Lexin(LX) - 2022 Q4 - Annual Report

Introduction Definitions and Conventions This section defines key operational terms, clarifies the VIE corporate structure, and specifies the reporting currency and exchange rates - The company conducts its operations in China through a combination of PRC subsidiaries and Variable Interest Entities (VIEs), with which it has contractual arrangements[6] - The reporting currency is the Renminbi (RMB), with all U.S. dollar translations made at a rate of US$1.00 = RMB6.8972 as of December 30, 2022[7] - Key operational terms defined include 'originations', 'active users', and '90 days+ delinquency ratio'[5] Forward-Looking Information This section outlines forward-looking statements regarding future performance and trends, noting associated risks and uncertainties - Forward-looking statements cover areas such as company goals and strategies, future business development, financial condition, and market growth expectations[9] - The company operates in a rapidly evolving environment, and it cautions that actual future results may be materially different from what is expected[10] PART I Item 3. Key Information This section details the company's VIE corporate structure, presents selected financial data, and outlines key associated risks Selected Financial Data and Corporate Structure This sub-section explains the VIE operational structure, presents consolidating financial statements, and discusses related risks - LexinFintech is a Cayman Islands holding company operating in China through contractual arrangements with its Variable Interest Entities (VIEs)[12] VIE Revenue Contribution | Year | Revenue Contribution from VIEs (%) | | :--- | :--- | | 2020 | 99.4% | | 2021 | 97.5% | | 2022 | 94.2% | Cash and Asset Transfers (Year Ended Dec 31, 2022, RMB in thousands) | Transfer Description | Amount | | :--- | :--- | | Service fees paid by VIEs to PRC subsidiaries | 1,539,812 | | Goods/service fees received by VIEs from PRC subsidiaries | 13,004 | | Funds from parent to Cayman, BVI, and Hong Kong subsidiaries (net) | (36,817) | | Funds from Cayman, BVI, and Hong Kong subsidiaries to parent (net) | (323,446) | | Funds provided by PRC subsidiaries to VIEs (net) | (1,507,456) | | Funds provided by VIEs to PRC subsidiaries (net) | 61,831 | Condensed Consolidating Statement of Operations (Year Ended Dec 31, 2022, RMB in thousands) | Account | Parent | Other Subsidiaries | Primary Beneficiary of the VIEs | The VIEs and the VIEs' subsidiaries | Consolidated totals | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Operating revenue | — | 161,811 | 2,036,113 | 9,298,063 | 9,865,811 | | Gross profit | — | 84,100 | 1,767,386 | 2,813,370 | 3,034,716 | | Income before income tax | 819,752 | 872,225 | 1,076,608 | 36,225 | 1,028,569 | | Net income | 819,752 | 872,049 | 888,094 | 22,275 | 825,929 | Condensed Consolidating Balance Sheet (As of Dec 31, 2022, RMB in thousands) | Account | Parent | Other Subsidiaries | Primary Beneficiary of the VIEs | The VIEs and the VIEs' subsidiaries | Consolidated totals | | :--- | :--- | :--- | :--- | :--- | :--- | | TOTAL ASSETS | 11,087,234 | 11,032,632 | 9,262,744 | 19,835,968 | 22,770,703 | | TOTAL LIABILITIES | 2,438,483 | 291,398 | 991,751 | 17,544,534 | 14,121,952 | | TOTAL SHAREHOLDERS' EQUITY | 8,648,751 | 10,741,234 | 8,270,993 | 2,291,434 | 8,648,751 | Risk Factors This section outlines significant risks related to the VIE structure, PRC operations, business-specific challenges, and ADSs - The company's reliance on VIEs is a primary risk, as these entities contributed 94.2% of revenue in 2022 and could be deemed non-compliant by the PRC government[60][73] - Significant risks from PRC government oversight and new regulations requiring CSRC filing for overseas offerings create uncertainty for future capital raising[113][174][175] - There is a risk of delisting from U.S. exchanges under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB cannot inspect the auditor in the future[181][185] - Evolving PRC regulations on interest rates, including a lowered cap for protected private lending rates, could materially impact the business[205][209][210] - The dual-class share structure gives its founder, Mr. Jay Wenjie Xiao, 77.2% of the aggregate voting power, limiting other shareholders' influence[413] Item 4. Information on the Company This section details the company's business model, history, regulatory environment, and complex VIE organizational structure History and Development of the Company This sub-section outlines key corporate milestones, including its founding, IPO, convertible note issuance, and headquarters development - The company commenced its online consumer finance business, Fenqile, in October 2013[463] - On December 21, 2017, the company's ADSs began trading on Nasdaq under the symbol 'LX', raising net proceeds of approximately US$108.4 million[463] - In September 2019, the company issued US$300 million in convertible senior notes, which were later amended to require full repayment by April 2024[464] Business Overview This sub-section describes the company's credit technology services, target users, risk management, and funding model within the PRC regulatory framework - The company connects young consumers with financial institutions through a model integrating online/offline channels and AI-driven risk management[469][471] - Core services include credit facilitation, tech-empowerment, and an installment e-commerce platform[470][472] User Statistics as of Dec 31, 2022 | Metric | Value | | :--- | :--- | | Registered Users | 