Lufax Holding Ltd [LU] Filings

20-F 1 d13225d20f.htm FORM 20-F Form 20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020.

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from to

Commission file number: 001-39654

Lufax Holding Ltd

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

No. 1333 Lujiazui Ring Road 15/F

Pudong New District, Shanghai

People’s Republic of China

+86 21-3863-2121

(Address of principal executive offices)

James Xigui Zheng, Chief Financial Officer

Telephone: +86 21-3863-2121

Email: Investor_Relations@lu.com

No. 1333 Lujiazui Ring Road 15/F

Pudong New District, Shanghai

People’s Republic of China

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
American depositary shares (two American depositary shares representing one ordinary share, par value US$0.00001 per share)	LU	New York Stock Exchange
Ordinary shares, par value US$0.00001 per share*		New York Stock Exchange

*	Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

1,231,150,560 ordinary shares, par value US$0.00001 per share, as of December 31, 2020.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☐		Non-accelerated filer ☒		Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐ Yes ☐ No

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Yes ☒ No

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP ☐	International Financial Reporting Standards as issued by the	Other ☐
	International Accounting Standards Board ☒

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No

TABLE OF CONTENTS


		Page

INTRODUCTION			1

FORWARD-LOOKING INFORMATION			4

PART I			5
Item 1.	Identity of Directors, Senior Management and Advisers		5
Item 2.	Offer Statistics and Expected Timetable		5
Item 3.	Key Information		5
Item 4.	Information on the Company		62
Item 4A.	Unresolved Staff Comments		134
Item 5.	Operating and Financial Review and Prospects		134
Item 6.	Directors, Senior Management and Employees		163
Item 7.	Major Shareholders and Related Party Transactions		175
Item 8.	Financial Information		177
Item 9.	The Offer and Listing		178
Item 10.	Additional Information		178
Item 11.	Quantitative and Qualitative Disclosures about Market Risk		195
Item 12.	Description of Securities Other than Equity Securities		203

PART II			206
Item 13.	Defaults, Dividend Arrearages and Delinquencies		206
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		206
Item 15.	Controls and Procedures		206
Item 16A.	Audit Committee Financial Expert		207
Item 16B.	Code of Ethics		207
Item 16C.	Principal Accountant Fees and Services		207
Item 16D.	Exemptions from the Listing Standards for Audit Committees		207
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		208
Item 16F.	Change in Registrant’s Certifying Accountant		208
Item 16G.	Corporate Governance		208
Item 16H.	Mine Safety Disclosure		208

PART III			209
Item 17.	Financial Statements		209
Item 18.	Financial Statements		209
Item 19.	Exhibits		209

SIGNATURES			214

INTRODUCTION

Except where the context otherwise requires and for purposes of this annual report only:

•

“active investors” refer to investors who have made at least one investment through our wealth management platform or have had client assets with us above zero in the past twelve months;

•

“ADSs” refer to our American depositary shares, with every two ADSs representing one ordinary share;

•

“AI” refers to artificial intelligence;

•

“APR” or “annualized percent rate” refers to the monthly all-in borrowing cost as a percentage of the outstanding balance annualized by a factor of 12, where all-in borrowing cost comprises the actual amount of (a) interest, (b) insurance premiums or guarantee fees and (c) retail credit facilitation service fees;

•

“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;

•

“client assets” refer to the outstanding balance of client assets generated through our platforms, where an asset is counted towards the outstanding balance for so long as it continues to be held by the investor who acquired it through our platform;

•

“cumulative borrowers” refer to the cumulative number of borrowers who had submitted their loan application request and successfully made drawdowns since our inception;

•

“DPD 30+ delinquency rate” refers to the outstanding balance of loans for which any payment is 30 to 179 calendar days past due, divided by the outstanding balance of loans.

•

“IFRS” refers to International Financial Reporting Standards as issued by the International Accounting Standards Board;

•

“legacy products” mainly include (1) a category of unsecured revolving credit lines in our retail credit facilitation business and peer-to-peer products and (2) certain types of structured alternative products originated by financial institutions for individual investors, which we refer to as business-to-consumer or B2C products, in our wealth management business;

•

“Lufax,” “we,” “us,” “our company” and “our” refer to Lufax Holding Ltd, a Cayman Islands exempted company, and its subsidiaries and, in the context of describing our operations and consolidated financial information, also include our consolidated affiliated entities and its subsidiaries;

•

“non-traditional financial service providers” refers to fintech companies, online-only TechFin companies and online lending platforms;

•

“ordinary shares” refer to our ordinary shares of par value US$0.00001 per share;

•

“outstanding balance of loans facilitated” refers to the total principal amount outstanding at the end of the given period for loans we facilitated;

•

“Ping An ecosystem” refers to Ping An Group and its subsidiaries, affiliates and associates, including but not limited to OneConnect Financial Technology Co., Ltd. (NYSE: OCFT), or OneConnect;

•

“Ping An Group” refers to Ping An Insurance and its subsidiaries;

•

“Ping An Insurance” refers to Ping An Insurance (Group) Company of China, Ltd.;

•

“Ping An P&C” refers to Ping An Property & Casualty Insurance Company of China, Ltd.;

•

“registered users” refer to individuals who have registered on our platform using their mobile phone number, without regard to whether they subsequently engage in any transactions on our platform;

•

“RMB” and “Renminbi” refer to the legal currency of China; and

•

“volume of new loans facilitated” refers to the principal amount of new loans we facilitated during the given period.

Our reporting currency is the Renminbi. This annual report also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.5250 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020. We make no representation that the Renminbi or U.S. dollars amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 5, 2021, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.4960 to US$1.00.

Due to rounding, numbers presented throughout this annual report may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

Summary of Risk Factors

Risks Relating to Our Business

•

Our industry is rapidly changing, and our business has evolved significantly in recent years, which makes it difficult to evaluate our future prospects.

•

A credit crisis or a prolonged downturn in the credit markets may materially and adversely impact our reputation, business, results of operations and financial position.

