Exhibit 99.1

Lufax Holding Ltd Supplemental and Updated Disclosures

Lufax Holding Ltd (the “Company”) has published a listing document (the “Listing Document”) with the Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”), subsequent to its initial application filed with the Hong Kong Stock Exchange on February 1, 2023, in connection with a proposed dual primary listing by way of introduction (the “Listing”) of its ordinary shares on the Main Board of the Hong Kong Stock Exchange.

The Listing Document contains new and supplemental descriptions of certain aspects of the Company’s business and financial information as required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as amended or supplemented from time to time, as well as updated disclosures of certain information previously disclosed in the Company’s annual report on Form 20-F for the year ended December 31, 2022 (the “2022 Form 20-F”). Exhibit 99.1 to this current report on Form 6-K sets forth such new, supplemental and updated information and disclosures as described therein. The disclosures therein supplement, and should be read in conjunction with, the disclosures in the 2022 Form 20-F and other disclosures furnished on this Form 6-K. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Listing Document.

There is no assurance as to if or when the Listing will take place. This communication is neither an offer to sell nor a solicitation of an offer to buy, nor shall there be any offer, solicitation, or sale of the Company’s securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful.

 

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FORWARD-LOOKING STATEMENTS

This exhibit contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates, and projections about us, our industries, and the regulatory environment in which we and companies integral to our business operate. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “target,” “goal,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to,” or other similar expressions.

Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: our operations and business prospects; our business and operating strategies and our ability to implement such strategies; our ability to develop and manage our operations and business; our future general and administrative expenses; competition for, among other things, capital, technology and skilled personnel; our ability to control costs; our dividend policy; changes to regulatory and operating conditions in the industry and geographical markets in which we operate; and other factors described under “Item 3. Key Information—D. Risk Factors” of our 2022 Form 20-F and “Risk Factors” in this exhibit.

The forward-looking statements made in this exhibit relate only to events or information as of the date on which the statements are made in this exhibit. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this exhibit completely in conjunction with documents we filed with or furnished to the SEC and with the understanding that our actual future results may be materially different from what we expect.

 

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TABLE OF CONTENTS

 

RECENT DEVELOPMENTS			4
RISK FACTORS			8
INDUSTRY OVERVIEW			25
REGULATORY OVERVIEW			38
HISTORY AND CORPORATE STRUCTURE			42
BUSINESS			56
CONTRACTUAL ARRANGEMENTS			116
FINANCIAL INFORMATION			135
RELATIONSHIP WITH THE CONTROLLING SHAREHOLDERS			159
CONNECTED TRANSACTIONS			169
SUBSTANTIAL SHAREHOLDERS			197
DIRECTORS AND SENIOR MANAGEMENT			199
GLOSSARY OF TECHNICAL TERMS			209
SHARE INCENTIVE PLAN			210

 

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RECENT DEVELOPMENTS

 

 

RECENT REGULATORY DEVELOPMENTS

New Financial Regulatory Body Consolidating Oversight in China

On March 10, 2023, the National People’s Congress of China approved a plan to reform the institutions under the State Council, including a formation of a new national financial regulatory administration (國家金融監督管理總局), directly under the State Council to oversee the whole financial industry (except securities). The new national financial regulatory administration will be built on the basis of the CBIRC. Certain functions of the People’s Bank of China and the CSRC will be transferred to the new National Financial Regulatory Administration. In addition, local financial regulatory mechanisms will be reformed.

Considering (i) the above reform plan is mainly a reorganization and an integration of the institutions under the State Council; (ii) up to the Latest Practicable Date, we have not seen any material changes to the relevant laws and regulations applicable to the Group; (iii) the Group may continue to operate business in accordance with the current effective laws and regulations applicable to the Group, the Company believes that the aforementioned reform plan has no material impact on the business operation of the Group as a whole as well as the listing plan.

Substantial Completion of Rectification Work for Online Financial Platforms

On April 29, 2021, the People’s Bank of China, together with the CBIRC, the CSRC and other regulatory authorities, jointly conducted a regulatory interview with 13 companies, including ours, as part of special work on self-investigation and rectification of online financial platforms. We have carried out self- investigation and rectification work in various aspects, including prudential supervision, financial consumer protection, integrated operation of financial business, personal credit business, capital market business, and third-party internet deposits (the “429 Rectification”). As of the Latest Practicable Date, we have substantially completed most of the rectification measures based on our self-examination results according to the guidance provided by the relevant authorities.

Furthermore, Guo Shuqing, the Party Chief of the People’s Bank of China and chairman of the CBIRC, stated in an interview on January 7, 2023, that the special rectification of the financial operations of the 14 platform enterprises has been substantially completed. In addition, at the press conference held on January 13, 2023, the official of the People’s Bank of China also said that under the guidance of the financial regulatory authorities, the rectification conducted by 14 large platform enterprises has been substantially completed. According to the guidance provided by the regulatory authorities, the regulatory authorities will perform normalized supervision in general going forward.

As advised by our PRC Legal Adviser, our exposure to the risk of material administrative penalties relevant to the 429 Rectification is remote. Further, we believe that the 429 Rectification does not and will not have any material adverse impact on our business operation. Having taken into account the aforementioned views of our Directors and our PRC Legal Adviser, which are concurred by the PRC legal adviser of the Joint Sponsors, and based on the independent due diligence work conducted by the Joint Sponsors, nothing has come to the attention of the Joint Sponsors, that would cause them to question the aforementioned views of our Directors and our PRC Legal Adviser. For more information, see “Business” and “Risk Factors.”

Interest Rate

Our income, including retail credit and enablement service fees and other fees, to the extent they are deemed to be or related to loan interest, are subject to restrictions on interest rates. For details, please see “Regulatory Overview—Regulations Relating to Retail Credit Enablement—Regulations on loans.”

During the track record period, we have not enabled any loan with an APR higher than 36% limit which is illegal; while we historically enabled loans with an APR higher than 24% but below 36%, which is not illegal, and, for such loans, our request to demand the portion of the fees that exceeds the 24% limit may not be upheld by the PRC courts at that time. After September 4, 2020, we have not enabled any new loans with an APR higher than 24% for loan applications. As of December 31, 2022, the total outstanding balance of enabled loans with an APR higher than 24% but below 36% amounted to RMB8 billion representing 1% of our total outstanding balance of enabled loans. As advised by our PRC Legal Adviser, we will not be penalized or sanctioned for our historical loans with an APR higher than 24% but below 36% since the APR higher than 24% but below 36% is not illegal under the PRC laws.

 

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During the Track Record Period and up to the Latest Practicable Date, as advised by the PRC Legal Adviser, our Directors are of the view that we have been adjusting the APR of loans that we enabled in compliance with latest applicable laws and rules. Having taken into account the aforementioned views of our Directors and our PRC Legal Adviser, which are concurred by the PRC legal adviser of the Joint Sponsors, and based on the independent due diligence work conducted by the Joint Sponsors, nothing has come to the attention of the Joint Sponsors, that would cause them to question the aforementioned views of our Directors and our PRC Legal Adviser.

However, there remain uncertainties in the interpretation and implementation of the abovementioned provisions of the Supreme People’s Court and the two amendments, including their applicability in practice and inconsistencies between the standard and the level of enforcement by different PRC courts. We may lower the APR or even be required to change our charging strategies from time to time as a result of changes in regulation or our business strategy.

Regulations on Local Financial Supervision and Administration

Pursuant to the currently effective Regulations on Financing Guarantee Companies (《融資擔保公司監督管理條例》), the financing guarantee license has no geographic limitation and companies granted with such license can practice relevant business nationwide, and a financing guarantee company may establish a branch to conduct financing guarantee business outside the province where it is domiciled with a prior approval from the regulatory department where the branch is located. We are currently licensed to conduct our current business across the provinces which is in accordance with above regulations. We have set up financing guarantee branches in multiple provinces mainly for purposes of conducting local business operation conveniently. As of December 31, 2022, we conducted retail credit and enablement business through our financing guarantee subsidiary and our 46 branches, covering 29 provinces. All of the branches have been licensed by the respective local financial authorities. We have set up financing guarantee branches covering all the provinces where we are conducting business except Yunnan province.

On December 31, 2021, the People’s Bank of China published the Regulations on the Local Financial Supervision and Administration (Draft for Comments), which requires that, among others, (i) six types of financial organizations, including financing guarantee companies, are deemed as local financial organizations, and the incorporation of local financial organizations should be approved by the competent provincial regulatory authorities before they apply for the business licenses, (ii) local financial organizations are required to operate their business within the area approved by the competent provincial regulatory authorities and are not allowed to conduct business across provinces in principle, and (iii) the rules for cross-province business carried out by local financial organizations should be formulated by the State Council or by the financial regulatory department of the State Council as authorized by the State Council. The financial regulatory department of the State Council will specify a transition period for local financial organizations that have carried out businesses across provinces to maintain compliance. In response to requirement of the draft measures that local financial organizations are not allowed to conduct business across provinces in principle, we have expedited the establishment of financing guarantee branches in three regions, namely, Tianjin province, Ningxia province and Yunnan province, where no branches had been set up at that time. As of the Latest Practicable Date, we had completed the establishment of our branches in Tianjin province and Ningxia province and was in the process of establishing one in Yunnan province.

As of the Latest Practicable Date, the draft measures had not been formally released and taken effect. If the draft measures were promulgated in their current form, including the requirement of “being not allowed to conduct business across provinces,” our PRC Legal Adviser has advised us that there is no material obstacle for us to comply with the draft measures.

 

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Cybersecurity and Data Privacy

On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law (《中華人民共和國數據安全法》), which took effect in September 2021. On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the Personal Information Protection Law of the PRC (《中華人民共和國個人信息保護法》), effective on November 1, 2021. On December 28, 2021, Cyberspace Administration of China, or the CAC, and other twelve PRC regulatory authorities jointly revised and promulgated the Measures for Cybersecurity Review (《網絡安全審查辦法 》), or the Cybersecurity Review Measures, which came into effect on February 15, 2022. The Cybersecurity Review Measures provides that, among others, a network platform operator is required to make a filing for a cybersecurity review by the Cybersecurity Review Office prior to its listing in a foreign country if it possesses personal information of more than one million users. As of the Latest Practicable Date, we possess personal information of over one million users. On February 10, 2023, we consulted the China Cybersecurity Review Technology and Certification Center (the “CCRC”), which was entrusted by the CAC to set up cybersecurity review consultation hotlines, on a named basis. The CCRC has advised us that (i) the term of “listing in a foreign country” under the Cybersecurity Review Measures does not apply to listings in Hong Kong, therefore we do not need to proactively apply for a cybersecurity review for listing in Hong Kong, and (ii) we do not need to apply for a cybersecurity review according to the Regulations on Cyber Data Security Management (Draft for Comments) (《網絡數據安全管理條例(徵求意見稿)》) since it has not become effective. Our PRC Legal Adviser is of the view, based on consultation with the CCRC, that the term of “listing in a foreign country” under the Cybersecurity Review Measures does not apply to listings in Hong Kong for purposes of the obligation to proactively apply for a cybersecurity review with the CAC. However, given the Cybersecurity Review Measures were recently promulgated, there are substantial uncertainties as to the interpretation, application and enforcement of the Cybersecurity Review Measures. For more information, please see “Regulatory Overview—Regulations Relating to Information Security and Privacy Protection.”

In addition, the Cybersecurity Review Measures also stipulates that the critical information infrastructure operators and the network platform operators which engage in data processing activities that affect or may affect national security shall also be subject to the cybersecurity review. On November 14, 2021, the CAC published Regulations on Cyber Data Security Management (Draft for Comments) (《網絡數據安全管理條例(徵求意見稿)》), or the Draft Regulations on Cyber Data Security Management, which specified that data processor who seeks to go public in Hong Kong, which affects or may affect national security, shall apply for cybersecurity review. However, further explanation or interpretation for “affect or may affect national security” remains to be clarified and elaborated by the CAC. If (i) our data processing activities are deemed to affect or may affect national security under the Cybersecurity Review Measures, or (ii) the Draft Regulations on Cyber Data Security Management is fully implemented in its current version, and our operation is deemed to affect or may affect national security, we may be subject to cybersecurity review. In addition, the competent PRC regulatory authorities may proactively conduct a cybersecurity review on us. As of the date of this listing document, we are not required to apply for the cybersecurity review in accordance with the Draft Regulations on Cyber Data Security Management. For more details, please see “Regulatory Overview—Regulations Relating to Information Security and Privacy Protection.”

As of the Latest Practicable Date, we have not received any notification from CAC or other regulatory authorities conducting cybersecurity review on us or determining our business as activities that affects or may affect national security. Based on the aforementioned, subject to the interpretation and discretion of the relevant regulatory authorities, after consulting with our PRC Legal Adviser, we are of the view that (i) considering factors for assessment of the national security risks, the possibilities that our business operations or this Listing are regarded as activities that may affect the national security and therefore we are required to proactively apply for the cybersecurity review in accordance with the Cybersecurity Review Measures are low; and (ii) we are not aware of any material legal impediment for us to take measures for compliance with the Draft Regulations on Cyber Data Security Management if become effective in its current form and the Cybersecurity Review Measures. For more details, please see “Risk Factors—Risks Relating to Our Business and Industry—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.”

 

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During the Track Record Period and up to the Latest Practicable Date, we had not been subject to any material fines, administrative penalties, or other sanctions by any relevant regulatory authorities in relation to violation of cybersecurity, data security and personal information protection laws and regulations. As advised by our PRC Legal Adviser, our Directors are of the view that we are in compliance with the existing PRC laws and regulations on cybersecurity, data security and personal information protection in all material aspects. Furthermore, our Directors believe that the existing and applicable laws and regulations in cybersecurity, data security and personal information protection will not have a material adverse impact on our business operations and our listing plan on the Stock Exchange. Having taken into account the aforementioned views of our Directors and our PRC Legal Adviser, which are concurred by the PRC legal adviser of the Joint Sponsors, and based on the independent due diligence work conducted by the Joint Sponsors, nothing has come to the attention of the Joint Sponsors, that would cause them to question the aforementioned views of our Directors and our PRC Legal Adviser. As there might be newly issued explanations or implementation rules on the existing regulations, laws and opinions or the draft measures mentioned above might become effective, we will actively monitor future regulatory and policy changes to ensure strict compliance with all applicable laws and regulations and will continue to obtain guidance to understand the latest regulatory development and regulatory requirements.

Business Change in Response to Regulatory Requirement

Cessation of B2C and P2P product offerings

In response to regulatory changes affecting the entire industry, we stopped the facilitation of offering B2C products in the second half of 2017 and peer-to-peer products in August 2019. As of December 31, 2021, no peer-to-peer products enabled by our company remained outstanding, and none of the new loans we enabled during the Track Record Period were funded by peer-to-peer individual investors. For more details, please refer to “Risk Factors—Risks Relating to Our Business and Industry—We have modified our business model and practices in the past as a result of changes in laws, regulations, policies, measures and guidance, and we are subject to risks in connection with our discontinued products and historical practices. If any of our discontinued products and historical practices is deemed to violate any PRC laws or regulations, our business, financial condition and results of operations would be materially and adversely affected.”

Cessation of microloan business

On November 2, 2020, the CBIRC, the People’s Bank of China and other regulatory authorities released the Interim Measures for the Administration of Online Microloan Business (Draft for Comments) (《網絡小額貸款業務管理暫行辦法(徵求意見稿)》), which states that a microloan company must obtain the official approval of the CBIRC to conduct an online micro lending businesses outside the province where it is registered. In addition, the draft provides the statutory qualified requirements for an online microloan company, covering such things as registered capital, controlling shareholders, and use of the internet to engage in an online microloan business. In response to this, we have stopped using our microloan subsidiaries to fund new loans from December 2020. Further, we canceled the microloan business license held by our Shenzhen and Hunan microloan subsidiaries in May 2022 and April 2022, respectively, and we completed the de-registration of our Hunan microloan subsidiary at local Administration of Market Regulation in December 2022. As of the Latest Practicable Date, the existing business of Shenzhen microloan subsidiary has been settled, and it is currently in the process of de-registration, which is estimated to be completed by the end of April 2023. We decided to de-register these two microloan subsidiaries due to the updates to our business model and our efforts to optimize our organizational structure and management efficiency. We have also applied for and obtained approval from the authorities regarding cancelation of the online loan business permit held by our remaining Chongqing microloan subsidiary in June 2022. As a result, we do not conduct any online microloan business as of the Latest Practicable Date.

 

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RISK FACTORS

 

 

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

Small business owners are more vulnerable to economic fluctuations

Small business owners are generally more vulnerable to macroeconomic fluctuations or changes in the regulatory environment, as they may lack the financial, management or other resources necessary to withstand the adverse effects brought on by economic downturns. Small business owners may also have no or only a limited credit history or a lower borrowing capacity than large entities, and therefore may be more vulnerable to economic downturns. In addition, small business owners normally have negligible market shares and often need substantial additional capital to expand or compete and may experience substantial volatility in results of operations, any of which may impair a borrowers’ ability to service a loan. As our core small business owner segment, which makes up the majority of our new loans enabled during 2022, has been among the earliest and most significantly impacted by the deteriorating macro environment, we witnessed worsening delinquency rates as well as rising credit impairment losses, weighing on our profitability during 2022. However, small business owners will need time to recover from the economic downturns. Going forward, any adverse changes in the economic, occurrence and/or development of natural disaster or epidemics or pandemic, including the resurgence of COVID-19, may affect the repayment ability of small business owners, which in turn may adversely affect our business, financial condition and results of operations.

We may be unable to source third-party credit enhancement at commercially attractive prices, grow our balance sheet to support our financing guarantee business, or persuade our funding partners to accept guarantees from our financing guarantee subsidiary. Any of these outcomes could materially and adversely affect our business, financial condition and results of operations.

We make use of third-party credit enhancement providers in our retail credit and enablement business. Under our current business model, we share the credit risk with credit enhancement providers for most of the loans we enable. As of December 31, 2022, our credit enhancement providers provided insurance or guarantees on 76.1% of the outstanding balance of loans we enabled under our Puhui brand. Furthermore, one credit enhancement provider, Ping An P&C, provided insurance or guarantees for 70.6% of the outstanding balance, with other credit enhancement providers accounting for the remaining 5.5%. However, the ability and willingness of our credit enhancement providers to continue providing credit enhancement at a commercially attractive cost cannot be assured. Our credit enhancement providers price their services based on factors such as the creditworthiness of the customers, their cost of funds, the conditions in the overall credit market and their expectations for how these factors will evolve and change over time. When credit default rates go up, which has been the general trend in China over the Track Record Period, credit enhancement providers tend to increase the cost they charge to offset the additional expected losses. Going forward, we cannot predict the percentage of outstanding loans with credit risk exposure for our company, because when and how much credit risk we take on and whether third-party credit enhancement is utilized depend on a dynamic mix of commercial factors, including the pricing of credit enhancement and the willingness of our funding partners to bear risk, as well as regulatory guidance. Our loan enablement can be done either with or without third-party credit enhancement, and if the cost of third-party credit enhancement is not commercially attractive or our credit enhancement providers, including Ping An Group, encounter difficulties including but not limited to financial challenges, credit rating downgrades or others which prevent them from continuing to provide credit enhancement services, the proportion of loans for which we have credit risk could greatly exceed 30%, depending on the balance of risk and reward. We have ongoing discussions with our funding partners regarding the potential adjustments in our new commercial arrangement where we do not engage external credit enhancement partners and this has not affected our cooperation with funding partners. As of the Latest Practicable Date, we had initiated dialogues with approximately two thirds of our 81 funding partners, and 10 banks and 5 trust companies among our partners have already agreed to the new arrangement. However, we cannot assure you that all our funding partners may continue provide the same level of funding support to us as we decrease the utilization of external credit enhancement partners to rely on our own credit guarantee subsidiary to provide credit enhancement. If we are unable to source third-party credit enhancement at commercially attractive prices, grow our balance sheet to support our financing guarantee business, or persuade our funding partners to accept guarantees from our financing guarantee subsidiary, our business, financial condition and results of operations may be materially and adversely affected.

 

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We are subject to credit risk of our loans and financial assets measured at amortized cost.

The sustainability of our business and future growth depends largely on our ability to effectively manage the credit risk of our loans and financial assets measured at amortized cost. During the Track Record Period, the gross carrying amount of loans we originated to customers was RMB 120.8 billion, RMB217.7 billion and RMB218.5 billion as of December 31, 2020, 2021 and 2022, and our financial assets measured at amortized cost was RMB6.6 billion, RMB3.8 billion and RMB4.7 billion (US$678 million) as of the same dates. Any deterioration in our loan portfolio quality and increase in the delinquent loan ratio could materially adversely affect our results of operations. As of December 31, 2020, 2021 and 2022, our DPD 30+ delinquency rate was 2.0%, 2.2% and 4.6%, respectively, and our DPD 90+ delinquency rate was 1.2%, 1.2% and 2.6%, respectively.

We may not be able to effectively control the level of our overdue loans in the future. Our delinquent loan ratio may increase in the future due to a variety of factors, including factors beyond our control, such as a slowdown in economic growth, a deepening of a credit crisis or other adverse macroeconomic trends. Such factors may cause operational, financial and liquidity issues for our customers and affect their ability to make loan repayments in a timely manner. If we fail to effectively manage credit risk of our loan and our overdue loans increase, our business, financial condition and results of operations may be materially adversely affected.

Our results of operations, financial condition and prospects may be adversely affected by fair value changes of financial assets at fair value through profit or loss and valuation uncertainty due to the use of unobservable inputs.

As of December 31, 2020, 2021 and 2022, our financial assets at fair value through profit or loss were RMB34.4 billion, RMB31.0 billion and RMB29.1 billion (US$4.2 billion), respectively. Our Group applied the discounted cash flow models and other similar techniques to determine the fair value of the financial assets at fair value through profit or loss classified as level 3 of the fair value hierarchy for financial reporting purpose. Determining whether to classify financial instruments into level 3 of the fair value hierarchy is generally based on the significance of the unobservable factors involved in valuation methodologies. The fair values of these financial instruments are based on cash flow discounted using the expected return according to management’s estimates. The estimation of these financial assets at fair value through profit or loss primarily uses unobservable inputs, such as the estimated future cash flows and the expected discount rate of the investment products.

Therefore, the valuation of fair value change of financial assets at fair value through profit or loss are subject to uncertainties in estimations. Such estimated changes in fair values involve the exercise of professional judgment and the use of certain bases, assumptions and unobservable inputs, which, by their nature, are subjective and uncertain. It may lead to changes in the fair value of financial assets at fair value through profit and loss, and changes in such fair value may affect our financial performance. In addition, the valuation methodologies may involve a significant degree of management judgment and are inherently uncertain, which may result in material adjustment to the carrying amounts of certain liabilities and in turn may materially and adversely affect our results of operations. As such, the financial assets at fair value through profit or loss valuation has been, and will continue to be, subject to uncertainties in estimations, which may not reflect the actual fair value of these financial assets and result in significant fluctuations in profit or loss from year to year.

We incurred and may continue to incur impairment losses on our intangible assets and goodwill.

Our intangible assets consist of trademarks and licenses, computer software and others, that were primarily acquired in business combination as part of our reorganization of the Group, recognized at fair value at the date of acquisition and are subsequently amortized on a straight line basis. We recorded intangible assets of RMB1.9 billion, RMB899.4 million and RMB885.1 million (US$127.3 million) as of December 31, 2020, 2021 and 2022, respectively. Goodwill arising from acquisitions represents the excess of the aggregate of the consideration transferred, the amount recognized for non-controlling interests and any fair value of our previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. As of December 31, 2020, 2021 and 2022, we had goodwill of RMB9.0 billion, RMB8.9 billion and RMB8.9 billion (US$1.3 billion), respectively. Intangible assets and goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. RMB64.2 million, RMB1.0 billion and RMB602.6 million (US$86.6 million) were recognized as impairment in respect of the intangible assets as of December 31, 2020, 2021 and 2022, respectively. RMB70.6 million, RMB199.3 million and RMB76.9 million (US$11.1 million) were recognized as impairment loss in respect of the goodwill as of December 31, 2020, 2021 and 2022, respectively. The assessment of impairment losses involves a significant degree of management judgments as well as estimates in determining the key assumptions, and unpredictable adverse changes in the future may also result in decreases in the value of our intangible assets and goodwill. Therefore, we cannot assure you that these assumptions and estimates would not result in outcomes that require a material adjustment to the carrying amounts of these intangible assets and goodwill in the future, which may in turn result in impairment losses. Significant impairment losses on intangible assets and goodwill may have a material adverse effect on our financial condition and results of operations, and may in turn limit our ability to obtain financing in the future.

 

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We may face risk regarding the recoverability of deferred tax assets.

As of December 31, 2020, 2021 and 2022, our deferred tax assets amounted to RMB3.4 billion, RMB4.9 billion and RMB5.0 billion (US$717.5 million), respectively. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. This requires significant judgment on the tax treatments of certain transactions and also assessment on the probability that adequate future taxable profits will be available for the deferred tax assets to be recovered. In this context, we cannot guarantee the recoverability or predict the movement of our deferred tax assets. In the case that the value of the deferred tax assets has changed, we may have to write-down the deferred tax assets, which may significantly affect our expenditure, profit and loss and financial condition in that respective year.

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 for the collection, use, safeguarding, sharing, transfer and other processing of data and personal information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Regulatory authorities in virtually every jurisdiction in which we operate have implemented and are considering a number of legislative and regulatory proposals concerning data protection.

In recent years, the PRC government has tightened the regulation of the storage, sharing, use, disclosure and protection of personal data and user data, particularly personal data obtained through individuals’ use of websites and online services. Relevant PRC laws and regulations require internet service providers and other network operators to clearly state the authorized purpose, methods and scope of the collection and usage of personal data and obtain the consent of users for the processing of this personal data, as well as to establish user information protection systems with remedial measures. The Cybersecurity Law became effective in June 2017 and requires network operators to follow the principles of legitimacy in collecting and using personal information. On June 10, 2021, the Standing Committee of the National People’s Congress of the PRC (中華人民共和國全國人民代表大會常務委員會) published the Data Security Law of the People’s Republic of China, which took effect on September 1, 2021. The Data Security Law provides a national data security review system, under which data processing activities that affect or may affect national security shall be reviewed, and prohibits any individual or entity in China from providing data stored in China to foreign judicial or law enforcement departments without the approval of competent authorities in China. Moreover, on August 20, 2021, the Standing Committee of the National People’s Congress of the PRC (中華人民共和國全國人民代表大會常務委員會) issued the Personal Information Protection Law (《中華人民共和國個人信息保護法》), which took effect on November 1, 2021, which further details the general rules and principles on personal information processing and further increases the potential liability of personal information processor.

On November 14, 2021, the CAC, published the Regulations on Cyber Data Security Management (Draft for Comments) (《網絡數據安全管理條例(徵求意見稿)》), or the Draft Regulations on Cyber Data Security Management, which specifies that a data processor who seeks to list in Hong Kong, which affects or may affect the national security, should apply for cybersecurity review. As of the Latest Practicable Date, the draft measures have not yet promulgated into law. Therefore, as advised by our PRC Legal Adviser, as of the Latest Practicable Date, we were not required to apply for the cybersecurity review in accordance with the Draft Regulations on Cyber Data Security Management. On December 28, 2021, the CAC and twelve other government authorities published a new version of the Cybersecurity Review Measures, which replaced the Cybersecurity Review Measures published in 2020 and became effective on February 15, 2022. In accordance with the Cybersecurity Review Measures, (i) critical information infrastructure operators that intend to purchase internet products and services and online platform operators engaging in data processing activities, which affects or may affect national security, and (ii) a network platform operator that processes the personal information of more than one million users and intends for “foreign listing,” must be subject to cybersecurity review. As advised by our PRC Legal Adviser, although several PRC laws and regulations have provided the definition of “critical information infrastructure,” the exact scope of “critical information infrastructure operators” under the current regulatory regime remains unclear, and the identification of any specific critical information infrastructure is subject to industry-specific identification rules promulgated by relevant regulators and the notice from the relevant regulators. Additionally, the Cybersecurity Review Measures also grant the CAC and other competent authorities the right to initiate a cybersecurity review without application, if any member organization of the cybersecurity review mechanism has reason to believe any internet products, services or data processing activities affect or may affect national security. The Cybersecurity Review Measures further elaborate the factors to be considered when assessing the national security risks, including, among others, (i) the risk of core data, important data, or a large amount of personal information being stolen, leaked, destroyed, and illegally used or illegally transferred abroad, and (ii) 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 risk of cyber information security due to the listing. The PRC government authorities may have wide discretion in the interpretation of “affect or may affect national security”. If any of our business are deemed to “affect or may affect national security”, we may be subject to cybersecurity review. The Cybersecurity Review Measures provide no further explanation or interpretation. According to mainstream opinions, “foreign listing” does not include “listing in Hong Kong”.

 

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Furthermore, on December 13, 2022, the MIIT released the Administrative Measures for Data Security in Industry and Information Technology Sectors (Trial) (《工業和信息化領域數據安全管理辦法( 試行)》), or the Data Security Measures, which came into effect on January 1, 2023. The measures apply to data management in certain industries, including telecommunication sectors, where certain data we process is generated from. The Data Security Measures set out three categories of data: ordinary data, important data and core data. The processing of important data and core data is subject to certain filing and reporting obligations. Since the categories of important data and core data have not been released, it is uncertain how the measures will be interpreted and implemented. We have sorted and cataloged data we process and will take further measures as required.

On July 7, 2022, the CAC promulgated the Measures on Security Assessment of Outbound Data Transfer (《數據出境安全評估辦法》), or the Measures on Security Assessment of Outbound Data Transfer, effective September 1, 2022. These measures shall apply to the security assessment of the provision of important data and personal information collected and generated by data processors in the course of their operations within the territory of the PRC by such data processors to overseas recipients, or the outbound data transfer. Where there are other provisions in laws and administrative regulations, such other provisions shall prevail. These Measures specify that an outbound data transfer by a data processor that falls under any of the following circumstances, the data processor shall apply to the CAC for the security assessment via the local provincial-level cyberspace administration authority: (i) outbound transfer of important data by a data processor; (ii) outbound transfer of personal information by a critical information infrastructure operator or a personal information processor who has processed the personal information of more than 1,000,000 people; (iii) outbound transfer of personal information by a personal information processor who has made outbound transfers of the personal information of 100,000 people cumulatively or the sensitive personal information of 10,000 people cumulatively since January 1 of the previous year; or (iv) other circumstances where an application for the security assessment of an outbound data transfer is required as prescribed by the CAC. There is no outbound data transfer involved during our daily business operations.

On February 22, 2023, the Cyberspace Administration of China issued the Measures for Standard Contract for Outbound Data Transfer of Personal Information (《個人信息出境標準合同辦法》), which will come into effect on June 1, 2023. The measures provide a transitional period of six months from the effective date for companies to take necessary measures to comply with the requirements. According to the measures, in the cases where a personal information processor provides personal information abroad by concluding a standard contract, the contract should be concluded in strict compliance with the form Standard Contract, which is attached as an annex to the measures. The measures further provide that personal information processors may agree on other terms with overseas recipients, but they should not conflict with the Standard Contract. According to the measures, the personal information processor should within ten working days from the effective date of the standard contract, file with the local provincial network information department and submit the standard contract and personal information protection impact assessment report for record.

The relevant regulatory authorities in China continue to monitor websites and apps in relation to the protection of personal information and data, privacy and information security, and may impose additional requirements from time to time. There are uncertainties as to the interpretation and application of laws in one jurisdiction which may be interpreted and applied in a manner inconsistent to another jurisdiction and may conflict with our current policies and practices or require changes to the features of our system. As a result, we cannot assure that our existing user information protection system and technical measures will be considered sufficient under all applicable laws and regulations. If we are unable to address any information protection concerns, any compromise of security that results unauthorized disclosure or transfer of personal data, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and result in governmental enforcement actions, litigation, fines and penalties or adverse publicity and could cause our borrowers and institutional partners to lose trust in us, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

We collect, process and store significant amounts of personal information and data concerning our borrowers and investors, as well as personal information and data pertaining to our business partners and employees. Compliance with applicable personal data and data security laws and regulations is a rigorous and time-intensive process. As global data protection laws and regulations increase in number and complexity, we cannot assure you that our data protection systems will be considered sufficient under all applicable laws and regulations due to factors including the uncertainty of the interpretation and implementation of these laws and regulations. Furthermore, we cannot assure you that the information we receive from our third-party data partners are obtained and transmitted to us in full compliance with relevant laws and regulations. Moreover, there could be new laws, regulations or industry standards that require us to change our business practices and privacy policies, and we may also be required to put in place additional mechanisms ensuring compliance with new data protection laws, all of which may increase our costs and materially harm our business, prospects, financial condition and results of operations. We will actively monitor future regulatory and policy changes to ensure strict compliance with all then applicable laws and regulations. However, as the regulatory authorities have wide discretion on the interpretation and implementation of the applicable laws and regulations, we cannot assure you that the regulatory authorities will form the similar opinions as ours. Any failure or perceived failure by us to comply with applicable laws and regulations could result in reputational damage or proceedings or actions against us by governmental entities, individuals or others. These proceedings or actions could subject us to significant civil or criminal penalties and negative publicity, result in the delayed or halted processing of personal data that we need to undertake to carry on our business, as well as the forced transfer or confiscation of certain personal data.

 

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Our shareholding structure is subject to further change, which could dilute the interests of existing shareholders or have a material adverse effect on our share price, our ability to raise funds and our funding costs.

On September 30, 2020, we issued Automatically Convertible Notes and Optionally Convertible Notes in a total principal amount of US$1,361,925,000 to certain holders of our Class C ordinary shares, in exchange for a total of 45,287,111 Class C ordinary shares held by them. The Automatically Convertible Notes were converted into 7,566,665 ordinary shares upon the closing of our initial public offering in the United States in November 2020. Taking into account the dividend announced on March 13, 2023, the Optionally Convertible Notes can be converted into an aggregate of 44,495,717 ordinary shares up to the Latest Practicable Date. For further details of Automatically Convertible Notes and Optionally Convertible Notes, see “History and Corporate Structure—Major Shareholding Changes of the Company and Our Principal Subsidiaries—Shareholding changes of the Company—C-Round Restructuring Convertible Notes.” In October 2015, in connection with our acquisition of the retail credit and enablement business from Ping An Insurance, we issued Ping An Convertible Promissory Notes in a total principal amount of US$1,953.8 million to Ping An Overseas Holdings, and subsequently Ping An Overseas Holdings agreed to transfer US$937.8 million of the outstanding principal amount of the Ping An Convertible Promissory Notes and all rights, benefits and interests attached thereunder to An Ke Technology. In December 2022, the Company, Ping An Overseas Holdings and An Ke Technology entered into an amendment and supplemental agreement to amend the terms of the Ping An Convertible Promissory Notes, pursuant to which the Company agreed to redeem 50% of the outstanding principal amount of the Ping An Convertible Promissory Notes from Ping An Overseas Holdings and An Ke Technology, and the remaining outstanding principal amount of the Ping An Convertible Promissory Notes can be converted into the Shares at any time from April 30, 2026 until the date which is five business days before (and excluding) October 8, 2026, at an initial conversion price of US$14.8869 per ordinary share subject to certain adjustments as set forth in each of the Ping An Convertible Promissory Notes. For further details of Ping An Convertible Promissory Notes, see “History and Corporate Structure—Major Shareholding Changes of the Company and Our Principal Subsidiaries—Shareholding changes of the Company—Convertible Promissory Notes Issued to Ping An Overseas Holdings and An Ke Technology.” As of the Latest Practicable Date, options to purchase a total of 14,226,039 ordinary shares and performance share units to receive a total of 2,271,573 ordinary shares are outstanding under the Share Incentive Plans. In the event that the conversion of the Optionally Convertible Notes, the conversion of the Ping An Convertible Promissory Notes, exercise of the outstanding options or the vesting of performance share units happens, our shareholding structure may change and the shareholding percentage of our existing Shareholders and investors will be diluted.

