Yiren Digital(YRD) - 2023 Q4 - Annual Report

PART I Key Information Details the company's Cayman holding structure, its operational reliance on Chinese VIEs, associated risks, and key financial data - Yiren Digital Ltd is a Cayman Islands holding company, not an operating company, with operations conducted through subsidiaries and consolidated Variable Interest Entities (VIEs) in China[13] - Revenues from consolidated VIEs accounted for 33.2% of total revenues in 2023, a decrease from 71.3% in 2021, showing a declining reliance on the VIE structure[13] - The company has obtained requisite operational licenses in China but acknowledges uncertainty regarding future regulatory requirements[20] - Cash transfers from PRC entities to entities outside mainland China are subject to governmental currency conversion controls, potentially limiting the ability to fund operations or make distributions[33][36] Condensed Consolidating Schedule of Financial Position (as of Dec 31, 2023) | (RMB in millions) | Parent | Company Subsidiaries | Consolidated VIEs | Consolidated ABFE | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | 8,093 | 7,088 | 5,193 | 572 | (10,669) | 10,277 | | Total Liabilities | 7 | 1,338 | 3,916 | 749 | (3,819) | 2,191 | Condensed Consolidating Schedule of Income (For the Year Ended Dec 31, 2023) | (RMB in millions) | Parent | Company Subsidiaries | Consolidated VIEs | Consolidated ABFE | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenue | — | 3,610 | 2,878 | — | (1,592) | 4,896 | | Net (Loss)/Income | (39) | 904 | 1,335 | (86) | (34) | 2,080 | Risk Factors Enumerates significant risks related to business operations, the VIE structure, the Chinese regulatory environment, and its ADSs - The company operates in emerging and evolving industries, requiring continuous modification of its services and products[44] - The business is highly dependent on institutional funding partners, with 99.9% of the RMB 36.0 billion in loans facilitated in 2023 funded by third parties[46] - There are significant risks related to the VIE structure; if PRC authorities deem the arrangements non-compliant, the company could face severe penalties, potentially causing the value of ADSs to decline or become worthless[29][121] - The PRC government has significant oversight over operations and may exert more control, which could hinder the ability to offer securities and cause their value to decline[31][132] - The company believes it was a Passive Foreign Investment Company (PFIC) for the 2023 tax year, which could result in adverse U.S. federal income tax consequences for U.S. holders[181] Information on the Company Provides an overview of the company's history, its three primary business segments, and its critical VIE organizational structure History and Development of the Company Traces the company's evolution from a CreditEase unit to a public entity, highlighting key realignments and international expansion - The company began its online consumer finance business in March 2012 as a business unit of its parent company, CreditEase[185] - On September 30, 2019, the company changed its name from "Yirendai Ltd" to "Yiren Digital Ltd" to reflect its broader business scope[187] - In a 2020 business restructuring, the company disposed of its P2P lending platform to focus solely on institutional funding partners[189] - The company has been expanding internationally, acquiring lending corporations in the Philippines and Mexico in 2023[189] Business Overview Details the three core business segments, the AI-powered platform, and the technology-driven approach to risk management - The company operates through three main business segments: Financial services, Insurance brokerage, and Consumption and lifestyle business[189] - The company's loan facilitation process is a highly automated, five-stage process that typically takes less than five minutes to two hours[211][212][213][216][217][219] Loan Volume by Channel (RMB in thousands) | | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Loans from online channels | 16,401,023 | 22,620,051 | 36,036,301 | | Loans from offline channels | 6,794,201 | 3,050 | — | | Total Amount of loans facilitated | 23,195,224 | 22,623,101 | 36,036,301 | Loan Volume by Funding Source (RMB in thousands) | Funding Source | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Third-party capital | 21,506,322 | 22,622,453 | 35,992,302 | | Banks | 2,740,551 | 6,801,585 | 12,102,205 | | Consumer finance companies | 111,562 | 3,456,515 | 17,286,038 | | Own capital | 1,688,902 | 648 | 43,999 | | Total | 23,195,224 | 22,623,101 | 36,036,301 | Organizational Structure Explains the use of a VIE structure and contractual arrangements to control its primary operating entities in China - The company uses a VIE structure to operate in sectors with foreign investment restrictions in China; investors hold equity in the Cayman Islands holding company, not the PRC operating entities[311] - The contractual arrangements with VIEs are designed to give the company effective control and the right to receive substantially all economic benefits[317] - Key agreements underpinning the VIE structure include Equity Interest Pledge Agreements, Powers of Attorney, and Exclusive Business Cooperation Agreements[318][323] Operating and Financial Review and Prospects Presents management's analysis of financial performance and condition for fiscal years 2021 through 2023 Operating Results Details financial performance from 2021-2023, highlighting significant revenue and net income growth driven by key business segments - Net revenue increased by 42.5% in 2023 compared to 2022, primarily due to a 28.3% increase in revenue from the financial services business and a 90.6% increase from the consumption and lifestyle business[382] Results of Operations (RMB in thousands) | | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net revenue | 4,477,929 | 3,434,620 | 4,895,633 | | Total operating costs and expenses | (3,190,596) | (1,962,756) | (2,300,851) | | Income before provision for income taxes | 1,203,173 | 1,495,383 | 2,645,360 | | Net income | 1,032,984 | 1,194,871 | 2,080,197 | Net Revenue by Segment (RMB in thousands) | Segment | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Financial services business | 3,184,302 | 1,959,732 | 2,515,119 | | Insurance brokerage business | 755,691 | 731,797 | 963,822 | | Consumption & lifestyle business and others | 537,936 | 743,091 | 1,416,692 | | Total net revenue | 4,477,929 | 3,434,620 | 4,895,633 | Loan Delinquency Rates (All Loans) | As of | 15-29 days | 30-59 days | 60-89 days | | :--- | :--- | :--- | :--- | | December 31, 2021 | 0.9% | 1.5% | 1.2% | | December 31, 2022 | 0.7% | 1.3% | 1.1% | | December 31, 2023 | 0.9% | 1.4% | 1.2% | Liquidity and Capital Resources Outlines the company's primary liquidity sources, cash flow activities, and capital resource management - The company's principal sources of liquidity are cash from operations and share issuances; as of December 31, 2023, cash and cash equivalents stood at RMB 5.8 billion (US$815.7 million)[402] - The ability to pay dividends depends on distributions from PRC subsidiaries, which are subject to PRC regulations on profit distribution and statutory reserve requirements[410] Summary of Consolidated Cash Flows (RMB in thousands) | | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 158,192 | 1,849,430 | 2,171,013 | | Net cash (used in)/provided by investing activities | (346,507) | 52,559 | 100,045 | | Net cash provided by/(used in) financing activities | 427,446 | (489,123) | (569,278) | | Net (decrease)/increase in cash | 238,195 | 1,415,352 | 1,697,909 | Directors, Senior Management and Employees Provides information on the company's leadership, compensation, board structure, employee data, and major share ownership - The company's board consists of seven directors; Ning Tang serves as the Executive Chairman and Chief Executive Officer[423][425] - In 2023, the aggregate cash compensation paid to directors and officers was approximately RMB 6.1 million (US$0.9 million)[428] - The company has three share incentive plans; as of March 31, 2024, 2,241,114 restricted share units were outstanding under the 2020 Plan[431] - As of March 31, 2024, CreditEase Holdings (Cayman) Limited is the principal shareholder, beneficially owning 82.5% of the total outstanding shares[448] Employee Count by Year | As of December 31 | Total Employees | | :--- | :--- | | 2021 | 3,797 | | 2022 | 1,064 | | 2023 | 754 | Major Shareholders and Related Party Transactions Details the ownership structure and the extensive transactional and contractual relationship with its controlling shareholder, CreditEase - The company is a majority-owned subsidiary of CreditEase and has a series of agreements governing their relationship, including master transaction and non-competition agreements[453] - Under a non-competition agreement, Yiren Digital and CreditEase have agreed not to compete in each other's core business areas until at least 2035[466] Costs and Expenses for Services from CreditEase Affiliates (RMB in thousands) | Service Type | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Customers acquisition and referral