PRC will apply to our business operations. For example, pursuant to the Civil Code of the PRC, usurious loans are explicitly banned, but a clear definition or interpretation of “usurious loans” is not provided. On September 4, 2020, nine local governmental authorities in Shanghai jointly issued, 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.
the Guidance on Further Strengthening the Administration of Financial Advertisement,
In accordance with theissued by the Supreme People’s Court on August 6, 2015, or the Private Lending Judicial Interpretations, 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.
Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases
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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%. In addition, on August 4, 2017, the Supreme People’s Court issued the, 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.
Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases,
On August 20, 2020, the Supreme People’s Court issued the Decision on Amending, 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 the, 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.”
the Provisions on Several Issues Concerning Laws Applicable to Trial of Private Lending Cases,
one-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,
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The Circular 141 specifies the features 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, including but 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 and
cooling-off
period; (iii) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model; (iv) all institutions are prohibited from extending 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 case where a financial institution participates in the “cash loan” business, any third parties are not allowed to charge 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 guarantees, including credit enhancement service in the form of a commitment to assume default risks, (iii) should comply with the judicial interpretations by the Supreme People’s Court of the PRC 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 fees from borrowers.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, 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 financing guarantee companies,, 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 online 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 from outsourcing the material procedures of loan management, and local 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 the cross-regional prohibition will takecame into effect on January 1, 2022. The
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 technology and loan collection. However, when collaborating with third parties for online lending businesses, 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 at 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,
non-conforming
legacy loans that extended before the promulgation of Circular 24 may be settled on their relative maturity dates. With certain limited exceptions, the Interim 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 operation results would be adversely and materially affected. Furthermore, we act as an intermediary between institutional funding partners and borrowers, and we cannot assure you that all the institutional funding partners we cooperate with have been and will be in strict compliance with the Interim Measures for Banks and Circular 24.On December 31, 2021, the PBOC, CBIRC and five other regulatory authorities jointly published the Administrative Measures for Online Offering of Financial Products (Draft for Comments), or the Draft Offering Measures, which stipulates that, among others, (i) except otherwise explicitly stipulated by the laws or regulations, a financial institution cannot authorize other organizations to offer its financial products; (ii) without approval from the competent financial regulatory authorities, any third-party internet platform cannot get involved, or get involved in a disguised form, in the online offering of financial products, including but not limited to, procedures of interactive consultant with the consumer, know-your-customer, sales contract conclusion, or fund transferring. The third-party internet platform cannot participate, or participate in a disguised form, in sharing the revenue generated from the financial business; (iii) the third-party internet platform cannot illegally crack, hold, nor store customer information and business data; (iv) the “online offering” is defined as commercial promotion and recommendation activities of the financial products on the internet platform, including but not limited to exhibiting the financial product information and the financial institution’s brand name or logo, providing sales channel for consumers to purchase financial products. The “financial products” includes deposit products, loan products, asset management products, etc. that are designed, developed, or sold by financial institutions; and (v) a transition period of 6 months would be given to the existing
non-compliance
activities before the effectiveness of the draft. As uncertainties remain regarding when the Draft Offering Measures would be adopted and become effective, and to what extent we would be subject to the Draft Offering Measures, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. If we cannot rectify our business model in a timely manner, or at all, the regulatory authorities may levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.Regulations on illegal financial institutions and intermediaries
The, 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 acted as an information intermediary for borrowers andWe have ceased facilitating new loans with funding from individual investors and was not a party to the loan agreements of loans facilitated throughon 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—The laws and regulations governing online consumer 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.”platform since October 2019. 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.
Measures for Banning of Illegal Financial Institutions and Illegal Financial Business Operations,
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In addition, the Supreme People’s Court, the Supreme Peoples’ Procuratorate, the MPS, and the Ministry of Justice jointly issued the, 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.
Guidance on Several Issues for Illegal Lending Regarding Criminal Case,
According to the Civil Code of the PRC, 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 institutional funding partners may be deemed as intermediation contracts under the Civil Code of the PRC. Pursuant to the Civil Code of the PRC, 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 CBIRC, together with eight other regulatory agencies jointly promulgated the, 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 issued, or the
Supplemental Rules to the Administration of Financing Guarantee Companies,
the Guidelines for
Off-Site
Supervision of Financing Guarantee Companies,Off-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.92
We incorporate three financing guarantee companies and provide quality assurance commitments to our institutional funding partners either through our own financing guarantee subsidiaries or through third-party financing guarantee companies/insurance companies. We are subject to certain regulatory risks as a result of such business practices. On December 31, 2021, the PBOC published the Regulations on the Local Financial Supervision and Administration (Draft for Comments), or the Draft Local Financial Regulation, which stipulates that, among others, (i) the local financial organizations should primarily serve their local clients; (ii) the guidance for local financial organizations to carry out business outside provinces where they are registered should be made by the State Council or financial regulatory authorities designated by the State Council; (iii) six types of financial organizations, including financing guarantee companies and micro-lending companies, are deemed as local financial organizations; (iv) transition period will be given to the organizations carrying out business outside provinces before the effectiveness of the draft by the relevant financial regulatory authorities; and (v) organization carrying out business outside provinces without approval of the competent provincial regulatory authorities may be subject to penalties, including correction orders, confiscation of illegal gains or fines, cessation of business operations, and revocation of business license. Currently both the third-party guarantee companies engaged by us and our own guarantee companies provide services to the borrowers nationwide. As uncertainties remain regarding when the Draft Local Financial Regulation would be adopted and become effective, and to what extent we would be subject to the Draft Local Financial Regulation, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. 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, or the AML Law, promulgated by the PBOC on October 31, 2006 and effective since January 2007, stipulates that special
PRC Anti-money Laundering Law,
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 specialnon-financial
institutions.In October 2018, the PBOC, the CBIRC, and the CSRC, jointly issued the, 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.
Anti-money Laundering and Anti-terrorism Financing Administrative Measures for Internet Finance Institution,
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.”
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Regulations Relating to Credit Reference
On January 21, 2013, the State Council promulgated the, 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,September 27, 2021, the PBOC releasedissued the,which came into effect on January 1, 2022 and stipulates that, among others (i) credit information refers to the 2021 Draft,following information that should be legally collected and used for public comments, which provides that (i)financial activities: basic information, loan information, other relevant information and analysis and evaluation information generated from the foregoing information of enterprises and individuals for identifying their credit status; and credit reference business refers to the activities of collecting, sorting, storing and processing the credit information includes, but is not limitedof enterprises and individuals, and providing them to the information relating to identity, address, debt, finance, payment and consumption, as well as analysis and appraisal of anusers; (ii) the 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 approvedinstitution license issued by the competentPBOC is required for engaging in the individual credit reference administrative authority. Webusiness, and the licensed individual credit reference institution shall report to the PBOC with respect to its cooperation with any information provider for collecting, sorting, storing and analyzing individual credit information; (iii) the financial institutions are not allowed to cooperate with any commercial entity that does not hold a credit reference license to obtain credit reference service; and (iv) any persons that engage in the individual credit reference business without the individual credit reference institution license will be given 18 months starting from January 1, 2022 to complete compliance rectification. Currently, we provide borrower referral and preliminary credit assessment services to our institutional funding partners;partners, and (iii)the information processors who collaborateshared by us with such institutional funding partners with due authorization may be deemed as credit information. If the preliminary credit assessment services provided by us to our institutional funding partners would be deemed by the regulatory authorities as the credit reference business, we may be required to obtain a license for individual credit reference business from the competent regulatory authorities or change our business model, pursue cooperation with the licensed credit reference agencies shall enter intoand filing of the relevant cooperation agreements and file such cooperation agreementsagreement 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,If we cannot assure you thatobtain the regulatory authorities may shareapproval or complete the same view as ours.