Further, the CBIRC promulgated the Measures for the Supervision and Administration of Insurance Group Companies on November 24, 2021 to strengthen the supervision and management of insurance companies. The measures restated that an insurance group company cannot hold a more than 25% shareholding in a non-financial enterprise or have a material influence in a non-financial enterprise, with certain exceptions. Ping An Insurance is one of our principal shareholders. As of the Latest Practicable Date, the total of all the Shares beneficially owned by Ping An Insurance, through An Ke Technology and Ping An Overseas Holdings, is approximately 41.4% of our issued and outstanding Shares. As the measures are relatively new, there are still uncertainties regarding its interpretation and implementation. If the government authorities determine that we are a non-financial enterprise, Ping An Insurance may need to adjust its shareholding percentage in our company. In the event that Ping An Insurance ceases to be our Controlling Shareholder, we believe that the Group can continue to maintain its collaborative relationship with Ping An Group on an on-going basis as our business and the business of Ping An Insurance are complementary and our business cooperation with Ping An Group is mutually beneficial. Through such cooperations, Ping An Group will continue to benefit from the revenue generated from the service fees charged for the provision of credit enhancement services to the borrowers we enable and the fees charged for the provisions of other services and products to us as disclosed in the section headed “Connected Transactions”. In addition, Ping An Group will also continue to benefit from the services and products we provide to them as disclosed in the section headed “Connected Transactions”. However, change in Ping An Insurance’s shareholding in our company could have a material adverse effect on our share price, our ability to raise funds and our funding costs.

We have granted, and may continue to grant, share options and other forms of share-based incentive plans, which may result in increased share-based compensation expenses.

We have adopted the Share Incentive Plans for the purposes of attracting and retaining the best available personnel by linking the personal interests of our employees to our success and by providing such individuals with an incentive for outstanding performance to generate superior returns for the Shareholders. As of the Latest Practicable Date, options to purchase a total of 14,226,039 ordinary shares and performance share units to receive a total of 2,271,573 ordinary shares are outstanding under the Share Incentive Plans. In 2020, 2021 and 2022, we recorded share-based compensation expenses of RMB165 million, RMB133 million and RMB46 million (US$6.6 million), respectively. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation 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.

 

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RISKS RELATING TO DOING BUSINESS IN CHINA

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.

We are a company incorporated under the laws of the Cayman Islands. However, we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, most of our senior executive officers reside within China for a significant portion of the time and many of them are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or our management inside mainland China. It may also be difficult for you to enforce the judgments obtained in Hong Kong courts against us and our officers and Directors as none of them currently resides in Hong Kong or has substantial assets located in Hong Kong. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of Hong Kong courts against us or such persons predicated.

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 and other applicable laws, regulations and interpretations based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or the Directors 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 Hong Kong.

In addition, the SEC, the U.S. Department of Justice and other U.S. or foreign authorities may also have difficulties in bringing and enforcing actions, conducting investigations or collecting evidence against us or our directors or executive officers in China. For example, under the newly amended Securities Law of the PRC (《中華人民共和國證券法》), effective March 1, 2020, overseas securities regulatory authorities are prohibited from conducting direct investigations or evidence collection activities within the territories of the PRC, and Chinese entities and individuals are prohibited from providing documents and information in connection with any securities business activities to any organizations and/or persons aboard without the prior consent of the securities regulatory authority of the State Council and the competent departments of the State Council. Uncertainty remains with respect to how this regulation will be interpreted, implemented or applied by the CSRC or other relevant government authorities. On February 24, 2023, the China Securities Regulatory Commission, the State Secrecy Bureau, the State Archives Administration and the Ministry of Finance jointly promulgated the Provisions on Strengthening the Confidentiality and File Management Work Related to Overseas Issuance and Listing of Securities by Domestic Enterprises（《關於加強境內企業境外發行證券和上市相關保密和檔案管理工作的規定》） , effective March 31, 2023, together with the Trial Measures, and would replace the Provisions on Strengthening Confidentiality and Archives Administration in Overseas Issuance and Listing of Securities issued in 2009. The provisions aim to develop a gatekeeping mechanism in provision of information by domestic enterprises to the relevant securities companies, securities service institutions, overseas regulatory authorities or other entity or individual, so as to prevent sensitive information from leakage and prescribe protective protocols for any residual sensitive information that still has to be provided.

 

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The approval of and filings with the CSRC or other PRC government authorities may be required in connection with our offshore listings under PRC law, and, if required, we cannot predict whether we will be able to obtain such approval or complete such filings or how long they might take.

The M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, require 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 listings 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 approval could be rescinded. Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore listings, or a rescission of such approval if obtained by us, would subject us to sanctions imposed by the CSRC 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 China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.

On July 6, 2021, the PRC government authorities issued the Opinions on Strictly Scrutinizing 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.

On February 17, 2023, the CSRC released a set of regulations consisting of 6 documents, including the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises（《境內企業境外發行證券和上市管理試行辦法》） , or the Trial Measures, and 5 supporting guidelines（5項配套指引）, collectively, the Filing Measures, effective March 31, 2023. The Filing Measures establish a new filing-based regime to regulate overseas offerings and listings by domestic companies. According to the Filing Measures, PRC domestic companies that seek to offer and list securities in overseas markets, either in direct or indirect means, are required to fulfill the filing procedure with the CSRC and report relevant information. The Trial Measures also sets certain regulatory red lines for overseas offerings and listings by domestic enterprises. Furthermore, after offering or listing, the company shall report material events to the CSRC within three working days after the occurrence and announcement of certain events, including, among other things, the change of control, investigation or penalties imposed by relevant authorities, the conversion of listing status or the transfer of listing board. Failure to comply with the filing or reporting requirements for any offering, listing or any other capital raising activities, may result in fines and other penalties on the companies, the controlling shareholder and other responsible persons. For more details of the Filing Measures, see “Regulatory Overview—Regulations Relating to M&A Rules and Overseas Listing.”

On February 17, 2023, the CSRC also held a press conference for the release of the Trial Measures and issued the Notice on Administration for the Filing of Overseas Offering and Listing by Domestic Companies (關於境內企業境外發行上市備案管理安排的通知), which, among others, clarifies that the domestic companies that have already been listed overseas before the effective date of the Trial Measures (i.e., March 31, 2023) shall be deemed as existing applicants (存量企業) (the “Existing Applicants”). Existing applicants are not required to complete the filing procedures immediately, and they shall be required to file with the CSRC when subsequent matters such as refinancing are involved. In addition, a six- month transition period will be granted to domestic companies which, prior to the effective date of the Trial Measures, have already obtained the approval from overseas regulatory authorities or stock exchanges (such as pass of hearing for listing in Hong Kong or the effectiveness of registration statement for listing in the U.S.), but have not completed the indirect overseas listing; if such domestic companies complete their overseas offering and listing within such six-month period (i.e., before September 30, 2023), they will be deemed as Existing Applicants. Within such six-month transition period, however, if such domestic companies need to re-apply for offering and listing procedures to the overseas regulatory authority or securities exchanges (such as being required to go through a new hearing procedure in Hong Kong), or if they fail to complete their indirect overseas issuance and listing, such domestic companies shall complete the filing procedures with the CSRC within three business days after submitting valid applications for overseas offering and listing. Furthermore, for the overseas listing of companies with contractual arrangements (VIE structure), the CSRC will solicit opinions from relevant regulatory authorities and complete the filing of the overseas listing of companies with these domestic companies which duly meet their compliance requirements, and support their development and growth by enabling them to utilize both markets and their resources.

 

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If we fail to file with the CSRC in a timely manner or at all, for any future offering (including, among others, follow-on offerings, issuance of convertible corporate bonds and exchangeable bonds, and other equivalent offering activities) pursuant to the Filing Measures due to our contractual arrangements, our ability to raise or utilize funds could be materially and adversely affected, and we may even need to unwind our contractual arrangements or restructure our business operations to rectify the failure to complete the filings. However, as the Filing Measures were recently promulgated, there remain substantial uncertainties as to their interpretation, application, and enforcement and how they will affect our operations and our future financing.

Relatedly, on December 27, 2021, the NDRC and the Ministry of Commerce jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which became effective on January 1, 2022. Pursuant to that, 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. On January 18, 2022, the spokesperson of the NDRC in a press conference confirmed that the foresaid provision is only applicable to the direct listing of domestic enterprises involving in industries prohibited for foreign investment under the 2021 Negative List. Nevertheless, as the 2021 Negative List is relatively new, there remain substantial uncertainties as to the interpretation and implementation of these new requirements, and it is unclear as to whether and to what extent listed companies like us will be subject to these new requirements. If we are required to comply with these requirements and fail to do so on a timely basis, if at all, our business operation, financial conditions and business prospect may be adversely and materially affected.

On February 24, 2023, the CSRC, jointly with other relevant governmental authorities, promulgated the revised Provisions on Strengthening Confidentiality and Archives Management of Overseas Securities Issuance and Listing by Domestic Enterprises, or the Confidentiality and Archives Management Provisions, effective March 31, 2023. According to the Confidentiality and Archives Management Provisions, domestic companies, whether offering and listing securities overseas directly or indirectly, must strictly abide by the applicable laws and regulations when providing or publicly disclosing, either directly or through their overseas listed entities, documents and materials to securities services providers such as securities companies and accounting firms or overseas regulators in the process of their overseas offering and listing. If such documents or materials contain any state secrets or governmental authorities work secrets, domestic companies must obtain the approval from competent governmental authorities according to the applicable laws, and file with the secrecy administrative department at the same level with the approving governmental authority. Furthermore, the Confidentiality and Archives Management Provisions also provides that securities companies and securities service providers shall also fulfill the applicable legal procedures when providing overseas regulatory institutions and other relevant institutions and individuals with documents or materials containing any state secrets or governmental authorities work secrets or other documents or materials that, if divulged, will jeopardize national security or public interest.

On November 14, 2021, the CAC published the Draft Administration Regulations on Cyber Data Security, which reiterates that a cybersecurity review will be imposed on the data processor who process personal information of one million or more users and apply for foreign listing. The cybersecurity review requirements would not apply to data processors who intend to list in Hong Kong unless the listing has or may have an impact on national security. As advised by our PRC Legal Adviser, the Draft Administration Regulations on Cyber Data Security were released for public comment only, and their provisions and anticipated adoption or effective date may be subject to change and thus their interpretation and implementation remain substantially uncertain. On December 28, 2021, the CAC, jointly with other 12 governmental authorities, promulgated the revised Measures for Cybersecurity Review (《網絡安全審查辦法》), which among others, stipulate that an online platform operator with personal information of over one million users that intends to apply for foreign listing must be subject to the cybersecurity review. These regulations remain unclear on whether the relevant requirements will be applicable to companies that have been listed in the United States and intend to apply for listing on the Hong Kong Stock Exchange. We cannot predict the impact of the Measures for Cybersecurity Review and the Draft Administration Regulations on Cyber Data Security, if any, at this stage, and we will closely monitor and assess any development in the rule-making process.

 

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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 Cybersecurity Review Measures, are required for our offshore listings, 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 listings, 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 listings. 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 listings 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 listings 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 listings, 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.

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 other currencies, including Hong Kong dollars and U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the Hong Kong dollar and U.S. dollar, at times significantly and unpredictably. The value of Renminbi against Hong Kong dollar, 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 Hong Kong dollar and 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. Our exchange differences on translation of foreign operations amounted to RMB614.7 million, RMB28.3 million, negative RMB1.6 billion (US$230.1 million) in 2020, 2021 and 2022, respectively.

Substantially all of our income and expenses are denominated in Renminbi and our reporting currency is Renminbi. Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from our financings into Renminbi for our operations, appreciation of the Renminbi against U.S. dollar would reduce the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert Renminbi into Hong Kong dollars or U.S. dollars for the purpose of paying dividends or for other business purposes, appreciation of Hong Kong dollar or U.S. dollar against the Renminbi would reduce Hong Kong dollar or U.S. dollar amount available to us.

Few hedging options are available in China to reduce our exposure to exchange rate fluctuations. We have only engaged in limited hedging activities to date, in connection with our obligations under our syndicated loan. While we may decide to enter into additional hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to hedge our exposure adequately 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.

Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.

Pursuant to the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States.

 

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On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong and our auditor was subject to that determination. In May 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. For this reason, our Directors are of the view that we do not expect to be identified as a Commission-Identified Issuer under the HFCAA after we file our annual report on Form 20-F for the fiscal year ended December 31, 2022 in April 2023. Based on the Directors confirmation above and after reviewing the announcement released by the PCAOB on December 15, 2022 and the statement released by the Chair of SEC on the same date, nothing has come to the attention of the Joint Sponsors that would cause them to disagree with the Directors’ view above.

Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the Securities and Exchange Commission, we would be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCAA, our securities would be prohibited from being traded on a national securities exchange or in the over-the-counter trading market in the United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that a market for our shares will develop outside of the United States. A prohibition of being able to trade in the United States would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk 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 raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.

RISKS RELATING TO OUR SHARES AND ADSS

The trading price of our Shares or ADSs is likely to be volatile, which could result in substantial losses to investors.

As of the Latest Practicable Date, the trading price of our ADSs has been volatile and has ranged from a high of US$19.72 to a low of US$1.40 since our ADSs started to trade on the NYSE on October 30, 2020. The trading price of our Shares, likewise, can be volatile for similar or different reasons after the Listing. Volatility in trading price can result from broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in Hong Kong or the United States. A number of Chinese companies have listed or are in the process of listing their securities on Hong Kong or U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in Hong Kong or the United States in general and consequently may impact the trading performance of our Shares or ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our Shares or ADSs may be highly volatile for factors specific to our own operations, including the following:

 

•

variations in our income, earnings and cash flow;

 

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announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

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announcements of new services and expansions by us or our competitors;

 

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changes in financial estimates by securities analysts;

 

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detrimental adverse publicity about us, our services or our industry;

 

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additions or departures of key personnel;

 

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expiration or release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

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changes in relations between Hong Kong or the United States and China; and

 

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potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our Shares or ADSs trade.

 

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In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their 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 and require us to incur significant expenses to defend the suit, which could harm our results of operations. 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.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our Shares or ADSs, the market price for our Shares or ADSs and trading volume could decline.

The trading market for our Shares or ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our Shares or ADSs, the market price for our Shares or ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our Shares or ADSs to decline.

Techniques employed by short sellers may drive down the market price of our Shares and/or ADSs.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.

Public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in the Shares and/or ADSs could be greatly reduced or even rendered worthless.

 

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The sale or availability for sale of substantial amounts of our Shares or ADSs could adversely affect their market price.

Sales of substantial amounts of our Shares or ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our Shares or ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in our initial public offering in the United States in 2020 are freely tradable without restriction or further registration under the U.S. Securities Act of 1933, and other Shares held by our existing Shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the U.S. Securities Act of 1933. As of the Latest Practicable Date, we had 1,146,108,643 ordinary shares issued and outstanding (excluding Shares underlying the ADSs repurchased by the Company pursuant to the share repurchase programs and Shares issued to the Depositary for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of options or awards granted under the Share Incentive Plans), of which 474,905,000 ordinary shares, or 41.4%, were held by members of the Ping An Group. Upon our listing on the Hong Kong Stock Exchange, Shares held by our existing Shareholders (other than our Controlling Shareholders) are not subject to any lock-up. We cannot predict what effect, if any, market sales of securities held by our Shareholders or the availability of these securities for future sale will have on the market price of our Shares or ADSs.

Because the amount, timing, and whether or not we distribute dividends at all is entirely at the discretion of our Board, you must rely on price appreciation of our Shares or ADSs for return on your investment.

We paid a cash dividend to our Shareholders of US$0.68 per Share in April 2022 based on our net profits for the financial year 2021. We announced a new policy of paying a semi-annual dividend equal to between 20% and 40% of our net profits for each six-month period, and our first dividend under the new policy was a cash dividend US$0.34 per Share paid to Shareholders in October 2022. Based on our current policy, the amounts of dividends will vary based on the existence and amount of net profits that we can generate. In addition, the amount, timing, and whether or not we actually distribute dividends at all remains entirely at the discretion of our Board. Our Board has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Our Board may revise our dividend policy, as it has already done once, or it may choose to cancel our dividend policy entirely. In addition, our Shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by the Directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our Board decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board. Accordingly, the return on your investment in our Shares or ADSs will likely depend entirely upon any future price appreciation of our Shares or ADSs. There is no guarantee that our Shares or ADSs will appreciate in value after the Listing or even maintain the price at which you purchased our Shares or ADSs. You may not realize a return on your investment in our Shares or ADSs, and you may even lose your entire investment in our Shares or ADSs.

You may face difficulties in protecting your interests, and your ability to protect your rights through Hong Kong or U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (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 responsibilities of the 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 responsibilities of the Directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in Hong Kong or some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than Hong Kong or 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 Hong Kong court or a federal court of the United States.

 

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Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records, other than copies of the memorandum and articles of association, the register of mortgages and charges and any special resolutions passed by our shareholders, or to obtain copies of lists of shareholders of these companies. The Directors have discretion under our 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, save that any register held in Hong Kong shall during normal business hours (subject to such reasonable restrictions as the Board may impose) be open to inspection by our Shareholder without charge and any other person on payment of a fee of such amount not exceeding the maximum amount as may from time to time be permitted under the Listing Rules as the Board may determine for each inspection, provided that we may be permitted to close the register in terms equivalent to section 632 of the Companies Ordinance. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other Shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as Hong Kong and the United States. We have chosen to rely on the home country exemption from Section 303A.08 of the NYSE Listed Company Manual, which requires that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto. In this respect, and in other respects if we choose to follow home country practice in other respects in the future, our Shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

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, the Board member or Controlling Shareholders than they would as public shareholders of a company incorporated in Hong Kong or the United States.

Certain judgments obtained against us by our Shareholders may not be enforceable.

We are a Cayman Islands company and substantially all of our assets are located outside of Hong Kong and the United States. Substantially all of our current operations are conducted in China. In addition, a majority of our current Directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside Hong Kong or the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in Hong Kong or the United States in the event that you believe that your rights have been infringed under the Hong Kong securities laws or 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 China may render you unable to enforce a judgment against our assets or the assets of the Directors and officers.

We will incur increased costs as a result of listing in Hong Kong.

We are now a public company in the United States and 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 U.S. SEC and the NYSE, impose various requirements on the corporate governance practices of public companies. These rules and regulations increase our legal and financial compliance costs and make some corporate activities more time-consuming and costly. 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. After we become a public company listed on the Stock Exchange, we will be subject to laws, rules and regulations in Hong Kong as well. As a dual listed company in Hong Kong and the United States, we will have to comply with laws and regulations on both markets. However, Hong Kong and the United States have different regulatory regime governing matters related to listed companies and in certain cases have fairly different requirements on certain matters. We will incur additional costs and expenses in complying with the complex regulatory systems on both markets. Failure to comply with any regulatory requirements could result in material adverse impact on the trading of our Share or ADSs and reputation and subject us to administrative penalties.

 

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ADS holders may not receive dividends or other distributions on our Shares and ADS holders may not receive any value for them, if it is illegal or impractical to make them available to them.

The Depositary of our ADSs has agreed to pay ADS holders the cash dividends or other distributions it or the custodian receives on Shares or other deposited securities represented by our ADSs, after deducting its fees and expenses. ADS holders will receive these distributions in proportion to the number of Shares represented by the ADSs. 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 U.S. Securities Act of 1933 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 Hong Kong or U.S. securities laws any ADSs, 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, Shares, rights or anything else to holders of ADSs. This means that ADS holders may not receive distributions we make on our Shares or any value for them if it is illegal or impractical for us to make them available to ADS holders. These restrictions may cause a material decline in the value of our Shares or ADSs.

RISKS RELATING TO THE DUAL LISTING

The liquidity of our Shares on the Stock Exchange could be limited and the effectiveness of the Liquidity Arrangements is subject to limitations.

Our Shares have not been traded on the Stock Exchange before the Introduction and there could be limited liquidity in our Shares on the Stock Exchange. We cannot assure you that an active trading market for our Shares on the Stock Exchange will develop or be sustained. In addition, there is no assurance that the price at which Shares are traded on the Main Board of the Stock Exchange will be substantially the same as or similar to the per-share equivalent price at which our ADSs are traded on NYSE or that any particular volume of Shares will trade on the Main Board of the Stock Exchange. If an active trading market of our Shares in Hong Kong is not developed or is not sustained after the Introduction, the market price and liquidity of our Shares on the Stock Exchange could be materially and adversely affected.

Throughout the Designated Period, the Designated Dealers intend to implement certain bridging and liquidity arrangements as set out in the section headed “Listings, Registration, Dealings and Settlement—Proposed Liquidity Arrangements.” While such arrangements are expected to contribute towards liquidity to meet demand for our Shares in Hong Kong and to maintain a fair and orderly market, investors should be aware that such bridging and liquidity arrangements are subject to the Designated Dealers’ ability to obtain sufficient numbers of our Shares to meet demand. There is no guarantee that such bridging and liquidity arrangements will attain and/or maintain liquidity in our Shares at any particular level on the Hong Kong Stock Exchange, nor is there any assurance that the price of our Shares in Hong Kong will not exhibit significant volatility.

The Liquidity Arrangements being implemented in connection with the Introduction are not equivalent to price stabilization activities that are frequently undertaken in connection with initial public offering on the Stock Exchange or other markets. The bridging and liquidity arrangements will terminate and cease to continue beyond the Designated Period. Accordingly, there may be volatility in the Hong Kong market after the Designated Period.

An active trading market for our Shares on the Stock Exchange might not develop or be sustained and trading prices of our Shares might fluctuate significantly.

Following the completion of the Listing, we cannot assure you that an active trading market for our Shares on the Stock Exchange will develop or be sustained. The trading price or liquidity for the ADSs on the New York Stock Exchange might not be indicative of those of our Shares on the Stock Exchange following the completion of the Listing. If an active trading market of our Shares on the Stock Exchange does not develop or is not sustained after the Listing, the market price and liquidity of our Shares could be materially and adversely affected.

 

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In 2014, the Hong Kong, Shanghai, and Shenzhen stock exchanges collaborated to create an inter-exchange trading mechanism called Stock Connect that allows international and PRC investors to trade eligible equity securities listed in each other’s markets through the trading and clearing facilities of their home exchange. Stock Connect currently covers over 2,000 equity securities trading in the Hong Kong, Shanghai, and Shenzhen markets. Stock Connect allows PRC investors to trade directly in eligible equity securities listed on the Stock Exchange, known as Southbound Trading; without Stock Connect, PRC investors would not otherwise have a direct and established means of engaging in Southbound Trading. However, there remains uncertainty as to the implementation details, especially with respect to shares of those companies with a secondary or dual-primary listing on the Stock Exchange. It is unclear whether and when the Shares of the Company, a company with a dual-primary listing in Hong Kong upon the Listing, will be eligible to be traded through Stock Connect, if at all. The ineligibility or any delay of our Shares for trading through Stock Connect will affect PRC investors’ ability to trade our Shares and therefore may limit the liquidity of the trading of our Shares on the Stock Exchange.

The characteristics of the U.S. capital markets and the Hong Kong capital markets are different.

The New York Stock Exchange and the Stock Exchange have different trading hours, trading characteristics (including trading volume and liquidity), trading and listing rules, and investor bases (including different levels of retail and institutional participation). As a result of these differences, the trading prices of our Shares and the ADSs representing them might not be the same, even allowing for currency differences. Fluctuations in the price of the ADSs due to circumstances peculiar to its home capital market could materially and adversely affect the price of the Shares. Because of the different characteristics of the U.S. and Hong Kong equity markets, the historic market prices of the ADSs may not be indicative of the performance of our securities (including the ordinary shares) after the Listing.

Exchange between our Shares and the ADSs may adversely affect the liquidity or trading price of each other.

The ADSs are currently traded on the New York Stock Exchange. Subject to compliance with U.S. securities laws and the terms of the deposit agreement, holders of our Shares may deposit Shares with the Depositary in exchange for the issuance of the ADSs. Any holder of ADSs may also withdraw the underlying Shares represented by the ADSs pursuant to the terms of the deposit agreement for trading on the Stock Exchange. In the event that a substantial number of Shares are deposited with the Depositary in exchange for ADSs or vice versa, the liquidity and trading price of our Shares on the Stock Exchange and the ADSs on the New York Stock Exchange may be adversely affected.

The time required for the exchange between our Shares and the ADSs might be longer than expected and investors might not be able to settle or effect any sale of their securities during this period, and the exchange of Shares into ADSs involves costs.

There is no direct trading or settlement between the New York Stock Exchange and the Stock Exchange on which the ADSs and our Shares are respectively traded. Subject to compliance with U.S. securities laws and the terms of the deposit agreement, holders of our ordinary shares may deposit Shares with the Depositary in exchange for the issuance of the ADSs. In addition, the time differences between Hong Kong and New York, unforeseen market circumstances, or other factors may delay the deposit of Shares in exchange for the ADSs or the withdrawal of the underlying Shares represented by the ADSs. Investors will be prevented from settling or effecting the sale of their securities during such periods of delay. In addition, we cannot assure you that any exchange for Shares into ADSs (and vice versa) will be completed in accordance with the timelines that investors may anticipate.

Furthermore, the Depositary is entitled to charge the ADSs holders fees for various services including for the issuance of ADSs upon deposit of Shares, cancelation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs, and annual service fees. As a result, Shareholders who exchange Shares into ADSs, and vice versa, may not achieve the level of economic return the Shareholders may anticipate.

 

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There is uncertainty as to whether Hong Kong stamp duty will apply to the trading or conversion of our ADSs following our Listing of our Shares on the Stock Exchange.

In connection with the Listing, we will establish a branch register of members in Hong Kong, or the Hong Kong Share Register. Our Shares that are traded on the Stock Exchange, including those that may be converted from ADSs, will be registered on the Hong Kong Share Register, and the trading of these Shares on the Stock Exchange will be subject to the Hong Kong stamp duty. To facilitate ADS-ordinary share conversion and trading between the NYSE and the Hong Kong Stock Exchange, we also intend to move a portion of our issued ordinary shares from our register of members maintained in the Cayman Islands to our Hong Kong share register.

Under the Hong Kong Stamp Duty Ordinance, any person who effects any sale or purchase of Hong Kong stock, defined as stock the transfer of which is required to be registered in Hong Kong, is required to pay Hong Kong stamp duty. The stamp duty is currently set at a total rate of 0.26% of the greater of the consideration for, or the value of, shares transferred, with 0.13% payable by each of the buyer and the seller. See “Listings, Registration, Dealings and Settlement—Dealings and Settlement—Settlement of dealings in Hong Kong.”

To the best of our knowledge, Hong Kong stamp duty has not been levied in practice on the trading or conversion of ADSs of companies that are listed in both the United States and Hong Kong and that have maintained all or a portion of their shares, including underlying shares represented by ADSs, in their Hong Kong share registers. However, it is unclear whether, as a matter of Hong Kong law, the trading or conversion of ADSs of these dual-listed companies constitutes a sale or purchase of the underlying Hong Kong-registered shares that is subject to Hong Kong stamp duty. We advise investors to consult their own tax advisors on this matter. If Hong Kong stamp duty is determined by the competent authority to apply to the trading or conversion of our ADSs, the trading price and the value of your investment in our Shares and/ or ADSs may be affected.

We may be subject to securities litigation, which is expensive and could divert management attention.

Companies that have experienced volatility in the volume and market price of their shares have been subject to an increased incidence of securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, and, if adversely determined, could have a material adverse effect on our business, financial condition and results of operations.

Forward-looking information in the Listing Document may be proved inaccurate.

The Listing Document contains certain forward-looking statements and information relating to us that is based on our management’s belief and assumptions. The words “anticipate,” “believe,” “expect,” “going forward” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Such statements reflect our management’s current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including the risk factors described herein. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our financial condition may be adversely affected and may vary materially from those described herein as anticipated, believed, estimated or expected. You are strongly cautioned that reliance on any forward- looking statements involves known or unknown risks and uncertainties. Subject to the requirements of the Listing Rules, we do not intend to publicly update or otherwise revise the forward-looking statements in the Listing Document, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed herein might not occur in the way we expect, or at all. In all cases, you should consider carefully how much weight or importance you should attach to, or place on, such facts or statistics.

 

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We strongly caution you not to place any reliance on any information contained in press articles or other media regarding us and the Introduction.

Before the publication of the Listing Document, there may be press and media coverage which contains certain information regarding the Introduction and us that is not set out in the Listing Document. We have not authorized the disclosure of such information in any press or media. We do not accept any responsibility for any such press or media coverage or the accuracy or completeness of any such information. We make no presentation as to the appropriateness, accuracy, completeness or reliability of any such information or publication. To the extent that any such information appearing in publications other than the Listing Document is inconsistent or conflicts with the information contained in the Listing Document, we disclaim it. Accordingly, prospective investors should not rely on any such information.

We cannot guarantee the accuracy of facts, forecasts and other statistics obtained from official governmental sources or other sources contained in the Listing Document.

Certain facts, statistics and data contained in the Listing Document relating to China and the industry in which we operate our business have been derived from various official government publications or other third-party reports we generally believe to be reliable. We have taken reasonable care in the reproduction or extraction of the official government publications for the purpose of disclosure in the Listing Document and have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. However, we cannot guarantee the quality or reliability of such source materials.

They have not been prepared or independently verified by us or the Joint Sponsors or any of their respective affiliates or advisors and, therefore, we make no representation as to the accuracy of such statistics, which may not be consistent with other information compiled within or outside China and Hong Kong. Due to possibly flawed or ineffective collection methods or discrepancies between published information and market practice, such statistics in the Listing Document may be inaccurate or may not be comparable to statistics produced with respect to other economies. Furthermore, we cannot assure you that they are stated or compiled on the same basis or with the same degree of accuracy as the case may be in other jurisdictions. In all cases, you should give due consideration as to how much weight or importance they should attach to or place on such facts.

 

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INDUSTRY OVERVIEW

 

 

THE SMB SEGMENT IN CHINA

Overview of SMBs and SBOs

Small and micro businesses (“SMBs”) are ubiquitous in China. According to the National Bureau of Statistics and State Administration for Market Regulation, whose definition of SMB depends to an extent on the type of business being conducted, there were approximately 143.5 million SMBs in China as of the end of 2021, of which 40.3 million were organized as legal entities and 103.2 million were operated by sole proprietors. Typically, SMBs have small scale operations, with fewer than 50 people and less than RMB30 million of annual income, and are dispersed across a wide range of industries and geographies. Moreover, SMBs have an average lifespan of less than five years. SMBs typically lack collateral to pledge or consistency in cash flow given their small scale and short lifespan.

 

Source: CIC Report

Small business owners (“SBOs”) include both owners of legal entities and individuals who conduct their businesses as sole proprietors. SBOs often own and operate multiple SMBs, either consecutively or concurrently, in the same or related industries and at different stages in their lifecycles. SBOs as individuals may have a much stronger credit profile than their businesses, with real estate, cars or other personal assets. At the end of 2021, the number of SBOs in China reached 119.6 million.

 

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SMBs are the backbone of the Chinese economy and enjoy strong national policy support. SMBs are responsible for over 60% of China’s GDP, over 80% of its job creation, and around 60% of its exports in 2021. The Chinese government uses a variety of policy tools to promote the development of SMBs, including the adoption of favorable policies such as innovation incentives, tax preferences and financing support.

Macro-level impacts, such as periodic outbreaks of COVID-19 and the resulting lockdowns as well as the resulting slower-than-expected economy recovery, have affected the business environment for SMBs. The SMB operating index, an indicator for SMBs’ overall monthly operations and development in China issued by the Economic Daily and the Postal Savings Bank of China, decreased from 50.6 in 2019 to 49.1 in the first half of 2022, reflecting that SMBs have not yet recovered to their pre-pandemic operation level.

The COVID-19 pandemic has placed great pressure on the revenue and operating costs of SMBs. According to a survey of one thousand SBOs conducted by CIC in December 2022, around 40% of respondents with increased financing needs during the COVID-19 period attributed the increase to declining revenue, and about 30% to higher operating costs. In the first quarter of 2022, due to lockdown measures taken by local governments, approximately 16% of China’s economy in terms of GDP and 11% of its population was directly affected, and the impact rose further to 23% and 20%, respectively, in the second quarter of 2022. According to the Ministry of Commerce, about 4.6 million business entities were deregistered in the first half of 2022. Despite the easing of COVID-19 restrictions over the summer, the percentage of China’s economy and population directly affected by lockdown measures still stood at 11% and 9%, respectively in the third quarter. According to a quarterly report on SMBs published by the Center for Enterprise Research of Peking University, SMBs’ revenue recovery ratio, calculated by comparing the operating revenue of SMBs in a given period against the corresponding period of 2019, reached its lowest point in the second quarter of 2022 at only 24.4%, compared to 28.1% in the third quarter of 2022 and 38.3% in the second quarter of 2021.

As a result of lower revenues and higher operating costs, profit margins continue to be squeezed and working capital conditions vary across SMBs. According to a quarterly report on SMBs published by the Center for Enterprise Research of Peking University, SMBs are generally tight on working capital, with only enough working capital for 2.6 months on average as of the end of June 2022, and 47.5% of SMBs claimed not to have enough working capital to sustain their business operations for over a month at that time.

 

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Challenges Faced by SMBs

SMBs and their owners face a variety of financial and operational challenges:

 

•

Limited access to financing: According to the survey of SBOs conducted by CIC in December 2022, 95.3% of the respondents indicated that current available funding meets less than half of their total financing needs. With neither eligible collaterals nor organized and reliable business and financial records, traditional financial institutions are reluctant to extend financial support to SMBs, especially for loans with larger ticket size. The most common channel for SBOs to obtain financing is through borrowing from their friends and other private lending sources, while borrowing from banks and fintech companies is less common due to the above reasons. This issue is more pronounced for SBOs in lower-tier cities, as these areas have lower bank branch coverage rates and technology penetration rates.

 

•

Lack of strong credit profile and financial record: Traditional banks generally require SBO borrowers to provide assets as collateral in order to extend financing to them. However, given the small-scale operation and typically shorter business lifespan nature of SMBs, SBOs often lack the collateral that traditional banks require to assess credit under a conventional risk assessment framework. SBOs also typically lack the financial expertise to maintain systematic financial records, which makes it more difficult for banks to assess their creditworthiness.

 

•

Unfamiliarity with digitalization: In general, SBOs lack the ability to select and utilize appropriate digitalization tools for design, operational management, customer sourcing and converting customer data into meaningful insights. According to a report on SMBs enablement services demand published by the Center for SMB Financing Research of Renmin University, over 60% of SBOs rely on offline distribution channels for sales and marketing, which limits their customer coverage and efficiency.

 

•

Limited access to customers and partners: Most SBOs are only able to acquire customers in their focused geographies. Customer traffic acquisition is also becoming increasingly expensive for SBOs, as customer acquisition costs doubled from 2017 to 2021. SBOs tend to run their businesses independently, and they often lack networks and resources for collaborating with other business partners, which are key for business expansion and customer acquisition.

OVERVIEW OF THE SMB LOAN MARKET IN CHINA

Market Size

Although lenders may have their own definitions for SMB loans that differ from the standard applied by the National Bureau of Statistics, annual operating income is the most common criterion to determine whether a borrower is an SMB. SMB loans are usually defined as loans extended to businesses with an annual operating income of less than RMB30 million. The total outstanding balance of SMB loans in China totaled RMB50.3 trillion in 2021, having grown at a CAGR of 12.7% from 2017 to 2021, and it is expected to reach RMB84.9 trillion by 2026, representing a CAGR of 11.0%. Despite the importance of SMBs as a key driver for the Chinese economy, SMB loans only accounted for 26.0% of total financing in China in 2021.