•

If the total fees we charge for our retail credit facilitation service are deemed to be in excess of interest rate limits imposed by laws or regulatory bodies, part of the interests and fees may not be valid or enforceable through the PRC judicial system.

•

The wealth management products displayed on our platform involve various risks, and failure to identify or fully appreciate such risks will negatively affect our reputation, client relationships, operations and prospects.

•

We may not have access to sufficient and sustainable funding at reasonable costs.

•

Our business is heavily regulated, and those regulations are complex and rapidly evolving, which makes compliance challenging.

•

Any failure to obtain, renew or retain requisite approvals, licenses or permits applicable to our business may have a material adverse effect on us.

•

Even as we modify our business model and practices to remain in compliance with PRC laws and regulations, our legacy products and historical practices may be deemed to violate PRC laws and regulations.

•

If our credit assessment and risk management model is flawed or ineffective, or if the data that we collect for credit analysis inaccurately reflects the borrower’s creditworthiness, or if we fail or are perceived to fail to effectively manage the default risks of loans facilitated through our platform for any other reason, our business and results of operations may be adversely affected.

•

Information regarding individuals to whom we provide our financial services may not be complete, and our ability to perform due diligence, detect borrower fraud or manage our risks may be compromised as a result.

•

We must attempt to collect delinquent loans while not engaging in misconduct or permitting third-party agents to engage in misconduct during the collection progress.

•

Our business may be materially and adversely affected by the effects of the outbreak of COVID-19 in China.

•

Our cooperation with various third parties is integral to the smooth operation of our business and platform, but these third parties may fail to perform or provide reliable or satisfactory services.

•

If we are unable to maintain or increase the amount of loans or investments we facilitate or if we are unable to retain existing borrowers and platform investors, or attract new borrowers or platform investors, our business may decline or fail to grow.

•

Our principal shareholders have significant influence over our company and their interests may not be aligned with the interests of our other shareholders.

Risks Relating to Our Corporate Structure

•

The PRC government or courts could decide that the contractual arrangements between our PRC subsidiaries and our consolidated affiliated entities do not comply with PRC law or are unenforceable, in part or in whole.

•

The contractual arrangements between our PRC subsidiaries and our consolidated affiliated entities may not be as effective as direct ownership in giving us operational control over our business.

•

Our consolidated affiliated entities or their shareholders may fail to perform their obligations under our contractual arrangements.

•

The shareholders of our consolidated affiliated entities may have conflicts of interest with us.

Risks Relating to Doing Business in China

•

PRC laws and regulations are developing and evolving, and PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory and contractual terms.

•

The audit report included in this prospectus is prepared by an auditor who is not inspected by the U.S. Public Company Accounting Oversight Board, or the PCAOB, and as a result, our investors are deprived of the benefits of such inspections. In addition, the recent enactment of the Holding Foreign Companies Accountable Act and the adoption of any additional rules, legislations or other efforts to increase U.S. regulatory access to audit information could cause uncertainty; if we are determined to have failed to meet the PCAOB inspection requirement for three years beginning in 2021, our securities could be delisted or prohibited from being traded in the United States and the value of your investment may be materially and adversely affected.

•

Various proceedings and legislative and regulatory developments related to China-based accounting firms, including our independent registered public accounting firm, and other developments due to political tensions between the U.S. and China may have an adverse impact on our listing and trading in the U.S., including adverse impact on the trading prices of our ADSs and possible delisting.

Risks Relating to Our ADSs

•

The trading price of our ADSs is likely to be volatile.

•

The sale or availability for sale of substantial amounts of our ADSs, particularly after the expiration of lock-up agreements from our initial public offering beginning on April 28, 2021, could adversely affect their market price.

•

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

•

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

Please see “Risk Factors” and other information included elsewhere in this annual report for a discussion of these and other risks and uncertainties that we face.

FORWARD-LOOKING INFORMATION

This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. 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.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

•

our goals and strategies;

•

our future business development, financial condition and results of operations;

•

the expected changes in our income, expenses or expenditures;

•

the expected growth of the retail credit facilitation and wealth management markets;

•

our expectations regarding demand for and market acceptance of our services;

•

our expectations regarding our relationship with borrowers, platform investors, funding sources, product providers and other business partners;

•

competition in our industry;

•

general economic and business conditions in China and elsewhere;

•

government policies and regulations relating to our industry; and

•

the outcome of any current and future legal or administrative proceedings.

You should read this annual report and the documents that we refer to in this annual report with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

This annual report also contains statistical data and estimates that we obtained from government and private publications. Although we have not independently verified the data, we believe that the publications and reports are reliable. The market data contained in this annual report involves a number of assumptions, estimates and limitations. The retail credit facilitation market, the wealth management market and related markets in China and elsewhere may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report. You should not place undue reliance on these forward-looking statements.

PART I

Item 1.

Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

Item 3.

Key Information

A.	Selected Financial Data

The following selected consolidated statements of operations and comprehensive income data for the years ended December 31, 2018, 2019 and 2020, summary consolidated balance sheet data as of December 31, 2019 and 2020 and summary consolidated cash flow data for the years ended December 31, 2018, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The following selected consolidated statements of operations and comprehensive income data for the year ended December 31, 2017, summary consolidated balance sheet data as of December 31, 2017 and 2018 and summary consolidated cash flow data for the year ended December 31, 2017 have been derived from our audited consolidated financial statements not included in this annual report. Selected financial data for our fiscal year ended December 31, 2016 is omitted as such data is not available on the same basis as the financial information for subsequent periods and would not be available without unreasonable effort and expense. You should read this “Selected Financial Data” section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with IFRS. Our historical results are not necessarily indicative of results expected for future periods.

The following table shows our selected consolidated statements of operations and comprehensive income data for the years ended December 31, 2017, 2018, 2019 and 2020.