Stipulations for Regulating Credit Reference,
Measures for Regulating Credit Reference, (Draft)
Regulations Relating to Foreign Investment
Investment activities in the PRC by foreign investors are governed by the, 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. ForeignUnless otherwise provided by relevant laws and regulations, 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 several times during 2011 to 20192020 and further amended by Special Administrative Measures for the Access of Foreign Investment (Negative List) in 2020,2021. According to the Negative List (2021), the foreign equity interest ownership of entities that engage in value-added telecommunications business (except forother applicable lawsforwarding and regulations.call center) must not exceed 50%. Foreign investors that invest in sectors on the Negative List (2021) in which foreign investment is restricted shall comply with special management measures with respect to, among others, shareholding and senior management personnel qualification in the Negative List (2021).
Guidance Catalog of Industries for Foreign Investment,
e-commerce,
domestic multi-party communication, storage and On March 15, 2019, the National People’s Congress enacted the, 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, theand the, 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 astill 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 ourthe 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 Law of the People’s Republic of China,
Sino-foreign Equity Joint Venture Enterprise Law,
Sino-foreign Cooperative Joint Venture Enterprise Law
Wholly Foreign-invested Enterprise Law,
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, theImplementation Regulations on the Foreign Investment Law
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Foreign investment in telecommunications companies in the PRC is governed by the, 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, and April 7, 2022, respectively. TheUnless otherwise provided, 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,
Provisions for the Administration of Foreign-Invested Telecommunications Enterprises,
On December 20, 2019, the majorMOFCOM and the SAMR jointly promulgated the Measures on Reporting of Foreign Investment Information, which came into effect on January 1, 2020, and has replaced the Interim Measures for the Administration of Record-filing of the Establishment and Changes in Foreign-Invested Enterprises. Foreign investors or foreign-invested enterprises shall submit investment information to the commerce administrative authorities through the Enterprise.
Registration System and the National Enterprise Credit Information Publicity System. On December 19, 2020, the NDRC and the MOFCOM jointly promulgated the Measures on the Security Review of Foreign Investment, effective on January 18, 2021, setting forth provisions concerning the security review mechanism on foreign investment, including the types of investments subject to review, review scopes and procedures, among others. The Office of the Working Mechanism of the Security Review of Foreign Investment (the “Office of the Working Mechanism”) will be established under the NDRC, who will lead the task together with the MOFCOM. Foreign investor who invests in a foreign-invested value-added telecommunications enterprise and operates the value-added telecommunications businessor relevant parties in China must demonstrate a good track recorddeclare the security review to the Office of the Working Mechanism prior to (i) the investments in the military industry, military industrial supporting and experienceother fields relating to the security of national defense, and investments in operationareas surrounding military facilities and military industry facilities; and (ii) investments in important agricultural products, important energy and resources, important equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and internet products and services, important financial services, key technologies and other important fields relating to national security, and obtain control in the target enterprise. Control exists when the foreign investor (i) holds over 50% equity interests in the target, (ii) has voting rights that can materially impact on the resolutions of value-added telecommunications business.
the board of directors or shareholders meeting of the target even when it holds less than 50% equity interests in the target, or (iii) has material impact on target’s business decisions, human resources, accounting and technology.
Regulations Relating to Internet Companies
Regulations on value-added telecommunication services
The, 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, attached to the Telecommunications Regulations, information services provided via fixed network, mobile network and Internet fall within value-added telecommunications services.
Telecommunications Regulations of the PRC,
Catalog of Telecommunications Business,
In July 2006, the Ministry of Information Industry, the predecessor of the MIIT, issued the, 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.
Circular on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business,
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In July 2017, the issuanceMIIT 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.
Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, unless otherwise provided, foreign investors are generally not allowed to own more than 50% of the Interimequity interests in a value-added telecommunication service provider (except forAugusttelecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises, which was promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, February 6, 2016, there was no clearand April 7, 2022, respectively. These regulations require that the foreign investors may acquire up to 50% equity interests in foreign-invested value-added telecommunications enterprises in China. PRC regulations impose sanctions for engaging in commercial internet information services, which is aofficial regulationthe ICP License, and sanctions for engaging in the operation of online data processing and transaction processing, which is anotherguidancethe ODPTP License. These sanctions include rectification orders and warnings from the PRC government as to whether online consumer finance service was a typecommunication administrations, fines, confiscation of value-added telecommunication servicesillegal gains, and whether its provider should be subject to value-added telecommunication regulations. Aftersuspension or termination of operating of the Interim Measures came into force, an online consumer finance information intermediary shall apply for appropriate telecommunication business licensewebsites and mobile applications 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.
question.e-commerce,
domestic multi-party communication, storage and forwarding and call center) in accordance with the Special Administrative Measures for Foreign Investment Access, the Negative List (2021), which was promulgated by the MOFCOM and the NDRC on December 27, 2021 and became effective on January 1, 2022. Foreign direct investment in sub-set
of value-added telecommunication business, without a value-added telecommunication service license for internet content provider, or sub-set
of value-added telecommunication business, without a value-added telecommunication service license for online data processing and transaction processing, or 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, or the APP Provisions, which was promulgated by 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.
Administrative Provisions on Mobile Internet Applications Information Services,
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)(i) to authenticate the identity information of the registered users, (2)(ii) to protect user information, and obtaining the consent of users while collecting and using users’ personal information in a lawful and proper manner, (3)(iii) 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)(iv) 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.
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Regulations on internet security
The National People’s Congress has enacted legislation that prohibits use of the internet that breaches the public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security and infringement on legal rights and interests of the state, society or citizens. Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities.
Internet information in China is regulated and restricted from a national security standpoint. The SCNPC, has enacted theon 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 MPS 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 MPS and the local security bureaus may revoke its operating license and shut down its websites.
Decisions on Maintaining Internet Security
In December 2015, the Standing Committee of the National People’s Congress promulgated the Anti-Terrorism Law of the PRC, or the Anti-Terrorism Law, which took effect on January 1, 2016 and was amended on April 27, 2018. According to the Anti-Terrorism Law, telecommunication service operators or internet service providers shall (i) carry out pertinent anti-terrorism publicity and education to society; (ii) provide technical interfaces, decryption and other technical support and assistance for the competent departments to prevent and investigate terrorist activities; (iii) implement network security and information monitoring systems as well as safety and technical prevention measures to avoid the dissemination of terrorism information, delete the terrorism information, immediately halt its dissemination, keep relevant records and report to the competent departments once the terrorism information is discovered; and (iv) examine customer identities before providing services. Any violation of the Anti-Terrorism Law may result in severe penalties, including substantial fines.
TheNetwork Cyber 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. On May 2, 2017, the CAC issued a trial version of the Measures for the Security Review of Network Products and Services (Trial), which took effect on June 1, 2017, to provide for more detailed rules regarding cybersecurity review requirements. On April 29, 2021, the Standing Committee of the National Peoples’ Congress issued a Second Draft for review of the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection.
For the further purposes of regulating data processing activities, safeguarding data security, promoting data development and utilization, protecting the lawful rights and interests of individuals and organizations, and maintaining national sovereignty, security, and development interests, on June 10, 2021, the Standing Committee of the PRC National People’s Congress published the Data Security Law of the People’s Republic of China, which took effect on September 1, 2021. The Data Security Law requires data processing, which includes the collection, storage, use, processing, transmission, provision, publication of data, to be conducted in a legitimate and proper manner. The Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities. The Data Security Law also introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective category of data. For example, a processor of important data is required to designate the personnel and the management body responsible for data security, carry out risk assessments of its data processing activities and file the risk assessment reports with the competent authorities. State core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key livelihood and major public interests, shall be subject to stricter management system. Moreover, the Data Security Law provides a national security review procedure for those data activities which affect or may affect national security and imposes export restrictions on certain data and information. In addition, the Data Security Law also provides that any organization or individual within the territory of the PRC shall not provide any foreign judicial body and law enforcement body with any data without the approval of the competent PRC governmental authorities. As the Data Security Law was recently promulgated and has not yet taken effect, we may be required to make further adjustments to our business practices to comply with this law, as well as any adjustments that may be required by the ultimate Personal Information Protection Law.
