Financial Performance - Interest and fees income for 2019 was RMB 2,953,480,997, a decrease of 30.8% from RMB 4,278,820,368 in 2018[24] - Net interest and fees income after provision for credit losses in 2019 was RMB 1,123,548,583, down 41.3% from RMB 1,915,851,543 in 2018[24] - Net income for 2019 was RMB 534,643,942, a decline of 37.9% from RMB 860,908,711 in 2018[27] - Basic earnings per share for 2019 was 0.39, down from 0.69 in 2018, representing a decrease of 43.5%[27] - Total assets as of December 31, 2019, were RMB 13,026,248,967, compared to RMB 19,354,717,165 in 2018, reflecting a decrease of 32.8%[28] - Total shareholders' equity increased to RMB 3,598,532,495 in 2019 from RMB 3,045,555,380 in 2018, marking an increase of 18.1%[28] Business Strategy and Operations - The company has been exploring new business models since December 2018 to broaden its prospective borrower base[33] - The company introduced a new collaboration model in December 2018 to enhance its loan service offerings[32] - The company aims to maintain a low aggregate delinquency rate and improve operational efficiency amidst evolving market conditions[34] - Approximately 95.4%, 99.5%, and 100.0% of the home equity loan origination volume was funded under the trust lending model in 2017, 2018, and 2019 respectively[49] - The company has implemented a new collaboration model with sales partners, categorizing them based on loan amounts[76] Regulatory Environment - The regulatory environment for China's home equity loan market remains uncertain, impacting the company's operational strategies[33] - The trust company partners are required to comply with regulations limiting loans to no more than 30% of the paid-in balance of all trust plans under management[47] - The company has not been subject to any fines or penalties under PRC laws regarding historical credit enhancement arrangements as of the date of the annual report[41] - If deemed to be providing financing guarantees without required licenses, the company may face penalties including fines of up to RMB1 million and suspension of business[38] - The current regulatory environment for debt collection in the PRC remains unclear, potentially harming the company's reputation and ability to collect payments[105] Risk Factors - The COVID-19 outbreak is expected to adversely impact the company's results of operations, with a projected decrease in total revenue for the first quarter of 2020 compared to the previous year[57] - The company faces risks related to natural disasters and health epidemics, which could disrupt operations and adversely affect financial performance[53] - The company may face material adverse effects if its funding sources are deemed to violate PRC laws and regulations[83] - The company may not be able to achieve low aggregate delinquency rates for loans, which could adversely affect its business and results of operations[95] - The company is subject to risks related to the COVID-19 outbreak, which may negatively impact its ability to maintain or increase loan facilitation[93] Financial Ratios and Metrics - The aggregate delinquency rate for 2019 was 5.43%, while the aggregate NPL rate was 3.55%[69] - The delinquency ratio for 2019 was 21.08%, and the NPL ratio was 13.75%[69] - The actual structural leverage ratio of trust plans was generally lower than 3:1 as of December 31, 2019[73] - The company's leverage ratio was 9.9 times, 6.4 times, and 3.7 times as of December 31 for the years 2017, 2018, and 2019 respectively[99] Collection and Loan Management - The company’s collection process is divided into distinct stages based on delinquency, with automatic reminders sent to borrowers as soon as collections commence[104] - The company may experience delays in collection efforts due to the COVID-19 outbreak, which could adversely impact its results of operations[106] - Loans secured by second lien interests accounted for 58.1% and 56.4% of the company's loan origination volume of home equity loans in 2018 and 2019, respectively[124] Compliance and Legal Risks - The company collects and stores a large volume of personally identifiable information, which is increasingly regulated under domestic and international privacy laws, creating potential compliance risks[128] - The company is subject to liabilities under the PRC Contract Law if it intentionally conceals material facts or provides false information, which could result in damages to trust company partners[126] - Non-compliance with PRC regulations regarding employee stock incentive plans may result in fines and legal sanctions for the company and its plan participants[216] Shareholder and Corporate Governance - Cathay Auto Services Limited holds approximately 23.3% of the company's ordinary shares, while CISG Holdings Ltd. and Kylin Investment Holdings Limited hold approximately 18.5% and 17.8%, respectively, indicating significant shareholder