 

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Source: CIC Report

The demand from SMBs for credit is expected to remain strong going forward. Considering the long-term positive outlook of the SMB segment, SMBs will continue to require external funding to support operating cash flow, customer acquisition and business expansion. SMBs also require financing solutions to cope with operational challenges and to navigate economic fluctuations, especially during and after the COVID-19 pandemic. There is also an increasing demand for digital transformation. An increasing number of SMBs are becoming more aware of how digitalization can improve their business processes. SMBs are expected to increase their investments in technology for various benefits, including deriving data insights that can potentially drive cost savings, increase productivity and generate market intelligence. Financial institutions are embracing technological innovation to enhance financial service offerings. With increased technology penetration, SMBs will also have more ability to apply for and obtain financing from channels outside of the traditional banking system, and online channels of traditional banks.

 

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Government Policies on SMBs

The PRC government has announced a number of favorable policies to help SMBs both before and during the pandemic. The People’s Bank of China had already lowered the criteria for inclusive SMB loans with lower reserve rate requirements for banks in January 2019, and the People’s Bank of China, the CBIRC, the Ministry of Finance, the NDRC and the MIIT have extended the repayment of inclusive SMB loans a number of times since June 2020. The CBIRC, the People’s Bank of China and the State Council have continued to encourage banks to prioritize the financing needs of SMBs with the issuance of several notices in 2022. In November 2022, the People’s Bank of China encouraged financial institutions to further reduce the effective annual interest rate of inclusive SMB loans by 1% in the fourth quarter of 2022 for the outstanding loans and new loans. Additionally, People’s Bank of China, the CBIRC, the Ministry of Finance, the NDRC, the MIIT, and the SAMR jointly released “Notice on Further Increasing the Support for Deferred Repayment of Loan Principal and Interest by Micro and Small Businesses” (《關於進一步加大對小微企業貸款延期還本付息支持力度的通知》 ), which encouraged delayed repayment of principal and interest of SMB loans. The State Council has also issued policies supporting sole proprietors in 2022 which strengthen the protection of their property rights and call for financial support for them. Leading banks have responded to the government’s directive to support loans to SMBs by revising their SBO lending policies, adjusting their credit standards, and offering incentives as well as other financial support to improve financing access for SMBs in 2022. Towards the end of 2022, multiple regulators also included support to SMBs in their annual work plans. Financial institutions have been guided by the People’s Bank of China to further address the difficulties in SMB financing regardless of their ownership structure, and the CBIRC has continued promoting and improving the structure of SMB loans, encouraging loan issuance to first-time SMB loan borrowers. The PRC government has also issued various policies to support domestic consumption spending, including the “Opinions of the General Office of the State Council on Further Unleashing the Potential of Consumer Spending and Promoting the Sustained Recovery of Consumption” (《國務院辦公廳關於進一步釋放消費潛力促進消費持續恢復的意見》 ) in April 2022, which encouraged financial institutions to enhance financial support for entities severely impacted by the pandemic. In June 2022, the CBIRC and People’s Bank of China issued the “Notice of Strengthening Financial Services for New Urban Residents” (《關於加強新市民金融服務工作的通知》), which encouraged financial institutions to improve the availability and facilitation of financial services to new urban residents, including strengthening credit support and the level of insurance protection for their entrepreneurship and employment. The “Outline of the Plan for the Domestic Demand Expansion Strategy (2022-2035)” (《擴大內需戰略規劃綱要（2022-2035年）》) issued by the State Council in December 2022 also set the long-term goals to scale-up consumption and investment in China and build up an effective system to boost domestic demand.

Thanks to the PRC government’s favorable policies and support of inclusive finance, the unmet financing demand of SMBs has been declining from 2019 to 2021. Nevertheless, CIC has estimated that 46.7% of the financing demand of SMBs remained unmet in China in 2021. This translates to an unmet financing demand of RMB44.1 trillion as of the end of 2021, and this metric is expected to increase to RMB70.9 trillion in 2026, implying a CAGR of 9.9%.

OVERVIEW OF THE INCLUSIVE SMB LOAN MARKET IN CHINA

Market Size

Inclusive SMB loans are SMB loans that are extended to a single qualified borrower with a total credit line not exceeding RMB10 million, according to the CBIRC definition. At the end of 2021, the outstanding balance of inclusive SMB loans in China reached RMB20.8 trillion, representing over 41% of the total outstanding balance of loans to SMBs. The inclusive SMB loan market, like the SMB loan market as a whole, is served by both traditional financial institutions and non-traditional financial service providers. Traditional financial institutions offer loans to SMBs using their own funds and focus primarily on secured lending with collaterals. Non-traditional financial service providers, also known as enablers, mainly enable traditional financial institutions to distribute loans to SMBs by leveraging their customer access and risk management capabilities through co-lending, guarantee or loan facilitation models. Certain non-traditional financial service providers will also fund the loans that they enable.

From 2017 to 2021, inclusive SMB loans grew at a CAGR of 27.9%, while non-inclusive SMB loans grew at a much lower CAGR of only 5.9%. Going forward, inclusive SMB loans are expected to grow at a CAGR of 15.5% from 2021 to 2026, while non-inclusive SMB loans are expected to grow at a CAGR of 7.4% in the same period. The growth of inclusive SMB loans is driven by the increase in number of SMBs and the increase in loan penetration rate, supported by credit stimulus policy and the government’s directive to enhance credit support for small and micro sized businesses.

 

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Source: CIC Report

Funding Sources

The inclusive SMB loan market is funded by two key funding sources, namely traditional banks and other financial institutions. Traditional banks include state-owned banks, joint-stock banks, city and rural commercial banks, other rural financial institutions, such as rural credit unions. Other financial institutions include mainly trust companies, leasing and factoring companies, digital banks and small loan companies. As of the end of 2021, 84.1% of the outstanding inclusive SMB loans, or RMB17.5 trillion, were funded by traditional banks. Going forward, traditional banks are expected to remain as the main source for providing inclusive SMB loans.

Enablement

As of the end of 2021, RMB2.7 trillion of the outstanding balance of inclusive SMB loans had been enabled by non-traditional financial service providers. The outstanding balance of inclusive SMB loans enabled by non-traditional financial service providers is expected to reach RMB6.0 trillion by 2026, representing a CAGR of 17.7% from 2021, which is faster than the expected growth of the overall inclusive SMB loan market of 15.5% across the same period.

 

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Source: CIC Report

Under the co-lending model, non-traditional financial service providers are regulated to fund the loans issued to borrowers jointly with other funding parties, contributing at least 30% of funds for each loan enabled per the Notice of Further Regulating the Internet Loan Business of Commercial Banks (《關於進一步規範商業銀行互聯網貸款業務的通知》). Under the guarantee model, non-traditional financial service providers generally do not contribute funds and mainly provide credit enhancement against the borrowers’ default risk. Meanwhile, under the loan facilitation model, non-traditional financial service providers primarily provide customer and loan matching services to traditional financial institutions, and minimize their credit risk exposure. To promote a healthy development of the inclusive SMB loan market, which mainly comprises loans with larger ticket size and longer tenor compared to consumer loans, regulators encourage market participants, including non-traditional financial service providers, to take on risk management roles jointly with traditional financial institutions. Thus, the co-lending and guarantee models, in which non-traditional financial service providers take on more credit risk themselves, are likely to be more prevalent in the next five years.

For SMBs in need of more accessible financing services, the diversified products and services provided by non-traditional financial service providers allow them to access more flexible financing products in terms of ticket size, loan tenor, and collateral. For financial institutions in need of innovative solutions to their long-standing challenges, the technological expertise of non-traditional financial service providers can help them expand customer reach, reduce their customer acquisition cost, improve their products and services with multi-dimensional customer data, and enhance their risk management capabilities. Therefore, non-traditional financial service providers are expected to gain more market share in the inclusive SMB loan market. As of the end of 2021, loans enabled by non-traditional financial service providers contributed 12.9% of the total inclusive SMB loan market, an increase from 7.8% in 2017. This ratio is expected to increase to 14.1% by the end of 2026.

 

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Although the growth for loans enabled by non-traditional financial service providers is expected to be faster than the inclusive SMB loan market in the medium term, it is expected to experience a less aggressive growth from 2022 to 2023, as leading non-traditional financial service providers have proactively limited their new loan enablement as an initiative to control credit quality during the market downturn that has accompanied the COVID-19 pandemic. Some customers have also been attracted by offers from traditional banks, as banks are being encouraged by regulators to lower prime rates to extend unsecured loans to those SMBs that traditional banks are able to reach.

Going forward, SMBs are expected to experience strong recovery. The PRC government has provided a series of preferential policies and support measures to SMBs, including three months of rent reduction or exemption, promoting the clear-off of SMB accounts receivable, reducing or waiving taxes and fees, and delaying repayment of loans for SMBs affected by the epidemic, all of which have strengthened the confidence of SBOs in future operations. Overall, CIC expects that SMB operations will recover to pre-epidemic levels between 2024 and 2026, and the total number of SMBs is expected to reach 222.2 million in 2026, at a CAGR of 9.1% between 2021 and 2026.

COMPETITIVE LANDSCAPE ANALYSIS

Non-traditional financial service providers in the inclusive SMB loan market in China typically have the following features:

 

•

Customer acquisition either offline-to-online or online channels

 

•

Focus on serving customers in their parent companies’ respective ecosystems and also providing lifestyle services, if they are backed by internet companies

 

•

Application of both customer behavioral and financial data for risk pricing and credit assessment, but certain providers backed by internet companies have a higher reliance on the former

 

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Ranking

The inclusive SMB loan market in China is relatively concentrated, with the top five players, including MYbank, WeBank, Du Xiaoman Financial, JD Technology and our company, accounting for 67.7% of the total market. As of June 30, 2022, the Company ranked as the second largest player among non-traditional financial service providers in terms of outstanding balance of inclusive SMB loans, with a market share of 17.6%. The following table shows the ranking of the top five non-traditional financial service providers in China in terms of outstanding balance of inclusive SMB loans as of June 30, 2022:

 

 

Source: CIC Report

Notes:

 

1.

Represents the outstanding balance of loans to SMBs including loans to SBOs, who are the owners of SMBs, and excludes loans to retail borrowers. Market share is measured by each company’s outstanding balance of inclusive SMB loans, divided by the total outstanding balance of inclusive SMB loans enabled by non-traditional financial service providers. The data for the our competitors were primarily obtained through expert interviews conducted by CIC.

2.	Company A is a leading digital bank which is not publicly listed on any stock exchange and its total asset was RMB425.8 billion as of December 31, 2021.

3.	Company B is a leading digital bank which is not publicly listed on any stock exchange and its total asset was RMB438.7 billion as of December 31, 2021.

4.	Company C is a leading Fintech company which is not publicly listed on any stock exchange and its total asset is not disclosed to the public.

5.	Company D is a leading Fintech company which is not publicly listed on any stock exchange and its total asset is not disclosed to the public.

6.

The information presented in this table is derived from the market research report prepared by CIC, which was commissioned by us. It is not feasible for the Company to obtain consent from industry peers to publicly disclose their names due to the competitive relationships between the Company and other market players. CIC obtained information on the market players by conducting its own analysis and conducting interviews with key industry experts and leading industry participants on a confidential basis.

 

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Challenges Faced by Our Competitors

Traditional financial institutions face a number of common challenges when providing inclusive SMB loans:

 

•

Limited SMB risk management expertise: Many financial institutions may lack the required risk management capabilities to properly assess SBO risks. Additionally, they often have no access to borrowers’ social data, such as location data, shared contact information and voiceprint data, which leads to difficulties in forming accurate customer portraits. Due to these two reasons, financial institutions cannot effectively price the risks of SBO loans unless collateral is pledged, which increases the approval time required and reduces the approval rate. As of 2021, 81.9% of inclusive SMB loans originated by banks were secured loans.

 

•

Information asymmetry: Many traditional financial institutions continue to use conventional systems in the risk management process, which still require manual verification and a lengthy paperwork process. Therefore, they may face difficulties in effectively analyzing information and integrating the results in a holistic approach.

 

•

High customer acquisition costs: Many traditional financial institutions are burdened by heightening marketing and customer acquisition costs attributable to their offline and siloed marketing channels. Because of their unfamiliarity with leveraging online traffic and data, many traditional financial institutions lack effective budgeting mechanisms, channels, and technology to accurately reach target groups and acquire customers.

Meanwhile, other non-traditional financial service providers face a different set of challenges when providing inclusive SMB loans:

 

•

Limited SBO customer reach. Non-traditional financial service providers that achieve scale thanks to the backing of major internet companies usually focus on serving customers in their respective ecosystems. They have difficulty in reaching SBO customers outside of their own ecosystem, leading to limited insights and accumulation of multi-dimensional data on SBO customers. Furthermore, they generally have limited offline reach, as they often lack a sizeable offline sales force or effective marketing capabilities to increase customer engagement and achieve cross-sell and up-sell.

 

•

Lack of financial services background: Non-traditional financial service providers backed by internet companies do not necessarily possess financial expertise in analyzing credit. They typically also rely heavily on social behavioral data rather than financial data for pricing and credit assessment, which is a handicap in providing loans with larger ticket sizes.

 

•

Inability to appropriately price the risks of SMB loans: Most non-traditional financial service providers generally focus on providing small ticket-size and short-tenor loans. They often lack the risk management expertise to price the risks of longer tenor loans with larger ticket sizes which SMBs require, and thus it is challenging for them to provider outstanding customer experience with flexible product offerings in terms of ticket size, tenor and product type.

 

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Key success factors for achieving market share in the inclusive SMB loan market include:

 

•

Expertise in data collection, processing and analysis: The ability to collect relevant financial and behavioral data from SMBs and efficiently process, analyze and convert them into meaningful customer insights are key to achieving an understanding of SMB demand for financing and to properly assessing their risk profiles for effective credit decisioning.

 

•

Risk management capability: SMBs are dispersed across various industries and geographies and present a wide variety of different risk profiles given their diversified nature. Strong risk management and risk-analyzing capabilities are key to accurately pricing the risks of SMB loans.

 

•

Effective customer acquisition channel: The customer acquisition costs for SBOs are typically high. SBOs often require customized and personalized service to meet the particular needs of their businesses. A large offline sales network can offer personalized experience and can be more effective at acquiring customers than pure online interactions.

 

•

Strong customer engagement: While digital capabilities are critical for processing and analyzing data, it is equally important to maintain strong customer engagement to increase customer loyalty for other business opportunities, including non-credit related services and operational solutions. Companies that can meet the needs of SMBs in multiple areas can leverage those solutions and services to increase ongoing engagement.

ADDITIONAL FUTURE GROWTH OPPORTUNITIES

In addition to their demand for financing for their businesses, SBOs also demand other financial services such as consumer finance loans, and SMB insurance, as well as value-added operational services to facilitate their businesses, all of which present new potential for monetization.

Consumer Finance

Consumer finance loans refer to loans to individuals for the purpose of general consumption. This includes auto loans, credit cards and other consumer credit loans. Consumer finance loans are typically provided by traditional banks, consumer finance companies and auto finance companies. The total outstanding balance of consumer finance loans in China, excluding housing mortgage loans, grew from RMB9.7 trillion in 2017 to RMB16.6 trillion in 2021 at a CAGR of 14.4%, and it is expected to further grow to RMB25.2 trillion in 2026 at a CAGR of 8.8%. Growth in the consumer finance loan segment in China is mainly due to (i) the change in individual purchasing behavior which promotes the idea of “consumption in advance”, (ii) the development of the online consumer credit loan market, driven by the development of financial technologies and the popularity of e-commerce and mobile payment, and (iii) a favorable policy environment that encourages personal consumption to support the real economy.

 

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Source: CIC Report

Value-added Operational Services

Besides financial services, SBOs also demand value-added operational services to improve the operational performance of their businesses. SBO operational services refer to software or digital platform as-a-service that is designed to improve the SBO’s operating efficiency and to grow and expand its businesses. These generally include customer relationship management (“CRM”) software-as-a-service (“SaaS”), enterprise resource planning (“ERP”) SaaS, supply chain management (“SCM”) SaaS and financial management (“FM”) SaaS. Regulatory bodies have issued favorable policies and regulations in support of the digital transformation of SMBs. Continual technological innovation and digital transformation will increase both supply and demand of SaaS and other operational services. With the rapid development of e-commerce, the importance of customer relations management and other operational services will continue to increase. The combination of supportive policies and regulations, technological innovation, and the development of e-commerce and social media is expected to drive the demand by SBOs for a comprehensive suite of operational services to support their business growth. SBO operational services also create a synergetic effect to the financial ecosystem of non-traditional financial service providers, as these services increase the stickiness of customers and allow these providers to collect multi-dimensional customer behavior and financial data that may enhance their core systems and capabilities. The total market size of SBO operational services in China is RMB11.1 billion in 2021, of which 43.1% is the SBO CRM SaaS market, 37.0% is the SBO ERP SaaS market, 10.7% is the SBO FM SaaS market and 9.2% is the SBO SCM SaaS market. Driven by the rise of social media and the development of e-commerce industry, the SBO CRM SaaS market and SBO ERP SaaS market, both of which are the addressable markets the Company targets, will continue to constitute the majority of the total SBO operational services market, and the total market size is expected to increase to RMB40.7 billion in 2026, representing a CAGR of 29.8%.

 

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SMB Insurance

As the SMB segment continues to grow, SBOs are also expected to allocate more resources to SMB-related insurance products to protect for the downside risk of their businesses and potential loss. These include property, general liability and work-related injury insurance, which are mainly recognized as non-life insurance. Growth in SMB-related insurance market has been witnessed in developed countries over the past few years. Taking Germany, the United States and the UK as examples, the overall size of insurance premiums from the SMB segment reached US$25.5 billion, US$117.2 billion and US$10.9 billion in 2021, representing CAGRs of approximately 13.3%, 5.8% and 3.3% from 2017 to 2021, outpacing the growth of the overall industry at 3.4%, 5.0% and 0.3%, respectively. The contribution of premiums from the SMB segment to total insurance premiums in Germany, the United States and the UK also grew from approximately 6.9%, 7.0% and 2.4% in 2017 to over 10.0%, 7.2% and 2.7% in 2021, respectively. As the SMB segment continues to grow in China, it is anticipated that the growth of the SMB insurance market will also pick up accordingly, due to the demand for protection from the SBOs for their businesses.

SOURCES OF INFORMATION

We commissioned China Insights Industry Consultancy Limited (CIC), an independent market research consulting firm that is principally engaged in the provision of market research consultancy services, to conduct a detailed study of the SMB financial services markets in China.

During the preparation of the CIC Report, CIC performed both primary and secondary research, and obtained knowledge, statistics, information, and industry insights on the industry trends of the SMB financial services markets in China. Primary research involved discussing the status of the industry with leading industry participants and industry experts. Secondary research involved reviewing company reports, independent research reports, and available data based on CIC’s own research database.

The CIC Report was compiled and the expected growth in China’s SMB financial services market was estimated based on the following assumptions and factors: (i) the overall social, economic, and political environment in China is expected to remain stable during the forecast period, (ii) the Chinese economy is expected to grow steadily during the forecast period, and (iii) there will be no extreme unforeseen events, including regulations and government policies, which may materially affect the market during the forecast period. The reliability of the CIC Report may be affected by the accuracy of the foregoing assumptions and factors. For the avoidance of doubt, impacts of the COVID-19 outbreak have been taken into account when compiling information in the CIC Report.

CIC is an independent market research and consulting firm. We have agreed to pay a fee of RMB880,000 to CIC in connection with the preparation of the CIC Report. We have extracted certain information from the CIC Report in this section, as well as in the sections headed “Summary,” “Risk Factors,” “Business” and “Financial Information” to provide our potential investors with a more comprehensive presentation of the industries where we operate.

 

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REGULATORY OVERVIEW

 

 

Regulations Relating to Retail Credit Enablement

Regulations on Financing Guarantee Companies

The Tentative Measures for the Administration of Financing Guarantee Companies (《融資性擔保公司管理暫行辦法》) were jointly promulgated by the China Banking Regulatory Commission, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the Ministry of Commerce, the People’s Bank of China, and the State Administration for Market Regulation on March 8, 2010, which stipulates the registered capital, business scope, operating rules, risk control and supervision of financing guarantee companies, and also require that (i) the outstanding balance of financing guarantee liabilities of a financing guarantee company shall not exceed 10 times of that company’s net assets, though the upper limit can be raised to 15 times for a financing guarantee company that mainly provides services to small and micro enterprises, the agriculture sector, rural villages and farmers, (ii) the balance amount of outstanding guarantee liabilities of a financing guarantee company for a single guaranteed party shall not exceed 10% of that company’s net assets, and (iii) the balance amount of outstanding guarantee liabilities of a financing guarantee company for a single guaranteed party and its affiliated parties shall not exceed 15% of that company’s net assets. On November 25, 2010, China Banking Regulatory Commission issued the Notice on Issuing the Guidelines for the Corporate Governance of Financing Guarantee Companies (《融資性擔保公司公司治理指引》), which was the basis for the Supervision and evaluation of the corporate governance of financing guarantee companies. According to the Notice, the directors, supervisors and senior managers of financing guarantee companies shall have the risk awareness of prudent operation, corresponding business skills and practical experiences. The State Council released the Regulation on Financing Guarantee Companies (《融資擔保公司監督管理條例》), effective October 1, 2017, to further clarify various regulatory indicators. “Financing guarantee” shall refer to the activities where a guarantor provides a guarantee for debt financing such as borrowings or debentures of a debtor. The regulatory authorities determined by the provincial level of governments shall be responsible for the supervision and administration of financing guarantee companies of its region. The establishment of a financing guarantee company shall be subject to the approval of the regulatory department and certain conditions. According to such regulation, any entity without a qualified license to engage in the financing guarantee business will be ordered to suspend its operations and be subject to a fine between RMB0.5 million and RMB1.0 million, and its relevant illegal income will be confiscated accordingly. In addition, if the outstanding balance of financing guarantee liabilities of the financing guarantee company does not meet the requirements pursuant to the aforementioned rules, it will be ordered to make timely rectification. If the company fails to make rectification in a timely manner, a fine of between RMB100,000 and RMB500,000 will be imposed, and the illegal income will be confiscated. Such a company may be ordered to suspend its business for rectification, and, under serious circumstances, its license for financing guarantee business may be revoked.

The Notice on Issuing Four Supporting Systems for the Regulations on the Supervision and Administration of Financing Guarantee Companies (《關於印發<融資擔保公司監督管理條例 >四項配套制度的通知》), or the Four Supporting Systems, was jointly promulgated by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the People’s Bank of China and the State Administration for Market Regulation on April 2, 2018 and amended on June 21, 2021, which includes the Administrative Measures on Financing Guarantee Business Permits (《融資擔保業務經營許可證管理辦法》), the Measures on the Measurement of the Balance of Financing Guarantee Liability (《融資擔保責任餘額計量辦法》), the Administrative Measures on the Asset Proportions of Financing Guarantee Companies (《融資擔保公司資產比例管理辦法》) and the Guidelines for Business Cooperation between Banking Financial Institutions and Financing Guarantee Companies (《銀行業金融機構與融資擔保公司業務合作指引》). The Administrative Measures on Financing Guarantee Business Permits clarify the definition of the operating license of financing guarantee business, the conditions and procedures for the issuance, renewal, revocation or cancelation of the operating license of financing guarantee business, and the information to be specified and recorded on the license. The Measures on the Measurement of the Balance of Financing Guarantee Liability provide the definition of the balance of financing guarantee liability and certain upper limits for the scale of loan guarantee business or the balance of financing guarantee liabilities for the relevant financing guarantee company. The Administration Measures on the Asset Proportions of Financing Guarantee Companies categorize the main assets of financing guarantee companies into three levels and set up specific requirements for each level. Among other things, the sum of the Level I and Level II financial assets of a financing guarantee company is required to be no less than 70% of such financing guarantee company’s total assets less qualified receivables. The ratio for Ping An Puhui Financing Guarantee Co., Ltd was 73.7% as of December 31, 2022. The Guidelines for Business Cooperation between Banking Financial Institutions and Financing Guarantee Companies require that, neither the bank nor the guarantee company may collect any fees, other than the fees as stated in the cooperation agreement or the guarantee contract, for any reason or in any form during their cooperation. Furthermore, banks and guarantee companies may separately accept clients’ applications and recommend clients to each other.

 

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On October 9, 2019, the Notice on the Promulgation of Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies (《關於印發融資擔保公司監督管理補充規定的通知 》) was jointly promulgated by the China Banking and Insurance Regulatory Commission, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the Ministry of Commerce, the People’s Bank of China, the Ministry of Housing and Urban- Rural Development, the Ministry of Agriculture and Rural Affairs, and the State Administration for Market Regulation, which was amended on June 21, 2021. This notice requires that all local regulatory authorities shall conduct a comprehensive investigation to supervise if the entities engaging in financing guarantee businesses have been licensed or not. For companies engaging in financing guarantee business without the financing guarantee business operation license, the relevant authority may order them to close down the relevant financing guarantee business.

On July 14, 2020, the Guidelines for Off-site Supervision of Financing Guarantee Companies (《融資擔保公司非現場監管規程》) was issued by the China Banking and Insurance Regulatory Commission, effective on September 1, 2020, which provide the guidelines for the competent regulatory authorities to continuously analyze and evaluate the risk of financing guarantee companies and the financing guarantee industry, by way of collecting report data and other internal and external data of the financing guarantee companies and carrying out corresponding measures.

On December 31, 2021, the People’s Bank of China published the Regulations on the Local Financial Supervision and Administration (Draft for Comments) (《地方金融監督管理條例(草案徵求意見稿)》), which requires that, among others, (i) six types of financial organizations, including financing guarantee companies, are deemed as local financial organizations, and the incorporation of local financial organizations should be approved by the competent provincial regulatory authorities before they apply for the business licenses, (ii) local financial organizations are required to operate their business within the area approved by the competent provincial regulatory authorities and are not allowed to conduct business across provinces in principle, and (iii) the rules for cross-province business carried out by local financial organizations should be formulated by the State Council or by the financial regulatory department of the State Council as authorized by the State Council. The financial regulatory department of the State Council will specify a transition period for local financial organizations that have carried out businesses across provinces to maintain compliance. Notwithstanding the foregoing, pursuant to the currently effective Regulations on Financing Guarantee Companies (《融資擔保公司監督管理條例》), a financing guarantee company may establish a branch to conduct financing guarantee business outside the province where it is domiciled with a prior approval from the regulatory department where the branch is located.

Ping An Puhui Financing Guarantee Co., Ltd. (平安普惠融資擔保有限公司), one of our subsidiaries registered in Jiangsu Province, holds a financing guarantee business permit issued by Jiangsu Provincial Bureau of Local Financial Supervision and Administration in May 2022 and has been approved by Jiangsu Provincial Bureau of Local Financial Supervision and Administration in October 2022 to absorb our financing guarantee subsidiary in Tianjin City, Pingan Financing Guarantee (Tianjin) Co., Ltd. (平安融資擔保（天津）有限公司). As of the Latest Practicable Date, the above absorption has been completed. We previously controlled two financing guarantee companies. During self-examination in the “429 Rectification”, in accordance with the regulatory principles, we decided to cancel the financing guarantee license held by Pingan Financing Guarantee (Tianjin) and complete the deregistration of Pingan Financing Guarantee (Tianjin) to centralize management for license and optimize our organizational structure and management efficiency. To accelerate the plan mentioned above and at the same time to settle the existing business of Pingan Financing Guarantee (Tianjin) prudently, after consultation with our PRC Legal Adviser, we chose to have the other financing guarantee subsidiary Ping An Puhui Financing Guarantee Co., Ltd. (“Puhui Financing Guarantee”) to merge with Pingan Financing Guarantee (Tianjin) by absorption. Upon the completion of the absorption merger, which is a form of mergers under the PRC Company Law, Pingan Financing Guarantee (Tianjin) was deregistered and all of the credits and debts of Pingan Financing Guarantee (Tianjin) have been succeeded by Puhui Financing Guarantee legally.

During the absorption process, the existing financing guarantee business of Pingan Financing Guarantee (Tianjin) has been succeeded by the Tianjin branch of Puhui Financing Guarantee, which does not involve any re-execution or cancelation of contracts with customers. Such succession arrangement has also been approved by the relevant regulatory authorities. Specifically, the absorption has been approved by Jiangsu Provincial Bureau of Local Financial Supervision and Administration in October 2022, and Tianjin Municipal Bureau of Local Financial Supervision and Administration has announced the withdrawal of Ping An Financing Guarantee (Tianjin) Co., Ltd from the financing guarantee industry on December 21, 2022.

Pingan Financing Guarantee (Tianjin) has ceased to develop new business since the end of 2021. Subsequently, we conduct financing guarantee business all through Puhui Financing Guarantee and/or its branches. As of the Latest Practicable Date, the above absorption has been completed.

 

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As advised by our PRC Legal Adviser, the above absorption has been approved by the competent authorities, and the relevant existing business has been directly succeeded by the surviving company, which is also a licensed financing company and qualified to operate the existing business. Based on the above, our directors are of the view that the absorption has no material actual or potential impact on our business operations.

Regulations Relating to Internet Advertising

The main regulations governing internet advertising include the Advertising Law of the PRC (《中華人民共和國廣告法》), which was recently amended on April 29, 2021, and the Interim Measures for Administration of Internet Advertising (《互聯網廣告管理暫行辦法》), which were issued by the State Administration for Market Regulation in 2016. Pursuant to these regulations, internet advertisers are responsible for the authenticity of the content of advertisements. The identity, administrative license, cited information and other certificates that advertisers are required to obtain in publishing internet advertisements shall be true and valid. Internet advertisements shall be distinguishable and prominently marked as “advertisements” in order to enable consumers to identify them as advertisements. Publishing and circulating advertisements through the internet shall not affect the normal use of the internet by users. It is not allowed to induce users to click on the content of advertisements by any fraudulent means, or to attach advertisements or advertising links in the emails without permission. The Internet Advertising Measures also impose several restrictions on the forms of advertisements and activities used in advertising. “Internet advertising” refers to commercial advertisements that directly or indirectly promote goods or services through websites, web pages, internet applications or other internet media in various forms, including texts, pictures, audio clips and videos. Furthermore, on February 25, 2023, the State Administration for Market Regulation published the Measures for Administration of Internet Advertising (《互聯網廣告管理辦法》), which will come into effect on May 1, 2023 and the Interim Measures for Administration of Internet Advertising will be repealed simultaneously. The new measures generally retain the requirements of the interim measures, while incorporating the following major modifications: (1) clarifying the respective responsibilities of advertising publishers, internet information service providers and advertising operators; (2) introducing rules targeting new types of advertisements including those published through smart home appliances and live webcast; and (3) further prohibiting disguised publication of advertisements and emphasizing the requirement of distinguishability.

On December 31, 2021, the People’s Bank of China, the Ministry of Industry and Information Technology, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the Cyberspace Administration of China, the State Administration of Foreign Exchange and the State Intellectual Property Office jointly issued the Measures for Administration of Online Marketing of Financial Products (Draft for Comments) (《金融產品網絡營銷管理辦法(徵求意見稿)》) (the “Draft Online Marketing Measures”), which regulates financial institutions and internet platform operators entrusted by such financial institutions to carry out internet marketing activities of financial products. Pursuant to this draft measures, financial institutions may not entrust any other entities or individuals to carry out internet marketing of financial products unless otherwise provided or authorized by laws and regulations. The draft measures also prohibit third-party online platform operators from participating in the sale of financial products in a disguised way without the approval of financial regulatory authorities, including but not limited to interactive consultation with consumers on financial products, suitability evaluation of consumers of financial products, signing of sale contracts, transfer of funds and participation in the income sharing of financial business by setting various charging mechanisms linked to the loan scale and interest scale. Private equity fund management institutions, credit rating agencies, and local financial organizations approved by local financial regulatory authorities, like our financing guarantee subsidiary shall also apply to this measures by reference when conducting internet marketing activities of financial products as financial institutions.

As advised by our PRC Legal Adviser, the Company is of the view that the business cooperation between our licensed subsidiaries and third-party online platforms, if applicable, is regulated by the Draft Online Marketing Measures. And the Draft Online Marketing Measures will also apply if we cooperate with other financial institutions in the role of an online platform to carry out the internet marketing of financial products. The Draft Online Marketing Measures do not prohibit our business as long as our business practices is in accordance with relevant laws, regulations and regulatory requirements.

Specifically, our business is primarily conducted through our financing guarantee subsidiary and consumer finance subsidiary, which shall be subject to the requirement for financial institutions under the Draft Online Marketing Measures when conducting internet marketing activities of financial products. Nevertheless, the impact of the Draft Online Marketing Measures towards our principal business is limited because we mainly acquire customers through offline channels, and have limited cooperation with third- party online platforms for online marketing for our financial products.

 

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However, we still have some business that may be defined as internet marketing of financial products through online platform, such as Lujintong. As advised by our PRC Legal Adviser, we, as an online platform, have complied with the Draft Online Marketing Measures in all material aspects except that in some limited cases, certain service fees we charge from financial institution partners are based on loan volume and interest rate, which may be recognized as participating in the income sharing of financial business in a disguised way. Therefore, once the Draft Online Marketing Measures are adopted in the current form, we may be required to adjust the way we charge financial institutions under certain cases. If the Draft Online Marketing Measures take effect in its current form, we will consult and negotiate with our financial institution partners to make the necessary adjustments on cooperation agreements as required by the authorities and our financial institution partners to ensure compliance. Given that (i) such business had very limited contribution to our financial performance during the Track Record Period, which amounted to less than 5% of our total income; (ii) we have not received any notice from its financial institution partners regarding the potential adjustment; and (iii) the Draft Online Marketing Measures provide a 6-month grace period from its effectiveness date for companies to make adjustments and become compliant with the provisions therein, if the Draft Online Marketing Measures are adopted in their current form, we believe the adjustment of the service fee arrangement will not have a material adverse effect on the cooperation between the financial institutions and us or our total income.

Based on the above, as advised by our PRC Legal Adviser, we are of the view that the Draft Online Marketing Measures as well as such measures we may take will not cause any adverse impact on our business operation and financial condition. We will closely monitor regulatory developments as they occur and adjust our business operations accordingly.

 

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HISTORY AND CORPORATE STRUCTURE

 

 

OVERVIEW

The history of our retail credit and enablement business dates back to August 2005, when Ping An Group launched a consumer loan business in Shenzhen, China.

In 2014, we underwent a series of reorganizations to further the strategic development of our business and incorporated Lufax Holding Ltd as an exempted company under the laws of the Cayman Islands in December 2014 to act as the holding company for our corporate group. In May 2016, we acquired our retail credit and enablement business from Ping An Group.

Prior to our initial public offering in the United States, we carried out three rounds of equity financing, the first two in 2015 and 2016, and the third one with separate closings in 2018 and 2019. In addition, we issued automatically convertible promissory notes and optionally convertible promissory notes in 2020. On October 30, 2020, the ADSs representing our ordinary shares commenced trading on NYSE under the symbol “LU.”

KEY BUSINESS MILESTONES

The following is a summary of our key business development milestones in our history:

 

		Year		Event
		2005		Launched our retail credit and enablement business when Ping An Group started a consumer loan business in Shenzhen, China
		2011		Shanghai Lufax was established by Ping An Group as one of its online wealth management business units
		2012		Launched our first online secondary trading place, lufax.com, offering wealth management services
		2013		Launched our mobile application, Lufax App, on the iOS and Android platform
		2014		Incorporated the Company under the laws of the Cayman Islands
				Chongqing Jin’an Microloan Co., Ltd. was incorporated under the laws of the PRC
		2015		Expanded product offering to include fund products
				Launched our mobile application, Puhui App, on the iOS and Android platform
		2016		Acquired 100% equity interests in Gem Alliance Limited and its subsidiaries (including but not limited to Ping An Puhui Enterprises Management and Ping An Puhui Financing Guarantee Co., Ltd.)