189 million | | Users with Credit Line | 40.0 million | | Cumulative Active Users | 29.4 million | - The company utilizes a proprietary 'Hawkeye' engine for credit assessment and risk management, leveraging big data and AI[492] - Funding is primarily sourced from institutional partners, which accounted for 100% of newly funded loans in 2022[489] - The business is subject to a wide range of PRC regulations governing Foreign Investment (VIE structure), Online Consumer Finance, and Data Security[522] Organizational Structure This sub-section details the VIE corporate structure and the contractual arrangements enabling control over its PRC operating entities - LexinFintech Holdings Ltd. is a Cayman Islands holding company that controls its PRC operating entities through a VIE structure due to foreign investment restrictions[727] - The contractual arrangements are designed to provide effective control over the VIEs and the right to receive substantially all economic benefits[728] - Key agreements underpinning the VIE structure include Exclusive Business Cooperation Agreements, Powers of Attorney, and Equity Pledge Agreements[730][732][733][734] Item 5. Operating and Financial Review and Prospects This section provides management's analysis of financial results, liquidity, capital resources, and critical accounting estimates Operating Results This sub-section analyzes financial performance from 2020-2022, detailing revenue and cost trends, and key loan performance metrics Key Operating Metrics (in RMB millions, except user numbers) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Outstanding principal balance | 76,480 | 85,930 | 99,618 | | Originations | 176,679 | 213,807 | 204,585 | | Active users (thousands) | 12,927 | 14,167 | 9,694 | Consolidated Results of Operations (in RMB millions) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Total operating revenue | 11,645 | 11,381 | 9,866 | | Gross profit | 3,633 | 5,749 | 3,035 | | Net income | 595 | 2,334 | 826 | - Operating revenue decreased by 13.3% in 2022, primarily due to lower credit facilitation and tech-empowerment service income[800][801][803] - The 90 day+ delinquency ratio increased to 2.53% as of December 31, 2022, attributed to the negative impact of COVID-19[766][770] - Provision for contingent guarantee liabilities increased by 136% in 2022 to RMB 1,468 million[806] Liquidity and Capital Resources This sub-section details the company's funding sources, cash position, debt obligations, and material cash requirements Cash and Cash Equivalents | As of Dec 31 | Amount (RMB millions) | | :--- | :--- | | 2020 | 1,564 | | 2021 | 2,664 | | 2022 | 1,494 | Summary of Cash Flows (Year Ended Dec 31, 2022, RMB in millions) | Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | 98.8 | | Net cash used in investing activities | (2,409.0) | | Net cash provided by financing activities | 1,111.7 | - As of December 31, 2022, total funding debts amounted to RMB 5.72 billion[849][850] - The company has US$300 million in convertible senior notes outstanding, which must be paid in full by April 2024 per a March 2023 amendment[842][869] - Capital expenditures for 2023 are expected to be approximately RMB 122 million, primarily for its new headquarters[864] Critical Accounting Estimates This sub-section identifies key estimates requiring significant management judgment, including credit loss allowances and revenue recognition - The allowance for credit losses is a critical estimate determined using a Current Expected Credit Losses (CECL) model[879][880] - The fair value of financial guarantee derivatives, a Level 3 measurement, is determined using a discounted cash flow model[882][883] - Revenue recognition for loan facilitation fees involves significant judgment in allocating the transaction price to performance obligations[884][886] Item 6. Directors, Senior Management and Employees This section provides information on the company's leadership, compensation, board structure, and employee composition Executive Officers and Directors | Name | Position/Title | | :--- | :--- | | Jay Wenjie Xiao | Chief Executive Officer and Chairman of the Board | | Jared Yi Wu | President and Director | | James Xigui Zheng | Chief Financial Officer and Director | | Shirley Yunwen Yang | Chief Human Resources Officer | | Jason Ming Zhao | Chief Marketing Officer | | Erwin Yong Lu | Chief Technology Officer | - For fiscal year 2022, the company paid an aggregate of approximately RMB 26.9 million in cash to its executive officers and RMB 1.6 million to non-executive directors[902] - The company has a 2017 Share Incentive Plan allowing for the grant of options, restricted shares, and restricted share units[907] Employee Breakdown by Function (as of Dec 31, 2022) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Sales and marketing | 2,514 | 64.9% | | Research and development | 602 | 15.5% | | Risk management | 387 | 10.0% | | General and administrative | 244 | 6.4% | | Installment e-commerce and Operations | 125 | 3.2% | | Total | 3,872 | 100% | - As of February 28, 2023, founder Jay Wenjie Xiao beneficially owns 77.2% of the aggregate voting power through his holdings of Class B ordinary shares[935][938] Item 7. Major Shareholders and Related Party Transactions This section details transactions with major shareholders and other related parties, including entities controlled by management family members - The company operates its business through VIEs based on a series of contractual arrangements due to PRC laws restricting foreign ownership[942] - In 2022, transactions