influence[175] - The concentration of ownership among major shareholders may discourage future changes in control, potentially impacting stockholder value[175] - The company has authorized the issuance of a maximum of 307,608,510 shares under the 2018 Plan, with all options currently outstanding[173] Operational Challenges - The company operates primarily in over 80 leased properties across various cities in China, with some properties lacking proper title certificates, potentially leading to operational disruptions[157] - Competition for skilled employees is intense, and the company may struggle to attract and retain qualified personnel necessary for its operations[160] - The company has identified a material weakness in its internal control over financial reporting, which could affect its ability to accurately report future financial results[168]

PART I [ITEM 3. KEY INFORMATION](index=8&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section presents selected financial data from 2016-2018 and details significant risks related to business operations, regulations, and securities [Selected Financial Data](index=8&type=section&id=3.A.%20Selected%20Financial%20Data) The company shows strong growth in revenue, net income, and total assets from 2016 to 2018 Selected Consolidated Statements of Comprehensive Income Data (2016-2018) | Indicator | 2016 (RMB) | 2017 (RMB) | 2018 (RMB) | | :--- | :--- | :--- | :--- | | **Net interest and fees income** | 800,884,505 | 2,000,542,084 | 2,349,605,444 | | **Income before income tax** | 288,045,262 | 808,667,625 | 1,157,737,186 | | **Net income** | 235,441,839 | 532,672,757 | 860,908,711 | | **Comprehensive income** | 39,983,249 | 529,872,608 | 860,811,637 | | **Basic EPS** | 0.19 | 0.43 | 0.69 | | **Diluted EPS** | 0.19 | 0.40 | 0.62 | Selected Consolidated Balance Sheet Data (as of year-end) | Indicator | 2016 (RMB) | 2017 (RMB) | 2018 (RMB) | | :--- | :--- | :--- | :--- | | **Total assets** | 7,806,357,480 | 18,215,865,490 | 19,354,717,165 | | **Total liabilities** | 6,687,671,062 | 16,384,616,698 | 16,309,161,785 | | **Total shareholders' equity** | 1,118,686,418 | 1,831,248,792 | 3,045,555,380 | [Risk Factors](index=10&type=section&id=3.D.%20Risk%20Factors) The company faces risks from its limited operating history, reliance on trust funding, high leverage, and potential PFIC classification - The company has a limited operating history in the home equity loan market, having adopted its current business model in 2014, making future prospects difficult to evaluate[26](index=26&type=chunk) - The company's historical credit enhancement arrangements may be challenged by PRC regulators as **providing financing guarantees without the required licenses**, potentially leading to penalties[29](index=29&type=chunk)[31](index=31&type=chunk) - A significant portion of loan funding comes from trust company partners, with **99.5% of home equity loan origination volume funded under the trust lending model in 2018**[40](index=40&type=chunk)[59](index=59&type=chunk) - The company's leverage ratio was high at 7.0x, 9.9x, and **6.4x** as of year-end 2016, 2017, and 2018, respectively, exposing it to liquidity risk[83](index=83&type=chunk) - The aggregate delinquency rate for originated loans **increased from 4.26% in 2017 to 7.58% in 2018**, while the aggregate NPL rate increased from 1.00% to 1.05% in the same period[80](index=80&type=chunk) - There is a high probability that the company was a **Passive Foreign Investment Company (PFIC)** for the 2018 tax year and will continue to be, which could result in adverse U.S. federal income tax consequences for U.S. taxpayers holding its shares or ADSs[258](index=258&type=chunk)[260](index=260&type=chunk) [ITEM 4. INFORMATION ON THE COMPANY](index=45&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details the company's history, business model targeting MSE owners, organizational structure, and applicable PRC regulations [History and Development of the Company](index=45&type=section&id=4.A.%20History%20and%20Development%20of%20the%20Company) The company was spun off from Fanhua Inc. in 2006 and completed its IPO on the NYSE in November 2018 - The company was spun off from Fanhua Inc. (NASDAQ: FANH) in 2006[262](index=262&type=chunk) - Completed its **initial public offering in November 2018**, listing its ADSs on the New York Stock Exchange under the symbol "CNF"[263](index=263&type=chunk) [Business Overview](index=45&type=section&id=4.B.