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On July 2020,6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which, among others, provides for improving relevant laws and regulations on data security, cross-border data transmission, and confidential information management. It provided that efforts will be made to revise the regulations on strengthening the confidentiality and file management relating to the offering and listing of securities overseas, to implement the responsibility on information security of overseas listed companies, and to strengthen the standardized management of cross-border information provision mechanisms and procedures.
On July 30, 2021, the State Council issued the Regulations on Protection of Critical Information Infrastructure, or the Regulations. Pursuant to the Regulations, critical information infrastructure shall mean the important network facilities or information systems of key industries or fields such as public communication and information service, energy, transportation, water conservation, finance, public services,
e-government
affairs and national defense science, and important network facilities or information systems which may endanger national security, people’s livelihood and public interest once there occur damage, malfunctioning or data leakage to them. The Regulations provide that no individual or organization may carry out any illegal activity of intruding into, interfering with, or sabotaging any critical information infrastructures, or endanger the security of any critical information infrastructures. The Regulations also require that critical information infrastructure operators shall establish a cybersecurity protection system and accountability system, and that the main responsible person of a critical information infrastructure operator shall take full responsibility for the security protection of the critical information infrastructures operated by it. In addition, relevant administration departments of each important industry and sector shall be responsible for formulating the rule of critical information infrastructure determination applicable to their respective industry or sector, and determine the critical information infrastructure operators in their industry or sector.On July 12, 2021, the MIIT and two other authorities jointly issued the Provisions on the Administration of Security Vulnerabilities of Network Products, or the Provisions. The Provisions state that, no organization or individual may abuse the security vulnerabilities of network products to engage in activities that endanger network security, or to illegally collect, sell, or publish the information on such security vulnerabilities. Anyone who is aware of the aforesaid offences shall not provide technical support, advertising, payment settlement and other assistance to the relevant offenders. According to the Provisions, network product providers, network operators, and platforms collecting network product security vulnerabilities shall establish and improve channels for receiving network product security vulnerability information and keep such channels available, and retain network product security vulnerability information reception logs for at least six months. The Provisions also bans provision of undisclosed vulnerabilities to overseas organizations or individuals other than to the product providers.
On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose and should be conducted in a method that has the minimum impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope as necessary to achieve the processing purpose and avoid the excessive collection of personal information. Personal information processors shall adopt necessary measures to safeguard the security of the personal information they handle. The offending entities could be ordered to correct, or to suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties.
On October 29, 2021, the CAC issued the Measures for Security Assessment of Cross-border Data Transfer (Draft for Comment). According to these measures, in addition to the self-risk assessment requirement for provision of any data outside China, a data processor shall apply to the competent cyberspace department for data security assessment and clearance of outbound data transfer in any of the following events: (i) outbound transfer of personal information and important data collected and generated by an operator of critical information infrastructure; (ii) outbound transfer of important data; (iii) outbound transfer of personal data by a data processor which has processed more than one million users’ personal data; (iv) outbound transfer of more than one hundred thousand users’ personal information or more than ten thousand users’ sensitive personal information cumulatively; (v) such other circumstances where
ex-ante
security assessment and evaluation of cross-border data transfer is required by the CAC.98
On November 14, 2021, the CAC released the Regulations on the Network Data Security Law (Draft)(Draft for Comments), or the Draft Data Security Regulations. The Draft Data Security Regulations provide that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. In accordance with the Draft Data Security Regulations, data processors shall apply for a cybersecurity review for the following activities: (i) merger, reorganization or division of internet platform operators that have acquired a large number of data resources related to national security, economic development or public comments,interests to the extent that affects or may affect national security; (ii) listing abroad of data processors which requiresprocess over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; or (iv) other data processing intermediariesactivities that affect or may affect national security. Besides, data processors that are listed overseas shall carry out an annual data security assessment. The Draft Data Security Regulations remain unclear on whether the relevant requirements will be applicable to identifycompanies that have been listed in the sourceUnited States, such as us. We cannot predict the impact of the Draft Data Security Regulations, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the Draft Data Security Regulations mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange, such as us, we face uncertainties as to whether such clearance can be timely obtained, or at all. In addition, if a final version of the Draft Data Security Regulations is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing. Based on the foregoing, our PRC legal counsel does not expect that, as of the date of this annual report, the current applicable PRC laws on cybersecurity would have a material adverse impact on our business.
On January 4, 2022, the CAC, the NDRC, the MIIT, and several other administrations jointly published the Amended Measures for Cybersecurity Review, which became effective on February 15, 2022. The Amended Measures for Cybersecurity Review further restates and expands the applicable scope of the cybersecurity review. Pursuant to the Amended Measures for Cybersecurity Review, (i) when the purchase of network products and services by a critical information infrastructures operator or the data processing activities conducted by a network platform operator affect or may affect national security, a cybersecurity review shall be conducted pursuant to the identificationsReview Measures. The operators shall file for a cybersecurity review with Cybersecurity Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for cybersecurity review shall be made by an issuer who is a network platform operator holding personal information of more than one million users before such issuer applies to list its securities on a foreign stock exchange; and (iii) the relevant PRC governmental authorities may initiate cybersecurity review if such governmental authorities determine that the issuer’s network products or services, or data providersprocessing activities affect or may affect national security. The Amended Measures for Cybersecurity Review focuses on assessing the following national security risks factors associated with relevant objects or circumstances: (i) the risk of illegal control, interference or destruction of critical information infrastructure, arising from the purchase and users,utilization of network products and maintainservices; (ii) the transaction records. Transactionharm on the business continuity of critical information infrastructure incurring from a disruption of network products and services supply; (iii) the safety, openness, transparency, diversity of sources of network products and services; the reliability of suppliers; and the risk of supply disruption due to political, diplomatic, trade and other reasons; (iv) the level of compliance with the PRC laws, administrative regulations and ministry rules of the suppliers of network products and services; (v) the risk of core data, with illegal sourceimportant data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or illegally exited the country; (vi) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments and the network information security risk in relation to listing abroad; and (vii) other factors that may harm critical information infrastructure, cyber security and/or data security. The Amended Measures for Cybersecurity Review was promulgated recently, and there are substantial uncertainties on the interpretation and application of the Amended Measures for Cybersecurity Review. We are not sure that whether our data processing activities may raise “national security” concern. There can be no assurance that we would be required to apply for cybersecurity review, or that we would be able to complete the applicable cybersecurity review procedures in a timely manner, or at all, if we are required to do so. Any failure in completion of a cybersecurity review may result in differentadministrative penalties, including but not limited to order for rectification, fines, confiscationa shut down of illegal gains, andour business, revocation of requisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effects on our 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 importancefinancial condition and results of data, a risk assessment system, a monitoring and early warning system, and an emergency disposal system.operations.
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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, 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.
Several Provisions on Regulating the Market Order of Internet Information Services,
In addition, pursuant to theissued 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.