 

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		Year		Event
				Expanded operations into the retail credit and enablement business   Awarded the 2016 Best Internet Financial Platform Award (2016年度最佳互聯網金融平臺獎) at the China Securities Journal Golden Bull Awards (中 國證券報金牛獎), the 2016 Top Ten Cases of Fintech Innovation (2016年中國金融機構金牌榜年度十佳互聯網金融創新公司) by the Financial Times (金融時報社), and the 2016 Asian Banker’s Trading Platform Award (亞洲銀行家2016年度交易平臺) by the Asian Banker (亞洲銀行家)
				Named as the 2017 Outstanding Fintech Company (2017年度卓越金融科技公司) by the Economic Observer (經濟觀察報) and the 2017 Most Competitive Internet Wealth Management Platform (2017卓越競爭力互聯網財富管理平臺) by the China Business Journal (中國經營報)
				Awarded the 2017 Best-in-Class Risk Control Award (2017風控能力先鋒機構獎) and the 2017 Best-in-Class Fintech Award (2017科技金融先鋒機構獎) by the International Finance News (國際金融報)
		2019		Completed our C-round financing
				Passed the CMMI Level 3 Appraisal
		2020		We listed the ADSs on the NYSE under the symbol “LU”
				Established Ping An Consumer Finance Co., Ltd. and obtained the Financial Business Permit (金融許可證) issued by the CBIRC Shanghai Office
		2022		Awarded the Best Inclusive Finance Project in China (中國最佳普惠金融項目) and the Annual Green Sustainable Management Platform (年度綠色可持續管理平臺) by the Asian Banker (亞洲銀行家)
				Awarded the Leading Financial Institution for SME Services of 2022 (年度中小企業服務領航金融機構) by the Economic Observer (經濟觀察報)
				Named in the China 2022 ESG 50 List by Forbes China (福布斯)
				Awarded the Sustainable Development Species Award (可持續發展物種獎) for our Janus risk decision engine by the Harvard Business Review (China edition) (哈佛商業評論)
				Awarded the Competitive Company of the Year (2022年度競爭力公司) by 21st Century Business Herald (21世紀經濟報導)

OUR PRINCIPAL OPERATING SUBSIDIARIES

Set forth below are certain details of our principal subsidiaries and Consolidated Affiliated Entities which made a material contribution to our results of operations during the Track Record Period:

 

Name of Entity		Principal Business Activities		Place of Establishment		Date of Establishment
Gem Blazing Limited		Intermediate holding		Cayman Islands		May 28, 2015

 

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Name of Entity		Principal Business Activities		Place of Establishment		Date of Establishment
Wincon Hong Kong Investment Company		Intermediate holding		Hong Kong		December 29, 2014
Weikun (Shanghai) Technology		Technology advisory service		PRC		February 28, 2015
Jinjiong (Shenzhen) Technology Service Company Ltd.		Intermediate holding		PRC		October 16, 2017
Lufax (Shenzhen) Technology		Internet platform service		PRC		September 25, 2018
Gem Alliance Limited		Intermediate holding		Cayman Islands		May 26, 2015
Harmonious Splendor Limited		Intermediate holding		Hong Kong		June 1, 2015
Ping An Puhui Financing Guarantee Co., Ltd.		Financing guarantee business		PRC		December 25, 2007
Ping An Puhui Enterprises Management		Enterprise management service		PRC		July 7, 2015
Chongqing Jin’an Microloan Co., Ltd.		Microloan business(1)		PRC		December 25, 2014
Ping An Puhui Investment & Consulting Co., Ltd.		Investment and financial consulting service		PRC		September 5, 2005
Ping An Puhui Information Services Co., Ltd.		Information technology service		PRC		July 18, 2016
Ping An Consumer Finance Co., Ltd.		Consumer finance business		PRC		April 9, 2020
Shanghai Xiongguo		Intermediate holding		PRC		December 10, 2014
Shanghai Lufax		Online wealth management information platform service		PRC		September 29, 2011
Shenzhen Lufax Enterprise Management		Intermediate holding		PRC		May 23, 2018

Note:

(1)    As of the Latest Practicable Date, Chongqing Jin’an Microloan Co., Ltd. was not involved in any business.

MAJOR SHAREHOLDING CHANGES OF THE COMPANY AND OUR PRINCIPAL SUBSIDIARIES

Shareholding changes of the Company

The Company was incorporated as an exempted company with limited liability in the Cayman Islands on December 2, 2014. As of the date of our incorporation, our authorized share capital was US$50,000 divided into 5,000,000,000 shares of US$0.00001 par value each, of which 4,500,000,000 shares were designated as Class A ordinary shares and 500,000,000 shares were designated as Class B ordinary shares.

 

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Class A Ordinary Shares

On the date of our incorporation, the Company issued 949,999,999 Class A ordinary shares, among which (i) 173,744,732 Class A ordinary shares to Lanbang Investment Company Limited, (ii) 280,705,464 Class A ordinary shares to Tongjun Investment Company Limited, (iii) 20,644,803 Class A ordinary shares to Linzhi Jinsheng Investment Company Limited, and (iv) 474,905,000 Class A ordinary shares to An Ke Technology, for a nominal consideration in connection with our corporate restructuring to mirror the then-shareholding structure in Shanghai Lufax.

As part of a reorganization, we acquired 40% equity interest in each of Ping An Jixin (Shanghai) Investment Management Co., Ltd. and Chongqing Chongjinsuo in 2018. Upon the completion of the transaction, we issued 22,146,871 Class A ordinary shares to Honor Reliance Development Limited, for a nominal consideration on June 12, 2018. Ping An Jixin (Shanghai) Investment Management Co., Ltd., Chongqing Chongjinsuo and Honor Reliance Development Limited are all controlled by the same person.

Class B Ordinary Shares

On March 23, 2015 and January 15, 2016, the Company issued a total of 73,124,858 Class B ordinary shares for a total consideration of US$776.6 million to our A-round investors, namely, Key Horizon Limited, CDH Merivale Limited, Fintech Investment Co. Ltd., Sino Delightful Holdings Limited, Ease Run Global Limited, Fung Shing Investments Ltd., Excelwit Investments Limited, Guosheng Internet Investment L.P. and Union Expert Investment Holding Limited.

On January 15, 2016, the Company issued a total of 62,071,988 Class B ordinary shares for a total consideration of approximately US$924 million to our B-round investors, namely, Bank of China Group Investment Limited, Chia Tai Bright Enterprise Limited, Spectron Enterprises Limited, Magic Continent Limited, CMBC International Holdings Limited, Country Garden Holdings Company Limited, Guotai Junan Finance (Hong Kong) Limited, Guosheng Internet Investment L.P., Lu Hu Investment Company Limited and Fung Shing Investments Ltd.

Convertible Promissory Notes Issued to Ping An Overseas Holdings and An Ke Technology

In October 2015, in connection with our acquisition of the retail credit and enablement business from Ping An Insurance, we issued the Ping An Convertible Promissory Notes with the outstanding principal amount of US$1,953.8 million. The acquisition was consummated in May 2016. In October 2015, Ping An Overseas Holdings agreed to transfer US$937.8 million of the outstanding principal amount of the Ping An Convertible Promissory Notes and all rights, benefits and interests attached thereunder to An Ke Technology.

 

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In December 2022, the Company, Ping An Overseas Holdings and An Ke Technology entered into an amendment and supplemental agreement to amend the terms of the Ping An Convertible Promissory Notes (the “Amendment and Supplemental Agreement”), pursuant to which (i) the parties agreed to extend the maturity date from October 8, 2023 to October 8, 2026 and the commencement date of the conversion period from April 30, 2023 to April 30, 2026 for the remaining 50% outstanding Ping An Convertible Promissory Notes, and (ii) 50% of the outstanding principal amount of the Ping An Convertible Promissory Notes shall be deemed redeemed from the effective date of the Amendment and Supplemental Agreement. In consideration of the above redemption and the extension of the maturity date and taking into account the fair market value of the Ping An Convertible Promissory Notes determined by the independent valuers, pursuant to the Amendment and Supplemental Agreement, the Company agreed to pay Ping An Overseas Holdings and An Ke Technology a total amount of approximately US$1,071.1 million (the “Consideration”) together with the unpaid interest accrued on the redeemed notes up to and including the effective date of the Amendment and Supplemental Agreement. The first tranche payment of the Consideration in the total amount of approximately US$535.5 million was paid in December 2022 and the second tranche payment of the Consideration in the total amount of approximately US$535.6 million was paid in March 2023. Taking into account the dividend announced on March 13, 2023, the Ping An Convertible Promissory Notes can be converted into an aggregate of 74,402,132 ordinary shares, representing approximately 6.5% of the total issued and outstanding Shares as of the Latest Practicable Date.

A summary of the principal terms and conditions of the Ping An Convertible Promissory Notes are set out below.

 

Holders of the Ping An Convertible Promissory Notes		China Ping An Insurance Overseas (Holdings) Limited An Ke Technology Company Limited
Issuance date of the Ping An Convertible Promissory Not		October 8, 2015
Outstanding principal amount of the Ping An Convertible Promissory Notes		US$507,988,000.00 for the convertible promissory note issued to China Ping An Insurance Overseas (Holdings) Limited US$468,912,000.00 for the convertible promissory note issued to An Ke Technology Company Limited
Interest and interest payment dates		The Ping An Convertible Promissory Notes will bear interest from October 8, 2015 at the rate of 0.7375% per annum of the principal amount of the Ping An Convertible Promissory Notes outstanding from time to time, payable by the Company semiannually until the maturity date.
Maturity date		The eleventh anniversary of the issuance date of the Ping An Convertible Promissory Notes (i.e., October 8, 2026)
Transferability		The Ping An Convertible Promissory Notes or any part(s) thereof may be assigned or transferred to any third party subject to compliance of certain conditions, including, among others, (a) the execution of a form of transfer substantially in the agreed form annexed to the Ping An Convertible Promissory Notes, and (b) that the Ping An Convertible Promissory Notes must be delivered for cancelation to the Company accompanied by a duly executed form of transfer.

 

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Conversion period		The period commencing on April 30, 2026 until the date which is five (5) business days before (and excluding) the maturity date (i.e., October 8, 2026).
Conversion right		The holders of the Ping An Convertible Promissory Notes shall have the right to convert the whole or any part of the outstanding principal amount of the Ping An Convertible Promissory Notes into certain number of the ordinary shares of the Company (“Conversion Shares”) at any time during the conversion period at the initial conversion price of US$14.8869 per share, subject to certain adjustments (“Conversion Price”), primarily including adjustments for (i) any consolidation or subdivision of Shares, (ii) any issuance of Shares to the shareholders by way of capitalization of profits or reserves, (iii) any capital distributions made to shareholders, (iv) certain issuance of Shares, or certain grant of options, warrants or other rights to purchase any Shares, to shareholders at a price less than the current market price, (v) any issuance of any securities (other than Shares or options, warrants or other rights to purchase Shares) to all or substantially all Shareholders as a class by way of rights, or any grant to all or substantially all Shareholders as a class by way of rights of any options, warrants or other rights to purchase any securities (other than Shares or options, warrants or other rights to purchase Shares), (vi) any issuance of securities by the Company or any subsidiary, or any other person (pursuant to any arrangements with the Company or any subsidiary) in connection with an offer by or on behalf of the Company or any subsidiary or such other person, pursuant to which offer the shareholders generally are entitled to participate in arrangements whereby such securities may be acquired by them, and (vii) other events that the Company considers that it would be appropriate for an adjustment to be made to the conversion price, subject to the Guidance Letters and all relevant regulations.
Determination of the number of Conversion Shares		The number of Conversion Shares to be issued by the Company to each holder of the Ping An Convertible Promissory Notes shall be equal to the quotient of (i) the principal amount of the relevant Ping An Convertible Promissory Note divided by (ii) the Conversion Price rounded down to the nearest US$ cent. No fraction of share shall be issued on conversion.

 

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Conversion Price		The initial conversion price is US$14.8869 per share, subject to anti-dilution adjustments including, among others, any consolidation or subdivision of shares and any payment of capital distribution to the shareholders.
Redemption right		Unless previously converted or purchased and canceled, the Company will redeem the Ping An Convertible Promissory Notes at 100% of its outstanding principal amount together with accrued interest (calculated up to but including the date of redemption) on the maturity date. The holders of the Ping An Convertible Promissory Notes shall be entitled (but not obliged) to give a redemption notice to the Company in writing that the Ping An Convertible Promissory Notes are, and shall become due and payable within 30 days of receipt of such notice if an event of default occurs and the Company fails to take any remedial steps within 45 days after the receipt of the written notice served by the holders of the Ping An Convertible Promissory Notes specifying the occurrence of any of the events of defaults.

Change of Authorized Share Capital

On October 18, 2018, our authorized share capital was re-classified to US$50,000 divided into 5,000,000,000 shares of par value of US$0.00001 each, of which 4,000,000,000 shares were designated as Class A ordinary shares, 500,000,000 shares were designated as Class B ordinary shares, and 500,000,000 shares were designated as Class C ordinary shares.

Class C Ordinary Shares

On November 29, 2018 and January 31, 2019, we issued a total of 46,949,725 Class C ordinary shares for a total consideration of approximately US$1,411.9 million to our C-round investors and purchasers, namely, F3 Holding LLC, DIC Holding LLC, HS Investments AP13 Limited, HS Investments (A) L.P., HS Investments (C) Limited, So Cheung Wing, Lux Holdings Limited, LionRock LJS L.P. (formerly known as LionRock Money L.P.), All-Stars PESP V Limited, Macquarie Capital Asian Fintech Investments Holdings LP, SBI Hong Kong Holdings Co., Limited, SBI AI&Blockchain Investment LPS, J.P. Morgan Securities LLC, UBS AG, London Branch, Hermitage Galaxy Fund SPC (on behalf of, Hermitage Fund Four SP), Broad Street Principal Investments L.L.C., United Overseas Bank Limited, Bangkok Bank Public Company Limited, Saber Capital (Mauritius) Limited.

C-Round Restructuring Convertible Notes

On September 30, 2020, we issued automatically convertible promissory notes and optionally convertible promissory notes (together, the “C-Round Restructuring Convertible Notes”) in a total principal amount of US$1,361,925,000 to certain holders of our Class C ordinary shares in exchange for a total of 45,287,111 Class C ordinary shares held by them. These holders are F3 Holding LLC, DIC Holding LLC, HS Investments AP13 Limited, So Cheung Wing, Lux Holdings Limited, LionRock LJS L.P., All-Stars PESP V Limited, Macquarie Capital Asian Fintech Investments Holdings LP, SBI Hong Kong Holdings Co., Limited, SBI AI&Blockchain Investment LPS, HS Investments (A) L.P., HS Investments (C) Limited, UBS AG, London Branch, Hermitage Galaxy Fund SPC (on behalf of Hermitage Fund Four SP), Broad Street Principal Investments L.L.C., United Overseas Bank Limited, Saber Capital (Mauritius) Limited, Rajendra Singh 2011 Florida Trust FBO Hersh Raj Singh, Rajendra Singh 2011 Florida Trust FBO Samir Raj Singh, LMA SPC for the account of Map 248 Segregated Portfolio, Aaron Nieman, Blaine Marder, J.P. Morgan Securities LLC and Generation Growth Investors Limited.

 

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The automatically convertible promissory notes (the “Automatically Convertible Notes”) were mandatorily and automatically converted into our ordinary shares upon the closing of our initial public offering in the U.S. in November 2020. The number of ordinary shares issued to the holder of Automatically Convertible Note(s) upon the automatic conversion were determined by dividing the outstanding principal amount of Automatically Convertible Note(s) by the price per ordinary share issued by us in our initial public offering in the U.S. in November 2020, subject to adjustments. The Automatically Convertible Notes bear interest from (and excluding) the date of issuance at the rate of 6% per annum of the principal amount outstanding, which were payable by us upon the conversion of the notes at the closing of our initial public offering in the U.S. in November 2020.

Pursuant to the optionally convertible promissory notes (the “Optionally Convertible Notes”), at any time during the period commencing on the closing of our initial public offering in the U.S. in November 2020 and ending on the business day immediately prior to September 30, 2023, the holder of Optionally Convertible Note(s) shall have the right (but not the obligation) to convert all or any portion of the outstanding principal amount of the Optionally Convertible Note(s) into ordinary shares and at any time during the period commencing on the first anniversary of the closing of our initial public offering in the U.S. (i.e., November 3, 2021) and ending on the business day immediately prior to September 30, 2023, we shall have the right (but not the obligation) to require the holders to convert all (but not less than all) of the outstanding principal amount of Optionally Convertible Note(s) into ordinary shares, so long as the closing price of the ADSs representing the ordinary shares during a specified period of time is at least 125% of approximately US$30.07 per ordinary share. The conversion price for the Optionally Convertible Notes is approximately US$30.07 per ordinary share, subject to adjustments, and, taking into account the dividend announced on March 13, 2023, the Optionally Convertible Notes can be converted into an aggregate of 44,495,717 ordinary shares, representing approximately 3.9% of the total issued and outstanding Shares as of the Latest Practicable Date. The Optionally Convertible Notes bear interest from (and excluding) the date of issuance at the rate of 6% per annum of the principal amount outstanding, which will be payable by us upon each of the first and second anniversary of date of issuance as well as the earlier of September 30, 2023 or the date(s) of conversion until the notes become fully repaid or converted.

As of December 31, 2022, the outstanding principal amount of the Optionally Convertible Notes amounted to RMB8,062.4 million.

Immediately prior to the completion of our initial public offering in the U.S. in November 2020, our authorized share capital increased to US$100,000 divided into 10,000,000,000 shares of US$0.00001 par value each, and (i) all of our issued and outstanding Class B ordinary shares and Class C ordinary shares were automatically converted into 136,859,460 Class A ordinary shares on a one-for-one basis, (ii) the remaining authorized and unissued Class B ordinary shares and Class C ordinary shares were re-designated and re-classified into Class A ordinary shares, (iii) all of the then issued and outstanding Class A ordinary shares and the remaining authorized and unissued Class A ordinary shares were re-designated and reclassified into ordinary shares on a one-for-one basis.

 

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For subsequent shareholding changes of the Company, see “Statutory and General Information—A. Further Information about the Company and Our Subsidiaries—2. Changes in share capital of the Company” in Appendix IV to the Listing Document.

Shareholding changes of our principal subsidiaries

For details of the changes in shareholding in our principal subsidiaries, see “Statutory and General Information—A. Further Information about the Company and Our Subsidiaries—3. Changes in the share capital of our subsidiaries” in Appendix IV to the Listing Document.

COMPLIANCE WITH GUIDANCE LETTER

Based on the documents provided by the Company relating to the Ping An Convertible Promissory Notes and the Optionally Convertible Notes, the Joint Sponsors confirm that the Ping An Convertible Promissory Notes and the Optionally Convertible Notes are in compliance with Guidance Letter HKEX- GL44-12 issued by the Stock Exchange in October 2012 and updated in March 2017.

MAJOR ACQUISITIONS, DISPOSALS AND MERGERS

In order to expand our business into the retail credit market, the Company acquired the entire issued share capital of Gem Alliance Limited, an investment holding company incorporated in the Cayman Islands that is principally engaged in retail credit and enablement business in the PRC through its wholly-owned subsidiaries, including Ping An Puhui Enterprises Management. For further details on the business of Ping An Puhui Enterprises Management, see the sections headed “Business—Our Business Model” in this listing document.

The Company acquired the entire issued share capital of Gem Alliance Limited from Ping An Overseas Holdings, the Controlling Shareholder, by entering into a share purchase agreement with Ping An Overseas Holdings dated August 27, 2015 and issuing convertible promissory notes as consideration to Ping An Overseas Holdings in October 2015, which were further transferred to An Ke Technology in October 2015. For details of the convertible promissory notes, see the paragraph headed “—Major Shareholding Changes of the Company and our Principal Subsidiaries—Shareholding changes of the Company—Convertible Promissory Notes Issued to Ping An Overseas Holdings and An Ke Technology” in this section. The consideration was determined based on arm’s length negotiation among the parties with reference to, amongst other things, the financial conditions, business prospects and market position of Gem Alliance Limited and its subsidiaries. The acquisition was properly and legally completed and settled on May 31, 2016. Ping An Puhui Enterprises Management and its wholly-owned subsidiaries have since then became wholly-owned subsidiaries of the Company.

Save as disclosed under this subsection, we have not conducted any other acquisitions, disposals or mergers since our inception that we consider to be material to us.

 

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OUR INVESTORS PRIOR TO THE NYSE LISTING

Prior to the listing of the ADSs on the NYSE in October 2020, the Company had raised three rounds of equity financing in the form of issuance of Class B ordinary shares and Class C ordinary shares of the Company. The total consideration of such financings was approximately US$3.1 billion. The financings led to the issuance of certain Class B ordinary shares and Class C ordinary shares in the share capital of the Company, and immediately prior to the completion of our initial public offering in the U.S., (i) all of our issued and outstanding Class B ordinary shares and Class C ordinary shares were automatically converted into 136,859,460 Class A ordinary shares on a one-for-one basis, (ii) the remaining authorized and unissued Class B ordinary shares and Class C ordinary shares were re-designated and re-classified into Class A ordinary shares, and (iii) all of the then issued and outstanding Class A ordinary shares and the remaining authorized and unissued Class A ordinary shares were re-designated and reclassified into ordinary shares on a one-for-one basis. Further details are as set out in the sub-section headed “—Major Shareholding Changes of the Company and our Principal Subsidiaries—Shareholding changes of the Company” in this section.

LISTING ON THE NYSE

On October 30, 2020, we listed the ADSs on the NYSE under the symbol “LU.” Our initial public offering was completed on November 3, 2020. Pursuant to our initial public offering, we sold 175,000,000 ADSs, representing 87,500,000 ordinary shares, at an offering price of US$13.50 per ADS. In addition, the underwriters exercised their option in part to purchase an additional 24,155,128 ADSs, representing 12,077,564 ordinary shares, at the public offering price on December 1, 2020. We raised US$2,578.9 million in net proceeds from our initial public offering after deducting underwriting commissions and discounts and the offering expenses payable by us.

As of the Latest Practicable Date, we have utilized over 80% of the net proceeds from our initial public offering in the U.S. for general corporate purposes. We still intend to use the remainder of the proceeds for purposes as disclosed in our registration statement on Form F-1 issued in connection with our initial public offering in the U.S. We invest any unutilized net proceeds in short-term, interest-bearing bank wealth management products and term deposits.

Our Directors confirm that since the date of our listing on the NYSE and up to the Latest Practicable Date, we had no instances of non-compliance with the rules of the NYSE in any material respects and to the best knowledge of our Directors having made all reasonable enquiries, there is no matter that should be brought to investors’ attention in relation to our compliance record on the NYSE.

Based on the currently available information and independent due diligence work conducted by the Joint Sponsors, including but not limited to, (a) engaging an investigative consultancy firm to conduct background search on the Company and its material subsidiaries, and reviewing such search results, the Joint Sponsors have followed up with the Company on the details of the finding and nothing material has come to the attention of the Joint Sponsors; (b) engaging agent to conduct litigation searches against the Company and its subsidiaries and reviewing such litigation search results, and no adverse records over litigation and bankruptcy in the United States involving the Company were identified; (c) conducting searches on NYSE website; (d) reviewing the Company’s public filings with the SEC and its websites; and (e) conducting due diligence interview with the management of the Company, nothing has come to the attention of the Joint Sponsors that would cause them to disagree with the Directors’ view above.

 

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REASONS FOR THE LISTING

We are currently seeking to have our Shares listed on the Main Board of the Stock Exchange in order to have the dual primary listing status in both the United States and Hong Kong. Our Directors consider that it is a critical step towards integrating our shareholdings and capital structure with the capital market in Hong Kong, and with the stature and prestige of having the Shares listed on the Stock Exchange, the Company will enhance its competitive position in pursuing its growth strategy particularly in Hong Kong, which the Company believes is beneficial and will create value for its Shareholders.

PRC REGULATORY REQUIREMENTS

According to the Regulations for Merger with and Acquisition of Domestic Enterprises by Foreign Investors (《關於外國投資者併購境內企業的規定》) (the “M&A Rules”) jointly issued by MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, SAT, the CSRC, the SAMR and SAFE on August 8, 2006, effective as of September 8, 2006 and amended on June 22, 2009, a foreign investor is required to obtain necessary approvals when it (i) acquires the equity of a domestic enterprise so as to convert the domestic enterprise into a foreign-invested enterprise; (ii) subscribes the increased capital of a domestic enterprise so as to convert the domestic enterprise into a foreign-invested enterprise; (iii) establishes a foreign-invested enterprise through which it purchases the assets of a domestic enterprise and operates these assets; or (iv) purchases the assets of a domestic enterprise, and then invests such assets to establish a foreign-invested enterprise. The M&A Rules, among other things, further purport to require that an offshore special purpose 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, especially in the event that the special purpose vehicle acquires shares of or equity interests in the PRC companies in exchange for the shares of offshore companies.

Our PRC Legal Adviser is of the opinion that based on its understanding of the current applicable PRC laws and regulations, the prior CSRC approval for this Listing under the M&A Rules is not required because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether listings like ours under the Listing Document are subject to the M&A Rules, (ii) our wholly-owned PRC subsidiaries were not established through mergers or acquisitions of “PRC domestic companies” as such term is defined under the M&A Rules using equities as consideration , (iii) that no provision in the M&A Rules clearly classified contractual arrangements as a type of transaction subject to the M&A Rules, and (iv) this is a listing of a company that has been listed in the United States. However, our PRC Legal Adviser further advises that there is uncertainty as to how the M&A Rules will be interpreted or implemented.

 

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SAFE REGISTRATION IN THE PRC

Pursuant to the SAFE Circular on Relevant Issues Concerning Foreign Exchange Administration of Overseas Investment and Financing and Round-trip Investments Conducted by Domestic Residents through Special Purpose Vehicles (《國家外匯管理局關於境內居民通過特殊目的公司境外投融資及返程投資外匯管 理有關問題的通知》) (“SAFE Circular 37”), promulgated by SAFE and became effective on July 4, 2014, (a) a PRC resident must register with the local SAFE branch before he or she contributes assets or equity interests in an overseas special purpose vehicle (the “Overseas SPV”) that is directly established or indirectly controlled by the PRC resident for the purpose of conducting investment or financing, and (b) following the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change in respect of the Overseas SPV, including, among other things, a change of Overseas SPV’s PRC resident individual shareholder(s), the name of the Overseas SPV, terms of operation, or any increase or reduction of the Overseas SPV’s capital, share transfer or swap by PRC residents, and merger or division. Pursuant to SAFE Circular 37, failure to comply with these registration procedures may result in penalties.

Pursuant to the SAFE Circular on Further Simplification and Improvement in Foreign Exchange Administration Policies on Direct Investment (《國家外匯管理局關於進一步簡化和改進直接投資外匯管理政策的通知》 ) (“SAFE Circular 13”), which became effective on June 1, 2015, the power to accept SAFE registration was delegated from local SAFE to local banks where the assets or interest in the domestic entity was located.

As advised by our PRC Legal Adviser, Mr. Wenwei DOU, Ms. Wenjun WANG, Mr. Xuelian YANG, Mr. Jingkui SHI, who indirectly hold Shares of the Company and are known to us as being PRC citizens, have completed the process of initial registration under the SAFE Circular 37 in December 2014.

OUR CORPORATE STRUCTURE

The following diagram illustrates a simplified corporate and shareholding structure of the Group as of the Latest Practicable Date:

 

 

Notes:

 

(1)

Represents 285,000,000 ordinary shares held by An Ke Technology, a Hong Kong company and 189,905,000 ordinary shares held by Ping An Overseas Holdings, a Hong Kong company. An Ke Technology is a wholly owned subsidiary of Ping An Financial Technology, which is wholly owned by Ping An Insurance, a company incorporated under the laws of the PRC whose shares are listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Ping An Overseas Holdings is a direct wholly-owned subsidiary of Ping An Insurance.

 

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(2)

Represents 275,203,430 ordinary shares held by Tun Kung Company Limited, a British Virgin Islands company, plus, as of March 30, 2023, (i) 33,626,250 ordinary shares which were converted to 67,252,500 ADSs and recorded in and represented by the collateral accounts and the custodial accounts held in the name of Tun Kung Company Limited with Goldman Sachs International pursuant to certain covered call arrangements by and among Tun Kung Company Limited, Goldman Sachs International and Goldman Sachs (Asia) L.L.C. between June and December 2022, and (ii) 11,500,000 ordinary shares which were converted to 23,000,000 ADSs and recorded in and represented by a collateral account held in the name of Tun Kung Company Limited with Morgan Stanley & Co. International plc pursuant to certain variable prepaid share forward arrangements between Tun Kung Company Limited and Morgan Stanley & Co. International plc between April and June 2022. As of December 9, 2022, each of Tongjun Investment Company Limited and Lanbang Investment Company Limited owned 47.2% and 52.8% of the issued and outstanding share capital of Tun Kung Company Limited, respectively. Tongjun Investment Company Limited and Lanbang Investment Company Limited are both British Virgin Islands companies. Each of the two individuals, Mr. Wenwei DOU and Ms. Wenjun WANG, owns 50% of Tongjun Investment Company Limited’s shares. Each of the two individuals, Mr. Xuelian YANG and Mr. Jingkui SHI, owns 50% of Lanbang Investment Company Limited’s shares. As far as Tun Kung Company Limited is aware, save as disclosed in the Listing Document, each of Mr. Jingkui SHI and Mr. Xuelian YANG has no other relationship with the Ping An Group and the Company as of the Latest Practicable Date. As advised by Tun Kung Company Limited, as far as Tun Kung Company Limited is aware, as of the Latest Practicable Date, there is no acting-in-concert arrangement between Tun Kung Company Limited (including its shareholders) and Ping An Group, nor does Tun Kung Company Limited hold the Shares on behalf of Ping An Group.

Tongjun Investment Company Limited is a company directly held by two individuals, Mr. Wenwei DOU and Ms. Wenjun WANG, as nominee shareholders to hold the shares of Tongjun Investment Company Limited on behalf of the beneficiaries, who are senior employees of Ping An Insurance and its subsidiaries or associates. Mr. Wenwei DOU is a senior attorney of Ping An Insurance. The nominee shareholders act upon, and vote and pass shareholders’ resolutions relating to, the matters of Tongjun Investment Company Limited in accordance with instructions from a five-person management committee. The five members of the management committee, which consist of Jun Yao, Jianrong Xiao, Peng Gao, Wenwei Dou and Wenjun Wang, represent the beneficiaries in making investment decisions for and supervise the management and operation of Tongjun Investment Company Limited. The five members of the management committee are all employees of Ping An Group. None of the five members is a director or senior management of Ping An Insurance, or a director, senior management or employee of our company.

Each shareholder of Lanbang Investment Company Limited, Mr. Jingkui SHI and Mr. Xuelian YANG, has granted an option to An Ke Technology to purchase up to 100% of his shares in Lanbang Investment Company Limited (the “Lanbang Offshore Call Options”). Lanbang Investment Company Limited held 52.8% of the shares of Tun Kung Company Limited, which in turn beneficially owned 28.3% of our ordinary shares. Each shareholder of Lanbang Investment Company Limited is entitled to his voting and other rights in Lanbang Investment Company Limited prior to An Ke Technology’s exercise of the Lanbang Offshore Call Options.

Lanbang Investment Company Limited has also granted an option to An Ke Technology to purchase up to 100% of its shares in Tun Kung Company Limited (the “Tun Kung Offshore Call Options”, and together with the Lanbang Offshore Call Options, the “Offshore Call Options”). Lanbang Investment Company Limited is entitled to its voting and other rights in Tun Kung Company Limited prior to An Ke Technology’s exercise of the Tun Kung Offshore Call Options.

The shareholders of Lanbang Investment Company Limited also hold the entire equity interest in Shanghai Lanbang Investment Limited Liability Company (“Shanghai Lanbang”), which holds 18.29% of the equity interest in two of the Consolidated Affiliated Entities, Shanghai Xiongguo and Shenzhen Lufax Enterprise Management. Each of Mr. Jingkui SHI and Mr. Xuelian YANG has granted an option to Ping An Financial Technology, the parent company of An Ke Technology, to purchase up to 100% of his equity interest in Shanghai Lanbang (the “Onshore Call Options”), and together with the Offshore Call Options, the “Call Options”).

On August 20, 2021, we were notified that An Ke Technology and its parent company, Ping An Financial Technology, amended the exercise period of the Call Options. Following such amendments to the exercise period of the Call Options, the Call Options are exercisable concurrently, in whole or in part, during the period commencing on November 1, 2024 and ending on October 31, 2034. Such ten-year period may be extended by An Ke Technology or Ping An Financial Technology, as applicable, by written notice.

 

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The exercise price of the Offshore Call Options is calculated pursuant to a formula, which is primarily based upon a predetermined value as multiplied by the ratio of the market price of our ADSs representing our ordinary shares plus any dividends and distributions to the price of our shares paid by our A-round investors. If An Ke Technology had already exercised an option to call the shares under Tun Kung Offshore Call Options before the first exercise of the option to call the shares under Lanbang Offshore Call Options, the exercise price for the first exercise of the option to call the shares under Lanbang Offshore Call Options shall be increased by an amount calculated based on the proceeds received by Lanbang Investment Company Limited pursuant to the exercise of the Tun Kung Offshore Call Options. The exercise price of the Onshore Call Options is calculated pursuant to another formula, which is primarily based upon a predetermined value plus amount as adjusted by a premium rate.

 

(3)	Namely, Bangkok Bank Public Company Limited and So Cheung Wing. The foregoing Shareholders are our investors that invested in us before our initial public offering in the U.S. and the share percentage excludes the Shares held by them in the form of ADSs that have been included in note (4) below.

(4)

Represents 342,989,127 ordinary shares underlying the ADSs held by our Depositary, excluding (i) 33,626,250 ordinary shares which were converted to 67,252,500 ADSs and recorded in and represented by the collateral accounts and the custodial accounts held in the name of Tun Kung Company Limited with Goldman Sachs International pursuant to certain covered call arrangements by and among Tun Kung Company Limited, Goldman Sachs International and Goldman Sachs (Asia) L.L.C. between June and December 2022, and (ii) 11,500,000 ordinary shares which were converted to 23,000,000 ADSs and recorded in and represented by a collateral account held in the name of Tun Kung Company Limited with Morgan Stanley & Co. International plc pursuant to certain variable prepaid share forward arrangements between Tun Kung Company Limited and Morgan Stanley & Co. International plc between April and June 2022, as detailed in note (2) above.

(5)

Ping An Financial Technology, Xinjiang Tongjun Equity Investment Limited Partnership, Shanghai Lanbang and Linzhi Jinsheng Investment Management Limited Partnership hold 49.99%, 29.55%, 18.29% and 2.17%, respectively, of the equity interests in each of Shanghai Xiongguo and Shenzhen Lufax Enterprise Management.

Ping An Financial Technology is wholly owned by Ping An Insurance. Xinjiang Tongjun Equity Investment Limited Partnership is a limited partnership incorporated under the laws of the PRC, and each of the two individuals, Mr. Wenwei DOU and Ms. Wenjun WANG, owns 50% of Xinjiang Tongjun Equity Investment Limited Partnership’s interests. Shanghai Lanbang is a company incorporated under the laws of the PRC, and each of the two individuals, Mr. Xuelian YANG and Mr. Jingkui SHI, owns 50% of Shanghai Lanbang’s shares. Linzhi Jinsheng Investment Management Limited Partnership is a limited partnership incorporated under the laws of the PRC, and Mr. Xuelian YANG owns 60% and Mr. Jingkui SHI owns 40% of Linzhi Jinsheng Investment Management Limited Partnership’s interests.