%20Business%20Overview) The company facilitates home equity loans for MSE owners primarily through a trust lending model, bearing first-loss risk Home Equity Loan Origination Volume | Year | Aggregate Principal (RMB billion) | YoY Change | Number of Borrowers | | :--- | :--- | :--- | :--- | | 2016 | 8.3 | - | 12,983 | | 2017 | 17.1 | +106.0% | 23,705 | | 2018 | 9.5 | -44.4% | 16,167 | - The primary target borrowers are **Micro and Small-Enterprise (MSE) owners** who own real properties in Tier 1 and Tier 2 cities in China and are underserved by traditional financial institutions[266](index=266&type=chunk) - The company's primary funding source is a trust lending model, which accounted for 94.1%, 95.4%, and **99.5% of total home equity loan origination volume** in 2016, 2017, and 2018, respectively[296](index=296&type=chunk)[300](index=300&type=chunk) - Under the trust lending model, CNFinance subscribes to all subordinated units of the trust plans, entitling it to residual value but also exposing it to **first-loss risk**[270](index=270&type=chunk)[305](index=305&type=chunk)[308](index=308&type=chunk) - The company has established a national network of **64 branches and sub-branches** in over 40 cities in China, providing local knowledge and resources for loan origination, security perfection, and debt collection[330](index=330&type=chunk) [Organizational Structure](index=70&type=section&id=4.C.%20Organizational%20Structure) The company is a Cayman Islands holding entity operating in the PRC through subsidiaries and consolidating trust plans as VIEs - The company is a **Cayman Islands holding company** that operates its business in the PRC primarily through its subsidiaries, including Shenzhen Fanhua United Investment Group Co., Ltd. and Guangzhou Heze Information Technology Co., Ltd[262](index=262&type=chunk)[420](index=420&type=chunk) - For accounting purposes, the company consolidates the financial results of the trust plans it collaborates with, as they are considered **Variable Interest Entities (VIEs)** due to the company's exposure to their risk and returns[420](index=420&type=chunk)[746](index=746&type=chunk) [Property, Plant and Equipment](index=71&type=section&id=4.D.%20Property,%20Plant%20and%20Equipment) The company leases its headquarters in Guangzhou and maintains office spaces in over 40 cities across China - The company's headquarters are in Guangzhou, China, under a lease expiring in September 2022 and it also leases office space in over 40 other cities[423](index=423&type=chunk) [OPERATING AND FINANCIAL REVIEW AND PROSPECTS](index=71&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes financial performance for 2016-2018, highlighting income growth alongside rising delinquency rates and decreased loan origination [Operating Results](index=72&type=section&id=5.A.%20Operating%20Results) In 2018, net income grew 61.6% despite lower loan originations, driven by a larger loan portfolio and reduced operating expenses Key Financial Performance (2016-2018) | Indicator (RMB millions) | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Total operating income | 867.3 | 2,013.0 | 2,338.2 | | Net income | 235.4 | 532.7 | 860.9 | - In 2018, interest and financing service fee on loans **increased by 25.6% to RMB 4,278.8 million**, primarily due to an increase in the daily average outstanding loan principal[511](index=511&type=chunk) - Total operating expenses **decreased by 16.8% in 2018**, mainly due to an 18.8% decrease in employee compensation and a 78.3% decrease in share-based compensation expenses[520](index=520&type=chunk) Loan Performance Metrics (as of year-end) | Metric | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Aggregate delinquency rate | 3.69% | 4.26% | 7.58% | | Aggregate NPL rate | 1.04% | 1.00% | 1.05% | | Allowance ratio | 1.95% | 2.64% | 5.44% | | NPL provision coverage ratio | 130.6% | 159.3% | 218.8% | [Liquidity and Capital Resources](index=87&type=section&id=5.B.%20Liquidity%20and%20Capital%20Resources) The company's liquidity improved significantly in 2018, with cash increasing to RMB 3.2 billion, supported by strong operating cash flow Summary of Cash Flows (RMB millions) | Cash Flow Activity | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 379.9 | 1,286.6 | 1,332.7 | | Net cash (used in)/from investing activities | (4,700.4) | (9,583.9) | 641.4 | | Net cash from/(used in) financing activities | 4,291.1 | 9,256.7 | (2.5) | - As of December 31, 2018, the company had **cash and cash equivalents of RMB 3.2 billion**, a significant increase from RMB 1.2 billion at the end of 2017[535](index=535&type=chunk) - The company received **net proceeds of approximately US$45.7 million** from its initial public offering in November 2018[684](index=684&type=chunk) [Research and Development](index=92&type=section&id=5.C.%20Research%20and%20Development) The company invests in its technology system to support platform scalability, with R&D expenses decreasing in 2018 Research and Development Expenses | Year | R&D Expenses (RMB millions) | | :--- | :--- | | 2016 | 8.5 | | 2017 | 4.8 | | 2018 | 1.4 | [Tabular Disclosure of Contractual Obligations](index=93&type=section&id=5.F.