Decision on Strengthening the Protection of Online Information
Pursuant to theissued 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 ofCAC, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology,MIIT, the MPS, and the SAMR jointly promulgated the, 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, thewas promulgated on November 28, 2019. On March 22, 2021, the CAC, the MIIT, the MPS, and the SAMR jointly promulgated the
Ninth Amendment to the Criminal Law
Notice on Rectification of Illegal Collection of Personal Information on Application,
Measures on Identifying Illegality of Personal Information Collection Conducts on Application
Guidance on Several Issues for Soft Violence Regarding Criminal Case,
the Administrative Provisions for Text Message and Voice Call Service (Draft)
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With respect to the security of information collected and used by mobile apps, pursuant to the Announcement of Conducting Special Supervision against the Illegal Collection and Use of Personal Information by Apps, which was issued on January 23, 2019, app operators should collect and use personal information in compliance with the Cyber Security Law and should be responsible for the security of personal information obtained from users and take effective measures to strengthen the personal information protection. Furthermore, app operators should not force their users to make authorization by means of bundling, suspending installation or in other default forms and should not collect personal information in violation of laws, regulations or breach of user agreements. Such regulatory requirements were emphasized by the Notice on the Special Rectification of Apps Infringing upon User’s Personal Rights and Interests, which was issued by MIIT on October 31, 2019. On November 28, 2019, the CAC, the MIIT, the Ministry of Public Security and the SAMR jointly issued the Methods of Identifying Illegal Acts of Apps to Collect and Use Personal Information. This regulation further illustrates certain commonly-seen illegal practices of apps operators in terms of personal information protection, including “failure to publicize rules for collecting and using personal information”, “failure to expressly state the purpose, manner and scope of collecting and using personal information”, “collection and use of personal information without consent of users of such App”, “collecting personal information irrelevant to the services provided by such app in violation of the principle of necessity”, “provision of personal information to others without users’ consent”, “failure to provide the function of deleting or correcting personal information as required by laws” and “failure to publish information such as methods for complaints and reporting”. Among others, any of the following acts of an app operator will constitute “collection and use of personal information without consent of users”: (i) collecting an user’s personal information or activating the permission for collecting any user’s personal information without obtaining such user’s consent; (ii) collecting personal information or activating the permission for collecting the personal information of any user who explicitly refuses such collection, or repeatedly seeking for user’s consent such that the user’s normal use of such app is disturbed; (iii) any user’s personal information which has been actually collected by the app operator or the permission for collecting any user’s personal information activated by the app operator is beyond the scope of personal information which such user authorizes such app operator to collect; (iv) seeking for any user’s consent in a
non-explicit
manner; (v) modifying any user’s settings for activating the permission for collecting any personal information without such user’s consent; (vi) using users’ personal information and any algorithms to directionally push any information, without providing the option ofnon-directed
pushing such information; (vii) misleading users to permit collecting their personal information or activating the permission for collecting such users’ personal information by improper methods such as fraud and deception; (viii) failing to provide users with the means and methods to withdraw their permission of collecting personal information; and (ix) collecting and using personal information in violation of the rules for collecting and using personal information promulgated by such app operator.On March 12, 2021, the CAC and three other authorities jointly issued the Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications. The Rules specifies the scope of necessary personal information to be collected each for a variety of common mobile internet applications, such as maps and navigation apps, online ride-hailing apps, instant messaging apps, online community apps. Operators of such apps shall not refuse to provide basic services to users on the ground of users’ refusal to provide their personal
non-essential
information. The basic service of online lending applications is to facilitate loans provided to the users online for use of personal consumption and business operation, and the necessary personal information for an online lending application includes the borrower’s mobile phone number, name, bank account, as well as type, number and valid period of its identity card.On April 26, 2021, the MIIT issued the Interim Administrative Provisions on Personal Information Protection in Internet Mobile Applications (Draft for Comment). The draft of the Interim Administrative Provisions on Personal Information Protection in Internet Mobile Applications sets forth two principles of collection and utilization of personal information, namely “explicit consent” and “minimum necessity.”
On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. The Personal Information Protection Law integrates provisions from several rules with respect to personal information rights and privacy protection. According to the Personal Information Protection Law, personal information refers to information related to identified or identifiable natural persons which is recorded by electronic or other means (excluding the anonymized information). The Personal Information Protection Law provides the circumstances under which a personal information processor could process personal information, such as where the consent of the individual concerned is obtained and where it is necessary for the conclusion or performance of a contract to which such individual is a party to such contract. It also stipulates certain specific provisions with respect to the obligations of a personal information processor. In addition, it imposes further obligations on a personal information processor that provides for basic internet platform services, has large amount of users, has complicated business activities, including formulating of an independent institution mainly comprising of outside members to supervise personal information processing activities, termination of provision of services for product or service providers on the platform whose personal information processing activities are in material violation of laws and regulations, and issuing personal information protection social responsibilities reports regularly.
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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 institutional 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—If our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.”
Regulations Relating to Foreign Exchange
Regulations on foreign currency exchange
The principal regulations governing foreign currency exchange in China are the, 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.
Foreign Exchange Administration Regulations,
On February 13, 2015, the SAFE promulgated the, 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.
Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment,
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 forself-use.
On October 23, 2019, the SAFE promulgated the, or the SAFE Circular 28. The SAFE Circular 28 provides that, 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 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.”
Notice of the Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment,
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 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,
Regulations on foreign exchange registration of overseas investment by PRC residents
SAFE promulgated the, 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.
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Round-trip Investment through Special Purpose Vehicles,
On February 13, 2015, SAFE released, 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.”
Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies,
Regulations on employee stock incentive plans of overseas publicly-listed company
Pursuant to the, issued by SAFE in February 2012, individuals participating in any stock incentive plan of any overseas publicly listed company who are PRC citizens or
Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company,
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 ornon-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.”103
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
Patent
Trademark
“first-to-file”
Domain Name
Administrative Measures on the China Internet Domain Names
Administrative Measures on the Internet Domain Names
Regulations Relating to Dividend Distribution
Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from Shanghai Guangjian, Beijing Prosper and Shanghai Manyin, which is aare wholly foreign-owned enterpriseenterprises 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 theirafter-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
Therequire 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.
PRC Labor Law and the Labor Contract Law
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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 therequires 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, 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.
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, thePRC Individual Income Tax Law
Reform Plan of the State Tax and Local Tax Collection Administration System,
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
Dividend withholding tax
Pursuant to theand its implementation rules, if a, 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, 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, or Circular 60, which became effective on November 1, 2015. Circular 60 provides that
Enterprise Income Tax Law
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 itsPRC-sourced
income at a rate of 10%. Pursuant to theArrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income,
Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements,
Administrative Measures for
Non-Resident
Taxpayers to Enjoy Treatments under Tax Treaties,non-resident
enterprises are not required to obtainpre-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 topost-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.105
Enterprise income tax
The, 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.
Enterprise Income Tax Law,
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, 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 theoperational 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.
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,
day-to-day
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 asPRC-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 arenon-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 asPRC-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 ournon-PRC
shareholders or ADS holders.”106
SAT issued a, or SAT Public Notice 7, on February 3, 2015, which replaced or supplemented certain previous rules under the, or SAT Circular 698. Under SAT Public Notice 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by
Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by
Non-Resident
Enterprises,Circular on Strengthening Administration of Enterprise Income Tax for Share Transfers by
Non-Resident
Enterprises,non-PRC
resident enterprises may bere-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 anon-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 theirnon-PRC
holding companies.”Under applicable PRC laws, payers of
PRC-sourced
income tonon-PRC
residents are generally obligated to withhold PRC income taxes from the payment. In the event of a failure to withhold, thenon-PRC
residents are required to pay such taxes on their own. Failure to comply with the tax payment obligations by thenon-PRC
residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes.PRC value-added tax
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.
Regulations Relating to Overseas Listing and M&A
On August 8, 2006, six PRC governmental and regulatory agencies, including the MOFCOM and the CSRC, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), a new regulation with respect to the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006 and revised on June 22, 2009. Foreign investors shall comply with the M&A rules when they purchase equity interests of a domestic company or subscribe for the increased capital of a domestic company, and thus changing the nature of the domestic company into a foreign- invested enterprise; or when the foreign investors establish a foreign-invested enterprise in the PRC for the purpose of purchasing the assets of a domestic company and operating the asset; or when the foreign investors purchase the asset of a domestic company, establish a foreign-invested enterprise by injecting such assets, and operate the assets. The M&A rules, among other things, purports to require that an offshore special vehicle, or a special purpose vehicle, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals, shall obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies.