 

(6)	Shanghai Xiongguo and Shanghai Huikang Information Technology Limited hold 99.995% and 0.005%, respectively, of the equity interests in Shanghai Lufax.

(7)	Ping An Puhui Enterprises Management holds the remaining 9.375% of the equity interests in Chongqing Jin’an Microloan Co., Ltd.

(8)	Ping An Insurance holds the remaining 30% of the equity interests in Ping An Consumer Finance Co., Ltd.

PUBLIC FLOAT

So far as our Directors are aware, immediately following the completion of the Listing (assuming no Shares are issued pursuant to the Share Incentive Plans or upon the conversion of the outstanding Convertible Promissory Notes), the following persons, (i) Ping An Insurance (through An Ke Technology, Ping An Overseas Holdings and Ping An Financial Technology), (ii) Tun Kung Company Limited and (iii) Mr. Gregory Dean GIBB, being Director and chief executive officer of the Company, will hold approximately 69.4% of the Company’s total issued and outstanding Shares in aggregate, and such Shares will not be counted towards the public float for the purpose of Rule 8.08 of the Listing Rules after the Listing.

 

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BUSINESS

 

 

OVERVIEW

Who we are

We are a leading financial services enabler for small business owners (“SBOs”) in China. Our mission is to foster small business competitiveness and sustainability by providing individual entrepreneurs with access to financial products and services and empowering institutional partners to reach and serve SBOs efficiently.

SBOs include both owners of legal entities and individuals who conduct their business as sole proprietors. SBOs often own and operate multiple small and micro businesses (“SMBs”), either consecutively or concurrently, in the same or related industries and at different stages in their lifecycles.

We offer financing products designed principally to address the needs of SBOs. In doing so, we have established relationships with over 550 financial institutions in China, many of which have worked with us for over three years. These financial institutions provide funding and credit enhancement for the loans we enable as well as other products to enrich the SBO ecosystem that we are creating.

We consider ourselves a non-traditional financial service provider, by which we mean we apply cutting-edge technology to the enablement of transactions by traditional financial institutions, such as banks, which are licensed to accept deposits and make loans but which are limited in their market reach in certain respects by their reliance on traditional offline business practices.

Enablement means that we make it possible for financing transactions to occur, by connecting financial institutions to borrowers they would not otherwise reach, providing or arranging credit enhancement services to allow loans to be made, and providing post-origination services such as collection services, and value-added services and tools.

Through our offline-to-online model supported by our nationwide direct sales network, we have served a total of over 4.6 million, 5.9 million, and 6.6 million SBOs in China since the beginning of our business in 2005, as of December 31, 2020, 2021 and 2022, respectively. The total outstanding balance of loans we enabled was RMB545.1 billion, RMB661.0 billion and RMB576.5 billion (US$82.9 billion) as of December 31, 2020, 2021 and 2022, respectively. We ranked second among non-traditional financial service providers for SBOs in China in terms of total outstanding balance of inclusive SMB loans as of June 30, 2022, with a market share of 17.6%.

What we do

We are primarily engaged in the enablement of loans in China. We enable loans under two distinct business models. Approximately 99.3%, 98.2% and 94.9% of the total outstanding loans we had enabled as of December 31, 2020, 2021 and 2022, respectively, are loans we enabled under our core retail credit and enablement business model. These are large-ticket loans, having an average ticket size of RMB164,483, RMB199,502 and RMB240,179 for general unsecured loans enabled in 2020, 2021 and 2022, respectively, and RMB390,467, RMB430,795, and RMB438,675 for secured loans enabled in 2020, 2021 and 2022, respectively. The remaining 0.7%, 1.8% and 5.1%, respectively, consist of loans we had enabled through our licensed consumer finance subsidiary. These are small-ticket loans, having an average drawdown of RMB3,301, RMB3,797, RMB5,979 in 2020, 2021 and 2022, respectively. The enablement of loans accounted for nearly all of our total income in the Track Record Period. In addition to the enablement of loans, we have also begun to refer borrowers to banks through a product that we have branded Lujintong (陸金通), which accounted for less than 2% of our total income during any year.

We operate our core retail credit and enablement business model under the Puhui brand. Puhui targets SBOs who require larger ticket size loans on short notice for imminent operating commercial needs of their businesses, and to a lesser extent also salaried workers dealing with major life expenses. Puhui enables two types of loans, which we refer to as general unsecured loans and secured loans. We do not fund these loans ourselves. We have two sources of funding for these loans, namely, banks and trusts, which we refer to collectively as our funding partners. We also arrange for credit enhancement for these loans through third- party credit enhancement providers or our own licensed financing guarantee subsidiary. Our financing guarantee subsidiary and third-party credit enhancement providers both offer credit enhancement services from the borrowers’ perspective. Our financing guarantee subsidiary provides credit guarantee to the borrowers, while insurance companies within our third-party credit enhancement providers offer credit guarantee insurance. Both credit guarantee and credit guarantee insurance refer to the same type of guarantee services. However, the nomenclature is different as guarantee companies and insurers operate under different licensing regimes. We refer to our funding partners and the third-party credit enhancement providers together as our institutional partners. Our ability to connect SBOs and other borrowers with similar needs to lenders and to make those loans possible through credit enhancement and a variety of other services is central to our value proposition.

 

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The following chart illustrates how we enable borrowers and institutional partners through our core retail credit and enablement business model.

 

We used to adopt a loan facilitation model before the Track Record Period. In 2018, we began the transformation of our business using a joint guarantee arrangement to share credit risk through our financing guarantee subsidiaries with our third party credit enhancement providers, and subsequently increased our risk sharing since late 2020 for a number of reasons. By accepting some credit risk on the loans we enable, we align ourselves more closely with trends in PRC government policy for non-traditional financial service providers. Taking credit risk also allows us to share borrower data with our institutional partners in a manner that is compliant with PRC regulatory requirements. Taking risk signals to our funding partners that we have confidence in our credit analysis, and it also gives us more flexibility in coping with fluctuations in the price for credit enhancement. As of December 31, 2020, 2021 and 2022, the outstanding balance of loans which we bore credit risks totaled RMB32.2 billion, RMB109.8 billion and RMB135.4 billion (US$19.5 billion), respectively, and the corresponding amounts of provision were RMB1.7 billion, RMB5.5 billion and RMB12.8 billion (US$1.8 billion), respectively. In 2020, 2021 and 2022, we made a payment of RMB0.7 billion, RMB1.5 billion and RMB6.8 billion (US$1.0 billion), respectively, to our funding partners for claims against defaults.

Our consumer finance subsidiary targets consumers in China who need small-ticket loans, typically to meet personal short-term cash flow needs or to make discretionary purchases of consumer goods. As a licensed entity operating in a highly regulated field, it operates separately from Puhui and follows its own distinct business model. The market for consumer finance loans is complementary to the market for the large-ticket, long-tenor loans that are enabled by Puhui and the borrowers typically do not overlap.

The following chart illustrates our consumer finance model:

 

 

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The following table shows some of the characteristics of the loans enabled by us through Puhui, in the case of general unsecured loans and secured loans, and through our consumer finance subsidiary, in the case of consumer finance loans, for the years indicated:

 

		For the Year Ended December 31,
		2020				2021				2022
Average ticket size (RMB)
General unsecured loans			164,483				199,502				240,179
Secured loans			390,467				430,795				438,675
Consumer finance loans (drawdown)			3,301				3,797				5,979
Average APR for new loans (%)
General unsecured loans			26.7				22.6				21.1
Secured loans			17.4				16.2				15.7
Consumer finance loans			19.1				20.3				20.6

In addition to loan enablement, we have also begun to refer borrowers to banks through Lujintong. These are borrowers who do not belong to the target customer segment for Puhui but who might qualify for loans directly from banks. We do not provide any funding or bear any credit risk on any resulting loans, nor do we include such loans in our operational data.

Our market opportunity

Small and micro businesses (“SMBs”) constitute a large, growing and systemically important sector in the Chinese economy with strong national policy support. SMBs have contributed over 60% of China’s GDP and over 80% of its job creation, but they have only obtained a disproportionate 26.0% of total financing as of the end of 2021. There were in aggregate approximately 143.5 million SMBs in China as of the same date according to the State Administration for Market Regulation and the National Bureau of Statistics, including 40.3 million small and micro business entities and 103.2 million sole proprietors.

The SMB sector presents numerous challenges to potential lenders and service providers. Typically, SMBs have small scale operations, with fewer than 50 people and less than RMB30 million of annual income, and are dispersed across a wide range of industries and geographies. Moreover, SMBs have an average lifespan of less than five years. SMBs typically lack collateral to pledge or consistency in cash flow given their small scale and short lifespan.

SBOs, as owners of SMBs, may have a much stronger credit profile than their businesses do, with real estate, cars or other personal assets. SBOs often own and operate multiple businesses, either consecutively or concurrently, in the same or related industries and at different stages in their lifecycles. SBOs include both owners of legal entities and individuals who conduct their businesses as sole proprietors. We also include individuals who have a management role at SMBs as well as other individuals who can show that they operate a business in the category of SBOs.

Our 17 years of accumulated proprietary data and our AI-driven dynamic risk modeling give us what we believe is a unique ability to assess both the SBOs as individuals and their businesses together as a whole to achieve higher precision in credit evaluation and risk-based loan sizing and pricing in China. We apply risk control measures in our selection of SBO customers while offering larger ticket sizes and longer tenor loans with or without collateral to meet individual entrepreneurs’ working capital needs across their businesses.

This risk management capability is difficult for other players to replicate, leading to substantial unmet SMB loan demand, estimated at RMB44.1 trillion as of the end of 2021 by CIC. Traditional financial institutions encounter significant challenges in risk assessment of SMBs due to high turnover and limited collateral while non-traditional financial service providers backed by internet companies primarily rely on social and other online behavior data to provide lending with smaller ticket size and shorter tenor.

Given their inefficiency in serving SMBs, traditional financial institutions have been turning to partnerships with non-traditional financial service providers to enable an increasing portion of the inclusive SMB loans that they fund. Inclusive loans are loans that are made to qualified borrowers such as SMBs and individuals who have difficulty accessing large-ticket-size credit, and in China, the CBIRC defines inclusive SMB loans as SMB loans that are extended to a single qualified borrower with a total credit line not exceeding RMB10 million.

 

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According to CIC, the demand from SMBs for credit is expected to remain strong going forward, and the PRC government has also announced a number of favorable policies to support SMBs. As owners of SMBs, SBOs also directly benefit from these positive tailwinds.

As of the end of 2021, the total outstanding balance of inclusive SMB loans in China amounted to RMB20.8 trillion, representing a five-year CAGR of 27.9%, and it is expected to grow further to RMB42.7 trillion by the end of 2026 at a CAGR of 15.5%, according to CIC. The percentage of such loans enabled by non-traditional financial service providers increased from 7.8% in 2017 to 12.9% in 2021 while the balance grew at a CAGR of 44.9% over the same period. The proportion enabled by non-traditional financial service providers is expected to increase further to 14.1% in 2026 with the balance growing at a CAGR of 17.7%, outpacing growth of the overall inclusive SMB loan market, according to CIC.

In addition, the outstanding balance of inclusive SMB loans as a percentage of total SMB loans in China increased from 24.9% in 2017 to 41.3% in 2021, and is expected to increase further to 50.2% in 2026, demonstrating significant room as well as willingness for financial institutions to reach previously underserved SMB borrowers. Our business is designed specifically to address the difficulties that SBOs face in accessing credit and to assist financial institution partners in serving the large unfulfilled demand.

Our value propositions to SBOs and financial institution partners

Our market leadership in the SBO segment is underpinned by our ability to integrate the resources of our customers and partners, namely SBOs and financial institutions, and to create value for them.

 

 

•

Our value proposition for SBOs includes:

 

•

Attractive products: We offer funding access with considerable flexibility to meet SBOs’ working capital needs at an affordable cost. Our product design and risk assessment approach considers the SBO both as an individual as well as an operator of his or her business, allowing us to price risks more accurately. Our risk management model combines a multi-faceted sub-segmentation algorithm with 17 years of proprietary data, allowing us to offer flexibility in structure (secured, unsecured, or a mixture of both), size (up to RMB10 million for secured and up to RMB1 million for unsecured) and tenor (up to 36 months) at affordable rates.

 

•

Personal engagement: While our loan application, approval and servicing processes are entirely online, we have a nationwide direct sales force of over 40,000 full-time employees covering over approximately 300 cities across China to understand the individual needs and preferences of our customers. Our agents offer offline support to SBOs and introduce a personal touch into the customer relationship, which is a major point of differentiation from competitors that provide primarily or even exclusively online support to their users.

 

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Fast and convenient online experience: We provide a fast and convenient pure online process for our customers. We embed AI, big data, and blockchain technology into each step of our customer journey to minimize manual input for loan application forms and provide a hassle-free experience. We are able to complete the loan approval process as fast as 20 minutes from the start of application for unsecured loans using a single app interface.

 

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Our value proposition for financial institutions who are our funding, credit enhancement and product partners includes:

 

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Extensive customer sourcing: We enable financial institutions to access tens of millions of SBOs a year across approximately 300 cities in China, making it possible for them to scale up in this priority segment in a cost effective manner, perform targeted marketing and improve their sales efficiency.

 

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SBO servicing capabilities (product design, risk analytics, post-loan service): We partner with financial institutions to co-design products for SBOs, and we improve their risk management model by providing them SBO customer insights and analytical tools to price risk. We also offer our funding partners and credit enhancement providers post-loan monitoring and collection services to alleviate their burden in managing troubled assets.

 

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Compliant and balanced risk sharing: We align our interest with that of our funding partners by sharing credit risk with them through our licensed financing guarantee subsidiary. Our guarantee model, which distinguishes us from competitors that have adopted a loan facilitation model with minimal risk-sharing, when combined with our strong capital base sets a foundation for us to be compliant and adaptive to the evolving regulatory environment. Our compliant data and risk sharing arrangements allow our funding partners to have controlled risk exposure and better earnings visibility.

Value creation through ecosystem approach

To further strengthen our business model, we launched a new small business owner value-added services platform in November 2022, to foster the growth of an SBO ecosystem that will create greater value for SBOs by deepening connectivity, content and operational service offerings. We have begun to bring in additional service providers to give SBOs access to broader offerings beyond financial products. These include a forum for information exchange, social networking and a suite of digital SaaS solutions. Together, these provide SBOs the necessary connectivity and tools for more effective customer acquisition, easier transaction making and overall improved efficiency.

As our ecosystem evolves, we can deepen the connectivity and engagement between different core participants, enhancing our value creation. We will be able to onboard a much broader set of SBOs to our ecosystem beyond just SBOs with immediate funding needs. By offering comprehensive services to our SBO customers both before and after their financial transactions, we are transforming ourselves into a SBO lifecycle advisor. We believe that this will increase the frequency and depth of customer engagement and enhance the longevity of our customer relationships. The ecosystem is designed to generate powerful self-reinforcing network effects, reinforcing engagement intensity with more customer service offerings, leading to higher customer conversion rate, lower acquisition costs and longer customer life span, thereby lifting our customer lifetime value.

OUR STRENGTHS

We believe that the following six competitive strengths contribute to our success and differentiate us from our competitors:

Leading SBO Financial Service Enabler in a Large and Underserved Market

We are a market leader with significant first-mover advantages, including a large existing customer base and longstanding institutional relationships with key financial institution partners. We are the second largest non-traditional financial service provider for SBOs by total outstanding balance of inclusive SMB loans as of June 30, 2022, with a 17.6% market share, according to CIC. Our industry leadership makes us a preferred service provider for both SBOs and financial institution partners. Since our inception, we have served around 6.6 million SBO customers. With the data we have accumulated and the insights we can draw from our large customer base, we have a profound understanding of the needs of SBOs, which allows us to provide tailored products and services to our customers, and creates a high entry barrier for others who have entered or might enter this sector after us. In addition, we have institutional relationships with over 550 financial institutions, including some of the largest banks, trust companies, consumer finance companies, leasing companies, insurers, funds and asset managers in China. We have worked with many of these partners for more than three years, and our deep partnerships with them allow us to provide a full suite of financial products and at the same time enable us to understand and help overcome their difficulties in servicing SBOs.

The SMB financing market is both large and underserved. SMBs represent a key segment of the Chinese economy with large unmet demand for financing and strong growth potential. As of the end of 2021, there were around 143.5 million SMBs in China, contributing over 60% of total GDP. Their unmet financing demand is estimated at RMB44.1 trillion by CIC and is expected to increase to RMB70.9 trillion in 2026. The SMB segment is expected to exhibit healthy growth in the next five years, and the outstanding balance of inclusive SMB loans is expected to grow at a CAGR of 15.5% to reach RMB42.7 trillion by 2026.

SBO-centric Product Design and Tailored Offerings

We design attractive products with significant flexibility to meet both SBO needs and the requirements of our financial institution partners. SBOs typically need larger ticket size loans with longer tenors, often on short notice. We are able to offer loan products with flexibility in structure (secured, unsecured, or a mixture of both), size (up to RMB10 million for secured and up to RMB1 million for unsecured) and tenor (up to 36 months) at affordable rates, which can be customized with different features for different customers.

 

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Our data-driven algorithms are key to enabling us to provide this flexibility. We first categorize our customers into established SBOs, developing SBOs or non-SBOs. We then apply a list of key criteria including operating history, scale, cash flow stability, credibility of shareholders and industry segment to come up with risk ratings on our customers based on our recently adopted R1 (highest) to R6 (lowest) borrower quality ranking system. Taking into account geographic location and local conditions, we further differentiate our borrowers into eligible and ineligible. For those whom we grade as eligible to receive loans, we further apply data-driven algorithms to dynamically assign different weightings for different factors, taking into account prevailing macro and sector conditions and risks to customize loan sizing and pricing for each specific customer profile. Crucially, unlike traditional financial institutions or the majority of non-traditional financial services providers, which typically analyze the risk of SBOs either on the business or on the personal level, we are able to combine the two using our algorithms to analyze the risks of our customers more wholistically on a multi-dimensional basis. Our ability to segment risks precisely and accurately allows us to provide larger ticket loans at differentiated pricing to our customers.

Integrated Offline-to-Online Channels Best Suited to Serve SBOs

Our integrated offline-to-online channels are critical to our ability to serve SBOs in China. SBOs often require customized solutions, as their financial and operational needs may differ based on their business type, region and target customers. Our nationwide direct sales network of over 40,000 full-time employees covering approximately 300 cities across China is the largest offline sales force focused on the SMB segment among non-traditional financial services providers and is the core of our customer acquisition strategy. Through this network, we have the ability to reach tens of millions of SBOs a year. Direct interaction with our customers enables us to understand their needs, improve our credit decisioning system and identify fraudulent applications through offline customer due diligence, thus allowing us to recommend the most suitable products and to serve our customers more comprehensively while controlling risks. Our direct sales force is complemented by a variety of channel partners and a telemarketing team of over 3,000 members that maintains regular contact with customers. In addition, we are able to tap the customer base of over 10,000 third-party agents on our Lujintong application, which provides information intermediary services to empower brokers to distribute the products of selected financial institution partners to their customers.

We equip our direct sales force with state-of-the-art online customer acquisition and customer engagement technology, assisting them to effectively target high quality borrowers, predict when those borrowers will have unmet funding needs, facilitate their ongoing engagement with them, and eventually increase their customer conversion rate. Our specialized sales enhancement mobile application gives our sales force a graphic portrayal of the geography of their target customers through an AI heat map that identifies regions with higher sales potential and conduct targeted sales activities. In addition, our integrated offline-to-online channels also allow us to further reduce our customer acquisition costs. In 2022, our average customer acquisition costs amounted to 3% of loan amount, lower than the 3–5% average for our non-traditional financial service provider competitors according to CIC.

Robust Data-Driven Risk Management Capabilities

Our credit risk management approach precisely identifies key risks and allows us to target the right cohort of customers. The foundation of our credit risk management is a dual KYC-and-KYB approach. KYC assesses the SBOs’ creditworthiness as individuals, while KYB assesses the cash flow sustainability of the SMBs. Our underwriting algorithm considers the intertwined relationship between the two to segment our customers into detailed risk categories, which allows higher precision in customer selection. With our on-the-ground staff and collection outlets across the country that collect first-hand information on the local markets, we are able to customize our risk management strategies for SBOs in each region to manage and price risk effectively by incorporating regional-specific data into our risk model.

We have a dynamic credit decisioning engine that leverages our proprietary data and incorporates post-loan collection feedback to enhance product pricing, improve underwriting results and lift loan collection efficiency. We start with over 7,000 predictive variables for each borrower, which we narrow down to approximately 1,600 key variables that are used for our loan decision models, of which the vast majority are credit and financial data. Our proprietary models, combined with the large volume of credit and financial data collected over 17 years, allow us to accurately price risks based on borrower creditworthiness. We have around 10,000 agents in our post-origination services team to conduct timely and effective collection of larger size loans. Data from post-loan monitoring and collection efforts is constantly fed back into customer selection and credit approval algorithms to make sure our models are being continually refined to further improve outcomes. Deployment of AI collectors and segmentation algorithms for collection has enhanced our ability to identify fraud and high-risk borrowers.

As a result of our robust risk management, we have been able to maintain sound asset quality through credit cycles. The resilience and fundamental strengths of our business model have been further proven during multiple extended lockdowns in China due to COVID-19.

 

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Cutting-Edge Proprietary Technologies

We embed cutting-edge technologies end-to-end throughout the SBO customer journey to deliver a seamless and efficient customer experience. Our customer onboarding process deploys biometric identification, natural language processing, and optical character recognition and to a large extent is conducted by video. Around 40% of our customers are vetted entirely by AI tools while the remaining ones are onboarded through a combination of AI tools and remote interviews by underwriting agents. This creates a fast and hassle-free pure online experience for our SBO customers that can be as fast as 20 minutes for general unsecured loans and as little as two hours for the review process for large ticket secured loans. Our credit assessment process is powered by data-driven analytics and anti-fraud technologies, applying micro-facial expression, voice recognition and AI. Customer information is automatically transferred and fed into the system after customer consent is obtained. Our post-loan management and loan collection process utilizes an online system that is powered by AI servicing, intelligent loan collection algorithms and App smart robots. We have created a 24/7 operating command cabin and loan collection system which has increased the stability, speed, and efficiency of our post-loan process. With the assistance of these tools, the average collection agent productivity was over 10% higher in 2022 than in 2020.

We also apply technology to broader use cases to empower our financial institution partners. We offer integrated front-end sales management tools, mid-end AI analytic tools and back-end data tools to our partners to digitize their operations and reduce their reliance on manual processes. Our end-to-end matching process is highly tailored for each partner’s credit appetite. We supply AI risk management solutions to our partners for anti-fraud measures, customer risk rating, customer identity verification, and customer data encryption, according to their business needs. We also provide big data infrastructure services to financial institutions with model building and other value-added solutions that generate output in the form of tailored and customized model strategies, giving financial institutions a one-stop solution for risk framework setting, model iterations and associated data analytics. Finally, we provide a post-loan management interface to our financial institution partners to handle non-performing assets that analyzes each customer’s credit profile and repayment history to determine their willingness to repay their loans and utilizes a combination of our online AI robots and offline collection network to execute the most effective collection approach for each customer.

Experienced Management Team And Strong Support from Ping An Group

We have an experienced management team with a proven track record comprised of veterans from reputable and market leading financial institutions that brings abundant local expertise and international experience to the table. Our Chairman, Mr. Yong Suk CHO, brings more than 20 years of experience in SMB lending and consumer finance, having held senior positions at Citibank and HSBC before joining Ping An Group in 2007. Mr. Cho managed important functions of our retail credit and enablement business even before our company was founded. Mr. Gregory Dean GIBB is a founding member of our company and has been our CEO for more than 10 years. The members of our management team have been with our company for an average of eight years. The foresight of our management team, combined with its strong execution capabilities, has been critical in driving our business transformation through business cycles against the backdrop of the changing regulatory landscape in China. At every point in our journey, our management team has delivered consistent and resilient operational and financial results, with a track record of correctly anticipating different regulatory outcomes and being able to react swiftly to adjust our business model.

Our relationship with Ping An Group, a longstanding business partner and strategic shareholder of ours, has enabled us to establish a business model that would be difficult to replicate while at the same time not compromising our autonomy. Ping An Group’s financial DNA, together with 30 years of R&D in Fintech, has helped us establish a strong understanding of financial services, leverage data in our business more efficiently, positively shape the development of our Fintech capabilities, and develop better insights into the regulatory landscape. Our relationship with Ping An Group also enables us to leverage its channels for customer sourcing, co-design credit insurance products with it and tap its knowledge of core technologies.

OUR STRATEGIES

Driven by substantial unmet demand, we aspire to deepen connections among SBOs and between SBOs and institutional partners to create greater value for our customers. We aim to achieve this by further building out our SBO ecosystem, broadening our institutional network, developing our offline-to-online channels, enhancing user engagement, and deepening our data and technology advantages to meet their needs.

Further build out SBO ecosystem to deepen customer engagement

In order to enhance products and services for SBOs and institutional partners, we plan to:

 

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Continue to enhance our full suite of unsecured and secured loan products, including further leveraging our consumer finance business, to maximize flexibility of options to our customers

 

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Introduce a broader range of products, for example non-life insurance products, to meet protection needs of our customers

 

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Introduce additional functionalities on our Ludiantong application to enable information sharing and social networking to further enhance connectivity among SBOs in our ecosystem

 

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Introduce additional SBO-focused service providers to offer comprehensive merchant services such as targeted marketing, store management, customer relationship management, inventory tracking, accounting, training management, AI calling, electronic receipt and tax assistance

 

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Offer a wider scope of enablement solutions to our financial institution partners covering front-, mid- and back-office functions, including customer targeting, channel management, credit risk analytics or assistive technology, digitalization tools, and non-performing asset management and recovery

In order to exploit new closed loop opportunities from our ecosystem, we plan to:

 

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Connect all of our SBO customers to each other in a single integrated app, to enable cross-industry business-to-customer contacts and provide SBOs with new channels for customer sourcing and information exchange

 

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Enable financial institutions to provide further value to our customers, through co-developed financial products that better cater to SBO needs drawing on credit risk analytics or assistive technology that we offer, as well as enablement solutions

Broaden customer and partner reach

In order to acquire more SBOs in different growth stages, we plan to:

 

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Continue to grow our different channels of acquisition, including Lujintong and other channels such as online and telemarketing

 

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Lift productivity of our direct sales force through implementing a structured rating system to ensure we retain and reward talents and optimize our team structure and creating incentives for direct sales team to cross-sell pre- and post- loan transaction

 

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Empower our direct sales force through new digital tools to increase customer engagement and stickiness, recommend solutions based on their demands, and respond to their queries in a systematic manner

 

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Continue to shift towards a higher-quality customer segment for our retail credit and enablement business

In order to deepen and broaden our institutional network, we plan to:

 

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Deepen relationship with existing institutional partners by increasing cooperation thresholds and cross-selling additional products and services

 

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Expand funding partnerships to include more banks as well as trust companies to further diversify funding source

 

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Continue to source additional financial institution customers for enablement solutions to drive growth and provide support to increase credibility to our ecosystem

Enhance customer engagement and unit economics

In order to enhance customer engagement and unit economics, we plan to:

 

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Facilitate conversion of reachable customers to active ones through more diversified product offerings and operational services, for example managing membership programs at the local level with client relation management tools that enable SBOs to precisely target the right customers with low transaction costs

 

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Enhance customer recognition and engagement by better understanding their lifecycle needs through multiple layers of data collected at the individual and business levels

 

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Increase customer unit value by upselling and cross-selling financial products, further understanding SBO demands by collating industry data and supply chain trends through the information exchange and social networking functionalities of our ecosystem

 

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Extend customer lifetime value by further exploring their other lifecycle needs, drawing on more customer insights obtained through new operational tools provided to SBOs

Deepen data advantage and further leverage technology

In order to deepen our data advantage and further leverage our technology, we plan to:

 

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Continue to leverage big data analytics to upgrade our risk models and fine-tune our product features based on our customers’ evolving preferences and changing local economic conditions as we continue to expand our customer base and collect more data and insights

 

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Strengthen our cloud-based infrastructure to enhance the efficiency and stability of our centralized data management system, which accumulates, analyzes and applies data to empower our core technological applications such as KYC, KYB, product matching, and customer segmentation and identification

 

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Invest in artificial intelligence capabilities and broaden application scenarios by establishing an AI open architecture to power the solutions and services recommendation system for SBOs and the sales and product approval system for institutional partners, as well as deploying AI collectors for post-loan monitoring and recovery

 

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Apply blockchain technology to safely and securely store our customers’ data in compliance with data regulations

OUR BUSINESS MODEL

The following table illustrates some basic facts about our business model.

 

		Core Retail Credit and Enablement Model
		Bank Funded Loans		Trust Funded Loans		Consumer Finance Loans		Lujintong Referrals
Outstanding Balance (RMB billions) as of December 31, 2022		356.0		190.8		29.7		Not applicable
% of credit risk borne by Lufax (% of new loans enabled in 2022)		21.3% through financing guarantee subsidiary		21.3% through financing guarantee subsidiary		Majority through consumer finance company		None
Funding by Lufax		None		None		100% through consumer finance company		None
Balance Sheet Treatment		Off–balance sheet guarantee liability		100% consolidated due to IFRS 10(1)		100% consolidated		Not applicable
Income Recognition		•  Retail credit and enablement service fees   •  Guarantee fees		Net interest income		Net interest income		Referral income from platform services

 

Note:

 

(1)	Based on new loans enabled in 2022.

Core retail credit and enablement model. Under our core retail credit and enablement model, we do not fund any of the loans ourselves. We work closely with funding partners through our financing guarantee subsidiary and its network of licensed branches in 29 provinces. We guarantee a portion of the risk on loan transactions together with our credit enhancement providers.

Our funding partners consist of the banks and trusts that fund the loans that we enable. We have relationships with 52, 60 and 75 banks as of December 31, 2020, 2021 and 2022, respectively, and 6 trust companies as of the same periods, none of which are affiliates of Ping An Group. Our bank partners do not include Ping An Bank, and our trust partners do not include Ping An Trust.

Our business development team actively seeks out and cultivates relationships with potential funding partners to help ensure that we have access to sufficient funding for the loans we enable. The number of our funding partners increased from 58 as of December 31, 2020 to 66 as of December 31, 2021 and 81 as of December 31, 2022. Our relationships with these funding partners have remained stable over the years. All 58 of the funding partners we had as of December 31, 2020 remained our funding partners as of December 31, 2021, and all 66 of the funding partners we had as of December 31, 2021 remained our funding partners as of December 31, 2022.

The total volume of new loans enabled under our core retail credit and enablement model that was funded by banks was 64%, 66% and 64% in 2020, 2021 and 2022, respectively, as compared to 36%, 34% and 36% that was funded by trusts in 2020, 2021 and 2022, respectively. Trusts are a widely used tool by industry peers for aggregating capital from individuals with high net worth, and using a combination of banks and trusts gives us the flexibility to source funding for the loans we enable at competitive rates. While we make funding decisions based on commercial considerations, the choice of funding source affects our financial statements in a number of ways due to the application of accounting rules.

 

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Bank-funded loans. We earn retail credit and enablement service fees on loans we enable that are funded by banks, and we earn guarantee income for the portion for which we provide credit enhancement through our financing guarantee subsidiary. We record the borrower acquisition costs under sales and marketing expenses. We take credit risk on bank-funded loans by providing guarantees. We had credit risk for 6.0%, 17.5% and 21.3% of new loan volume funded by banks in 2020, 2021 and 2022, respectively. The amount we guarantee through our financing guarantee subsidiary is reflected as off–balance sheet guarantee liabilities, and bank-funded loans are not consolidated on our balance sheet regardless of risk taking.

Trust-funded loans. Under IFRS 10, the accounting rules stipulate that we consolidate those trust plans over which we have control and from which we receive variable returns which are affected by our control over these trust plans. The arrangement of consolidated and unconsolidated trust plans is quite similar while the variable return could be different, depending on a dynamic mix of commercial factors. From an accounting perspective, we have power to direct the activities of these trust plans, which only invest in loans enabled by us and which contract with us as the sole provider of loan management services. During the Track Record Period, we have gradually lowered the APR on loans we enable. With the decrease in investor’s return as a result of decrease in market interest rate and the increase in the proportion of loans on which we bear credit risk, the magnitude of variable return attributable to funding partners and/or credit enhancement providers declines accordingly, while the magnitude of variable return earned by us keeps relatively stable. As a result, more loans enabled with trust plans were consolidated since we were entitled to higher proportion of the variable return. For the year ended December 31, 2022, we consolidated 100% of the new loan volume we enabled with trusts as the funding source. All cash flows directly attributable to these on–balance sheet loans, including the contractual interest income, service fees, guarantee fees, and borrower acquisition expenses, are recorded as net interest income using the effective interest method in accordance with IFRS 9. Borrower acquisition costs are deducted from net interest rather than being recognized separately. Our risk exposure in trust-funded loans is determined by the amount of guarantees we provide on these loans, and the consolidation of such loans onto our balance is not related to the amount of credit risk taken by us. We had credit risk for 3.7%, 16.2% and 21.3% of new loan volume funded by trusts in 2020, 2021 and 2022, respectively. We are not contractually obligated to repay the funding partners any shortfall in repayment in the event that the third-party credit enhancement providers failed to make the default claims payments to the relevant funding partners. Our relationship and the funding partners’ relationship with the third-party credit enhancement providers are on a pari passu basis.

Although for accounting purposes we are considered to control the trusts that we consolidate, we are not the trustee and we do not create or operate the trust. We work with the trust company that acts as the trustee to ensure that there is a potential use for the trust assets that will attract investors to provide capital to the trust. In our case, this means establishing the parameters for inclusive SMB and other loans that we believe we could enable with the trust assets. The trustee is responsible for putting the trust assets into active use, whether by making loans that we enable or by making other investments, in order to generate investment returns on the trust assets. We do not participate in the decision-making process of the trustee on the use of the trust assets. Under the trust arrangements, the trust companies make payments to the investors over the life of the trust, as well as paying the trustee’s remuneration and other expenses of the trusts, and we are entitled to receive any trust assets that still remain upon the expiration of the trust after all its obligations have been met. From both a legal and an accounting perspective we are the primary beneficiary of the trust.

We are not involved in the operations of the trust plan. Trust company is responsible to safeguard the assets in the trust plan based on the regulatory requirements of the trust industry. Assets in the trust plan, including restricted cash, are escrowed by the custodian bank, and the custodian bank is responsible for safeguarding the restricted cash.

We act as the asset service provider for the trust plan, and are responsible for referring borrowers to the trust plans. We have no liability to the trust companies or the trust investors.

As advised by our PRC Legal Adviser, during the Track Record Period and up to the Latest Practicable Date, our operations under the above trust arrangements with our financial institution partners had complied with the applicable existing effective laws and regulations in all material aspects and such trust arrangements are valid and binding under PRC laws and regulations.

Because there are loans we consolidate for which we do not provide credit enhancement (and so do not have credit risk exposure), and loans we do not consolidate for which we do provide credit enhancement (and so do have credit risk exposure), there is no correlation between our credit risk exposure and the amount of on–balance sheet loans we have. For example, we did not have credit risk exposure on 88.9%, 79.0% and 69.0% of the outstanding balance of loans that we consolidated on our balance sheet as of December 31, 2020, 2021 and 2022, respectively, whereas we did have credit risk exposure on 4.9%, 14.5% and 19.0% of the outstanding balance of loans that we did not consolidate on our balance sheet as of that same dates. For this reason, we separately disclose the proportion of loans on which we have credit risk and the proportion of loans that we consolidate. See “—Key Operating Metrics”. The use of trusts as funding partners affects our balance sheet but does not thereby affect how much credit risk we are exposed to. There is also no correlation between our credit risk exposure and whether the loan is secured by collaterals. Whether the loan is secured by collateral does not affect the credit risk exposure the Company is exposed to. For our secured loans, upon foreclosure, the proceeds we receive from the disposal reduce our actual credit net loss.