with entities controlled by an immediate family member of senior management for collection services amounted to RMB 16.2 million[944] - The company provided a loan to L.P. Technology Holdings Limited, an equity investee, with RMB 6.6 million due as of December 31, 2022[946] Item 8. Financial Information This section presents the audited financial statements, discusses past legal proceedings, and outlines the company's dividend policy - Two putative federal securities class actions filed against the company in 2020 were both dismissed by December 2021[950] - The company has no present plan to pay cash dividends and intends to retain future earnings to operate and expand its business[952] - As a holding company, its ability to pay dividends is dependent on receiving dividends from its PRC subsidiaries, which is subject to PRC laws and regulations[952] Item 10. Additional Information This section provides details on corporate governance, articles of association, and material tax consequences for investors Memorandum and Articles of Association This sub-section summarizes key provisions of the company's governing documents, including its dual-class share structure and voting rights - The company has a dual-class share structure where each Class A share has one vote and each Class B share has ten votes[960] - A special resolution, requiring a two-thirds majority vote, is needed for important matters like amending the articles of association[962] - Anti-takeover provisions include the board's authority to issue preferred shares without shareholder approval[974] Taxation This sub-section details tax implications in the Cayman Islands, PRC, and U.S., including risks of PRC residency and PFIC classification - The Cayman Islands, where the company is incorporated, does not levy taxes on profits, income, gains, or dividends[991] - If deemed a PRC resident enterprise, the company could be subject to a 25% tax on its global income and a 10% withholding tax on dividends to non-resident shareholders[994][996] - The company believes it was not a Passive Foreign Investment Company (PFIC) for 2022 but notes a continued decline in its ADS price increases this risk for future years[1007][1008] Item 11. Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk and foreign exchange risk - The company's primary market risks are interest rate risk and foreign exchange risk[1026][1029] - The company does not expect a material impact from interest rate fluctuations and does not use derivatives for hedging[1027] - Foreign exchange risk exists as revenues are in RMB while ADSs are traded in USD, and the company does not currently hedge this risk[1029] Item 15. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[1038] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[1039] - The independent auditor, PricewaterhouseCoopers Zhong Tian LLP, audited and confirmed the effectiveness of the company's internal control over financial reporting[1042] Item 16. Other Information This section covers accountant fees, share repurchase programs, corporate governance practices, and HFCAA compliance status Principal Accountant Fees (USD) | Fee Type | 2021 | 2022 | | :--- | :--- | :--- | | Audit fees | 2,630,602 | 2,448,442 | | Tax fees | 85,828 | 142,812 | | Other service fees | 308,285 | 125,964 | - The company announced a US$50 million share repurchase program in March 2022 and an additional US$20 million program in November 2022[1049] ADS Repurchases under March 2022 Program (as of March 31, 2023) | Period | Total ADSs Purchased | | :--- | :--- | | Mar 2022 | 1,398,881 | | Apr 2022 | 4,354,136 | | May 2022 | 396,262 | | Jun 2022 | 7,075,381 | | Jul 2022 | 3,238,744 | | Aug 2022 | 1,538,277 | | Sep 2022 | 1,902,479 | | Oct 2022 | 1,871,588 | | Nov 2022 | 385,924 | | Dec 2022 | 23,146 | - As a 'controlled company' and foreign private issuer, the company follows certain home country corporate governance practices instead of Nasdaq rules[1053][1054] - The company does not expect to be identified as a Commission-Identified Issuer under the HFCAA for the 2022 fiscal year[1055] PART III Financial Statements This section contains the complete audited consolidated financial statements and accompanying notes for fiscal years 2020-2022 Report of Independent Registered Public Accounting Firm This sub-section presents the auditor's unqualified opinion on the financial statements and internal controls, noting key audit matters - The auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified opinion on both the financial statements and the effectiveness of internal control[1072] - A change in accounting principle was noted for 2020 with the adoption of the CECL (Current Expected Credit Losses) methodology[1072][1169] - Critical Audit Matters identified were revenue recognition, expected credit losses, and fair value measurement of financial guarantee derivatives[1079][1084][1087] Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies, including revenue recognition, CECL, and fair value measurements - Starting in 2022, the company updated its revenue presentation to three categories: Credit facilitation, Tech-empowerment, and Installment e-commerce[1120] - The adoption of the CECL methodology (ASC 326) on January 1, 2020 resulted in a cumulative-effect decrease to opening retained earnings of approximately RMB 1.9 billion[1169][1173] - As of December 31, 2022, restricted net assets amounted to RMB 5.0 billion, representing 57.8% of consolidated net assets[1400] - Total share-based compensation expense was RMB 156.3 million for the year 2022[1402]