%20Tabular%20Disclosure%20of%20Contractual%20Obligations) As of year-end 2018, the company had total contractual obligations of RMB 125.5 million related to operating leases Contractual Obligations as of December 31, 2018 (RMB) | Obligation Type | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease commitment | 125,481,028 | 55,912,805 | 49,017,842 | 15,302,669 | 5,247,712 | [DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES](index=93&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section details the company's leadership, compensation, board structure, and employee base as of 2018 [Directors and Senior Management](index=93&type=section&id=6.A.%20Directors%20and%20Senior%20Management) The company's leadership team is headed by Chairman and CEO Bin Zhai and CFO Ning Li, supported by a seven-member board - **Bin Zhai** serves as the Chairman of the Board and Chief Executive Officer[575](index=575&type=chunk) - **Ning Li** serves as the Executive Director and Chief Financial Officer[577](index=577&type=chunk) [Compensation](index=95&type=section&id=6.B.%20Compensation) Executive officers received RMB 1.6 million in cash compensation in 2018, with key leaders holding substantial option grants - In fiscal year 2018, the company paid an aggregate of **RMB 1.6 million in cash compensation** to its executive officers[585](index=585&type=chunk) Outstanding Equity Awards to Key Executives (as of report date) | Name | Options Outstanding | Exercise Price (Per share) | Expiration Date | | :--- | :--- | :--- | :--- | | Bin Zhai | 40,000,000 | RMB 0.5 | Dec 31, 2022 | | Ning Li | 30,000,000 | RMB 0.5 | Dec 31, 2022 | | Jun Qian | 20,000,000 | RMB 0.5 | Dec 31, 2022 | | Zehui Zhang | 20,000,000 | RMB 0.5 | Dec 31, 2022 | [Board Practices](index=97&type=section&id=6.C.%20Board%20Practices) The seven-member board includes three independent directors and has established audit, compensation, and governance committees - The Board of Directors consists of **seven directors, three of whom are independent**[601](index=601&type=chunk) - The company has established an **Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee**[603](index=603&type=chunk) [Employees](index=100&type=section&id=6.D.%20Employees) As of year-end 2018, the company had 2,761 employees, with the majority focused on sales, marketing, and risk management Employee Breakdown by Function (as of Dec 31, 2018) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Risk Management | 806 | 29.2% | | Sales and Marketing | 1,406 | 50.9% | | General and Administration | 217 | 7.9% | | Finance | 191 | 6.9% | | Others | 141 | 5.1% | | **Total** | **2,761** | **100.0%** | [Share Ownership](index=100&type=section&id=6.E.%20Share%20Ownership) As of March 2019, insiders and principal shareholders hold significant stakes, with the Chairman and CEO owning 38.2% Beneficial Ownership of Major Shareholders (as of March 31, 2019) | Shareholder | Beneficial Ownership (%) | | :--- | :--- | | Bin Zhai (Chairman & CEO) | 38.2% | | CAA Holdings Company Limited | 36.8% | | Cathay Auto Services Limited | 23.3% | | CISG Holdings Ltd. | 18.5% | | Cathay Capital Holdings II, L.P. | 10.8% | [MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS](index=102&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section outlines major shareholders and details transactions with related parties, including Fanhua Inc [Related Party Transactions](index=103&type=section&id=7.B.%20Related%20Party%20Transactions) The company engaged in transactions with Fanhua Inc., including a revolving loan agreement and a trust fund subscription - The company had a revolving loan agreement with Fanhua Inc. with a credit limit of up to **US$79.7 million**, which bore a 7.3% interest rate and expired in March 2018[627](index=627&type=chunk) - In May 2018, Fanhua Inc. subscribed to approximately **RMB 138 million in senior units** of the Jinghua Structure Fund 27, which were subsequently transferred to a third party in July 2018[628](index=628&type=chunk) [FINANCIAL INFORMATION](index=103&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section includes the company's consolidated financial statements and discusses its dividend policy and legal proceedings [Consolidated Statements and Other Financial Information](index=103&type=section&id=8.A.%20Consolidated%20Statements%20and%20Other%20Financial%20Information) The company is not involved in material legal proceedings and does not plan to pay dividends, retaining earnings for growth - The company is **not currently a party to any material legal or administrative proceedings**[630](index=630&type=chunk) - The company has **no plan to declare or pay any dividends** in the near future, intending to retain earnings to operate and expand the business[631](index=631&type=chunk) [ADDITIONAL INFORMATION](index=105&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section covers share capital, material contracts, and taxation, highlighting the company's likely PFIC status for U.S. investors [Taxation](index=105&type=section&id=10.E.