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On December 27, 2021, the NDRC and the MOC jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which will become effective on January 1, 2022. Pursuant to such Special Administrative Measures, if a domestic company engaging in the prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the competent governmental authorities. Besides, the foreign investors of the company shall not be involved in the company’s operation and management, and their shareholding percentage shall be subject, mutatis mutandis, to the relevant regulations on the domestic securities investments by foreign investors. In a Q&A released on NDRC’s official website on January 18, 2022, the respondent NDRC official indicates that these requirements are only imposes on PRC domestic companies that directly offer or list their securities in an overseas market. We are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities and we conduct our operations in China primarily through the consolidated variable interest entities with which we have maintained contractual arrangements. We believe we are not a domestic company that directly offered or listed securities in an overseas market.
On December 24, 2021, the State Council issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Provisions, and the CSRC issued a draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Administration Measures, for public comments. According to the Draft Provisions and the Draft Administration Measures, the overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. Specifically, the determination of an indirect offering and listing will be conducted on a “substance over form” basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic company if the issuer meets the following conditions: (i) the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC. According to the Draft Administration Measures, an overseas offering and listing is prohibited under any of the following circumstances: (i) if the intended securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (ii) if the intended securities offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (iii) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (iv) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (v) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (vi) other circumstances as prescribed by the State Council.
According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC (i) with respect to its initial public offering and listing within three business days, after its initial filing of the listing application to the regulator in the place of the intended listing, (ii) with respect to its
follow-on
offering within three business days after completion of thefollow-on
offering, (iii) with respect to itsfollow-on
offering for purpose of acquiring specific assets, within three business days after the first public announcement of the transaction, and (iv) with respect to listing by means of reverse takeover, share swap, acquisition and similar transactions, within three business days after its initial filing of the listing application or the first public announcement of the transaction, as case may be.Non-compliance
with the Draft Administration Measures or an overseas listing completed in breach of Draft Administration Measures may result in a warning on the relevant domestic companies or a fine of RMB1 million to RMB10 million on them. If the circumstances are serious, they may be ordered to suspend their business or suspend their business pending rectification, or their permits or businesses license may be revoked. Furthermore, the controlling shareholder, actual controllers, directors, supervisors, and other legally appointed persons of the domestic enterprises may be warned, or fined between RMB500,000 to RMB5,000,000 either individually or collectively.On April 2, 2022, the CSRC published the Provisions on Strengthening the Confidentiality and Archives Management of Overseas Issuance and Listing of Securities (Draft for Comments) for public comments. Pursuant to this draft, domestic joint-stock enterprises listed in overseas markets via direct offering and domestic operational entities of enterprises listed in overseas markets via indirect offering must obtain approval and complete filing or other requirements before they publicly disclose any documents and materials that contain state secrets or government work secrets or that, if divulged, will jeopardize China’s national security or public interest, or before they provide such documents or materials to entities or individuals such as securities companies, securities service providers and overseas regulators. As of the date of this annual report, it is still unclear as to what approvals and procedures might be required in practice.
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C. | Organizational Structure |
The following diagram illustrates our corporate structure as of the date of this annual report, including our principal subsidiaries and our principal consolidated variable interest entityentities and itstheir principal subsidiaries.
| (1) | Beijing Paipairongxin currently has four shareholders: Jun Zhang, our co-founder and director, Tiezheng Li, ourco-founder, vice chairman and president, Honghui Hu, ourco-founder and director, and Shaofeng Gu, ourco-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, ourco-founder, vice chairman and president, Honghui Hu, ourco-founder and director, Shaofeng Gu, ourco-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. |
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Contractual Arrangements
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 consolidated 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 call 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 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 call 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 February 2022, our contractual arrangements with Shanghai Nianqiao and the shareholders of Shanghai Nianqiao were terminated and all equity interests in Shanghai Nianqiao had been transferred to Shanghai Zihe.
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 call 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.
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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 call option agreement among Shanghai Manyin, Chengdu Yougao and shareholders of Chengdu Yougao, and (vi) power of attorney between shareholders of Chengdu Yougao and Shanghai ManyinManyin. In January 2022, our contractual arrangements with Chengdu Yougao and the shareholders of Chengdu Yougao were terminated and all equity interests in Chengdu Yougao had been transferred to Shanghai Zihe.
The contractual arrangements with Beijing Paipairongxin, Shanghai Zihe, and Shanghai Ledao 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, and Shanghai Ledao, Shanghai Nianqiao and Chengdu Yougao, and we treat Beijing Paipairongxin, Shanghai Zihe, and Shanghai Ledao Shanghai Nianqiao and Chengdu Yougao as ourthe consolidated variable interest entities under U.S. GAAP. We have consolidated the financial results of Beijing Paipairongxin, Shanghai Zihe, and Shanghai Ledao 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 consolidated 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
Loan Agreement.
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 call option agreement among Shanghai Guangjian, Beijing Paipairongxin, Beijing Prosper and the shareholders of Beijing 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
Restated Power of Attorney.Attorney
attorney-in-fact
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.
Agreement that allows us to receive economic benefits from Beijing Paipairongxin and Shanghai PPDai
Restated Exclusive Technology Consulting and Service Agreement.
case-by-case
Agreement that provides us with the option to purchase the equity interest in Beijing Paipairongxin
Restated Option Agreement.
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 consolidated variable interest entity, Shanghai Zihe, and the shareholders of Shanghai Zihe.
Agreements that provide us with effective control over Shanghai Zihe
Loan Agreement.
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 call 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 Agreement.
Power of Attorney.
attorney-in-fact
Equity Pledge Agreement.
Agreement that allows us to receive economic benefits from Shanghai Zihe
Exclusive Technology Consulting and Service Framework AgreementAgreement.
case-by-case
Agreement that provides us with the option to purchase the equity interest in Shanghai Zihe
Exclusive
Call
Option AgreementAgreement.
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 consolidated variable interest entity, Shanghai Ledao, and the shareholders of Shanghai Ledao.
Agreements that provide us with effective control over Shanghai Ledao
Loan Agreement.
Business Operation Agreement.
Power of Attorney.
attorney-in-fact
Equity Pledge Agreement.
Agreement that allows us to receive economic benefits from Shanghai Ledao
Exclusive Technology Consulting and Service Framework Agreement.
case-by-case
Agreement that provides us with the option to purchase the equity interest in Shanghai Ledao
Exclusive Call Option Agreement.
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 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;
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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 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; and
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, 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, theand the, 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 astill 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 ourthe 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.,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,”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.”
Foreign Investment Law of the PRC,
Sino-foreign Equity Joint Venture Enterprise Law,
Sino-foreign Cooperative Joint Venture Enterprise Law
Wholly Foreign-invested Enterprise Law,
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, theImplementation Regulations on the Foreign Investment Law
D. | Property, Plants and Equipment |
Our corporate headquarters is located in Shanghai, where we lease office space with an area of approximately 20,393.21 square meters as of the date of this annual report. For our customer services and loan collection services, we lease an area of approximately 3,352 square meters in Changsha, approximately 6,715 square meters in Hefei, and approximately 1,3322,665 square meters in Zhengzhou. We also lease office space in Beijing, Hainan, Indonesia, Singapore, Vietnam and 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.
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ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 5. | 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.
A. | Operating Results |
Overview
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, 2020,2021, we had over 116.1131.2 million registered users.
users in China.