	For the Year Ended December 31,
	2017			2018			2019			2020
	RMB			RMB			RMB			RMB			US$
	(in millions except per share data)
Technology platform-based income:
Retail credit facilitation service fees		15,336			29,576			39,325			39,457			6,047
Wealth management transaction and service fees		1,885			2,645			2,604			1,765			270

Total technology platform-based income		17,221			32,221			41,929			41,222			6,318
Net interest income		7,256			5,894			3,909			7,750			1,188
Guarantee income		1,456			814			465			602			92
Other income		810			508			879			1,517			232
Investment income		1,060			1,017			579			940			144
Share of net profits of investments accounted for using the equity method		16			46			73			15			2

Total income		27,819			40,500			47,834			52,046			7,976
Sales and marketing expenses		(7,451	)		(10,767	)		(14,931	)		(17,814	)		(2,730	)
General and administrative expenses		(2,823	)		(2,796	)		(2,853	)		(2,976	)		(456	)
Operation and servicing expenses		(3,072	)		(4,367	)		(5,471	)		(6,031	)		(924	)
Technology and analytics expenses		(1,302	)		(1,659	)		(1,952	)		(1,792	)		(275	)
Credit impairment losses		N/A	*		(935	)		(1,863	)		(3,035	)		(465	)
Asset impairment losses		(3,736	)		(7	)		(135	)		(7	)		(1	)
Finance costs		(1,297	)		(900	)		(1,520	)		(2,866	)		(439	)
Other gains/(losses) – net		225			(420	)		325			384			59

Total expenses		(19,455	)		(21,850	)		(28,400	)		(34,136	)		(5,232	)
Profit before income tax		8,364			18,649			19,434			17,910			2,745
Less: Income tax expenses		(2,337	)		(5,073	)		(6,117	)		(5,633	)		(863	)

Net profit		6,027			13,576			13,317			12,276			1,881

Note: The line item for credit impairment losses is not applicable in 2017 as a result of the adoption of IFRS 9.

The following table shows our selected consolidated balance sheet data as of December 31, 2017, 2018, 2019 and 2020.


	As of December 31,
	2017			2018		2019		2020
	RMB			RMB		RMB		RMB		US$
	(in millions)
ASSETS
Cash at bank		18,713			18,576		7,352		24,159		3,702
Restricted cash		6,558			7,937		24,603		23,030		3,529
Financial assets at fair value through profit or loss		12,442			16,444		18,583		34,424		5,276
Financial assets at amortized cost		N/A	*		3,108		8,623		6,564		1,006
Accounts and other receivables and contract assets		18,467			20,095		26,296		23,326		3,575
Loans to customers		97,553			34,428		47,499		119,826		18,364
Total assets		180,358			117,919		149,534		248,890		38,144
LIABILITIES
Payable to platform investors		10,212			9,820		15,344		9,115		1,397
Payable to investors of consolidated structured entities		114,728			31,810		47,243		110,368		16,915
Accounts and other payables and contract liabilities		3,756			6,244		4,826		5,484		840
Convertible redeemable preferred shares		—			8,935		10,259		—		—
Optionally convertible promissory note		—			—		—		7,531		1,154
Convertible promissory note payable		8,071			9,135		10,014		10,117		1,551
Total liabilities		159,122			82,971		101,388		165,739		25,401
Share premium		10,870			14,113		14,113		33,213		5,090
Retained earnings		2,677			16,237		29,346		40,928		6,272
Other reserves		7,120			4,579		4,582		7,419		1,137
Total equity		21,236			34,948		48,145		83,151		12,743

Note: The line item for financial assets at amortized cost is not applicable in 2017 as a result of the adoption of IFRS 9.

The following table shows our selected consolidated cash flow data for the years ended December 31, 2017, 2018, 2019 and 2020:


	For the Year Ended December 31,
	2017			2018			2019			2020
	RMB			RMB			RMB			RMB			US$
	(in millions)
Selected Consolidated Cash Flows Data:
Net cash generated from/(used in) in operating activities		2,675			(1,452	)		2,192			7,121			1,091
Net cash (used in)/generated from investing activities		(1,630	)		3,494			(11,014	)		(15,004	)		(2,299	)
Net cash generated from/(used in) financing activities		6,505			(2,008	)		(2,612	)		24,874			3,812
Effect of exchange rate changes on cash and cash equivalents		(47	)		(86	)		170			(518	)		(79	)
Net increase/(decrease) in cash and cash equivalents		7,503			(52	)		(11,264	)		16,474			2,525
Cash and cash equivalents at beginning of the year		11,125			18,628			18,576			7,312			1,121
Cash and cash equivalents at end of the year		18,628			18,576			7,312			23,786			3,645

The following table shows certain of our operating data as of the dates and for the periods indicated:


	As of and For the Years Ended December 31,
	2017			2018			2019			2020
Retail Credit Facilitation
Number of cumulative borrowers (millions)		7.5			10.3			12.4			14.5
Outstanding balance of loans facilitated (RMB billions)		288.4			375.0			462.2			545.1
Percentage without credit risk exposure		75.4	%		94.7	%		97.8	%		93.7	%
Percentage with credit risk exposure		24.6	%		5.3	%		2.2	%		6.3	%
Volume of new loans facilitated (RMB billions)		343.8			397.0			493.7			565.0
Percentage funded by third parties		51.8	%		96.8	%		99.8	%		98.4	%


	As of and For the Years Ended December 31,
	2017			2018			2019			2020
Percentage funded by us		48.2	%		3.2	%		0.2	%		1.6	%
Wealth Management
Number of registered users (millions)		33.8			40.4			44.0			46.2
Number of active investors (millions)		9.6			11.2			12.5			14.9
Total client assets (RMB billions)		461.7			369.4			346.9			426.6
Current products		27.1	%		49.4	%		70.2	%		95.5	%
Legacy products		72.9	%		50.6	%		29.8	%		4.5	%

B.	Capitalization and Indebtedness

Not applicable.

C.	Reasons for the Offer and Use of Proceeds

Not applicable.

D.	Risk Factors

Risks Relating to Our Business

Our industry is rapidly changing, and our business has evolved significantly in recent years, which makes it difficult to evaluate our future prospects.