 

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Under our retail credit and enablement model, we earn fees for the enablement services as well as the guarantee that we provide (for trust funded loans the nature of the services we provide are the same as bank-funded loans although the fees are all classified under net interest income due to accounting standard requirement). The fees we earn for enablement services depend on the amount of services and the level of appraisal valuation work required during the loan application process. Our enablement services cover the entire loan process including borrower referral, risk analytics, and post-loan services. We collect one combined service fees covering both loan enablement and post-origination services from the borrowers on a monthly installment basis. In accordance with the principles of IFRS 15 applicable for off balance loans, we do not have an observable standalone selling price for the loan enablement services or post-origination services because we do not provide loan enablement services or post-origination services on a standalone basis in similar circumstances to similar customers. As a result, we use an expected cost plus margin approach to estimate the standalone selling prices of loan enablement services and post-origination services as the basis of revenue allocation. The pricing of guarantee fee we charged to borrowers is determined with reference to the expected risk of the borrowers and the guarantee fee is recognized based on the remaining balance we guarantee over the duration of loan.

Consumer finance loans. Our consumer finance subsidiary funds the loans that it enables and consolidates them all on its balance sheet. We recognize the income from the consumer finance loans as net interest income. Borrower acquisition costs are deducted from net interest rather than being recognized separately. Our consumer finance subsidiary bears risk on a large majority of the loans that it enables while the remainder is borne by third parties.

Lujintong. We charge our partner banks a referral fee based on the loan volume that is generated by Lujintong referrals, which we recognize as referral income from platform service. We do not make funding arrangements, perform credit analysis, bear any credit risk, co-design products or monitor any of the characteristics of any resulting loans such as tenor, repayment status, or outstanding balance.

Relationship with credit enhancement providers

In our core retail credit and enablement business model, how much credit risk we take on ourselves depends on a dynamic mix of commercial factors, including the pricing of third-party credit enhancement and the willingness of our funding partners to bear risk, as well as regulatory guidance. Our loan enablement can be done either with or without third-party credit enhancement, and if the cost of third-party credit enhancement is not commercially attractive or our credit enhancement providers, including Ping An Group, encounter any difficulties in continuing to provide credit enhancement services, we will increase the proportion of loans for which we bear credit risk, depending on the balance of risk and reward. The percentage of outstanding loans with credit risk exposure for our company was 6.3%, 16.6% and 23.5% as of December 31, 2020, 2021 and 2022, respectively. Going forward, we intend to increase the percentage of outstanding loans with credit risk exposure for our company to at least 30%. All of the third party credit enhancement providers that we used during the Track Record Period and up to the Latest Practicable Date were properly licensed during the life of the loans that they insured or guaranteed.

Due to the effects of COVID-19 lockdowns and other associated macroeconomic challenges on the Chinese economy, the cost of third-party credit enhancement remains at elevated levels, reflecting the historical loss experience on older vintages of loans. Furthermore, we remain conscious of the possibility that the PRC government will continue to encourage players in our industry to bear more risk on the loans that they enable or impose new restrictions on the use of third-party credit enhancement. For both of these reasons, we are looking to increase the amount of credit risk that we bear through our licensed financing guarantee subsidiary on the loans we enable, and continually reassessing the terms of our cooperation with third-party credit enhancement providers.

The financial impact of our increasing risk bearing through providing a higher proportion of guarantee on the loans we enable depends on the expected credit loss when pricing our guarantee and the actual credit loss incurred. We will generate incremental profit if actual credit loss is in line or lower than the expected credit loss, and on the other hand our earnings will be negatively impacted if actual credit loss exceeds the fees we earn from providing the guarantee. In today’s environment, third party credit enhancement providers are setting their prices higher than usual due to a more cautious assessment of future expected risk after incurring higher historical losses. Our extensive experience in post-loan monitoring and collection services gives us first-hand information regarding the latest market conditions and credit performance trend of the borrowers which allows us to reflect such into appropriate guarantee pricing with little time lag. As we expect macroeconomic recovery to be underway, our shift towards targeting borrowers with higher creditworthiness will improve the asset quality on newer vintages and likewise improve the financial performance of the credit enhancement that we provide. If our expectations prove to be correct, this would be a favorable time from a risk/reward perspective to increase the level of credit enhancement that we provide. However, the possibility that increasing impairment losses would outweigh higher credit enhancement premiums still remains a risk.

 

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Relationship with funding partners

We have ongoing discussions with our funding partners regarding our cooperation with third-party credit enhancement partners. The increase in the level of the risk that we bear over the Track Record Period has not affected our cooperation with funding partners to date. In terms of actual progress made, we have initiated dialogues with approximately two thirds of our 81 funding partners, and 10 banks and 5 trust companies among our partners have already agreed to the new arrangement where we do not engage external credit enhancement partners to provide credit enhancement services and we provide 100% of any credit enhancement through our licensed financing guarantee subsidiary. Moreover, our financial guarantee subsidiary is rated AAA by China Chengxin International Credit Rating (CCXI), in line with our current credit enhancement partners such as Ping An P&C. It also enjoys a strong capital position, with net assets of RMB13.4 billion, RMB47.4 billion and RMB47.9 billion as of December 31, 2020, 2021 and 2022, respectively, as well as abundant leverage available, with a 1.8x, 1.8x and 2.0x leverage ratio as of the same dates. Thus, we do not expect a significant impact on our relationship with funding partners.

We do not compete with banks for the same type of borrowers. Typical banks are designed to serve customers who demand very large ticket sizes, typically RMB10 million or higher, due to their set-up and cost structure. They generally do not have cost-effective means to reach SBOs and they may lack the required risk management capabilities to properly assess SBO risks. They often have no access to borrowers’ social data, such as location data, shared contact information and voiceprint data, which leads to difficulties in forming accurate customer portraits. This leads to a reliance on collateral-based assessment, which increases the approval time required and is difficult for many SMBs as they lack collateral that can be pledged. Furthermore, many traditional financial institutions continue to use conventional systems in the risk management process, which still require manual verification and a lengthy paperwork process, and makes loans to borrowers other than large enterprises uneconomical. Banks’ risk appetite is also constrained by their preference to keep their non-performing loan ratio at very low levels.

SBOs as individuals may only qualify for small credit amounts, such as credit cards, from banks unless they are willing and able to pledge assets as collateral. Our 17 years of accumulated proprietary data and our AI-driven dynamic risk modeling give us the ability to assess both the SBOs as individuals and their businesses together as a whole to achieve higher precision in credit evaluation and risk-based loan sizing and pricing in China. By arranging for credit enhancement or by providing it ourselves, we enable the banks to get comfortable with making business loans to SBOs both with and without collateral.

As part of the loan enablement process, we also provide post-origination services. Post-origination services include repayment reminders, payment processing, and collection services. Borrowers whose loans are overdue by one day are contacted by AI, and all other borrowers with overdue loans are contacted by a live collection agent. The relatively large average ticket size of the loans that we enable makes it more cost-efficient for us to escalate the collection process for delinquent loans, as compared to platforms that primarily enable small consumer loans. In line with common industry practice, we use third-party collection agencies to collect loans that are delinquent for more than 80 days. We regularly evaluate our agency partner companies based on their performance, service quality and compliance with relevant laws and regulations. See “Business—How We Enable Our Institutional Partners—Loan Servicing and Collection Services.”

Below is a summary of relevant financial and operational figures and metrics as of December 31, 2020, 2021 and 2022 to illustrate the unit economics for retail credit enablement, including loans enabled under our Puhui brand and through our consumer finance subsidiary. These financial figures provide a representative basis for understanding income, expenses, and profits relative to the business scale for our retail credit and enablement business.

 

		For the Year Ended December 31,
		2020				2021				2022
		(RMB in millions except for percentages)
Average outstanding loans(1)			516,000				609,000				648,000
Total income from retail credit and enablement business(2)			49,275				58,416				55,002
Revenue take rate(3) (%)			9.5	%			9.6	%			8.5	%
Operating expenses(4)			27,708				28,958				25,652
Impairment losses(5)			2,996				6,349				15,931
Profit before income tax expenses			18,571				23,109				13,420

Notes:

 

1.	The average of the average outstanding balances of loans enabled during the first, second, third and fourth quarter of 2022, rounded to the nearest billion.

2.	Includes loan enablement service fees, post-origination service fees, net interest income, guarantee income and the penalty fees and account management fees.

 

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3.	Calculated by dividing the aggregated amount of loan enablement service fees, post-origination service fees, net interest income, guarantee income and the penalty fees and account management fees by the average outstanding balance of loans enabled for each period.

4.

Includes sales and marketing expenses—borrower acquisition expenses, sales and marketing expenses—general sales and marketing expenses, general and administrative expenses, operation and servicing expenses and technology and analytics expenses. Operating expenses exclude sales and marketing expenses—investor acquisition and retention expenses, which is related to wealth management business, and sales and marketing expenses—referral expenses from platform service, which is related to Lujintong, both of which are not related to our retail credit and enablement business. Operating expenses include head office overhead and other business line expenses which are not exclusively related to our core retail credit and enablement business.

5.	Includes actual and expected losses from loan to customers, accounts and other receivables and contract assets related to our retail credit and enablement business and guarantee contracts.

We had a cumulative total of 19.0 million borrowers as of December 31, 2022. Our total outstanding balance of loans was RMB576.5 billion (US$82.9 billion) as of December 31, 2022, of which RMB29.7 billion (US$4.3 billion) or 5.1% consists of loans enabled by our licensed consumer finance subsidiary.

DECLINING FINANCIAL PERFORMANCE

Beginning in 2020, outbreaks of COVID-19 resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities across China. Normal economic life throughout China was sharply curtailed. We took a series of measures to protect our employees, including temporarily closing our offices, facilitating remote working arrangements for our employees, including our collection staff, and canceling business meetings and travels. The operations of some of our business partners and service providers were also constrained and impacted. The population in most of the major cities was locked down to a greater or lesser extent at various times and opportunities for discretionary consumption were extremely limited. In particular, many of our borrowers are small business owners, and some of them were unable to operate their businesses and lost the ability to repay their loans as a result of lockdowns or other measures instituted to control the spread of the pandemic. These events negatively affected our small business owner borrowers and have contributed to the steady rise in loan delinquency over the Track Record Period for loans we enabled.

COVID-19 has had a significant impact on the Chinese economy in 2021 and 2022. The demand for retail credit enablement in China is dependent upon overall economic conditions. General economic factors, including GDP growth, the interest rate environment and unemployment rates, may affect borrowers’ willingness to seek loans and ability to repay them. In addition, small business owners were particularly vulnerable to the effects of the temporary lock-downs that were imposed from time to time in different places in China to prevent the spread of COVID-19. Many small business owners cannot work remotely and rely on foot traffic and in-store purchases to generate sales. Weakening economic conditions, combined with the impact of COVID-19, have weighed on borrowers’ willingness to borrow and ability to repay.

In early 2022, a resurgence of COVID-19 led to a series of regional lock-downs across China and suspension of offline business activities. To comply with government measures, we adjusted our collection operations in Shanghai and certain other cities in China to focus on online activities, which adversely impacted the effectiveness of our collection services. Our core small business owner segment, which made up the majority of our new loans enabled in 2022, has been among the earliest and most significantly impacted by the deteriorating macro environment. In addition, there was a spike in the number of cases of COVID-19 reported in China during October and November of 2022, before the Chinese government began to modify its zero-COVID policy in December 2022. Immediately after the relaxation of the zero-COVID policy, we witnessed a surge in COVID-19 cases nationwide, before economic activities started returning back to normal. Our risk metrics further worsened for the fourth quarter of 2022 as a result of the effects on economic activity in China.

We witnessed worsening delinquency rates as well as rising credit impairment losses, weighing on our profitability in 2022. Our DPD 90+ delinquency rates, as measured by the outstanding balance of loans for which any payment is 90 to 179 calendar days past due divided by the outstanding balance of loans, increased from 1.2% as of December 31, 2021 to 2.6% as of December 31, 2022. Our credit impairment losses widened from RMB6.6 billion in 2021 to RMB16.6 billion (US$2.4 billion) in 2022, representing 10.7% and 28.5% of our total income, respectively. Our net profits decreased from RMB16.7 billion in 2021 to RMB8.8 billion (US$1.3 billion) in 2022.

 

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We maintained a stable cash and cash equivalents balance of RMB29.5 billion as of December 31, 2022, as compared to RMB26.5 billion as of December 31, 2021. We also had ample liquid financial assets of RMB43.4 billion (US$6.2 billion), consisting of RMB14.3 billion (US$2.1 billion) in term deposits with maturity over three months, and RMB29.1 billion (US$4.2 billion) in financial assets at fair value through profit or loss as of December 31, 2022. These liquid financial assets can be easily converted into cash to support working capital needs. In addition, our financing guarantee subsidiary maintained a low leverage ratio of 2.0x as of December 31, 2022, as compared to 1.8x as of December 31, 2021. Despite of recent fluctuations in our financial performance, our liquidity and capital position remains resilient, and provides a solid foundation for us to navigate through business cycles.

We experienced a similar cycle of macroeconomic challenges at the onset of the COVID-19 pandemic in 2020, when the Wuhan lockdown affected our collection operations in a way similar to the business disruption we experienced in 2022. At that time, we adopted an enhanced risk-management measure in customer selection by tightening lending standards in the regions and industries that were most impacted by the pandemic. The negative impact from the pandemic was concentrated within a limited number of regions and we successfully drove a swift recovery in our credit and business performance in the period following the initial COVID-19 shock. Our total volume of new loans increased from RMB565.0 billion in 2020 to RMB648.4 billion in 2021. The DPD 90+ delinquency rate quickly restored to 1.3% within 3 months after reaching a peak of 1.8% as of June 30, 2020. Our net profits increased from RMB12.3 billion in 2020 to RMB16.7 billion in 2021.

The wide-spread lock-downs across China and the recent resurgence of the pandemic and spike of inspected cases in 2022 had a larger impact on business activities and our performance as compared to the beginning of COVID-19 pandemic. We thus have implemented broader adjustments to our credit policy and business operations. There are three stages to the approach we have adopted:

Stage 1: Broader credit policy adjustment

During the course of 2022, we tightened up our credit standards to make clear choices in customer risk ratings, geography and channel.

 

•

Customer risk ratings: we raised our risk acceptance criteria across all segments to focus on loan enablement to high quality customers with better creditworthiness. For example, we have cut loan enablement to borrowers with a credit score of R5 or lower.

 

•

Geographical selection: while credit quality deterioration took place across the board in China in 2022, we witnessed growing differences in economic resilience and underlying credit performance by region. We carefully reviewed our loan portfolio by geographies across China and made tradeoffs as to where are we going to apply the credit cut-off. The contribution of new loans enabled from the top third provinces, as measured by the flow rate of the loans, was higher in the fourth quarter of 2022 than in the third quarter of 2022.

 

•

Channel selection: we scaled down our third party channels as we have noticed deterioration of credit quality of borrowers sourced through those channels.

Such measures have allowed us to sustain our existing business on the back of macroeconomic challenges.

Stage 2: Business adjustment and operating efficiency improvement

Starting from the third quarter of 2022, we have prioritized asset quality over asset growth in new loan enablement by focusing on high quality customers in more economic resilient regions. In addition, we have adopted various cost control measures to manage operational and customer acquisition costs. We streamlined management layers and revised our direct sales force to be more nimble and productive. We reduced the headcount of our direct sales force from approximately 58,000 full-time employees as of September 30, 2022 to approximately 46,000 full-time employees as of December 31, 2022. We have retained the more productive employees in our direct sales force, which has resulted in improved productivity in January 2023 as compared to the fourth quarter of 2022. Our cost-to-income ratio decreased from 48.8% for the year ended December 31, 2021 to 46.3% for the year ended December 31, 2022. We will continue to make appropriate cost control and operational adjustments based on business needs.

 

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Stage 3: Back to sustainable growth and profitability as economy is returning to normal

In view of the elevated credit insurance pricing from third-party credit enhancement providers, we have started to undertake discussions with funding partners and diversified our credit enhancement arrangements by providing more credit enhancement through our own financing guarantee subsidiary. We target to complete these discussions with the majority of our funding partners in the next few quarters. We believe such initiatives are essential to protecting our margins and allowing us to maintain strategic flexibility. As of the Latest Practicable Date, 15 of our 81 current funding partners have already agreed to the arrangement under which our financing guarantee subsidiary provides the full provision of credit enhancement, gradually alleviating future margin pressure from the elevated fees currently sought by third-party credit enhancement providers. We are well positioned to increase the proportion of loans which we bear risk given our stable funding sources, long term relationship with our institutional partners, and the ample headroom from our financing guarantee subsidiary’s low guarantee leverage ratio.

The abovementioned adjustments will provide a runway for our business to return to normal on the back of normalized credit metrics and a reboot of the Chinese economy following the modification of the zero-COVID policy.

As SMBs are highly dependent on the macroeconomic environment, we expect that the operations of SMBs will gradually return to normal following the recent COVID-19 policy changes in China. We have consciously chosen to scale down our new loan volume, which has resulted in and will continue to lead to declining income in the next few quarters. Due to the lagging effect of SMB business recovery, we also expect our delinquency rates to remain at elevated levels and indemnity loss to continue to increase given default of the loans we enabled in prior years during the credit deterioration period, weighing on our near-term profitability in the next few quarters. We expect indemnity loss to continue to maintain at a relatively elevated level for a few quarters in 2023 due to the default of those loans we enabled during the credit deterioration period in 2022. We have adopted a prudent provision policy for credit impairment loss, taking into account the potential increase in the proportion of loans for which we bear credit risk and our outlook on macroeconomic and credit conditions. The indicators that the Group is monitoring closely include consistent improvement in and stabilization of the flow rate as well as the asset quality of new loan vintages compared with older ones as measured by delinquency rates by vintage. Improvement in financial performance should follow in the coming quarters after recovery of these indicators. While it is too early to say which phase of the U-shape we are at, leveraging our experience with driving business recovery from the Wuhan lockdown and throughout the COVID-19 period, we believe we can deliver a U-shaped recovery in our business, though the timing and magnitude of any such recovery are still uncertain and subject to many contingencies.

HOW WE ENABLE SMALL BUSINESS OWNERS AND RETAIL BORROWERS

Our Borrowers

Under our Puhui brand, we target small business owners who have residential property, automobiles, financial assets and some access to commercial bank credit. Small business owners often need larger ticket size loans on short notice for imminent commercial operating needs of their businesses and yet are underserved by traditional financial institutions. We also enable loans to salaried workers who need large ticket size consumption loans for purposes such as education, home decoration, and purchase of consumer durables.

Many of our SBO borrowers have fewer than 50 employees and annual revenues of less than RMB30 million. Some of them do business through a corporation, others through a partnership, still others as a sole proprietor, but regardless of the legal form of the business, the owner of the business is always the borrower in his or her personal capacity, so that the owner cannot avoid repayment of the loan on the basis of having limited liability for the debts of the entity.

Our SBO borrowers are engaged in a very diverse set of businesses. These include retail and wholesale commerce, construction and renovation, manufacturing, business services, scientific research, information technology, hospitality, and residential services, among others. Borrowers from the top five industries amounted to 75% of our volume of new loans enabled during the fourth quarter of 2022. Some of them operate more than one business, either simultaneously or sequentially. They are also geographically diverse: no city accounted for more than 3.7% of the outstanding balance of general unsecured and secured loans we enabled as of December 31, 2022. This diversity in economic activity and geographical distribution diversifies our risk.

As of December 31, 2022, we had over 6.6 million cumulative SBO borrowers and around 2.5 million SBO borrowers with loans outstanding under our Puhui brand. Small business owners accounted for approximately 72%, 78% and 86% of all new loans we enabled under our Puhui brand in 2020, 2021 and 2022, respectively, and 68%, 76% and 82% of the balance of such loans as of December 31, 2020, 2021 and 2022, respectively. As we continue to target small business owners, we expect them to account for an even larger percentage of all such new loans we enable going forward.

 

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In response to ongoing developments in the Chinese economy, we have been concentrating our efforts on borrowers for our general unsecured loans at the higher end of our internal ranking of creditworthiness. In 2022, of the borrowers of loans under our Puhui brand, 91% had credit cards, 43% owned residential property, 45% had life insurance policies, and 53% had no unsecured loans outstanding from banks. Those borrowers whom we define as high quality borrowers, i.e. borrowers ranked R3 or higher based on our recently adopted R1 (highest) to R6 (lowest) borrower quality ranking system, accounted for 48.2% of the general unsecured loans we enabled in 2022, as compared to 31.8% under the same criteria in 2021.

Beginning in June 2020, we also make loans through our newly established consumer finance subsidiary. Borrowers of consumer finance loans are typically looking to meet personal short-term cash flow needs or to make discretionary purchases of consumer goods.

We attach great importance to complaints from borrowers and have put in place a series of internal complaint-handling policies and procedures to timely and effectively address the filed complaints. We also establish a consumer protection committee to supervise the implementation and execution of our complaint-handling policies and procedures as well as a customer support team with over 600 members dedicated to handling borrowers’ complaints. In addition, we consider complaint-handling capabilities in evaluating the performance of senior management members of our company as an important metric that impacts their performance rankings. During the Track Record Period and up to the Latest Practicable Date, we had not experienced material complaints from borrowers. The customer complaint rate for 2020, 2021 and 2022 was 0.0026%, 0.0011% and 0.0008%, respectively.

Sourcing Borrowers

We had a cumulative total of 19.0 million borrowers as of December 31, 2022. The number of active borrowers for whom we enabled loans increased from 4.4 million in 2020 to 4.9 million in 2021 and decreased to 4.8 million in 2022. We source borrowers through a variety of channels. Our new loan volume based borrower acquisition cost as a percentage of the volume of new loans we enabled was 2.4%, 2.2% and 2.0% for the years ended December 31, 2020, 2021 and 2022, respectively.

Retail Credit and Enablement

Direct Sales

We had a direct sales network of over 40,000 full-time employees as of December 31, 2022, of whom over 95% have a junior college education or above. Together they covered approximately 300 cities across China. Our direct sales force proactively seeks out potential borrowers using their own knowledge and contacts with the help of a specialized mobile app designed to optimize their time and efforts. This system tracks and shows location and travel data for all of our sales employees in real time. Our system can further overlay an AI heat map showing our borrowers and their borrowing characteristics, which allows us to identify regions with higher sales potential.

Our direct sales channel gives us the capability to enable loans with larger ticket size as these borrowers tend to have more demand for face-to-face consultation. These consultations typically encompass explanation of how our credit application process works, our overall assessment criteria, loan repayment terms, as well as the loan collection process should the borrowers fails to repay on time. For borrowers who are less familiar with our online loan application process, our direct sales team would provide on the ground assistance to guide them through the usage of the online application system to ensure a seamless customer experience.

In supervising and evaluating the performance of our direct sales network, we give close attention to the creditworthiness of the borrowers they bring in. The productivity of our direct sales force has been stable across the Track Record Period, as evidenced by the volume of new loans sourced per employee per month, which was RMB402 thousand in 2020, RMB427 thousand in 2021 and RMB363 thousand (US$52.2 thousand) in 2022.

Our direct sales channel was responsible for sourcing RMB269.5 billion, or 48.3%, of our total volume of new loans in 2020, RMB309.6 billion, or 49.7%, of our total volume of new loans in 2021 and RMB247.1 billion (US$35.5 billion), or 56.6%, of our total volume of new loans in 2022. Of the loans sourced by our direct sales channel in 2022, 79% were for borrowers located in cities that we classify internally as more economically developed.

Consumer Finance

Our consumer finance subsidiary acquires customers online through our consumer finance app and traffic platforms and offline through our direct sales network. In 2022, we sourced 42.2% of our consumer finance borrowers offline and 57.8% online. The number of borrowers with outstanding consumer finance loans increased from 168 thousand as of December 31, 2020 to 608 thousand as of December 31, 2021 and further to 1.3 million as of December 31, 2022.

 

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Loan Products

We enable both secured and general unsecured loans under our Puhui brand. The typical borrower of a secured loan is a small business owner who uses the loan proceeds for business operations. Borrowers of general unsecured loans include both small business owners and salaried workers who use the loan proceeds for business operations or personal consumption. We base our credit assessment on individual data for salaried workers and a combination of individual and business data for small business owners, plus the characteristics of the collateral for borrowers of secured loans, who are almost all small business owners. We only accept residential property and automobiles as collateral. We also make consumer finance loans to retail borrowers through our licensed consumer finance subsidiary. The following chart summarizes some of the characteristics of these various borrowers and their loans in 2022:

Core Retail Credit and Enablement Model

 

		General Unsecured Loans		Secured Loans		Consumer Finance Loans
Credit Risk Assessment		•  Individual, business		•  Individual, business, collateral		•  Individual
Average Ticket Size		•  RMB240,179 (US$34,536)		•  RMB438,675 (US$63,078)		•  RMB5,979 (US$860)(1)
Average Contractual Tenor		•  38.0 months		•  38.8 months		•  N/A
Average APR		•  21.1%		•  15.7%		•  20.6%
Repayment Schedule		•  Fixed installments		•  Fixed installments or balloon payment		•  Fixed installments

 

Note:

 

(1)	This represents the average single drawdown amount for consumer finance loans.

 

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The following table shows the outstanding balance of loans under Puhui and our consumer finance subsidiary by product as of the dates indicated.

 

		As of December 31,
		2020								2021								2022
Outstanding Balance		(RMB)				(%)				(RMB)				(%)				(RMB)				(%)
		(in billions, except percentages)
General unsecured loans(1)			447.8				82.1				520.1				78.7				423.8				73.5
Secured loans			93.7				17.2				129.3				19.6				123.1				21.4
Consumer finance loans			3.6				0.7				11.6				1.8				29.7				5.1
Total			545.1				100.0				661.0				100.0				576.5				100

 

Note:

 

(1)	General unsecured loans include RMB0.4 billion of legacy products in 2020.

The following table shows the volume of new loans by product during the years indicated.

 

		For the Year Ended December 31,
		2020								2021								2022
Volume of New Loans		(RMB)				(%)				(RMB)				(%)				(RMB)				(%)
		(in billions, except percentages)
General unsecured loans			436.1				77.2				481.7				74.3				318.6				64.3
Secured loans			122.3				21.7				141.5				21.8				118.2				23.9
Consumer finance loans			6.5				1.2				25.3				3.9				58.6				11.8
Total			565.0				100.0				648.4				100.0				495.4				100

The following table shows our quarterly loan vintage based on our outstanding loan balance enabled during the Track Record Period:

 

		Outstanding Loan Balance Enabled (RMB billions)(1)
		2020																2021																2022
Vintage		Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4
2017			9.0				3.9				0.9				0.1				0.01				—				—				—				—				—				—				—
2018			70.1				48.8				30.9				18.4				9.7				4.3				1.2				0.1				0.02				—				—				—
2019			283.4				214.1				159.4				119.8				87.6				63.2				43.2				27.7				16.0				8.0				2.7				0.4
2020			140.3				250.9				341.6				402.9				320.7				251.9				195.8				151.9				114.4				84.0				58.3				38.0
2021			—				—				—				—				159.1				281.5				396.0				469.7				386.1				312.9				249.1				197.6
2022			—				—				—				—				—				—				—				—				138.4				231.3				298.4				310.9
Total			502.8				517.6				532.8				541.2				577.1				600.8				636.2				649.4				655.0				636.3				608.6				546.9

 

Note:

 

1.	Excluding legacy products and consumer finance loans.

 

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Loans are available on flexible terms. The loan products we enable under our Puhui brand permit large ticket sizes, long tenors and early repayment options, which are important features for small business owners.

The maximum permitted ticket size in 2022 was RMB10 million for secured loans and RMB1 million for general unsecured loans. Average loan size for these loans was considerably smaller. The following table shows the average ticket size for loans we enabled in Renminbi for both general unsecured loans and secured loans and the average drawdown in Renminbi for consumer finance loans. The increase in the average ticket size is generally due to our pivot to serving more SBOs and higher quality borrowers.

 

		As of December 31,
		2020				2021				2022
Average Ticket Size / Drawdown						(RMB)
General unsecured loans			164,483				199,502				240,179
Secured loans			390,467				430,795				438,675
Consumer finance loans			3,301				3,797				5,979

In general, the maximum contractual tenor offered on general unsecured loans and secured loans is 36 months, and most borrowers choose a tenor of 36 months. In 2021, we began to enable loans with contractual tenors of up to 60 months to selected borrowers, but we discontinued this practice in 2023. The following table shows the average contractual tenor for loans we enabled in months, for both general unsecured loans and secured loans.

 

		As of December 31,
		2020				2021				2022
Average Contractual Tenor						(months)
General unsecured loans			35.3				35.4				38.0
Secured loans			36.0				35.9				38.8

Due to early repayment options, the effective tenor will be shorter than the average contractual tenor. The table below sets forth the estimated effective tenor of loans that we do not consolidate on our balance sheet, after considering assumptions of early repayment, as of December 31, 2020, 2021 and 2022.

 

		As of December 31,
		2020				2021				2022
Estimated Effective Tenor for Off–Balance Sheet Loans						(months)
General unsecured loans			19.18				19.37				19.75
Secured loans			12.64				13.44				14.62

 

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Our consumer finance revolver loans have a typical contractual tenor of 12 months, and our consumer finance installment loans have a maximum contractual tenor of 36 months.

We enable loans with fixed installment and balloon payment repayment schedules. As of December 31, 2022, approximately 91.0% of the loans we enabled under our Puhui brand had fixed installment repayment schedules and the other 9.0% had balloon payment schedules. Fixed installment loans include loans where the sum of the principal repayment and interest payment is fixed and service, insurance and guarantee fees gradually decrease as the outstanding balance decreases. We do not offer an interest-free period in any of the loans we enable under our Puhui brand.

In 2022, our average APR for new loans was 21.1% for general unsecured loans, 15.7% for secured loans and 20.6% for consumer finance loans. APR represents the monthly all-in borrowing cost as a percentage of the outstanding balance annualized by a factor of 12. The all-in borrowing cost comprises the actual amount of (a) interest, (b) insurance premiums or guarantee fees and (c) retail credit enablement service fees. The following table shows our average APR for new loans during the Track Record Period for general unsecured loans, secured loans and consumer finance loans. We have not enabled any loans with an APR higher than 24% for loan applications after September 4, 2020. As of December 31, 2022, the total outstanding balance of enabled loans with an APR higher than 24% but below 36% amounted to RMB8 billion representing 1% of our total outstanding balance of enabled loans.

 

		As of December 31,
		2020				2021				2022
Average APR for New Loans						(%)
General unsecured loans			26.7				22.6				21.1
Secured loans			17.4				16.2				15.7
Consumer finance loans			19.1				20.3				20.6

General Unsecured Loans

General unsecured loans target both small business owners and salaried workers. In 2022, approximately 82.0% of the general unsecured loans we enabled, by volume, were borrowed by small business owners, and 18.0% by salaried workers. The average contractual tenor of new general unsecured loans we enabled during this period was 38.0 months and the average ticket size was RMB240,179 (US$34,536).

Our outstanding balance of general unsecured loans enabled was RMB447.5 billion, RMB520.1 billion and RMB423.8 billion (US$60.9 billion) as of December 31, 2020, 2021 and 2022, respectively. Our total volume of general unsecured loans enabled amounted to RMB436.1 billion, RMB481.7 billion and RMB318.6 billion (US$45.8 billion) in 2020, 2021 and 2022, respectively.

 

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The following table presents the volume of general unsecured loans we enabled by ticket size for the years indicated:

 

		For the Year Ended December 31,
		2020								2021								2022
Ticket Size		(RMB)				(%)				(RMB)				(%)				(RMB)				(%)
		(in billions, except percentages)
Up to RMB50,000			12.9				2.9				7.2				1.5				3.0				1.0
RMB50,001 to RMB100,000			57.7				13.2				38.5				8.0				18.5				5.8
RMB100,001 to RMB200,000			146.2				33.5				138.0				28.6				68.1				21.4
RMB200,001 to RMB300,000			131.4				30.1				159.2				33.1				93.5				29.3
RMB300,001 or above			88.0				20.2				138.8				28.8				135.5				42.5
Total			436.1				100.0				481.7				100.0				318.6				100.0

We focus on enabling loans with higher ticket size, which is an important feature for satisfying the needs of small business owners. As shown in the table above, only a small and decreasing percentage of the general unsecured loans we enabled had ticket sizes of RMB50,000 or lower, and the percentage of loans with ticket sizes over RMB300,000 has more than doubled since 2020.

Secured Loans

Secured loans target small business owners. Approximately 95.5% of the secured loans we enabled, by volume, were borrowed by small business owners. In 2022, the average contractual tenor of new secured loans we enabled was 38.8 months and the average ticket size was RMB438,675 (US$63,078).

Our outstanding balance of secured loans enabled was RMB93.7 billion, RMB129.3 billion and RMB123.1 billion (US$17.7 billion) as of December 31, 2020, 2021 and 2022, respectively. Our total volume of secured loans enabled amounted to RMB122.3 billion, RMB141.5 billion and RMB118.2 billion (US$17.0 billion) in 2020, 2021 and 2022, respectively.

For our secured loans, we focus on SBOs who have residential property located in economically more developed cities which can be pledged as collaterals, given such cities’ relatively stable economic growth and real estate prices. The majority of the outstanding balance of secured loans is secured by real estate and the remainder by automobiles. The real estate collateral is well diversified across China, with a large proportion located in more developed cities. As we continue to focus on serving more SBOs and higher quality borrowers, there has been an increase in the average ticket size for our secured loans during the Track Record Period. As a result, the average loan-to-value ratio at origination for the secured loans we enabled has grown from 67% in 2020 to 71% in 2021 and further to 74% in 2022.

 

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Consumer Finance Loans

We began to make consumer finance loans in June 2020 through our licensed consumer finance subsidiary. Borrowers of consumer finance loans are typically looking to meet personal short-term cash flow needs or to make discretionary purchases of consumer goods.

Our consumer finance loans include both revolver loans and installment loans. Our consumer finance revolver loans have a typical contractual tenor of 12 months, and our consumer finance installment loans have a maximum contractual tenor of 36 months. Our consumer finance loans had average drawdowns of RMB3.3 thousand, RMB3.8 thousand and RMB6.0 thousand in 2020, 2021 and 2022, respectively.

Our outstanding balance of consumer finance loans was RMB3.6 billion, RMB11.6 billion and RMB29.7 billion (US$4.3 billion) as of December 31, 2020, 2021 and 2022, respectively. Our total volume of consumer finance loans amounted to RMB6.5 billion, RMB25.3 billion and RMB58.6 billion (US$8.4 billion) in 2020, 2021 and 2022, respectively.

 

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OUR TRANSACTION PROCESS AND FUND FLOW

Loan Application and Credit Assessment Workflow

The charts below illustrate the loan application and credit assessment workflow when loans are enabled by our core retail credit and enablement model and by our consumer finance subsidiary.

Core Retail Credit and Enablement Model

 

Step 1: We source borrowers under our Puhui brand primarily through offline direct sales channel, as well as a large and robust set of channel partners. Once an individual is identified as a prospective customer, he will be prompted to first create a customer account for online loan application.

Step 2: After receiving the prospective borrower’s loan application, we will conduct pre-screening including KYC, credit assessment, and product recommendation via Luzhangfang, which is supported by big data, AI and multi-dimensional analytic models. We initiate credit assessment with AI interviews at the front-end and human support at the back-end. These assessments include observations from AI video interview, customer identification, voiceprint matching and referencing historical credit record. We may also ask the prospective borrower to provide residential property and automobiles as collaterals alongside their loan application for credit assessment and product recommendation.

 

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Step 3: Guarantee from our licensed financing guarantee subsidiary is provided to the borrowers. Credit enhancement options (credit guarantee insurance or guarantee) from third party credit enhancement providers are also offered to the borrowers, which they can apply for to enhance their loan application.