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 institutional funding partners with an opportunity to connect with an emerging asset class—consumer loans—through a variety of product 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 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 RMB4.5 billion in 2018 to RMB6.0 billion in 2019 to RMB7.6 billion in 2020, and further to RMB7.6RMB9.5 billion (US$1.21.5 billion) in 2020.2021. A substantial portion of our operating revenues for these periods were attributable to fees collected from borrowers, third party guarantee companies and institutional funding partners. Our net profit was RMB2.5 billion in 2018, RMB2.4 billion in 2019, and RMB2.0 billion in 2020 and RMB2.5 billion (US$301.7391.6 million) in 2020.2021. Our total assets as of December 31, 2018, 2019, 2020 and 20202021 were RMB13.1 billion, RMB18.3 billion, and RMB14.9 billion, and RMB18.1 billion (US$2.32.8 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 the
COVID-19
pandemic,per capita disposable income,
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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. In early 2020, in response to intensifying efforts to contain the spread of sharply curtailed during the outbreak 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 theCOVID-19,
asking China residents to remain at home and to avoid gathering in public, and other actions. TheCOVID-19
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 reduced our business operation capacity and negatively affected our operating results. The outbreak ofCOVID-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 half quarter of 2020. Also, 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 half of 2020 compared to the first half of 2019 and the fourth quarter of 2019 due to our adoption of a more prudent approach in facilitating new loans. In addition, in the spring of 2022, there was an uptick in cases in Shanghai, attributed to the highly contagious Omicron variant. The outbreak in Shanghai spread to many other provinces and cities in China. Certain travel restrictions and other limitations were re-imposed in various places in response to these new cases. In response to the uptick in cases in Shanghai, we made remote working arrangements and suspended business travels again to ensure the safety and health of our employees, which may reduce our business operation capacity and negatively affected our operating results. Furthermore, normal economic life throughout China wasCOVID-19
and opportunities for discretionary consumption were extremely limited. Our results of operations could be adversely affected to the extent that theCOVID-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 toCOVID-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 Maintainmaintain and Expandexpand our Borrower Baseborrower base in a Cost-Effective Mannercost-effective manner
Our revenues are dependent on our ability to acquire new borrowers and retain and increase engagement of existing borrowers. In 2018, 2019, 2020 and 2020,2021, we served approximately 6.8 million, 6.7 million, 3.5 million and 3.55.6 million borrowers, respectively. We use various means, including mobile app stores, search engine marketing, online advertising and online partnerships, to attract new borrowers. We also establish an offline direct sales team to acquire new borrowers across different cities in China. 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 15.6%12.1%, 12.1%6.4% and 6.4%16.7% of our total operating revenues in 2018, 2019, 2020 and 2020,2021, respectively. The significant decrease in our sales and marketing expenses as a percentage of our total operating revenues in 2020 was attributable to our efforts to optimize effectiveness of borrower acquisition, an increase in revenues contribution by existing borrowers and the decline in online customer acquisition expenses. The significant increase in our sales and marketing expenses as a percentage of our total operating revenues in 2021 was attributable to the increase in revenue contribution by new borrowers and the increase in online customer acquisition expenses. We intend to continuously dedicate significant resources to borrower acquisition and improve the effectiveness of these efforts.
Ability to Maintainmaintain and Expandexpand our Investor Basecooperation with institutional funding partners
Our revenues are also dependent on the maintenance and growth inof our investor base.cooperation with institutional funding partner. We have increased investments from institutional funding partners. As of December 31, 2020,2021, we had 37cumulatively cooperated with 63 institutional funding partners active on our platform.in China. 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.
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Maintenance of Effective Risk Managementeffective risk management
Our ability to effectively segment borrowers into appropriate risk profiles impacts our ability to attract and retain borrowers and institutional 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.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,Allowance for Credit Losses,” 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.”
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 Accuratelyprice 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.
Ability to Innovateinnovate
Our growth to date has depended on, and our future success will depend in part on, successfully meeting borrower and institutional funding partner demand for new products and services. We have made and intend to continue to make substantial investments to develop products and improve services for borrowers and 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.120
Ability to Compete Effectivelycompete effectively
We compete for both borrowers and institutional 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.
Loan Performance Data
Delinquency Raterate by Balancebalance
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 consideredand 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 20192020 and early 20202021 were relatively higherlower than previous delinquency rates primarily due to decrease in loan origination volume during the period and the outbreakour acquisition of the COVID-19 in early 2020.better quality borrowers.
charged-off and
Delinquent for | Delinquent for | |||||||||||||||||||||||||||||||||||||||||||||||
15-29 days | 30-59 days | 60-89 days | 90-119 days | 120-149 days | 150-179 days | 15-29 days | 30-59 days | 60-89 days | 90-119 days | 120-149 days | 150-179 days | |||||||||||||||||||||||||||||||||||||
March 31, 2018 | 0.87 | % | 2.10 | % | 2.43 | % | 3.83 | % | 2.29 | % | 1.89 | % | ||||||||||||||||||||||||||||||||||||
June 30, 2018 | 0.83 | % | 1.21 | % | 1.05 | % | 0.98 | % | 1.60 | % | 2.03 | % | ||||||||||||||||||||||||||||||||||||
September 30, 2018 | 1.03 | % | 1.77 | % | 1.49 | % | 1.29 | % | 1.06 | % | 1.02 | % | ||||||||||||||||||||||||||||||||||||
December 31, 2018 | 0.92 | % | 1.63 | % | 1.41 | % | 1.45 | % | 1.44 | % | 1.34 | % | ||||||||||||||||||||||||||||||||||||
March 31, 2019 | 0.80 | % | 1.61 | % | 1.45 | % | 1.29 | % | 1.31 | % | 1.20 | % | 0.80 | % | 1.61 | % | 1.45 | % | 1.29 | % | 1.31 | % | 1.20 | % | ||||||||||||||||||||||||
June 30, 2019 | 0.86 | % | 1.42 | % | 1.37 | % | 1.19 | % | 1.26 | % | 1.21 | % | 0.86 | % | 1.42 | % | 1.37 | % | 1.19 | % | 1.26 | % | 1.21 | % | ||||||||||||||||||||||||
September 30, 2019 | 0.90 | % | 1.50 | % | 1.35 | % | 1.31 | % | 1.17 | % | 1.20 | % | 0.90 | % | 1.50 | % | 1.35 | % | 1.31 | % | 1.17 | % | 1.20 | % | ||||||||||||||||||||||||
December 31, 2019 | 1.34 | % | 2.40 | % | 1.86 | % | 1.76 | % | 1.62 | % | 1.53 | % | 1.34 | % | 2.40 | % | 1.86 | % | 1.76 | % | 1.62 | % | 1.53 | % | ||||||||||||||||||||||||
March 31, 2020 | 1.34 | % | 3.03 | % | 2.33 | % | 2.44 | % | 2.64 | % | 2.17 | % | 1.34 | % | 3.03 | % | 2.33 | % | 2.44 | % | 2.64 | % | 2.17 | % | ||||||||||||||||||||||||
June 30, 2020 | 0.71 | % | 1.36 | % | 1.70 | % | 2.00 | % | 2.75 | % | 2.38 | % | 0.71 | % | 1.36 | % | 1.70 | % | 2.00 | % | 2.75 | % | 2.38 | % | ||||||||||||||||||||||||
September 30, 2020 | 0.46 | % | 0.72 | % | 0.74 | % | 0.90 | % | 1.07 | % | 1.43 | % | 0.46 | % | 0.72 | % | 0.74 | % | 0.90 | % | 1.07 | % | 1.43 | % | ||||||||||||||||||||||||
December 31, 2020 | 0.35 | % | 0.55 | % | 0.48 | % | 0.52 | % | 0.49 | % | 0.55 | % | 0.35 | % | 0.55 | % | 0.48 | % | 0.52 | % | 0.49 | % | 0.55 | % | ||||||||||||||||||||||||
March 31, 2021 | 0.29 | % | 0.52 | % | 0.43 | % | 0.39 | % | 0.38 | % | 0.36 | % | ||||||||||||||||||||||||||||||||||||
June 30, 2021 | 0.30 | % | 0.45 | % | 0.39 | % | 0.32 | % | 0.36 | % | 0.33 | % | ||||||||||||||||||||||||||||||||||||
September 30, 2021 | 0.34 | % | 0.51 | % | 0.43 | % | 0.39 | % | 0.33 | % | 0.32 | % | ||||||||||||||||||||||||||||||||||||
December 31, 2021 | 0.39 | % | 0.67 | % | 0.55 | % | 0.49 | % | 0.41 | % | 0.36 | % | ||||||||||||||||||||||||||||||||||||
Delinquency Raterate by Vintagevintage
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 is30-day
plus past due after 30 days pass its actual due date, while under our previous definition, a loan was30-day
plus past due after 30 days passed the presumed due date, which wasone-month
after the loan’s funding date. The following chart and table display the historical cumulative30-day
plus past due delinquency rates by loan origination vintage for all continuing loan products facilitated through our online platform under the adjusted definition of30-day
plus past due delinquent loans.