We operate in China’s retail credit and wealth management industries, which are rapidly changing and may not develop as we anticipate. There are few established players and no proven business model in these new and fast growing industries. The regulatory frameworks governing the retail credit and wealth management industries continue to develop rapidly but are expected to remain uncertain for the foreseeable future. In addition, our business and business model have evolved significantly in recent years. As these industries and our business continue to develop, we may further modify our business model or our platform, services and solutions. These modifications may not achieve expected results and may have a material and adverse impact on our financial condition and results of operations.

You should consider our business and future prospects in light of the risks and challenges we may encounter in these rapidly changing industries, including our ability to:

•

attract, retain and develop active users for our platform and apps;

•

navigate a complex and evolving regulatory environment;

•

continue to develop, maintain and scale our platform and sustain our historical growth rates;

•

convince prospective customers, users and partners of the value of products and services on our platform;

•

increase our market share and offer personalized and competitive services;

•

offer or maintain attractive fees while driving the growth and profitability of our business;

•

develop sufficient, diversified, sustainable, cost-efficient and reputable institutional funding sources;

•

continue to develop and improve the effectiveness, accuracy and efficiency of our proprietary credit assessment and risk management technology;

•

improve our operational efficiency and maintain profitability;

•

enhance our technology infrastructure to support the growth of our business, maintain the security of our system and the confidentiality of the information provided and utilized across our system;

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effectively maintain, upgrade and scale our financial and risk management controls and procedures;

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defend ourselves against legal proceedings and regulatory actions, such as claims against us relating to our sales and collection efforts, fee structures, employee and third-party misconduct, intellectual property, cybersecurity or privacy;

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operate without being adversely affected by negative publicity about our industry in general and our company in particular, including baseless or ill-intentioned negative publicity; and

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navigate fluctuations in economic conditions.

If we fail to address any or all of these risks and challenges, our business may be materially and adversely affected.

A credit crisis or a prolonged downturn in the credit markets may materially and adversely impact our reputation, business, results of operations and financial position.

Our business is subject to credit cycles associated with the volatility of the general economy. In particular, the operations of our retail credit facilitation and wealth management businesses may be severely affected in a credit crisis or prolonged downturn in the credit markets. For example, we may face increased risk of default or delinquency of borrowers, which will result in lower returns or losses for our funding partners, credit enhancement partners and us. In the event that the creditworthiness of our borrowers deteriorates or we cannot accurately track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be rendered ineffective. This in turn may lead to higher default rates and an adverse impact on our reputation, business, results of operations and financial position as well as our ability to retain existing or attract new funding and credit enhancement partners. Moreover, the performance of the underlying assets of the wealth management products available on our platform maybe materially and adversely affected during a prolonged downturn in the credit markets. If our platform investors suffer from losses in their investments as a result, existing or potential investors may be discouraged from using our services and our reputation may be harmed.

In addition, a credit crisis or prolonged downturn in the credit markets might cause tightening in credit guidelines, limited liquidity, deterioration in credit performance and increased foreclosure activities. Since we predominantly generate our income from fees charged for services, a decrease in loans facilitated and total client assets invested could cause a material decline in our income for the duration of a crisis or downturn. In addition, we and our business partners may increase fees, including guarantee fees, when they perceive heightened credit risks, which may have a material and adverse impact on our profitability. Moreover, a financial and credit crisis may be coupled with or trigger a downturn in the macroeconomic environment, which could cause a general decrease in lending and investment activities over a prolonged period of time and materially and adversely impact the industries we operate in. If a credit crisis or prolonged downturn were to occur, particularly in China’s credit markets, our business, financial performance and prospects may be materially and adversely affected.

Furthermore, a credit crisis may lead to fluctuations in interest rates. If the prevailing market interest rates rise while borrowers on our platform are unwilling to accept a corresponding increase in interest rates, funding partners may be deterred from providing funding through our platform. If our borrowers decide not to utilize our credit products because of increases in interest rates, our ability to retain existing borrowers, attract or engage prospective borrowers as well as our competitive position may be severely limited. We cannot assure you that we will be able to effectively manage such interest risk at all times or pass on any increase in interest rates to our borrowers. If we are unable to effectively manage such an increase, our business, profitability, results of operations and financial condition could be materially and adversely affected. If the prevailing market interest rates decrease and we fail to adjust the interest rates for borrowers on our platform, prospective borrowers may choose to borrow from other platforms to take advantage of the lower funding cost offered by them. As a result, any fluctuation in the overall interest rate environment may discourage borrowers from making credit applications from us or utilize their approved credit, which may adversely affect our business.

The total fees we charge for our retail credit facilitation service may be deemed to be in excess of interest rate limits imposed by laws or regulatory bodies. As a result, part of the interests and fees may not be valid or enforceable through the PRC judicial system.

Our retail credit facilitation service and other fees, to the extent they are deemed to be or related to loan interest, are subject to the restrictions on interest rates as specified in applicable rules on private lending. The Notice on the Regulation and Rectification of the “Cash Loan” Business, or Circular 141, requires online platforms, microloan companies and other entities to charge synthetic fund costs, including the interest and fees paid by the borrowers, in compliance with the rules provided by the Supreme People’s Court, and such costs shall be within the legally allowed annualized interest rate for private lending. According to the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases promulgated on September 1, 2015, in the event the sum of the annualized interest that lenders charge and the fees we and our business partners charge exceeded the 24% limit, and borrowers refused to pay the portion that exceeds the 24% limit, PRC courts would not uphold our request to demand the portion of the fees that exceeds the 24% limit from such borrowers. If the sum of the annual interest that lenders charge and the fees we and our business partners charge exceeds 36%, the portion that exceeds the 36% limit is invalid. The Supreme People’s Court issued the Several Opinions on Further Strengthening the Judicial Work in the Finance Sector in August 2017, which provides that in the context of peer-to-peer lending, if an online lending information intermediary and a lender intentionally collude to evade the interest rate ceiling as set out by the law through disguising loan interest as loan facilitation service fees, then such arrangements shall be declared invalid. On July 22, 2020, the Supreme People’s Court and the National Development and Reform Commission, or the NDRC, jointly released the Opinions on Providing Judicial Services and Safeguards for Accelerating the Improvement of the Socialist Market Economic System for the New Era. This document states that if the interest and fees, including interest, compound interest, penalty interest, liquidated damages and other fees, claimed by one party to the loan contract exceed the upper limit under judicial protection, the claim will not be supported by the court, and if the parties to the loan disguise the financing cost in an attempt to circumvent the upper limit, the rights and obligations of all parties to the loan will be determined by the actual loan relationship.