services | 281,633 | 216,958 | 175,471 | | System support services | 135,118 | 100,635 | 72,035 | | Credit assessment services | 56,957 | 110,566 | 118,395 | | Collection services | 17,943 | 22,735 | 29,188 | | Total costs and expenses | 491,651 | 450,985 | 396,913 | Revenue from Services Provided to CreditEase Affiliates (RMB in thousands) | Service Type | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Customers acquisition and referral services | 442,570 | 409,688 | 140,782 | | Technical services | 85,832 | — | — | | Post-loan management services | 44,586 | — | — | | Total revenue | 573,158 | 411,010 | 141,595 | Financial Information Confirms the inclusion of financial statements, discusses legal proceedings, and outlines the current dividend policy - The company's consolidated financial statements are appended to the annual report[473] - The board of directors decided in August 2018 to temporarily suspend its semi-annual dividend policy, and no dividends have been declared since[475] Additional Information Provides supplementary details on the corporate charter, exchange controls, and key taxation considerations in various jurisdictions - The company is a Cayman Islands exempted company, and its affairs are governed by its memorandum and articles of association and the Companies Act of the Cayman Islands[477] - Under PRC Enterprise Income Tax Law, dividends from the company's PRC subsidiaries are subject to a 10% withholding tax, which may be reduced to 5% under the China-HK tax arrangement[298] - For U.S. federal income tax purposes, the company believes it was classified as a Passive Foreign Investment Company (PFIC) for 2023, which could have adverse tax consequences for U.S. holders[504] Quantitative and Qualitative Disclosures about Market Risk Addresses the company's exposure to market risks, primarily foreign exchange, interest rate, and inflation risk - The company's primary market risk is foreign exchange risk, as all revenues are denominated in RMB, and the company does not currently use hedging instruments[516] - The company has not been exposed to material risks from changes in market interest rates but acknowledges that future changes could impact its business[517] - Inflation in China has not materially impacted the company's results of operations to date[518] PART II Controls and Procedures Confirms management's conclusion that disclosure controls and internal control over financial reporting were effective - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[529] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[530] - No material changes were made to the internal control over financial reporting during the period covered by the annual report[532] Corporate Governance and Other Matters Covers governance topics including the audit committee, accountant fees, share repurchases, and cybersecurity risk management - The board has an audit committee financial expert, Mr. Sam Hanhui Sun, and has adopted a code of business conduct and ethics[532] - Under its 2022 Share Repurchase Program, the company repurchased a total of 2,609,949 ADSs in 2023 at an average price of US$2.61 per ADS[536][537] - The company has implemented a cybersecurity risk management strategy overseen by a dedicated board committee[542][545] Principal Accountant Fees (RMB in thousands) | Fee Type | 2022 | 2023 | | :--- | :--- | :--- | | Audit fees | 10,161 | 11,613 | | Audit-related fees | 1,682 | — | | Tax fees | — | — | | All other fees | — | — | PART III Financial Statements Presents the complete audited consolidated financial statements for the fiscal years 2021, 2022, and 2023 Consolidated Balance Sheet Highlights (RMB in thousands) | | Dec 31, 2022 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | 8,536,095 | 10,276,916 | | Cash and cash equivalents | 4,271,899 | 5,791,333 | | Contract assets, net | 626,739 | 978,051 | | Total Liabilities | 2,505,282 | 2,191,367 | | Total Equity | 6,030,813 | 8,085,549 | Consolidated Statements of Operations Highlights (RMB in thousands) | | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net revenue | 4,477,929 | 3,434,620 | 4,895,633 | | Total operating costs and expenses | (3,190,596) | (1,962,756) | (2,300,851) | | Net income | 1,032,984 | 1,194,871 | 2,080,197 | Consolidated Statements of Cash Flows Highlights (RMB in thousands) | | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 158,192 | 1,849,430 | 2,171,013 | | Net cash (used in)/provided by investing activities | (346,507) | 52,559 | 100,045 | | Net cash provided by/(used in) financing activities | 427,446 | (489,123) | (569,278) |