| (1) |
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. |
| (2) | Our vintage delinquency rate for loans facilitated during 2020 was 2.53%, 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, |
Month on Book | Month on Book | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vintage | 2nd | 3rd | 4th | 5th | 6th | 7th | 8th | 9th | 10th | 11th | 12th | 2 nd | 3 rd | 4 th | 5 th | 6 th | 7 th | 8 th | 9 th | 10 th | 11 th | 12 th | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018Q1 | 1.37 | 2.20 | 2.99 | 3.67 | 4.32 | 4.86 | 5.23 | 5.50 | 5.66 | 5.74 | 5.77 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018Q2 | 1.87 | 3.12 | 4.39 | 5.46 | 6.33 | 6.99 | 7.47 | 7.80 | 7.99 | 8.08 | 8.13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018Q3 | 1.45 | 2.51 | 3.53 | 4.39 | 5.09 | 5.59 | 5.97 | 6.28 | 6.50 | 6.64 | 6.72 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018Q4 | 1.43 | 2.49 | 3.55 | 4.42 | 5.18 | 5.76 | 6.20 | 6.54 | 6.81 | 7.01 | 7.16 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019Q1 | 1.34 | 2.38 | 3.45 | 4.36 | 5.13 | 5.75 | 6.22 | 6.65 | 6.99 | 7.25 | 7.43 | 1.34 | 2.38 | 3.45 | 4.36 | 5.13 | 5.75 | 6.22 | 6.65 | 6.99 | 7.25 | 7.43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019Q2 | 1.33 | 2.34 | 3.31 | 4.18 | 5.05 | 5.82 | 6.44 | 6.98 | 7.34 | 7.50 | 7.52 | 1.33 | 2.34 | 3.31 | 4.18 | 5.05 | 5.82 | 6.44 | 6.98 | 7.34 | 7.50 | 7.52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019Q3 | 1.02 | 2.16 | 3.42 | 4.55 | 5.64 | 6.45 | 6.92 | 7.13 | 7.20 | 7.20 | 7.15 | 1.02 | 2.16 | 3.42 | 4.55 | 5.64 | 6.45 | 6.92 | 7.13 | 7.20 | 7.20 | 7.15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019Q4 | 0.83 | 2.07 | 3.37 | 4.45 | 5.12 | 5.50 | 5.68 | 5.79 | 5.83 | 5.80 | 5.73 | 0.83 | 2.07 | 3.37 | 4.45 | 5.12 | 5.50 | 5.68 | 5.79 | 5.83 | 5.80 | 5.73 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020Q1 | 0.81 | 1.73 | 2.46 | 2.97 | 3.35 | 3.59 | 3.71 | 3.78 | — | — | — | 0.81 | 1.73 | 2.46 | 2.97 | 3.35 | 3.59 | 3.71 | 3.78 | 3.82 | 3.82 | 3.80 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020Q2 | 0.44 | 0.92 | 1.34 | 1.65 | 1.90 | — | — | — | — | — | — | 0.44 | 0.92 | 1.34 | 1.65 | 1.90 | 2.08 | 2.21 | 2.30 | 2.36 | 2.38 | 2.38 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020Q3 | 0.41 | 0.81 | — | — | — | — | — | — | — | — | — | 0.41 | 0.81 | 1.16 | 1.47 | 1.72 | 1.89 | 2.01 | 2.10 | 2.16 | 2.20 | 2.21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020Q4 | 0.36 | 0.70 | 1.01 | 1.28 | 1.50 | 1.68 | 1.82 | 1.93 | 2.02 | 2.08 | 2.11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2021Q1 | 0.27 | 0.55 | 0.84 | 1.10 | 1.34 | 1.56 | 1.74 | 1.91 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2021Q2 | 0.29 | 0.57 | 0.87 | 1.17 | 1.46 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2021Q3 | 0.29 | 0.63 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Results of Operations
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, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2019 | 2020 (1) | 2019 | 2020 (1) | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
RMB | % | RMB | % | RMB | US$ | % | RMB | % | RMB | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||||||||
(in thousands, except for percentages) | (in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loan facilitation service fees | 2,919,234 | 64.2 | 3,310,875 | 55.5 | 1,908,851 | 292,544 | 25.2 | 3,310,875 | 55.5 | 1,908,851 | 25.2 | 3,794,182 | 595,390 | 40.1 | ||||||||||||||||||||||||||||||||||||||||||
Post-facilitation service fees | 922,797 | 20.3 | 1,200,373 | 20.1 | 672,981 | 103,139 | 8.9 | 1,200,373 | 20.1 | 672,981 | 8.9 | 1,309,565 | 205,499 | 13.8 | ||||||||||||||||||||||||||||||||||||||||||
Guarantee income | — | — | — | — | 3,386,032 | 518,932 | 44.8 | — | — | 3,386,032 | 44.8 | 2,593,512 | 406,979 | 27.4 | ||||||||||||||||||||||||||||||||||||||||||
Net interest income (2) | 256,108 | 5.6 | 1,106,669 | 18.6 | 1,113,337 | 170,626 | 14.7 | 1,106,669 | 18.6 | 1,113,337 | 14.7 | 1,216,170 | 190,844 | 12.8 | ||||||||||||||||||||||||||||||||||||||||||
Other revenue | 376,915 | 8.3 | 344,840 | 5.8 | 481,886 | 73,852 | 6.4 | 344,840 | 5.8 | 481,886 | 6.4 | 556,699 | 87,358 | 5.9 | ||||||||||||||||||||||||||||||||||||||||||
Changes in expected discretionary payment to investors protected by investor reserve funds | 68,619 | 1.5 | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Net revenues | 4,543,673 | 100.0 | 5,962,757 | 100.0 | 7,563,087 | 1,159,093 | 100.0 | 5,962,757 | 100.0 | 7,563,087 | 100.0 | 9,470,128 | 1,486,070 | 100.0 | ||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||||||||||||||||||||||
Origination, servicing expenses and other cost of revenue | (1,164,716 | ) | (19.5 | ) | (1,315,496 | ) | (17.4 | ) | (1,834,453 | ) | (287,866 | ) | (19.4 | ) | ||||||||||||||||||||||||||||||||||||||||||
Origination, servicing expenses and other cost of revenue | (43,494 | ) | (0.7 | ) | (10,104 | ) | (0.1 | ) | (7,503 | ) | (1,177 | ) | (0.1 | ) | ||||||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses | (710,754 | ) | (15.6 | ) | (720,333 | ) | (12.1 | ) | (482,859 | ) | (74,001 | ) | (6.4 | ) | (720,333 | ) | (12.1 | ) | (482,859 | ) | (6.4 | ) | (1,584,233 | ) | (248,601 | ) | (16.7 | ) | ||||||||||||||||||||||||||||
General and administrative expenses | (383,388 | ) | (8.4 | ) | (435,816 | ) | (7.3 | ) | (461,116 | ) | (70,669 | ) | (6.1 | ) | (435,816 | ) | (7.3 | ) | (461,116 | ) | (6.1 | ) | (518,245 | ) | (81,324 | ) | (5.5 | ) | ||||||||||||||||||||||||||||
Research and development expenses | (317,965 | ) | (7.0 | ) | (390,585 | ) | (6.6 | ) | (370,175 | ) | (56,732 | ) | (4.9 | ) | (390,585 | ) | (6.6 | ) | (370,175 | ) | (4.9 | ) | (434,850 | ) | (68,237 | ) | (4.6 | ) | ||||||||||||||||||||||||||||
Credit losses for quality assurance commitment | — | — | — | — | (2,007,968 | ) | (307,735 | ) | (26.5 | ) | — | — | (2,007,968 | ) | (26.5 | ) | (1,963,609 | ) | (308,133 | ) | (20.7 | ) | ||||||||||||||||||||||||||||||||||
Provision for loans receivable (2) | (192,749 | ) | (4.2 | ) | (299,504 | ) | (5.0 | ) | (463,175 | ) | (70,985 | ) | (6.1 | ) | (299,504 | ) | (5.0 | ) | (463,175 | ) | (6.1 | ) | (374,243 | ) | (58,727 | ) | (4.0 | ) | ||||||||||||||||||||||||||||