The Supreme People’s Court amended the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases on August 20, 2020, and then again on January 1, 2021. Under these amendments, if the service fees or other fees that we charge are deemed to be loan interest or fees related to loans (inclusive of any default rate and default penalty and any other fee), then in the event that the sum of the annualized interest that lenders charge and fees we and our business partners charge exceed four times the one-year Loan Prime Rate at the time of the establishment of the agreement, the borrower may refuse to pay the portion that exceeds the limit. In that case, PRC courts will not uphold our request to demand the payment of fees that exceed the limit from the borrower. If the borrower has already paid the fees that exceed the limit, the borrower may request that we refund the portion exceeding the limit and the PRC courts may uphold such requests. The aforementioned one-year Loan Prime Rate refers to the one-year loan market quoted interest rate issued by the National Bank Interbank Funding Center. The one-year loan market quoted interest rate issued by the National Bank Interbank Funding Center on February 20, 2021 was 3.85%, and we cannot assure you that the one-year loan market quoted interest rate or the upper limit on interest and fee rates will not decrease in the future. As to the cases accepted by PRC courts of first instance on or after August 20, 2020 and in which the loan contracts were established before August 20, 2020, if the lender requests that the court apply the old limits of 24% and 36% for calculating the loan interest accrued from the establishment of the loan contracts up to August 19, 2020, such request will be supported by the court, but the loan interest accrued from August 20, 2020 to the date of the loan repayment shall be calculated by applying the new limit of four times the one-year Loan Prime Rate at the time of the filing of the lawsuit. On December 29, 2020, the Supreme People’s Court also issued the Reply Regarding the Scope of Application of the New Private Lending Judicial Interpretation, which provides that the two amendments are not applicable to disputes arising from the relevant financial business of microloan companies, financing guarantee companies, and five other types of local financial organizations which are regulated by local financial authorities. However, there remain uncertainties in the interpretation and implementation of the two amendments, including their applicability in practice, the basis of the formula used to calculate the interest limit, and the scope of inclusion of related fees and insurance premiums, as well as inconsistencies between the standard and the level of enforcement by different PRC courts. We cannot assure you that there will not be any changes to the detailed formula used to calculate the interest limit, that our future fee rates will not be lowered as a result of the limit described above, or that the limit will not be applied to our historical and legacy products where the related dispute cases are accepted by PRC courts of first instance on or after August 20, 2020. In such cases, we and our business partners may be required to repay certain borrowers if our historical and legacy loan products are deemed to have violated the applicable laws and regulations concerning the limit on lending interest and fee rates, and our business, results of operations and financial condition may therefore be materially and adversely affected.

In addition to rules, opinions and decisions issued by the PRC courts, we and our business partners are also subject to regulatory agencies’ requirements, supervision or guidance. We have lowered the APR on loans we facilitate since early September 2020 and may further lower the APR from time to time as a result of changes in regulation or our business strategy. We may also reduce our outstanding loan volumes, significantly modify our fee rate structure within a prescribed period of time or modify our business cooperation model with third-party business partners, including our credit enhancement partners. If we are unable to comply with such regulatory requirements, supervision or guidance or are deemed to be charging above the maximum interest rates permitted by the relevant laws, regulations, policies or guidance, we could be subject to orders of suspension, cessation or rectification, cancellation of qualifications, or other penalties, and our business, financial condition, results of operations and our cooperation with business partners could be materially and adversely affected as a result. See also “—Our business is subject to laws, regulation, and supervision by national, provincial and local government and judicial authorities, industry associations and other regulatory bodies. The laws, regulations and official guidance relating to our business are complex, evolving rapidly and may be subject to further changes. Non-compliance with any existing or new regulation may result in penalties, limitations and prohibitions on our business activities, and we have been modifying and may need to continue to modify our business operations in response to changes in laws and regulations.”

We display a broad variety of wealth management products on our platform, including asset management plans, mutual funds, private investment funds and trust products, among others. These products often have complex structures and involve various risks, including default risk, interest rate risk, liquidity risk and other risks. In addition, third parties we collaborate with might be confronted with liquidity risks, which may expose our platform investors to the liquidity risks in the products we display on our platform. Moreover, the wealth management products available on our platform are also subject to systematic risk and market volatility, which may reduce the value of the investments of our platform investors regardless of the performance or profitability of the businesses underlying such investment products.

Neither the principal nor the return of the wealth management products available on our platform is guaranteed by us. As such, we generally do not bear any liabilities for any loss to capital invested in the products. However, despite product risk warnings and platform disclaimers, our platform investors may attempt to hold us responsible for their losses, which could harm our reputation and result in reduced traffic to our platform. Furthermore, we may also face pressure from regulatory authorities to share losses incurred by our platform investors in order to maintain social harmony and financial market stability, which can have a material and adverse impact on our business, results of operations and financial condition.

In addition, although we have implemented strict suitability management and transparent disclosure policies, such policies and procedures may not be fully effective in mitigating suitability-related risks in all scenarios. If we or our customer service personnel are found to have engaged in suitability-related misconduct, we may be held responsible when our platform investors incur losses, and our reputation, client relationships, business and prospects will be materially and adversely affected. For more details on risks relating to our product risk management, see “—Information regarding individuals to whom we provide our financial services may not be complete, and our ability to perform due diligence, detect borrower fraud or manage our risks may be compromised as a result.”