%20Taxation) The company is tax-exempt in the Cayman Islands, subject to a 25% tax rate in the PRC, and is likely a PFIC for U.S. tax purposes - The company is **not subject to income or capital gains tax** in its jurisdiction of incorporation, the Cayman Islands[637](index=637&type=chunk) - The company's PRC subsidiaries are subject to a statutory **enterprise income tax rate of 25%**[639](index=639&type=chunk)[471](index=471&type=chunk) - There is a high probability that the company was a **PFIC for its 2018 taxable year** and will continue to be one, which carries adverse U.S. federal income tax consequences for U.S. Holders[649](index=649&type=chunk) [QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=110&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risks include interest rate, foreign exchange, and inflation risk - The company is exposed to **interest rate risk**, as rising rates could reduce demand for its loan products and increase its own funding costs[669](index=669&type=chunk) - Substantially all revenues are denominated in Renminbi (RMB), which is not freely convertible and is subject to fluctuation against the U.S. dollar, creating **foreign exchange risk**[670](index=670&type=chunk)[671](index=671&type=chunk) - Inflation in China has not materially impacted results of operations, with the consumer price index increasing by 1.9% in 2018[674](index=674&type=chunk) [DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES](index=111&type=section&id=ITEM%2012.%20DESCRIPTION%20OF%20SECURITIES%20OTHER%20THAN%20EQUITY%20SECURITIES) This section describes the fees associated with the company's American Depositary Shares (ADSs) managed by the depositary bank [American Depositary Shares](index=111&type=section&id=12.D.%20American%20Depositary%20Shares) ADS holders are subject to various fees by the depositary, from which the company received a US$0.4 million payment in 2019 - ADS holders are subject to fees from the depositary, including up to **$5.00 per 100 ADSs for issuance/cancellation** and up to $0.05 per ADS for cash distributions[675](index=675&type=chunk)[676](index=676&type=chunk) - In March 2019, the company received a **US$0.4 million cash payment** from the ADR program's depositary bank, JPMorgan Chase Bank, N.A[682](index=682&type=chunk) [CONTROLS AND PROCEDURES](index=113&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management concluded that disclosure controls were ineffective as of year-end 2018 due to a material weakness in financial reporting - Management concluded that as of December 31, 2018, the company's **disclosure controls and procedures were ineffective**[689](index=689&type=chunk) - A **material weakness was identified** in internal control over financial reporting due to a lack of sufficient financial reporting and accounting personnel with appropriate experience in U.S. GAAP and SEC reporting requirements[691](index=691&type=chunk) - The company is implementing remediation measures, including **hiring more qualified accounting personnel** and providing regular U.S. GAAP training[692](index=692&type=chunk) [CORPORATE GOVERNANCE AND ACCOUNTING](index=114&type=section&id=ITEM%2016.%20[Reserved]) This section covers corporate governance, including the audit committee financial expert and principal accountant fees [Audit Committee Financial Expert](index=114&type=section&id=16.A.%20Audit%20Committee%20Financial%20Expert) The Board has identified Mr. Fengyong Gao, an independent director, as the audit committee financial expert - **Mr. Fengyong Gao**, an independent director, has been identified by the Board as the "audit committee financial expert"[696](index=696&type=chunk) [Principal Accountant Fees and Services](index=114&type=section&id=16.C.%20Principal%20Accountant%20Fees%20and%20Services) Total fees paid to the independent auditor, KPMG Huazhen LLP, were RMB 13.1 million in 2018 Auditor Fees (RMB in thousands) | Fee Type | 2017 | 2018 | | :--- | :--- | :--- | | Audit Fees | 730 | 12,738 | | Audit-Related Fees | - | 330 | | Tax Fees | - | - | | Other Fees | - | - | | **Total** | **730** | **13,068** | [FINANCIAL STATEMENTS](index=116&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section contains the company's U.S. GAAP consolidated financial statements for 2016-2018 with an unqualified audit opinion [Report of Independent Registered Public Accounting Firm](index=119&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KPMG Huazhen LLP issued an unqualified audit opinion on the 2016-2018 consolidated financial statements - The independent auditor, KPMG Huazhen LLP, provided an **unqualified opinion** on the consolidated financial statements for the three-year period ended December 31, 2018[708](index=708&type=chunk) - The audit was conducted in accordance with the standards of the **Public Company Accounting Oversight Board (PCAOB)**[710](index=710&type=chunk)