Step 4: Once the prospective borrower accepts the loan product we recommend, we will submit their loan application to the respective funding partner.

Step 5: Subsequently, the funding partners will also conduct their own credit assessment. If our funding partners reject the loan application of the prospective borrower, we will refer the prospective borrowers to other funding partners and resubmit their loan application. We will repeat this process for a total of three times for our prospective borrowers who have been previously rejected.

Step 6: If our financial institution partners accept the loan application, we will notify the prospective borrower on the final loan approval decision. The total loan APR and its components, including the interest, insurance premiums or guarantee fees, and the retail credit and enablement service fees, as well as the details of the loan repayment schedule and penalty fees are also presented to the borrowers on the app. We will explain the items to the borrowers, and the communication will be recorded. After the borrowers acknowledge the information and terms, we will enter into a borrower contract with them.

Step 7: Our funding partners will disburse the loans to the borrower directly upon the loan drawdown.

Consumer Finance

 

Step 1: Our consumer finance subsidiary acquires customers through both online and offline channels, primarily through its own consumer finance app, third party traffic platforms, as well as through its direct sales network. Once an individual is identified as a prospective borrower, he will be prompted to first initiate a loan application.

 

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Step 2: After receiving the prospective borrower’s loan application, our consumer finance subsidiary will conduct screening including KYC and credit assessment.

Step 3: Our consumer finance subsidiary will engage guarantor to provide credit enhancement based on the borrower’s credit profile.

Step 4: If our consumer finance subsidiary accepts the loan application, the prospective borrower will be notified on the final loan approval decision. Afterwards, we enter into a borrower contract with them.

Step 5: Our consumer finance subsidiary will disburse funds to the borrower directly upon loan drawdown.

The Flow of Funds

The charts below illustrate the flow of funds when loans are enabled by our core retail credit and enablement model and by our consumer finance subsidiary.

Core Retail Credit and Enablement Model

 

Step 1: Our funding partners will directly disburse loans to borrowers.

Step 2: For normal loans, borrowers will repay the loan principal and interests directly to our funding partners.

Step 3: Once loans become overdue, we will initiate the loan collection process.

Step 4A: For loans that are overdue for 1-79 days, borrowers can still repay the overdue principal and interest directly to our funding partners.

 

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Step 4B(I): Once a loan becomes overdue for over 80 days, under our joint guarantee model where we guarantee the loan under our licensed guarantee subsidiary together with the credit enhancement providers, our licensed financing guarantee subsidiary (Puhui Guarantee) and credit enhancement providers will make the default claims payment to our funding partners, based on the respective guaranteed percentages and pre-agreed arrangements with the funding partners. Default claims payment is severally, not jointly, provided by our financing guarantee subsidiary and third party credit enhancement providers, and our financing guarantee subsidiary is only liable for the default claims payment in respect to the portion that it guarantees.

Step 4B(II)i: Once we are able to recover the principal and interests from borrowers, our guarantee subsidiary and credit enhancement partners will receive the payments from the borrowers based on the contractual arrangement.

Step 4B(II)ii: For our secured loans, upon foreclosure, we act on behalf of the credit enhancement providers and our financing guarantee subsidiary, disposes of the collaterals via auction or consignment and use the proceeds to minimize or mitigate the losses for credit enhancement providers and our financing guarantee subsidiary, based on the pre-agreed guarantee percentage split.

Under our core retail credit and enablement model, we receive retail credit and enablement service fees, guarantee income and net interest income from our borrowers, as well as account management service fees from our credit enhancement providers. In some cases, we may receive performance-based fees from funding partners depending on credit performance of loans enabled by us.

The fund flow under different funding sources is quite similar. Once a new loan application passes our credit assessment process, we will refer the borrower to a funding partner and, if applicable, a credit enhancement provider for them to conduct an independent evaluation of the loan application. If the funding partner finds the borrower acceptable, it disburses the loan to the individual borrower directly.

As for the claim process, once a loan becomes delinquent for 80 days, a notice of claim will be sent to the credit enhancement provider, and the credit enhancement provider will typically complete its review and make the payment to the funding partner. For on–balance sheet loans, the payment is made to the consolidated trust plans.

Consumer Finance

 

 

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Step 1: Our consumer finance subsidiary will fund the loans and disburse the loans directly to the borrowers.

Step 2: We pay guarantee fee to the guarantor (our financing guarantee subsidiary or third party guarantor) based on contractual arrangements, if the guarantee is in place. There is no joint guarantee arrangement between our financing guarantee subsidiary and third party guarantor. Our third party guarantor does not involve entity of Ping An Group.

Step 3: For normal consumer finance loans, borrowers will repay the loan principal and interest directly to our consumer finance subsidiary.

Step 4: Once loans become overdue, we will initiate the loan collection process.

Step 5A: For overdue loans without guarantee in place, the borrowers will repay the relevant overdue principal and interest directly to our consumer finance subsidiary.

Step 5Bi 5Bii: When loans with guarantee in place become overdue, the guarantor (our financing guarantee subsidiary or third party guarantor) will make the default claims payment to our consumer finance subsidiary for the portion of loans they guarantee based on contractual arrangements. The borrowers will subsequently repay the relevant overdue amount which is guaranteed to the guarantor, and the portion which is not guaranteed to our consumer finance subsidiary. The flow of funds and the contractual arrangement are the same regardless of our financing guarantee subsidiary or third party guarantor being the guarantor.

We receive net interest income from our borrowers for our consumer finance business.

Third-party Payment Channels and Banks

Core Retail Credit and Enablement Model

 

We engage third-party payment providers and banks in handling fund transfers and settlements under our core retail credit and enablement model. The role of the third-party payment providers and banks is to distribute funds from borrowers to us, our funding partners and credit enhancement providers based on the pre-agreed arrangement. We receive retail credit and enablement service fees, guarantee income and interest income via the third-party payment providers and banks. We are not involved in the loan disbursement arrangement between our funding partners and borrowers.

 

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Consumer Finance

 

Similarly, we also engage third-party payment providers and banks for our consumer finance business. Our third-party payment providers and banks will distribute the funds from our consumer finance subsidiary to the borrowers, and from the borrowers to our consumer finance subsidiary and guarantor partners, if applicable. We receive interest income via the third-party payment providers and banks.

We pay payment process expenses to our third-party payment providers and banks based on the fund transfers and settlement volume. The payment process expenses for the year ended December 31, 2020, 2021 and 2022 were RMB1.2 billion, RMB1.2 billion and RMB1.1 billion, respectively.

 

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OUR GUARANTEES

Substantially all new loans enabled during the Track Record Period under the core retail credit and enablement model are jointly guaranteed by our own financing guarantee subsidiary and third party credit enhancement providers. The remainder is guaranteed only by us without third party credit enhancement. For our consumer finance business, our consumer finance subsidiary directly provides funding and takes a majority of the credit risk, while the remainder of the credit risk is guaranteed by third party guarantors or our financing guarantee subsidiary. The guarantee arrangement between our consumer finance subsidiary and our financing guarantee subsidiary is due to commercial factors. As our consumer finance business, which commenced in 2020, is scaling up, we choose to cooperate with our financing guarantee subsidiary and third party guarantor to manage credit risk exposure. There is no joint guarantee arrangement between our financing guarantee subsidiary and third party guarantor. Our third party guarantor does not involve entity of Ping An Group.

We work closely with funding partners through our financing guarantee subsidiary and its network of licensed branches in 29 provinces. For loans funded by third parties where the lender requires credit enhancement, our financing guarantee subsidiary will determine how much risk we will guarantee on each new loan transaction based on a dynamic mix of regulatory and commercial factors. In light of latest regulatory development, we believe credit enablers are encouraged to show more commitment to the loans enabled by taking on more credit risk. In addition, we also take into account the risk appetite of funding partners, the prices quoted by credit enhancement providers, and our own capital position when deciding the proportion of credit risk we take through our financing guarantee subsidiary. These apply to both our bank-and trust-funded loans. Our credit enablement model through our financing guarantee subsidiary makes it possible for us to share data with our institutional partners in a manner that is fully compliant with regulatory requirements. We had RMB21.0 billion, RMB64.7 billion and RMB68.5 billion (US$9.8 billion) in off–balance sheet financing guarantee contracts as of December 31, 2020, 2021 and 2022, respectively.

The pricing for our guarantee service takes into consideration of the underlying cost to guarantee such loans, which is determined mainly by the borrowers’ owned assets, collaterals, credit records from the People’s Bank of China and their customer type (SBOs or individuals). We also take into account market pricing to ensure our services remain competitive. We are not responsible for the pricing offered by the third party credit enhancement providers.

We made default claims payment of RMB0.8 billion, RMB1.6 billion and RMB7.0 billion in 2020, 2021 and 2022, respectively, representing 2.3%, 1.5% and 5.2% of the loans which we had credit risk exposure during that period. We recovered RMB0.5 billion, RMB0.5 billion, and RMB0.3 billion of default claims payment in 2020, 2021 and 2022, respectively.

Pursuant to the relevant regulations and rules regarding financing guarantee companies, the minimum registered capital of a financing guarantee company is not less than RMB20 million and its net assets must be no less than one-fifteenth of the total outstanding guaranteed amount it has guaranteed. Our financing guarantee subsidiary had net assets of RMB47.9 billion in aggregate as of December 31, 2022 and a leverage ratio of approximately 2.0×.

VALUE-ADDED SERVICES FOR SMALL BUSINESS OWNERS

We launched our new small business owner value-added services platform in November 2022. This value-added services platform, branded Ludiantong (陸店通), is an open-platform design and is being populated with digital operating tools and industry-focused content to support business development for small businesses. We intend to use this platform to engage potential customers at an earlier stage, deepen our interaction with existing customers, and create both new cross-sell opportunities and a new source of customer referrals. Our goal is to create an ecosystem that is interactive among customers as well as between customers and our direct sales team, and that supports business owners whose end customers are other small businesses or consumers.

 

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Ludiantong offers tools and functions for small business owners to acquire customers and increase customer engagement. It enables small business owners to attract potential customers and gain deeper insights into their behavior via the data collected. It also helps small business owners to better identify the needs of their existing customers by leveraging the insights of other ecosystem participants and to expand their business networks. We expect to launch more features on Ludiantong going forward, including customer referral, service bundling offers and customer relationship management tools, and to foster the growth of an SBO ecosystem around our value-added services platform.

Customer Experience

The Customer Journey

Step 1: loan application

 

App interface

The loan application process is entirely online and paperless. Our mobile app makes it easy, convenient and hassle-free for borrowers to apply for our loans. We acquire borrowers offline but enable them to submit their loan applications online through our mobile app. Since 2019, all of our transactions have occurred on our mobile app.

 

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The process of creating an account is quick and simple. A borrower can create an account with us using a mobile phone number. Once an account has been created, the borrower will be able to apply for our loan products online.

We have access to data and analytical insights that enable us to make an immediate credit assessment decision once we have verified the borrower’s identification. The borrower’s identity is verified through various means, including facial recognition.

If borrowers wish to provide documentation to support their risk profile and increase their credit limit, our mobile app allows borrowers of general unsecured loans to upload insurance policies, automobile registration, residential mortgages and deeds, and tax bills. They scan the documents and our system reads them through optical character recognition and natural language processing. Our system guides borrowers towards the most suitable loan options based on the information provided. The information will be considered as part of our credit assessment process and may impact the approved loan amount and borrowing cost.

We believe that offline teams are essential for penetrating our target markets but that online processes are necessary for efficient and speedy delivery of customer service. All of our loan applications for both secured and general unsecured loans are processed online. For secured loans, we are collaborating on a pilot program to enable borrowers to pledge residential property as collateral either completely online or with only one visit to the government agency where the collateral is recorded.

Using our AI-powered credit assessment capabilities, we launched a one-stop loan application service on our mobile app in September 2021 to streamline the loan application process. We refer to this service as Luzhangfang (陸賬房). Luzhangfang enables borrowers to choose from a combination of loan plans and preferential rates with a simple and intuitive application process. Traditionally, borrowers would have to complete a separate loan application form and go through a separate approval process for each loan product they intend to apply for. This process can be time-consuming and unsatisfying for borrowers. Through Luzhangfang, a borrower only needs to submit an application on our mobile app and our system will automatically generate a variety of loan plans with preferential rates for the borrower to choose from based on our preliminary assessment. If borrowers are not satisfied with the results, they can provide additional information, such as enterprise qualifications, insurance policies, personal property or vehicle information, to increase their loan limit and obtain more favorable rates. Luzhangfang can provide a borrower up to four loan plans with a maximum amount of RMB10 million.

Step 2: credit assessment

 

 

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AI interview and online interview on mobile app

Our credit application and approval process could be entirely AI-based or entirely human-based in selected cases for our general unsecured loans, but more commonly it is conducted through a combination of AI with human assistance, leveraging our AI-driven application and approval interface. The interface uses automatic speech recognition, optical character recognition and natural language processing to communicate with the prospective borrower. Loan processing time can be significantly shortened as a result and application conversion improved. The entire loan approval process can be as fast as 20 minutes, entirely through one screen interaction, with minimal text input. All online applications begin with the same portal, leading to an immediate credit offer for qualified applicants. The potential borrower then has an AI credit assessment interview, during which anti-fraud, credit assessment, and loan approval processes run seamlessly in the background so that the credit assessment can be completed before the interaction ends. Based on the borrower’s credit profile, credit enhancement options are provided to them and they can choose to add potential credit guarantee insurance to enhance their loan applications. If the loan is approved, the borrowers will be made aware of the identity of the funding partner we refer to, and they will sign the contract online by indicating agreement to all of the terms. The funds are normally disbursed on the same day and the borrower is notified through the app once the transfer is completed. If our funding partners reject the loan application of the potential borrowers, we will resubmit the application to other funding partners. We will repeat this process for a total of three times. Borrowers can set up automatic repayments on our mobile app.

We select high-quality borrowers to target for new loans. These include borrowers who have made nine straight months of repayments on their current loans and borrowers who have already repaid their loans. Applications from repeat customers can be completed expeditiously and we provide assistance by telephone when needed.

Step 3: post loan

 

We initiate smart repayment reminders five days, three days and one day before a repayment is due. The T—5 reminder covers all borrowers with outstanding loans. The T—3 reminder serves as a second layer of protection and will be sent to borrowers who are not reached by the T—5 reminder. The T—1 reminder is targeted at first-time borrowers, borrowers with inferior credit quality, borrowers not reached by previous reminders, and borrowers who specifically requested a T—1 reminder.

As soon as a loan is one day past due, we initiate our AI independent collection process, which analyzes customer profile, historical repayment records, and delinquency stage to identify the treatment appropriate for different customers with loans overdue. Our system analyzes the reasons for late repayment and records when the collection process is initiated and whether and when the repayment is made. For customers with higher expected loan recoverability, we focus on identifying key factors for late repayment and offer them assistance in repaying the loan as soon as possible. For customers with lower expected loan recoverability, we send overdue warnings to the borrowers, and cases requiring next level support are automatically transferred to our collection agents.

 

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When a loan becomes overdue and the case is transferred to our collection agent, our AI assistant tool will provide a tailored script to our collection agents based on the customer’s expected behavior, and a tailored voice tone is also generated to ease the conversation. As of December 31, 2022, the vast majority of our collection efforts were enabled by AI. We have also implemented new scenario analysis for various late repayment situations so that our collection agents can better understand the situation and conduct follow-up discussion with our borrowers.

HOW WE ENABLE OUR INSTITUTIONAL PARTNERS

Our Funding Partners

Trusts

Under the trust model, a third-party trust company sets up a trust plan to which investors contribute funds through three major funding sources. There are: (1) retail funding directed by private banks, (2) institutional funding from banks, securities and insurance companies, and (3) funding from open market issuance. We provide loan enablement services for borrowers and enable borrowers to obtain loans from trusts. We perform credit assessments and match borrowers to the trust plans.

We partnered with six trust companies in each of 2020, 2021 and 2022. Trusts funded approximately 35.1% of the new loans we enabled in 2020, 32.2% of the new loans we enabled in 2021 and 31.7% of the new loans we enabled in 2022. The loans funded by consolidated trusts appear on our balance sheet, and those funded by unconsolidated trusts do not. See “Financial Information—On- and Off-Balance Sheet Treatment of Loans and Risk Exposure.”

The chart below shows the typical structure of the trust arrangements and the roles and obligations of the parties involved, including the Company, trust plans, trust companies, trust investors, third-party credit enhancement providers and borrowers.

 

Credit Analytics

Data

Our credit assessment is built upon a variety of our own and third-party data, under proper authorization and within lawful ranges, including the data of the Credit Reference Center of the People’s Bank of China, data publicly available from other governmental institutions, and a variety of consumption, social or other behavioral data. We have cumulatively analyzed over 17 years of through-cycle credit data from approximately 68 million unique individual applicants, supplemented by access to the Ping An ecosystem insights and access to enterprise data for approximately 10 million businesses through external data providers as of December 31, 2022. Our proprietary and third-party data includes both know-your-customer or KYC personal financial information and know-your-business or KYB business information for loans to small business owners. All data are accessed and used only with the customer’s consent.

 

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Out of over 7,000 predictive variables per borrower, we applied machine learning algorithms and regression analysis to select around 1,600 of the most relevant variables to build our anti-fraud models and around 1,600 of the most relevant variables to build our loan decision models as of December 31, 2022. The predictive variables used to build our anti-fraud models and loan decision models include the number of enquiries to view a borrower’s credit score in the past 24 month, overdue times within the last three months, the operating registration of a borrower, years of operation, the enterprise registered capital and whether there is a hit of a borrower’s telephone number against the blacklist of fraud cell phone numbers, among others.

For loans with larger ticket sizes, our experience shows that both ability to repay and willingness to repay are important in the credit underwriting process. Behavioral data are nearly as useful as credit and financial data in anti-fraud assessment, as they can be helpful in evaluating a borrower’s willingness to repay. However, credit and financial data are substantially more predictive of creditworthiness as they can help evaluate a borrower’s ability to repay. As of December 31, 2022, credit and financial data comprise approximately 59% of the variables of our anti-fraud assessment and 89% of the variables of our credit assessment, while behavioral data make up the remaining 41% of the variables for our anti-fraud assessment and 11% of the variables of our credit assessment.

Credit Assessment

 

Borrowers who pass our anti-fraud assessment process move onto our credit assessment process. Our credit assessment process has been made as convenient as possible for potential borrowers through the application of automatic speech recognition, optical character recognition and natural language processing. The approval process for general unsecured loans can be as fast as 20 minutes, entirely through one screen interaction, with minimal text input.

We have three key models for credit assessment: an application score model, a risk-based pricing model and a loan sizing model.

The application score model generates a score for each borrower, based on which we determine the borrower’s eligibility for a given loan. Our acceptance criteria and assessment processes vary depending on the borrower risk rating, which may vary from R1 to R6 on our recently adopted rating system. Currently we only enable loans for borrowers with a risk rating of R4 or better. In 2022, we gave AI-assisted live interviews or purely AI interviews to 60.7% of borrowers of general unsecured loans, and the other 39.3% of borrowers of general unsecured loans had the interview waived because nothing in their data required further clarification. Borrowers of secured loans, who have extensive personal interaction with our direct sales team or our channel partners, are all given live interviews.

When we give a live interview, our credit approval team interviews borrowers using web conferencing tools. During interviews, we use facial and voice recognition to identify borrowers and micro facial expression and speech emotion analytics to analyze borrowers’ emotional reactions to assist in assessing the trustworthiness of the borrowers. Other than live interviews, our credit assessment process is entirely automated, which helps us to achieve a unified and data-driven decision process with strong predictive power.

 

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After being screened by the application score model, the borrower will be further assessed by our risk-based pricing and loan sizing models. In our risk-based pricing model, we consider the borrower’s risk rating and debt to income ratio and the value of the borrower’s assets to determine the appropriate risk-based pricing. After taking into account the borrower’s risk rating and debt to income ratio and the value of the borrower’s assets, the borrower can only qualify for a loan if the assigned pricing does not exceed the maximum permitted APR. Our loan sizing model is primarily based on the borrower’s credit and financial information, which we access with due authorization, such as other loan or credit card repayment records, insurance repayment records, car value, social insurance records and indebtedness information. Every loan applicant must authorize us to check their data through the Credit Reference Center of the People’s Bank of China, and these checks form a routine part of our credit assessment process. The data includes information on outstanding loans funded by licensed financial institutions in China such as banks, trusts, consumer finance companies and financing leasing companies. Our sizing model for secured loans further takes into consideration the value of the pledged collateral, which we determine in an efficient and expeditious manner with help from online valuers. Since we specialize in large ticket size loans, a borrower only qualifies for a general unsecured or secured loan if they meet the minimum creditworthiness threshold of at least RMB20,000.

For small business owners, know your business or KYB is an additional element of our credit assessment process. We analyze data relating to the borrower’s business including its corporate credit rating, if any, its VAT, point-of-sale and UnionPay records, its utility bills, and any insurance, memberships in industry organizations or other pertinent information. We believe that it is essential to combine both KYC and KYB data for small business owners to accurately assess their creditworthiness.

Borrower Profiles

The following table summarizes the DPD 30+ delinquency rate and the DPD 90+ delinquency rate by credit score category on our recently adopted borrower quality ranking system for general unsecured loans (excluding top-ups on existing loans) enabled by Puhui for the year indicated.

 

		For the Year Ended December 31, 2022
Credit Score		DPD 30+ Delinquency Rate		DPD 90+ Delinquency Rate
R1		1.1%		0.6%
R2		2.2%		1.2%
R3		3.1%		1.7%
R4		4.8%		2.8%
R5		7.2%		4.3%
R6		11.7%		7.2%

The following table presents the APR by credit score category for general unsecured loans (excluding top-ups on existing loans) enabled by Puhui for the years indicated.

 

		APR
		For the Year Ended December 31,
Credit Score		2020				2021				2022
						(%)
R1			20.5				18.9				17.4
R2			22.0				20.7				19.1
R3			23.3				21.7				20.3
R4			24.6				23.1				22.1
R5			26.3				23.4				22.5
R6			28.7				23.7				23.0

 

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The following table presents the volume of new loans by credit score category as a percentage of total loan volume for general unsecured loans (excluding top-ups on existing loans) enabled by Puhui for the years indicated.

 

		Volume of New Loans Enabled
		For the Year Ended December 31,
Credit Score		2020				2021				2022
						(%)
R1			6.0				8.8				15.7
R2			8.6				9.6				14.7
R3			12.6				13.3				17.8
R4			27.9				25.0				25.3
R5			28.1				26.4				20.1
R6			16.9				16.9				6.4
Total			100.0				100.0				100.0

Loan Servicing and Collection Services

Our loan servicing and collection services enable our institutional partners to concentrate on their core businesses while we manage troubled assets for them. We have accumulated 17 years of through-cycle proprietary data based on our offline-to-online business model that informs our collection efforts.

We utilize an online system for efficient and effective post-loan management and loan collection. Powered by AI servicing, intelligent loan collection algorithm and App smart robots, we have created a 24/7 operational command dashboard for our loan collection system which has increased the stability, speed, and efficiency of our post-loan process. Data from post-loan monitoring and collection efforts is constantly fed back into customer selection and credit approval algorithms to make sure our models are continuously refined to further improve outcomes. Deployment of AI collectors and segmentation algorithms for collection has enhanced our ability to identify fraud and high-risk borrowers, while being able to enhance product pricing, improve underwriting results and lift loan collection efficiency.

Our post-loan servicing model is based on credit scores to triage delinquencies. We check the loan records of our existing borrowers through the Credit Reference Center of the People’s Bank of China with their authorization on a regular basis so as to monitor their liability status and we use customer segmentation modeling to divide borrowers into low, medium and high risk. We also provide a repayment reminder service to our borrowers, including text message reminders for low-risk borrowers and AI-enabled contact for medium- and high-risk borrowers. In 2022, we carried out 54% of our repayment reminders through messages and the remainder through AI-enabled phone calls.

If borrowers fail to repay on time, our collection process will be initiated. Borrowers whose loans are overdue by one day are contacted by AI, and all other borrowers with overdue loans are contacted by a live collection agent. The relatively large average ticket size of the loans that we enable makes it more cost-efficient for us to escalate the collection process for delinquent loans, as compared to platforms that primarily enable small consumer loans.

Our collection professionals cannot access the mobile phone numbers of our borrowers and can only contact them through our systems. All contact with customers is recorded and retained for use in resolving disputes and ensuring that our collection team is fully in compliance with applicable laws and rules at all times. Data we accumulate in the collection process gets fed back into our credit assessment process in a closed loop.

The productivity of our post-loan servicing team has been continually improving. The average outstanding loan balance per post-loan servicing employee per year was RMB54.1 million, RMB65.5 million and RMB60.4 million (US$8.7 million) in 2020, 2021 and 2022, respectively.

 

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In line with common industry practice, we use third-party collection agencies to collect loans that are delinquent for more than 80 days. We regularly evaluate our agency partner companies based on their performance, service quality, experience in the industry and compliance with relevant laws and regulations. To fulfill the compliance requirements, we have adopted and enforced comprehensive, online and systematic collection management and process monitoring to ensure that all the collection practices by the third parties we cooperate with are in compliance with current laws and regulations. First of all, collection operations conducted through third-party agencies are generally processed on our online system so that we are able to track and perform full-angle inspection on the collection practices. We closely monitor the practices of the third-party collection agencies, including their system login history and telephone and text message records. All collection calls initiated by third-party agents are recorded and transmitted to our inspection system for an “AI + manual” dual inspection procedure, where our AI models will perform automatic, preliminary risk analysis on the content of the collection conversation and text messages against the rules that we set, identifying the expressions that are suspected to be deviating from our rules, and our operation inspection team will then further investigate the high risk cases and provide improvement advice. The third-party collection agencies are forbidden from downloading the information in our system. All customer contact information on our system is sanitized and protected to prevent it from being accessed by the third-party collection agencies without authorization. Second, we maintain on-site inspection on all collection operations of the third-party collection agencies on a monthly or quarterly basis. Our inspection team closely monitor whether the third-party collection agencies are sufficiently staffed, whether they use private cellphones for the collection efforts, and whether they exploit our customers’ private information. Third, we penalize the third-party agencies’ violations based on the severity of the violations. Once a violation is detected and confirmed, the third-party agency who committed the violation will be penalized by our policies based on level of violation. Our customers may file complaints if their private information is violated by the third-party agencies. We may terminate contracts with third-party agencies based on contractual arrangements if they violate any laws or regulations, which involve criminal or civil proceedings, in their cooperations with other companies.

In addition to the collection efforts described above, we have an additional foreclosure procedure for our secured loans. Acting on behalf of the credit enhancement providers and our financing guarantee subsidiary, we first repossess the collateral using our local collection team, supported by third-party local collection agencies as necessary. We then assess the condition of the residential property, obtain third-party appraisal reports of its value and initiate the process to foreclose on the residential property. Upon foreclosure, we dispose of residential property via auction or consignment and use the proceeds to minimize or mitigate losses for the credit enhancement provider.

 

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Credit Risk Management

Credit risk is the risk that the borrowers of our loans default and do not repay, including due to a lack of intention to repay or a lack of ability to repay. Credit risk is borne by one or more of the funding partner, the credit enhancement provider and our own licensed financing guarantee subsidiary, in different combinations and different proportions depending on the loan. The ability to manage credit risk is thus of key importance in our business. We manage credit risk through anti-fraud assessment, credit assessment and loan servicing and collections.

For the general unsecured loans we enable, we rank qualified borrowers on a scale of one to six, where R1 is the highest quality (lowest risk) and R6 is the lowest quality (highest risk). The risk level is determined based on two primary considerations. The first is credit risk score, modeled using statistical techniques and based on the records of the Credit Reference Center of the People’s Bank of China and the borrower’s prior records such as repayment, delinquency and application histories. The other consideration takes into account the customer’s assets, such as residential property, vehicle and insurance policies. Borrowers with higher credit risk scores and better assets will be assigned a lower risk level.

As mentioned previously, we have been concentrating our efforts on borrowers at the higher end of our R1 to R6 ranking of creditworthiness. Risk rating is a dynamic process which reflects our risk appetite and acceptance from time to time, and we have been focusing our efforts on serving high quality customers. High quality borrowers, which we define as borrowers rated between R1 and R3, accounted for 48.2% of the general unsecured loans (excluding top-ups on existing loans) we enabled in 2022, as compared to 31.8% in 2021.

The following table shows the DPD 30+ delinquency rates for general unsecured loans and secured loans as of December 31, 2020, 2021 and 2022.

 

		As of December 31,
DPD 30+ Delinquency Rates by Type of Loan		2020				2021				2022
General unsecured loans			2.3				2.6				5.2
Secured loans			0.7				0.8				2.6
Total			2.0				2.2				4.6

The core indicator for credit quality monitored by our management is DPD 90+. The following table presents the DPD 90+ delinquency rates for general unsecured loans and secured loans as of December 31, 2020, 2021 and 2022. We define the DPD 90+ delinquency rate as the outstanding balance of loans for which any payment is 90 to 179 calendar days past due, divided by the outstanding balance of loans. This table reflects all the loans we enable on a whole portfolio basis, not just the loans that are consolidated on our balance sheet. In addition, when a loan becomes 80 days past due and the funding provider is reimbursed by a credit enhancement provider, we still treat the loan as overdue for purposes of the DPD 90+ calculation, since the loan has not been repaid by the borrower. The credit enhancement provider acquires the creditor rights after reimbursing the funding provider and we continue to provide post-loan services to the credit enhancement provider.

 

		As of December 31,
DPD 90+ Delinquency Rates by Type of Loan		2020				2021				2022
General unsecured loans			1.3				1.5				3.0
Secured loans			0.4				0.4				1.2
Total			1.2				1.2				2.6

Our Track Record Period largely overlapped with developments of the COVID-19 pandemic. Since the beginning of 2020, outbreaks of COVID-19 have led to ongoing pandemic controls and sharply disrupted the economic life throughout China, resulting in limited discretionary consumption and slow economic growth. Our core SBO segment has been impacted by the challenging macro environment over the past few quarters, as small businesses are typically the earliest to be impacted in periods of macroeconomic change. The aforementioned factors have led to continued deterioration in our asset quality, as evidenced by the heightening DPD 30+ and DPD 90+ delinquency rates and flow rates throughout our Track Record Period. In particular, the modification in zero-COVID policy in the fourth quarter in 2022, and the spike in COVID-19 cases in December 2022 due to the reopening of China have put pressure on both our customers and our operations, leading to a further decline in asset quality.

 

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The following chart shows the DPD 90+ delinquency rates by vintage as of December 31, 2022, on general unsecured loans that we have enabled. DPD 90+ delinquency rates by vintage is defined as the total balance of outstanding principal of a vintage for which any payment is over 90 calendar days past due as of a particular date (adjusted to reflect total amount of recovered past due payments for principal and without taking into account charge-offs), divided by the total initial principal in such vintage. Months on book, or MOB, is the number of complete calendar months that have elapsed since the calendar month in which the loan was originated, measured at the end of each calendar month.

 

The following chart shows the DPD 90+ delinquency rates by vintage as of December 31, 2022 on secured loans that we have enabled.

 

The charts above represent the percentage of past due outstanding principal of different loan vintages as of a particular month, after time periods have elapsed since the loan was originated. In general, the maximum contractual tenor offered on general unsecured loans and secured loans is 36 months, and most borrowers choose a tenor of 36 months. Thus, delinquency rates need to be observed throughout the loan lifecycle to reflect the quality of a vintage. For all loan vintages shown above, as time periods elapse and these loan vintages mature, the balance of outstanding principal that is past due would increase as demonstrated by the upward sloping vintage curve for each loan vintage over months on books (MOB), which then flattens closer to loan maturity when loss rate is stabilized. For secured loans, loan vintages tend to exhibit a downward trend as they approach MOB36 given they are adjusted to reflect total amount of recovered past due payments for principal through its secured assets and without taking into account charge-offs.

COVID-19 resurgence and regional lock-downs across China had impacted offline business activities and the effectiveness of our collection services. Weakening economic conditions, combined with the impact of COVID-19, have also weighed on borrowers’ ability to repay in 2022. As illustrated in the charts above, the DPD 90+ delinquency rates for the 2021 loan vintage have noticeably heightened relative to older vintages as our collection efforts were impacted and borrowers had difficulties to repay their loan principal and interests that are still outstanding in 2022.

 

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Flow rate is a forward-looking indicator that estimates the percentage of current loans that will become non-performing at the end of three months, and is defined as the product of (i) the loan balance that is overdue from 1 to 29 days as a percentage of the total current loan balance of the previous month, (ii) the loan balance that is overdue from 30 to 59 days as a percentage of the loan balance that was overdue from 1 to 29 days in the previous month, and (iii) the loan balance that is overdue from 60 to 89 days as a percentage of the loan balance that was overdue from 30 days to 59 days in the previous month.

During the Wuhan lockdown when COVID first broke out in the first quarter of 2020, our flow rates quickly raised to 0.9% for general unsecured loans and 0.5% for secured loans, as compared to prepandemic levels at 0.5% for general unsecured loans and 0.2% for secured loans in the fourth quarter of 2019. The impact of Wuhan lockdown was mainly concentrated in one province for a few months. As we swiftly resumed our business operations in the second quarter of 2020, the flow rates declined to 0.5% for general unsecured loans and 0.2% for secured loans. Flow rates remained stable afterwards until the last quarter of 2021. The impact from multiple waves of COVID resurgence in 2022 was larger in magnitude and longer in duration. Our core small business owner segment, which made up the majority of our new loans enabled in 2022, has been among the earliest impacted by the deteriorating macro environment. These operating challenges have led to worsening flow rates reaching 1.1% and 0.6% respectively as of the fourth quarter of 2022 for general unsecured and secured loans. As flow rate is a leading indicator, it would more accurately reflect earlier signs of asset quality deterioration or improvements, as compared with delinquency rate which is a lagging indicator.

The following chart shows the flow rates during the Track Record Period for the general unsecured loans we have enabled.

 

The following chart shows the flow rates during the Track Record Period for the secured loans we have enabled.

 

 

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The impact of COVID-19 has caused a divergence in flow rates between Chinese cities in different regions to emerge in 2022. COVID-19 has had both direct and indirect effects on small businesses. In addition to not being able to operate during lockdowns, small business owners may be hesitant to incur debt, expand the scale of their existing businesses or start new businesses, due to concern about future lockdowns. This effect seems to be stronger in less developed regions in China, which have been less resilient than the more developed regions in recovering from lockdowns. If we group the loans we have enabled under our Puhui brand (which excludes consumer finance loans) by province and divide the provinces into three groups of equal size (in terms of total outstanding loans) by the flow rate of the loans in the fourth quarter of 2022, there is a clear divergence between the top third, middle third and bottom third, as shown in the following chart:

 

		For the Three Months Ended
Flow Rate (%)		June 30, 2022				September 30, 2022				December 31, 2022
Top third provinces			0.70				0.68				0.73
Middle third provinces			0.79				0.93				1.04
Bottom third provinces			0.94				1.14				1.33

In the fourth quarter of 2022, the top third consisted primarily of Shanghai, Beijing, and other provinces with large cities in the eastern part of the country, whereas the bottom third consisted primarily of provinces with smaller cities in the western part of the country and certain peripheral provinces in the north and south.