Our access to sufficient and sustainable funding at reasonable costs cannot be assured.

The growth and success of our future operations depend on the availability of adequate lending capital to meet borrowers’ demands for loans on our platform. To maintain sufficient and sustainable funding to meet borrower demands, we need to keep expanding the funding base and securing a stable stream of funds from our funding partners.

The availability of funding from our funding partners depends on many factors, some of which are out of our control. Changes in the credit environment may impact the funding costs and the terms of our agreements with funding partners, and we may not be able to obtain sufficient and sustainable funding from our funding partners if the funding cost increases significantly. In addition, our competitors in the retail credit facilitation markets may offer better terms to attract institutional funding partners away from us or form exclusive partnerships with them. We may not be able to maintain long-term business relationships with institutional funding partners in this evolving market. In addition, some of our funding partners have limited operating histories and experiences and we cannot rely on them for our funding. Our funding partners are subject to PRC laws and regulations, and in the event that all or some of them cease or modify their operations and cooperation with us as a result of existing or new regulatory requirements, such as the Notice of Further Regulating Online Loan Business of Commercial Banks recently issued by the China Banking and Insurance Regulatory Commission, or the CBIRC, which prohibits local commercial banks from engaging in an online loan business outside the territory of its registered place, the availability of our funding may be materially and adversely affected.

While we have made efforts to diversify funding sources, we cannot assure you that such efforts would be successful or funding sources for the loans we facilitate will remain or become increasingly diversified in the future. If we become dependent on a small number of funding partners and any such funding partners decide not to collaborate with us, change the commercial terms to the extent unacceptable to our borrowers or limit the funding available on our platform, such constraints may materially limit our ability to facilitate loans and adversely affect our user experience. As a result, our business, financial condition, results of operations and cash flow may be materially and adversely affected.

Our business is subject to laws, regulations, and supervision by national, provincial and local government and judicial authorities, industry associations and other regulatory bodies. The laws, regulations and official guidance relating to our business are complex, evolving rapidly and may be subject to further changes. Non-compliance with any existing or new regulation may result in penalties, limitations and prohibitions on our business activities, and we have been modifying and may need to continue to modify our business operations in response to changes in laws and regulations.

The industries in which we operate are highly regulated. Our businesses are subject to national, provincial and local laws, rules, regulations, policies and measures in China. See “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulations.” These laws, rules, regulations, policies and measures are issued by the National Congress of China and its standing committee, the State Council, and different central government ministries and departments as well as provincial and local government authorities, and are enforced by different levels of regulatory agencies and by local authorities in each province in which we operate. As a result, there may be inconsistencies between the rules, regulations, policies, orders and guidance of various regulatory agencies. In order to comply with existing and new rules, regulations, policies and measures of each regulatory agency, we have modified, and may continue to modify, our business models from time to time, which could cause us to incur significant costs and expenses, divert resources and materially disrupt our operations, which could have a material adverse effect on our results of operations and financial condition. For example, in July 2020, the CBIRC issued the Interim Measures for the Administration of Online Loans by Commercial Banks to provide detailed rules on online loans provided by commercial banks. Further, on February 19, 2021, the CBIRC further issued the Notice of Further Regulating Online Loan Business of Commercial Banks, also known as Circular 24, which provides that the commercial banks shall independently carry out the risk management of online loans and are forbidden from outsourcing the material procedures of loan management. Where a commercial bank and its joint lending partner jointly contribute funds to issue online loans, the funding contribution percentage of its joint lending partner shall not be less than 30%. Moreover, Circular 24 caps a bank’s own loan balance under a joint lending partnership with a single counterparty at 25% of its tier-1 capital and prohibits local commercial banks from engaging in an online loan business outside the territory of their registered place. Circular 24 will also apply by analogy to branches of foreign banks, trusts, consumer finance companies and auto finance companies. These rules and regulations may require some of our funding partners to evaluate their cooperation entities and adjust their cooperation with us and thus have a potentially significant impact on our retail credit facilitation business.

In addition, on January 13, 2021, the CBIRC and the People’s Bank of China released the Notice on Regulating Personal Deposit Business by Commercial Banks through the Internet, which provides detailed rules for the conduct of a deposit business by commercial banks through the internet and further prohibits commercial banks from conducting a time deposit and time-demand optional deposit business through online platforms that they do not operate themselves, including such services as marketing and promotion, product display, information transmission, access to purchase and interest subsidies. We ceased to facilitate the bank deposit products provided by our bank partners in December 2020. However, the PRC governmental authorities may further tighten the requirements that regulate the industries we operate in, which may limit or restrict our current practices and may require changes to our business model or operations.

Our microloan companies are subject to the laws, regulations, policies and measures in Chongqing, Shenzhen and Hunan in respect of registered capital and of loan-to-capital and other leverage ratios, among other things, and our financing guarantee companies are subject to the supervision of local financial authorities in Nanjing, Tianjin and other jurisdictions where their branch offices are located. Historically, some of our microloan companies and financing guarantee companies maintained leverage ratios that were above the maximum level allowed. As of the date of this annual report, we have modified our microloan companies’ and financing guarantee companies’ business models in order to comply with the leverage ratio requirements and other laws, regulations, policies and measures for these companies in all of these jurisdictions. Historically, regulators have given us verbal and written guidance on our business practices, and we have modified our business operations based on such guidance. While we have not been subject to any regulatory penalties as of the date of this annual report in connection with such microloan and financing guarantee companies’ business practices, we may be subject to regulatory warnings, correction orders, condemnation and fines and may be required to further modify our business if any of our microloan and financing guarantee companies is deemed to have violated national, provincial or local laws and regulations or regulatory orders and guidance. For example, on September 16, 2020, the CBIRC issued the Notice on Strengthening the Supervision and Management of Microloan Companies, or Circular 86. Adopted to regulate the operations of microloan companies, Circular 86 stipulates that the financing balance of a microloan company’s funding by bank loans, shareholder loans and other non-standard financing instruments shall not exceed such company’s net assets, and the financing balance of the microloan company funding by issuance of bonds, asset securitization products and other instruments of standardized debt assets shall not exceed four times of its net assets. Local financial regulatory authorities may further lower the leverage limits mentioned above.