Provision for accounts receivable and other receivables | (106,652 | ) | (2.3 | ) | (261,882 | ) | (4.4 | ) | (144,661 | ) | (22,170 | ) | (1.9 | ) | (261,882 | ) | (4.4 | ) | (144,661 | ) | (1.9 | ) | (139,226 | ) | (21,848 | ) | (1.5 | ) | ||||||||||||||||||||||||||||
Total operating expenses | (2,697,079 | ) | (59.4 | ) | (3,316,330 | ) | (55.6 | ) | (5,255,554 | ) | (805,450 | ) | (69.5 | ) | (3,316,330 | ) | (55.6 | ) | (5,255,554 | ) | (69.5 | ) | (6,856,362 | ) | (1,075,913 | ) | (72.4 | ) | ||||||||||||||||||||||||||||
Other income (3) | 774,063 | 17.0 | 210,053 | 3.5 | 116,469 | 17,850 | 1.5 | 210,053 | 3.5 | 116,469 | 1.5 | 122,368 | 19,202 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||
Profit before income tax expenses | 2,620,657 | 57.7 | 2,856,480 | 47.9 | 2,424,002 | 371,493 | 32.1 | 2,856,480 | 47.9 | 2,424,002 | 32.1 | 2,736,134 | 429,359 | 29.0 | ||||||||||||||||||||||||||||||||||||||||||
Income tax expenses | (151,206 | ) | (3.3 | ) | (481,962 | ) | (8.1 | ) | (455,421 | ) | (69,796 | ) | (6.0 | ) | (481,962 | ) | (8.1 | ) | (455,421 | ) | (6.0 | ) | (240,818 | ) | (37,790 | ) | (2.5 | ) | ||||||||||||||||||||||||||||
Net profit | 2,469,451 | 54.3 | 2,374,518 | 39.8 | 1,968,581 | 301,697 | 26.0 | 2,374,518 | 39.8 | 1,968,581 | 26.0 | 2,495,316 | 391,569 | 26.3 | ||||||||||||||||||||||||||||||||||||||||||
| (1) | On January 1, 2020, we adopted the ASC Topic 326, Measurement of Credit Losses on Financial Instruments or “CECL”, using a modified retrospective method with prior periods continue to be reported in accordance with our historic accounting method. Upon adoption of ASC Topic 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 loans receivable within the financial statement line item “net interest income (expense) and loan provision losses.” In 2019, we reclassified provision for loans receivable amounting RMB299.5 million from “net interest income (expense) and loan provision losses” in operating revenue to “provision for loans receivable” in operating expenses. |
| (3) | The following table sets forth the breakdown of our other income: |
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2019 | 2020 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
RMB | % | RMB | % | RMB | US$ | % | RMB | % | RMB | % | RMB | US$ | % | |||||||||||||||||||||||||||||||||||||||||||
(in thousands, except for percentages) | (in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain from quality assurance | 510,894 | 11.2 | 98,405 | 1.6 | — | — | — | 98,405 | 1.6 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Realized gain/(loss) from financial guarantee derivatives | (157,244 | ) | (3.5 | ) | 31,444 | 0.5 | — | — | — | 31,444 | 0.5 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Fair value change of financial guarantee derivatives | 272,057 | 6.0 | (56,287 | ) | (0.9 | ) | — | — | — | (56,287 | ) | (0.9 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Other income, net | 148,356 | 3.3 | 136,491 | 2.3 | 116,469 | 17,850 | 1.5 | 136,491 | 2.3 | 116,469 | 1.5 | 122,368 | 19,202 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||
Total other income | 774,063 | 17.0 | 210,053 | 3.5 | 116,469 | 17,850 | 1.5 | 210,053 | 3.5 | 116,469 | 1.5 | 122,368 | 19,202 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||
123
Revenues
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.
2021 Compared to 2020.
2020 Compared to 2019.
COVID-19
on the Chinese economy in general. The
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.
2021 Compared to 2020.
2020 Compared to 2019.
Guarantee income
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.
2021 Compared to 2020.
124
Other revenue
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 servicesrevenue generated from new business segments.
2021 Compared to 2020.
2020 Compared to 20192019.
Net interest income
In 2021, we recorded RMB1,290.0 million (US$202.4 million) interest income and RMB73.8 million (US$11.6 million) interest expenses, compared to RMB1,341.7 million interest income and RMB228.3 million interest expenses in 2020.
A substantial portion of our interest income and interest expenses in 2021 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.
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 interest income and RMB235.6 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, compared to loan provision losses of RMB192.7 million in 2018.
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 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.
125
Operating Expensesexpenses
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 and other cost of revenue
Origination, and servicing expenses and other cost of revenue 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, loan collection and loan collection.other cost of revenue.
2021 Compared to 2020.
2020 Compared to 2019.
Origination, servicing expenses and servicing expenses-relatedother cost of revenue-related party
Origination, servicing expenses and servicing expenses-relatedother cost of revenue-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.”
Sales and marketing expenses
Sales and marketing expenses consist primarily of advertising and online marketing promotion expenses.
2021 Compared to 2020.
2020 Compared to 2019.
126
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.
2021 Compared to 2020.
2020 Compared to 2019.
Research and development expenses
Research and development expenses was reclassified separately from general and administrative expenses in 2019.
2021 Compared to 2020.
Our research and development expenses in 2021 included the share-based compensation expenses of RMB40.4 million (US$6.3 million). Our research and development expenses as a percentage of our total operating revenues decreased from 4.9% to 4.5%.
2020 Compared to 2019.
Credit losses for quality assurance commitment
Credit losses for quality assurance commitment was accounted for in addition to and 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.
Credit losses for quality assurance commitment weredecreased by 2.2% to RMB1,963.6 million (US$308.1 million) in 2021 from RMB2,008.0 million (US$307.7 million) in 2020.2020, primarily due to the improved asset quality, partially offset by the increase in outstanding loan balance.
Provision for loans receivable
2021 Compared to 2020
.
2020 Compared to 2019.
127
Provision for accounts receivable and other receivables
2021 Compared to 2020.
2020 Compared to 2019.