Our consumer finance subsidiary operates separately from our core retail credit and enablement business in many respects and has its own independent credit risk management personnel. As a licensed and regulated entity in the PRC, it must follow certain procedures and track certain metrics in order to ensure its compliance with regulatory requirements. As part of credit risk management for our consumer finance business, we conduct an online verification on customer identity and an anti-fraud assessment for each prospective borrower and determine the credit quota through our automated decisioning engine. Upon applying for drawdown, selected customers would enter into phone interviews with our credit assessment staff, and the drawdown would be disbursed after approval. We rely on a combination of text messages, AI and human agents in our collection process for consumer finance loans. We use texts and AI primarily for reminders and for payments that are not long overdue, and outsource collection efforts for longer overdue loans. The percentage of non-performing loans more than 60 days overdue for our consumer finance loans was 2.0% in 2020, 2.2% in 2021 and 1.9% in 2022. Our consumer finance subsidiary had a capital adequacy ratio of 118.6%, 35.6% and 18.2% as of December 31, 2020, 2021 and 2022, respectively.

Our Credit Enhancement Providers

Our credit enhancement providers include credit insurance companies and guarantee companies. We worked with seven credit insurance companies in 2022. We enable them to extend credit enhancement for loans whose borrowers meet their desired risk profile. Credit enhancement providers benefit from the same customer referral, risk analytics and loan servicing and collection services as our funding partners.

The proportion of the outstanding balance of loans we enabled under the Puhui brand that was insured or guaranteed by third parties was 89.4%, 78.9% and 76.1% of the outstanding balance as of December 31, 2020, 2021 and 2022, respectively. Our loan enablement can be done either with or without third-party credit enhancement. How much credit risk we take on and whether third-party credit enhancement is utilized depend on a dynamic mix of commercial factors, including the pricing of credit enhancement and the willingness of our funding partners to bear risk, as well as regulatory guidance. We conduct commercial negotiations with our credit enhancement providers on a running quarterly basis, so changes in the credit enhancement market may affect the commercial terms of our agreements with our credit enhancement providers very quickly. If the cost of third-party credit enhancement is not commercially attractive, the proportion of loans for which we have credit risk could greatly exceed 30%, depending on the balance of risk and reward.

Ping An P&C provides credit enhancement on standard commercial arm’s-length terms for loans we enable. Ping An P&C provided credit enhancement on 70.6% of the outstanding balance of loans we had enabled under our Puhui brand as of December 31, 2022. No other credit enhancement provider insured or guaranteed more than 2% as of that date. For loans we enable that are insured by Ping An P&C, we have entered into agreements with terms of three years with Ping An P&C and each of the funding partners. These third-party credit enhancement providers provide credit guarantee insurance or guarantees on the loans we enable and will repay the lenders if a loan becomes sufficiently delinquent. We are not aware of any instance where our credit enhancement providers have ever failed to fulfill their insurance or guarantee obligations. Our credit enhancement providers conduct their own evaluation of each borrower to determine whether they will provide insurance or guarantees while we help our partners collect the necessary information.

 

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All of our credit enhancement providers are regulated and inspected by the Chinese authorities and subject to detailed statutory and regulatory requirements. Insurance companies are regulated and inspected by the China Banking and Insurance Regulatory Commission, or the CBIRC. Pursuant to the regulations and rules regarding insurance companies issued by the CBIRC, the minimum registered capital of an insurance company is no less than RMB200 million and must be fully paid up in cash. For insurance companies engaged in credit guarantee insurance, the core solvency adequacy ratio at the end of the last two quarters must be no less than 75%, and the comprehensive solvency adequacy ratio must be no less than 150%. We engage in a strict assessment process in selecting our credit enhancement providers. We assess whether an insurer has a license from the CBIRC to provide credit insurance on three-year retail credit, whether it is able to meet the CBIRC’s stringent requirements for solvency ratios, concentration risks, leverage ratios and liquidity stress tests under the Measures for Regulating the Credit Insurance and Guaranty Insurance issued by the CBIRC in May 2020, and whether it has the relevant experience, track record and reputation within the industry. Our insurers are required to publicly file their quarterly solvency reports with the CBIRC, and we review their public filings to verify that they remain in compliance with the relevant requirements. Financing guarantee companies are regulated and inspected by the financial authorities of the local provincial or municipal government. Pursuant to the relevant regulations and rules regarding financing guarantee companies, the minimum registered capital of a financing guarantee company is not less than RMB20 million and must be fully paid up in currency, and net assets must be no less than one-fifteenth of their total outstanding guaranteed amount.

We have established a highly automated claims process with our funding partners and credit enhancement providers. Once a loan becomes delinquent for 80 days, a notice of claim will be automatically sent to the third-party credit enhancement provider. Normally this payment occurs without our participation and the timing of it does not affect our cash flow or cash position.

The table below shows the amount of claims submitted to credit enhancement providers for the loans consolidated on our balance sheet and the amount of claims reimbursed during each period, in millions of RMB. The discrepancies in amounts submitted and amounts reimbursed are mainly due to timing differences. When we submit a claim, the credit enhancement provider will typically complete its review and make the payment to the funding partner within one business day.

 

		For the Year Ended December 31,
		2020				2021				2022
Amount of claims submitted			1,938.8				5,084.4				12,490.0
Amount of claims reimbursed			1,940.1				5,084.4				12,490.0

Other Services

We enable a variety of financial institutions including banks, trust companies, mutual fund companies, private investment fund management companies, asset management companies, securities companies and insurance companies to access investors for wealth management products. We enabled 436 such partners in 2020, 470 in 2021 and 489 in 2022. The wealth management products we enabled in 2022 included asset management plans, mutual fund products, private investment fund products and trust products, among others.

 

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DATA SECURITY AND PRIVACY

We have established and implemented a series of comprehensive and stringent internal policies and measures covering cybersecurity and the lifecycle of data processing activities (data collection, transmission, storage, use, access, sharing, backup and recovery, deletion) to protect cybersecurity and data security and prevent data leakage. We have adopted internal control policies for cybersecurity and data protection at the Group level, which mainly include (i) Full Lifecycle Management of Data (《資料全生命週期管理》), which provides guidelines to regulate data processing activities at all stages of the data lifecycle, including collection, transmission, storage, use, sharing and destruction; (ii) Personal Information Protection Management Measures (《個人資訊保護管理辦法》), which provides the basic principles for processing personal information, collecting personal information, storing personal information, responding to personal information security incidents, classifying personal information and auditing personal information for compliance; (iii) Data Classification and Grading (《資料分類分級》), which classifies and manages data in a hierarchical manner, taking into account the business reality, optimizing the necessary control measures and establishing appropriate rights management for the different levels of data.

For each subsidiary, we have adopted internal control policies related to cybersecurity and data protection, taking Ping An Puhui as an example, which mainly comprises of: (i) Information Security Code — Personal Information Protection (《資訊安全規範-個人資訊保護》) , which provides the general principles of processing personal information, collecting personal information, storing personal information, transmitting personal information, using personal information, deleting personal information, disclosing personal information, processing sensitive personal information, and assessing the impact of personal information protection; (ii) External Data Management Code (《對外資料管理規範》) , which provides the management principles, allocation of responsibilities, prior assessment, declaration requirement process and post-event control in relation to the external processing of personal information; (iii) Personal Information Complaint Management Procedures (《個人資訊諮訴處理管理程式》) , which provides the channels and principles for processing seven types of complaints relating to users’ personal information: inquiries, corrections, deletions, withdrawal of authorized consent, account cancelation, request for copies of personal information and automated information system decisions; (iv) The Data Security Emergency Plan (《資料安全應急預案》) , which provides the allocation of responsibilities for responding to information security incidents, the security incident reporting process and requirements, incident classification, incident response and handling timelines, incident assessment and suppression, incident remediation and recovery; (v) Data Lifecycle Management Specifications (《資料全生命週期管理規範》), which defines the design of information security controls at all stages of the full lifecycle of data collection, transmission, storage, use, sharing and destruction to ensure data confidentiality, integrity and availability, legality and compliance, minimization, auditability and traceability of data-related activities.

We have established a Personal Information Protection Policy (《個人資訊保護政策》) to ensure the legality and compliance of data processing activities, which, for example, specifies that the collection of personal information must be directly related to the products or services provided and that the user’s consent should be obtained as required by the Personal Information Protection Law. Data transmission must be secured according to the level of risk, using cryptography or other reasonable and practicable security measures in accordance with relevant laws and regulations, market standards and internal policies to ensure the security of data transmission. In addition, we store users’ personal information for the minimum time necessary to process such data, and personal information is encrypted and de-identified to ensure storage security. Personal information will be deleted without a copy in a timely manner after the purpose for which it was processed has been achieved, or as otherwise required by law or regulation. When data is used, personal information must be kept confidential and it is prohibited to disclose or manipulate personal information. If personal information is displayed through the interface, measures such as de-identification of the personal information to be displayed must be taken to reduce the risk of personal information being compromised in the display process. In addition, each subsidiary has taken technical measures to prevent computer virus attacks and has adopted network security protection strategies to prevent internal data leakage and ensure that data security incidents such as personal information leakage are monitored and effectively prevented.

During the Track Record Period and up to the Latest Practicable Date, (i) we have not experienced any material data or personal information leakage or loss, infringement of data or personal information, or information security incident; (ii) we have not been subjected to any material fines or administrative penalties, or other sanctions by any relevant regulatory authorities or material complaints in relation to violation of cybersecurity, data security and personal information protection laws and regulations; (iii) we have not received any material complaints in relation to data security and personal information privacy.

 

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CUSTOMERS AND SUPPLIERS

We generate income from a large number of small business owners and other retail borrowers in China under our core retail credit and enablement business model. These customers are material in the aggregate but none of them individually is a material customer. Our top five customers are financial institutions for whom we provide a variety of services. We had over three years of business relationship with each of our top five customers during the Track Record Period. In 2020, 2021 and 2022, income from our top five customers accounted for 5.1%, 9.0% and 4.8% of our total income (i.e., less than 30% of our total income), respectively. The following table sets forth the background information of our five largest customers for each year during the Track Record Period.

Year ended December 31, 2020

 

Customers		Customer business profiles		Role
Ping An P&C		An insurance company with registered office in Shenzhen, Guangdong		Credit enhancement provider
Customer A*		A joint-stock commercial bank with registered office in Tianjin		Funding partner
Customer B*		A joint-stock commercial bank with registered office in Weihai, Shandong		Funding partner, wealth management product provider
Customer C*		A trust company with registered office in Nanchang, Jiangxi		Funding partner
Ping An Bank		A joint-stock commercial bank with registered office in Shenzhen, Guangdong		Partner under the referral business model, wealth management product provider
Year ended December 31, 2021
Customers		Customer business profiles		Role
Ping An P&C		An insurance company with registered office in Shenzhen, Guangdong		Credit enhancement provider
Ping An Bank		A joint-stock commercial bank with registered office in Shenzhen, Guangdong		Partner under the referral business model, wealth management product provider
Customer A*		A joint-stock commercial bank with registered office in Tianjin		Funding partner
Customer B*		A joint-stock commercial bank with registered office in Weihai, Shandong		Funding partner, wealth management product provider
Customer D*		A joint-stock commercial bank with registered office in Hangzhou, Zhejiang		Funding partner
Year ended December 31, 2022
Customers		Customer business profiles		Role
Ping An Bank		A joint-stock commercial bank with registered office in Shenzhen, Guangdong		Partner under the referral business model, wealth management product provider
Ping An P&C		An insurance company with registered office in Shenzhen, Guangdong		Credit enhancement provider
Customer E*		A fund sales company with registered office in Shanghai		Wealth management product provider
Customer D*		A joint-stock commercial bank with registered office in Hangzhou, Zhejiang		Funding partner
Customer A*		A joint-stock commercial bank with registered office in Tianjin		Funding partner

 

Note:

 

*	The Company’s contract with such customer contains customary non-disclosure provisions that limit the Company’s ability to disclose confidential information, including their identities. The Company has not received consent from such customer to disclose its name in this document.

 

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Ping An P&C was our largest customer in 2020 and 2021. We generated income of RMB1,274 million and RMB3,641 million from Ping An P&C in 2020 and 2021, representing 2.4% and 5.9% of our total income, respectively. Our largest customer in 2022 was Ping An Bank. We generated income of RMB1,227 million (US$176 million) from Ping An Bank in 2022, representing 2.1% of our total income. See “Relationship with the Controlling Shareholders—Our Relationship with Ping An Group” for further details about our cooperation with Ping An Group. See “Connected Transactions” for our transactions with the Ping An Group going forward. Please also see “Risk Factors—Risks Relating to Our Business and Industry—We have extensive cooperation with Ping An Group in our business. If such cooperation is subject to any change or if Ping An Group cannot continue to support us, our business, financial performance and results of operations may be adversely affected.”

We enter into cooperation agreements with institutional funding partners in relation to our provision of services to enable transactions between institutional funding partners and borrowers. The agreements cover various terms including scope of services, fees (typically including a fixed amount and a floating component based on circumstances and preferences of the institutional funding partner), term of contract, and consequences in the event of breach of contract, among other. The following table summarizes the salient terms of a typical cooperation agreement that we enter into with an institutional funding partner:

 

Key Terms		Descriptions
Service type		We offer risk analytic services, facilitate the entry of relevant agreements relating to consumer loans or SBO loans between institutional funding partners and borrowers, and provide post-loan services. We provide guarantee and/or insurance to the loans that meet certain criteria and assume credit risks.
Fees		We charge consulting service fee to the institutional funding partner for risk analytics, post-loan services and other related services.
Term and renewal		Three to five years, which may be renewed prior to expiry upon entry into a new cooperation agreement.
Termination		The cooperation agreement may be terminated upon, but not limited to, the occurrence of any of the following events: (i) the institutional funding partner promoting loan products, other than the products contemplated under the cooperation agreement, to borrowers that we refer to the institutional funding partner; or (ii) the institutional funding partner providing information of the borrowers that we refer to the institutional funding partner to any third party who is not a party to the cooperation agreement (each, a “Termination Event”).
Penalty		Upon the occurrence of the Termination Event, we are entitled to all income derived from the Termination Event and received by the institutional funding partner and any third party that it collaborated with. Any party breaching any obligations provided in the cooperation agreement may be required to compensate the non-breaching party/parties for the damages caused to the non-breaching party/parties.

We also enter into service agreements with borrowers in relation to our provision of services to enable transactions between institutional funding partners and borrowers. The agreements cover various terms including scope of services, fees (typically based on circumstances of the borrowers), contract term, and consequences in the event of breach of contract, among others. The following summarizes the salient terms of a typical financing agreement that we enter into with a borrower:

 

Key Terms		Descriptions
Service type		We offer credit-screening and consulting services to assist the borrower in securing loans funded by our institutional funding partner.
Fees		We charge service fees to the borrower typically on a monthly basis for the services provided.
Term and renewal		The same as the term of the loan disbursed by the institutional funding partner, subject to certain exceptions and adjustments.
Termination		The service agreement may be terminated upon, but not limited to, the occurrence of any of the following events: (i) we are no longer able to provide services due to policy changes; (ii) the borrower is using our services for illegal purposes; (iii) any fraudulent conduct committed by the borrower in relation to the services provided by us; (iv) the borrower’s disqualification to use our services, subject to our reasonable discretion; and (v) any other event that causes obligations contemplated under the agreement cannot be performed.
Penalty		The borrower will assume all legal liabilities if it violates any laws and regulations or provides false information to us, causing us to suffer damages.

 

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In addition, we enter into service agreements with institutional funding partners in relation to our provision of asset management services to trusts. The agreements cover various terms including scope of services, fees, contract term, and consequences in the event of breach of contract, among others. The following table summarizes the salient terms of a typical service agreement that we enter into with an institutional funding partner:

 

Key Terms		Descriptions
Service type		We offer asset management services to the trusts, which include but not limited to, maintaining books and records of the assets that are held in the trusts in relation to enablement of loans, collecting the loans, participating in legal proceedings in conjunction with collection of the loans and recovery of trust assets. The institutional funding partner also provides asset management services to the trusts, including but not limited to, accounting of the assets and disbursing loans.
Fees		We charge service fees for the asset management services. We are entitled to reimbursement if we incur expenses in relation to legal proceedings brought to recover trust assets, subject to certain limitations.
Term and renewal		The service may be terminated upon (i) the complete return of capital commitments and accrued interests to subscribers of the trust if the asset backed special plan (“ABS plan”) in connection with the trust is not established successfully; or (ii) the completion of liquidation after the termination of the ABS plan.
Termination		The service agreement may be terminated upon, but not limited to, the occurrence of any of the following events: (i) material breach of the service agreement by us or the institutional funding partner; (ii) any material adverse event that relates to us or the institutional partner as reasonably determined during a meeting of controlling investors of ABS plan; and (iii) any force majeure event.
Penalty		We are obligated to compensate the investors of the trusts for damages incurred if we commit willful misconduct, gross negligence or other breach of our obligations pursuant to the service agreement. Any party breaching any obligations or certain representations and warranties provided in the service agreement, including but not limited to, operating with the required business licenses and compliance with the PRC laws and regulations relating to false advertisement and intellectual property, may be required to compensate the non-breaching party/parties for the damages caused to the non-breaching party/parties.

We also enter into agreements with our funding partners in relation to our guarantee services through our financing guarantee subsidiary to enable transactions between institutional funding partners and borrowers. The agreement covers various terms including scope of services, contract term, and consequences in the event of breach of contract, among others. The following summarizes the salient terms of a typical guarantee agreement that we enter into with a funding partner.

 

Key Terms		Descriptions
Service type		We offer guarantee services against potential defaults of borrowers to our funding partners.
Fees		We charge guarantee fees to borrowers for guarantee services provided by us.
Term and renewal		Typically three years. If there are outstanding loans to be repaid by borrowers at the end of the term, we and funding partners should continue to fulfill the obligations under the guarantee agreement till the full repayment.
		Our payment obligation under such guarantee agreements will typically become due upon the lapse of the pre-agreed guarantee compensating period of 80 days with our fund partners.
Termination		The guarantee agreement may be mutually terminated if (i) we or our funding partners fail to verify and manage the use of funds in accordance with relevant laws and regulations, provide timely feedback to each other regarding inconsistencies of the actual use of funds with intended purpose, and establish regular communication mechanisms or (ii) we or our funding partners induce borrowers to change the use of funds, conceal actual use of funds, induce borrowers to file malicious complaints and conduct false advertising.

Our suppliers primarily include companies that provide credit-related technology services. We had over three years of business relationship with each of our top five suppliers during the Track Record Period. In 2020, 2021 and 2022, our top five suppliers accounted for 9.2%, 8.1% and 6.0% of our total expenses for the respective years (i.e., less than 30% of our total expenses). In 2020, 2021 and 2022, our largest supplier accounted for 3.7%, 3.3% and 2.7% of our total expenses for the respective years. Ping An Payment Technology Services Co., Ltd. (平安付科技服務有限公司) was our largest supplier in each of 2020, 2021 and 2022.

 

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On a group basis, income from our largest customer in 2020, 2021 and 2022 accounted for 3.6%, 8.0%, and 4.4% of our total income (i.e. significantly less than 30% of our total income), respectively. In 2020, 2021 and 2022, income from our five largest customers on a group basis accounted for 6.2%, 10.0% and 5.2% of our total income (i.e. significantly less than 30% of our total income), respectively. In addition, in 2020, 2021 and 2022, expenses from our largest supplier on a group basis accounted for 9.1%, 8.6% and 6.5% of our total expenses (i.e. significantly less than 30% of our total income), respectively. In 2020, 2021 and 2022, expenses from our five largest suppliers on a group basis accounted for 12.7%, 10.9% and 8.1% of our total expenses (i.e. significantly less than 30% of our total expenses), respectively. Therefore, there is no concentration risk in our five largest customers or suppliers even on a group basis.

PROPERTIES

We are headquartered in Shanghai. We had 662 offices in China and another 3 offices in Hong Kong and Indonesia as of December 31, 2022. The following table sets forth a summary of our facilities as of December 31, 2022:

 

		Number of Facilities				Aggregate Size (m2)
Guangdong			71				73,707
Jiangsu			63				64,747
Shanghai			15				56,504
Shandong			44				41,210
Hubei			30				36,350
Henan			29				33,576
Hebei			36				33,489
Sichuan			31				31,742
Anhui			21				26,458
Hunan			23				20,561
Others			302				202,120
Total			665				620,465

Owned Properties

As of December 31, 2022, properties that we own have a total gross floor area of 3,603 square meters and each owned property ranges from a gross floor area of approximately 79 square meters to 136 square meters. We have valid title certificates or relevant authorization certificates to substantially all of the properties that we own. We have been advised by our PRC Legal Adviser that we have the legal ownership of the properties for which we have valid title certificates or relevant authorization certificates and we have the rights to possess, utilize, and generate income from these properties.

Leased Properties

We lease our premises under lease agreements. The lease terms vary typically from one to six years. As of December 31, 2022, our leased properties have a total gross floor area of over 620,000 square meters. Much of our system hardware is hosted in leased facilities located in Shanghai, Shenzhen and Hebei that are operated by our IT staff. We also maintain a real-time backup system and a remote backup system at separate facilities also located in Shanghai, Shenzhen and Hebei. These properties are used for non-property activities as defined under Rule 5.01(2) of the Listing Rules and are principally used as office premises for our business operations. 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.

As of December 31, 2022, lessors of 20 of our material leased properties in China with a total gross area of over 35,000 square meters had not provided us with ownership certificates or other similar proof evidencing their rights to lease the properties to our principal subsidiaries and variable interest entities. As a result, these leases may not be valid, and there are risks that we may not be able to continue to use such properties. See “Risk Factors—Risks Relating to Our Business and Industry—Any failure to comply with PRC property laws and relevant regulations regarding certain of our leased properties may negatively affect our business, results of operations and financial condition.”

Pursuant to PRC laws and regulations, property lease contracts must be registered with the local branch of the Ministry of Housing and Urban-Rural Development of the PRC. As of December 31, 2022, we had not obtained lease registrations for the majority of the material properties we leased in China, primarily due to the difficulty of procuring our lessors’ cooperation to register such leases. The registration of such leases will require the cooperation of our lessors. Our PRC Legal Adviser has advised us that the lack of registration for the lease contracts will not affect the validity of such lease contracts under PRC law, and has also advised us that a maximum penalty of RMB10,000 may be imposed for each incident of noncompliance of lease registration requirements. We will take all practicable and reasonable steps to ensure that the unregistered leases are registered.

 

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LICENSES AND QUALIFICATIONS

In accordance with the laws and regulations in the jurisdictions in which we operate, we are required to obtain various licenses and regulatory approvals to operate our business. See “Regulatory Overview” in the Listing Document for details about the regulations that apply to us. During the Track Record Period and up to the Latest Practicable Date, we had obtained all necessary licenses that are material to our business operations from the relevant government authorities. Some of our licenses are valid for an indefinite term, and some are valid for a fixed period and subject to renewal upon expiry in accordance with the applicable PRC laws and regulations. Our Directors do not expect any impediment in the renewal of our licenses.

The table below sets forth a summary of the principal licenses that we have obtained for our business operations as of the Latest Practicable Date:

 

License		Holder		Supervisory Authority		Latest Grant Date		Date of Expiry
Financial Business Permit		Ping An Consumer Finance Co., Ltd.		China Banking and Insurance Regulatory Commission Shanghai Office		January 13, 2022		N/A
Financing Guarantee Business Operation License (License No. Su 010032)		Ping An Puhui Financing Guarantee Co., Ltd.		Jiangsu Local Financial Supervision Authority		May 30, 2022		N/A
Private Investment Fund Manager Registration Certificate (No.P1002716)		Shenzhen Ping An HuiFu Asset Management Co., Ltd.		Asset Management Association of China		May 26, 2014		N/A
Chongqing Municipal Financial Work Office on the Approval of the Opening of Chongqing Jinan Microfinance Co. (Letter No. 32 [2015] of Chongqing Financial Work Office)		Chongqing Jin’an Microloan Co., Ltd		Chongqing Financial Work Office		February 26, 2015		N/A
Value-added Telecommunications Business License (License No. Yu B2-20160063)		Chongqing Financial Assets Exchange Co., Ltd.		Communications Administration of Chongqing Province		December 16, 2021		December 16, 2026
Chongqing Municipal People’s Government on the establishment of the Chongqing Financial Assets Exchange approval (Letter No. 119 [2010] of Chongqing Municipal People’s Government)		Chongqing Financial Assets Exchange Co., Ltd.		Chongqing Municipal People’s Government		December 14, 2010		N/A
Value-added Telecommunications Business License (License No. Yue B2-20280140)		Shenzhen Lufax Internet Information Services Co., Ltd.		Communications Administration of Guangdong Province		February 14, 2023		February 14, 2028
P2P Lending License(1)		PT Ringan Technology Indonesia		Indonesian Financial Services Authority or Otoritas Jasa Keuangan (“OJK”)		August 2, 2021		N/A

 

Note:

 

(1)	We hold a P2P lending license in Indonesia since we may be able to copy our successful business model in China to Indonesia, which is a fast-developing international market.

 

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AWARDS

The following table sets forth some of the most important awards we have received in recognition of our business and capabilities during the Track Record Period:

 

Year		Award		Issuing Authority
2020		Fintech of the Year, China		The Asset
2020		Top 100 Most Valuable Chinese Brands, No. 19		WPP KANTAR
2020		China’s Fintech Pioneer List 2020 中國金融 科技先鋒榜		Securities Times 證券時報
2020		Diamond Award for AI; Platinum Award for Blockchain-based Transformation; Platinum Award for Cybersecurity		Institute of Financial Technologists of Asia
2021		Top 50 Online New Economy (Shanghai) 在線新經濟（上海）50強		Jiemian News, Shanghai United Media Group 上海報業集團|界面新聞
2016-2021		China Leading Fintech 50 List		KPMG China
2022		Best Inclusive Finance Project in China中 國最佳普惠金融項目; Annual Green Sustainable Management Platform 年度綠色可持續管理平臺		The Asian Banker 亞洲銀行家
2022		Excellent and Competitive Financial Institution for SME Services 卓越競爭力普 惠金融踐行金融機構		China Business Journal 中國經營報
2022		2022 China ESG 50		Forbes China 福布斯
2022		Sustainable Development Species Award可 持續發展物種獎 (for our Janus risk decision engine)		Harvard Business Review (China edition) 哈佛商業評論
2022		Competitive Company of the Year 2022年 度競爭力公司		21st Century Business Herald 21世紀經濟 報導

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

We are dedicated to corporate social responsibilities, environmental awareness, and long-term sustainable development. Being a socially responsible company is an integral part of our business and has been our core value since our inception. We have taken various initiatives and practices to promote our value.

 

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ESG Governance

As the foundation to realize the sustainable development of our Company, we have formulated a series of internal ESG management policies to guide all business departments to improve the scientific, systematic and standardized ESG management. Our board of directors is the highest decision-making body for ESG management. To effectively supervise and implement ESG-related tasks of our Company, our board set a Consumer Rights and Interests Protection and Environmental, Social and Governance Committee (the “Consumer Protection and ESG Committee”), which mainly supervise consumption, protection and ESG issues. The Consumer Protection and ESG Committee further authorizes relevant functions to the Executive Committee, which primarily is responsible for the execution of specific ESG targets, managing policy formulation and performance evaluation, the identification of material ESG issues for business operation and stakeholders and reporting the outcomes of ESG management to the Board regularly. Under the Executive Committee, an ESG Executive Group and an Executive Group for Consumer Rights and Interests Protection are set up, consisting of various companies and functional departments, to optimize the top-down ESG governance framework, and effectively supervise, manage and deliver all ESG-related tasks within our Company. To effectively manage and control ESG-related risks, we have incorporated ESG indicators into the performance appraisal system of senior executives, directly linking ESG governance with their remunerations.

Our ESG strategies generally address three key areas: society, which entails consumer rights and interest protection measures, environment, which broadly includes energy preservation and reduction of carbon emission, and governance, which targets the sustainable development management.

Our Commitment to Social Responsibilities

We believe that our continued growth rests on integrating social values into our business and serving the community at large in China. Since our inception, we have been highly committed to supporting and participating in charitable and socially responsible projects that align with our core values and mission, and to establishing inclusive technology and innovations to extend the benefits of our technological capabilities to the community at large.

Our major corporate social responsibility initiatives include:

The Preferential Agricultural Fund

We established the Preferential Agricultural Fund, which is an innovative program that aims to revitalize the rural economy by supporting micro and small businesses as well as cooperatives in rural areas. Focusing female leaders of rural cooperatives, we provide them with well-rounded entrepreneurship and employment assistance through interest-free funds, skill trainings, and traffic support.

In 2021, we joined forces with the China Women’s Development Foundation, the Ningxia Women’s Federation, and Ningxia Women and the Children’s Development Foundation and announced a grant of RMB10 million for the Huinongjin (惠農金). The funds have been granted to rural micro and small businesses and cooperatives led by 13 female entrepreneurs in six provinces to support their entrepreneurship and innovation. In 2021, we donated another RMB2 million to the China Women’s Development Foundation for distributing Preferential Agricultural Funds in the following two years.

 

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Supporting Students and Promoting Education

We have a long-standing commitment to providing each child with an opportunity to lead a better life through knowledge. We have continued to assist Ping An Hope Primary School in Niuhe, Gansu in the past six years. Our volunteer team supports the healthy development of local students by providing on-site visits, online and offline interactions, a variety of courses that range from basic courses to horizon-broadening AI courses, and comprehensive supplies, including school supplies to students.

Initiatives to Combat the COVID-19 Pandemic

Since the outbreak of the COVID-19 pandemic, we have been supporting nationwide efforts to contain the pandemic and motivating employees to participate in volunteer activities in local communities. In response to volunteer shortage during the pandemic, our volunteers actively participated in events to combat the pandemic, with over 8,550 employees working in the front line for epidemic prevention and control. For example, our Shenzhen branch sent nearly 20 groups of volunteers to assist in nucleic acid testing and our Beijing branch brought supplies to community residents, helped to build nucleic acid testing tents, and assisted with testing.

Donations to Society

We pay close attention to trending social issues and have launched several charity donations that benefit the community at large in China. For example, we invested RMB8.5 million in public welfare in 2021. This included RMB5.8 million spent on the national park program for the Ping An Guardian Action, which is a program designed to strengthen the development of China’s ecological environment protection and restoration; RMB2 million spent on our Preferential Agricultural Funds program; RMB500,000 spent to support China’s nationwide efforts to combat the COVID-19 pandemic; and the remaining RMB200,000 spent on the Dream in the New Era initiated by the Central Conservatory of Music, which is a program that brings music education to students in rural areas. In addition, to relieve the pressure induced by the shortage of supplies during the COVID-19 pandemic, we aligned forces across our branches nationwide to procure urgently needed supplies, including protective suits, face masks, medical gloves, clothing and food, and donated them to local governments, communities and local police stations.

We are also committed to protecting consumers’ financial rights and interests, such as the right to information and independent choice. At the same time, we join forces with various institutions of all levels to promote financial knowledge, including antifraud knowledge and techniques, to safeguard consumers’ asset. Set forth below is a few initiatives we have taken to strengthen consumer rights and interest protection.

Responsible Marketing. We have formulated relevant marketing, advertisement and sales regulations to regulate our Company’s code of marketing and publicity conduct and clarify the review and approval process for marketing and publicity materials as well as the penalty mechanism for non-compliance. We have established a material review, approval and supervision mechanism for responsible marketing, stipulating that all marketing materials must be reviewed for compliance, and approved by authorized management personnel of our Company to ensure the compliance and appropriateness regarding the content and form, and thereby preventing any exaggerated or false publicity. In order to raise the awareness of compliant marketing and avoid noncompliance marketing risks among relevant personnel, we have set up various compliance marketing promotion activities, such as induction training, special training, compliance week and compliance month activities, daily meetings and case studies.

 

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Protection of Financial Consumers. We attach great importance to consumer protection by establishing a whole-process system for consumer rights and interest protection. A Consumer Rights and Interests Protection Affairs Committee has been established responsible for planning, arranging and deploying the implementation of protecting consumer rights and interests, monitoring and reviewing products, and reporting to our board and the Consumer Protection Executive Committee regularly. We have standardized the debt-collection process and trained our employees on debt collection through in-person lectures and online courses. In addition, we also use technological means to monitor violent debt-collection and any other behaviors that may undermine the rights and interests of customers. In joint hands with authoritative media, we expose anti-collection organization scams to raise customers’ alertness.

We remain committed to taking sustainable corporate responsibility initiatives and making our contributions to society, in particular to those in need, in China.

Environmental Sustainability and Worker Safety

We do not operate any manufacturing facilities or any logistical facilities. Therefore, we are not subject to significant health, work safety or environmental risks. We believe that our business operation did not have any significant impact on the environment and climate change during Period. We are, however, dedicated to environmental awareness and energy efficiency. To ensure compliance with applicable laws and regulations, from time to time, our human resources department would, if necessary and after consultation with our legal advisor, adjust our human resources policies to accommodate material changes to relevant labor and safety laws and regulations. During the Track Record Period and up to the Latest Practicable Date, we had not been subject to any material fines or other material penalties due to non-compliance with health, work safety, social or environmental regulations.

Metrics and targets

We have established environmental goals and initiated green office measures in the following areas to achieve low-carbon and sustainable development goals.

 

•

Greenhouse gas emission. We evaluate our greenhouse gas emission level using total greenhouse gas emission measured in tons. In 2021, our total greenhouse gas emission was 36,613.5 tons. We intend to keep the level of our total greenhouse gas emission between 80% and 120% of that in 2021 over the next three years.

 

•

Water usage. We evaluate our water usage level using total water usage measured in tons. In 2021, our total water consumption was 227,721.4 tons. We intend to keep the level of our water usage between 80% and 120% of that in 2021 over the next three years.

 

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•

Electricity consumption. We evaluate our energy consumption level using total energy consumption measured in MWh. In 2021, our total energy consumption was 54,523.7 MWh. We intend to keep the level of our energy consumption between 80% and 120% of that in 2021 over the next three years.

 

•

Paper consumption. We evaluate our paper consumption level using total weight of paper measured in tons. In 2021, our total paper consumption was 473.8 tons. We intend to keep the level of our paper use between 80% and 120% of that in 2021 over the next three years.

 

•

Solid waste discharge. We evaluate our solid waste discharge level using total weight of solid waste measured in tons. In 2021, our total solid waste discharge was 505.9 ton. We intend to keep the level of our solid waste discharge between 80% and 120% of that in 2021 over the next three years.

Measures to Achieve the Goals

Green Office. We have initiated several green office measures to achieve low-carbon and sustainable development. To save electricity, we have installed energy-saving LED lights to replace traditional tubes, designed zonal circuit in the office area and installed smart meters to monitor real-time data for effective consumption management. To save water, we have installed induction faucet to avoid unnecessary waste of water and advocated water-saving awareness through campaigns, such as posting save water slogans in our offices. To save resources, such as paper, we have advocated paperless office by practicing cloud printing and reducing the use of paper materials in work groups and promoted a digitalized bidding process to reduce the use of related paper materials. To reduce solid waste, we revitalize idle assets and reduce the generation of waste. In addition, we properly dispose and recycle harmless and hazardous wastes generated in office and operation processes after classification. For hazardous wastes such as printer cartridges and waste lamps, we have set up special disposal areas and recycling processes. For computer accessories and used batteries, they are sent to qualified suppliers for centralized and proper treatment regularly. In order to improve the current asset utilization, we collect the data of idle assets from various places every month and share the pooled data of available old resources nationwide. A reward mechanism is included in the asset assessment module to encourage everyone to make full use of old resources, reduce the purchase of new equipment, and improve the efficiency of equipment use.

Green Finance. Thanks to the use of digital and AI technology in our industry, we have set up a green finance office, which has full authority to manage the green financial products sold on the platform designed to support environmentally friendly industries, such as sewage treatment and new energy. To support the sustainable development of low-carbon and green finance, and respond to the national industrial plan and the United Nations sustainable development goal initiative, we specifically introduced ESG-related public offering products and underlying assets and invested in net worth products in fields of green finance, energy conservation and emission reduction. For example, we have released a new product tailored to new energy vehicles, which solves the financing difficulties for many new energy vehicle owners and lowers the threshold for traditional vehicles trade-in products to facilitate the goal of carbon neutrality.

 

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