On November 2, 2020, the CBIRC, the People’s Bank of China and other regulatory authorities released a consultation draft of the Interim Measures for the Administration of Online Microloan Business, 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 microlending business. In response to this, we stopped using our microloan subsidiaries to fund new loans in December 2020.

We are also subject to oversight by the Ministry of Industry and Information Technology, or the MIIT, the Cyberspace Administration of China and the National Internet Finance Association of China in connection with our mobile applications. If we fail to comply with the requirements and standards set by the relevant authorities or if our apps fail to remain on the white list, mobile app stores including the iOS App Store and Android app stores may cease the distribution of our mobile apps and our business may be materially and adversely affected.

There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. Recently enacted laws, rules and regulations may be subject to significant degrees of interpretation by PRC regulatory authorities. Because many of the laws, rules and regulations governing our businesses are relatively new, and because of the limited number of published judicial decisions and the non-binding nature of some of such decisions, we have encountered uncertainties as to the judicial interpretation and application of laws, and it is possible that laws may be interpreted and applied inconsistently in different jurisdictions. Such interpretations and application may conflict with our current practices, require changes to our business model or cause disruptions to our operations. For example, we may be required to fund more loans ourselves as a result of new laws, rules and regulations, and our ability to collect loans from borrowers may also be restricted by developments in the interpretation of PRC laws, rules and regulations. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have retroactive effects. As a result, we may not be aware of our violation of these policies and rules until after a violation has occurred. We might also not be able to foresee what regulatory measures the national, provincial and local government authorities may take and whether new regulatory measures would adversely impact our existing business or business plans. For example, though there is currently no specific regulation pertaining to the qualifications and operations of websites such as Lu.com, which helps us facilitate the distribution of financial products for our licensed product providers, new laws, rules, regulations, measures, polices or interpretations may arise in the future. Similarly, the qualified investor requirements and minimum investment thresholds for asset management products, trust products, private funds may be subject to further changes in the future. New regulations may also require us to obtain licenses for the processing and storage of borrower data, and request more detailed documentations for borrowers’ usage of loans, which may materially and adversely impact the flexibility and efficiency of our retail credit facilitation services and as a result the volume of loans we facilitate. Furthermore, there are currently few regulations on the use of technologies we deploy in our businesses, such as chatbots and AI, new laws, rules, regulations, measures policies or interpretations may arise in the future. We might not be able to be in compliance with the new requirements, and even if we successfully comply with such requirements through improvements, corrections and rectification, the business model may no longer be profitable or commercially viable.

We expect the laws, rules, regulations, policies and measures governing our business, our cooperation with third-party business partners and the products we facilitate on our platform to continue to evolve. Our business activities and growth may be adversely affected if we do not respond to regulatory changes in a timely manner. Non-compliance with the applicable laws, rules, regulations, policies and measures, including as a result of ambiguities in them, may subject us to sanctions by regulatory authorities, monetary penalties, or restrictions on our business activities or new product introduction or revocation of our licenses, all of which could have material and adverse effects on our business, financial condition and results of operations.

Any failure to obtain, renew or retain requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business, financial condition and results of operations.

The PRC government extensively regulates internet-related businesses, including supervising foreign ownership, and requiring licenses and permits pertaining to the companies in internet-related businesses. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

We are required to obtain various approvals, licenses and permits from different regulatory authorities in order to offer certain categories of our loan product and wealth management product facilitation services online.

We have made efforts to obtain all the applicable approvals, licenses and permits, but due to the complexities, uncertainties and frequent changes in laws, rules, regulations and their interpretation and implementation, we may not always be able to do so, and we may be penalized by governmental authorities for facilitating products or providing services without proper approvals, licenses or permits. For example, we cannot assure you that we will not be required to obtain any additional internet content service provider license, or ICP license, for our current business operations. Moreover, as we continue to increase the product and service selection on our platform, we may also become subject to new or existing laws and regulations that did not affect us in the past. Failure to obtain, renew, or retain requisite licenses, permits or approvals may adversely affect our ability to conduct or expand our business.

In March 2018, the Office of the Leading Group of Special Rectification of Internet Financial Risks issued the Notice on Strengthening Rectification and Carrying Out Inspection Acceptance Work of Online Asset Management Operations, or Circular 29, which provided that without the license or approval from the PRC financial regulatory authorities, no entity may issue or sell asset management products through the internet. The application and interpretation of Circular 29, including the definition of “asset management product,” are ambiguous and may be inconsistent between different government authorities. Although we believe our role is only that of a platform between the providers and the purchasers of the wealth management products, which is not forbidden by Circular 29, the PRC regulatory authorities may have a different view and categorize our activities as the sale of wealth management products in violation of Circular 29 and other PRC laws and regulations. If the PRC government determines that we are operating or have operated our wealth management or other businesses without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or permits or imposes additional restrictions on the operation of any part of our business, it has the power to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue the relevant parts of our business or to impose restrictions on the affected portion of our business. While we may still be able to operate our wealth management business by cooperating with entities that hold the required license, approval or permit, any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

In addition, we are currently in the process of upgrading and moving our wealth management platform investors’ balances from our platform, which we offered as an add-on service to streamline our platform investors’ subscription process at their consent, to bank accounts with a commercial bank. With this new service, our platform investors can use their bank account balances to directly purchase wealth management products displayed on our platform. However, some platform investors have not yet made the upgrade or may not be willing to make such upgrades, and our practice of allowing our platform investors to top-up and transfer their balances on our platform to purchase wealth management products and withdraw the funds to their bank accounts may be deemed to be engaging in payment services without having obtained the required licenses in violation of Administrative Measures for the Payment Services Provided by Non-financial Institutions and the Notice of the General Office of the People’s Bank of China on Further Strengthening the Disciplinary Action against Unlicensed Transaction of Payment Business. Although we have not been subjected to any fines or other penalties as of the date of this annual report in connection with the practice described above, we cannot be certain that the measures or the circular will not apply or that our existing or past practices would not be deemed to violate any existing or future laws, regulations and rules or subject us to regulatory penalties. Furthermore, we currently cooperate with third-party channel partners for borrower and platform investor acquisition. See “Item 4. Information on the Company—B. Business Overview—Retail Credit Facilitation—Retail Credit Origination” and “Item 4. Information on the Company—B. Business Overview—Wealth Management—Platform Investor Acquisition.” If we or these third parties are deemed to be providing investment advisory services without the requisite approvals, licenses or permits, they may be subject to regulatory actions and be prohibited from engaging in client acquisition activities, and as a result we may need to significantly modify our borrower and client acquisition model. This could have a material adverse impact on our business prospects, results of operations and financial condition.

Moreover, the PRC government has adopted a series of regulations governing credit investigation businesses. Among those regulations, the Regulation for the Administration of Credit Investigation Industry, promulgated by the State Council and effective in March 2013, provides that credit investigation business means the activities of collecting, organizing, storing and processing credit-related information of individuals and enterprises, as well as providing such information to parties that may use such information. To further strengthen the supervision for credit investigation businesses, the People’s Bank of China published a draft of Administrative Measures for Credit Investigation Business for public comments on January 21, 2021, which provides that credit-related information refers to information used to determine the credit status of individuals and enterprises when providing services for financial and economic activities, which includes information of identification, address, transportation, contact, debt, property, payment, consumption, operation, performance of legal obligations and information regarding analysis and evaluation of the credit status of individuals and enterprises based on the aforesaid information. We may collect, store and analyze certain information which falls within the scope of so-called credit-related information and conduct credit assessment based on such information. We may also share such information with our business partners under proper authorization. As of the date of this annual report, we have not been subject to any penalties under PRC laws related to credit investigation business. Due to the evolving regulatory environment of the credit investigation industry and the lack of detailed interpretation, we cannot assure you that our business will not be regarded as credit investigation business and we will not be required to obtain the approval or license for credit investigation business or have to modify our business model, which could cause us to incur significant costs and expenses, divert resources and disrupt our operations, which may adversely materially affect our results of operations and financial condition.

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 legacy products and historical practices. If any of our legacy 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.

Given the complexities, uncertainties and frequent changes in these laws, rules, regulations, policies and measures, including changes in their interpretation and implementation, we have historically modified our business models and practices due to shifts in regulatory requirements and our strategies. Among wealth management products, we ceased to facilitate the offering of structured alternative products originated by financial institutions for individual investors, which we refer to as business-to-consumer or B2C products, in the second half of 2017. We also ceased to facilitate the bank deposit products provided by our bank partners in December 2020. Among retail credit facilitation products, we ceased to facilitate the offering of peer-to-peer products in August 2019, as well as stopped using funding from peer-to-peer individual investors as a funding source for our retail credit facilitation business in 2019. As of December 31, 2020, peer-to-peer products as a percentage of total client assets had fallen to 4.5%, and none of the new loans we facilitated in 2020 were funded by peer-to-peer individual investors.

To facilitate the exit of investors after we discontinued our facilitation of the offering of B2C products in the second half of 2017, as a one-time event, we decided to repurchase certain trust plans, asset management plans and debt investments from our platform investors. As these trust plans, asset management plans and debt investments were overdue as of December 31, 2019, we recorded impairment of RMB1.0 billion and fair value loss of RMB0.7 billion in 2019. In the year ended December 31, 2020, we recorded impairment losses of RMB29 million (US$5 million) and fair value loss of RMB337 million (US$52 million). The performance of these trust plans, asset management plans and debt investments, with an aggregate net balance of RMB2.2 billion (US$0.3 billion) as of December 31, 2020, may continue to have an adverse impact on our financial condition. We are currently pursuing a number of claims against the debtors related to some of our historical B2C products. While none of these claims is considered material to our business on an individual basis, the overall results of these ongoing litigations may have continued impact on our financial condition. We are currently unable to estimate the possible outcome or possible range of recovery, if any, associated with the resolution of these cases, and adverse outcome of our claims could have a material adverse effect on our business, results of operations, cash flows and reputation. In addition, we cannot assure you that our historical B2C products will not be deemed to violate laws and regulations, including Circular 29, adopted in March 2018, which provides that any public issuance or sale of asset management products through the internet is deemed to be a financing business requiring asset management licenses or permits.

We ceased using individual funding as a funding source for loans in 2019 in response to new regulations on peer-to-peer lending. Under existing regulations, entities engaging in peer-to-peer lending are required to apply for record-filings with authorities. In addition, in January 2019, the PRC government issued the Notice on Further Implementing the Compliance Inspection and Follow-up Work of Peer-to-Peer Online Lending, which requires all peer-to-peer lending platforms to reduce the total outstanding peer-to-peer lending balance, the total number of borrowers, and the total number of individual investors. Three platforms operated by our consolidated affiliated entities have been engaging in peer-to-peer lending services. After close consultation with regulators, we have ceased facilitating new peer-to-peer loans on our platform since August 2019 and currently only focus on serving the remaining borrowers and lenders on our platforms. We have not received any administrative penalty for our online lending information intermediary services as of the date of this annual report. Nevertheless, we cannot assure you that we will not be subject to fines or other regulatory penalties for our historical and currently outstanding peer-to-peer loans, or that we will not be required by regulatory authorities to terminate all legacy products. Any of such events may materially and adversely affect our client relationship, reputation, and business operations. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation, and we cannot assure you that our historical practices would not be deemed to be a violation of the applicable laws and regulations, which may subject us to fines and other administrative sanctions and adversely affect our reputation, business prospects and financial condition.

If our credit assessment and risk management model is flawed or ineffective, or if the data that we collect for credit analysis inaccurately reflects borrower’s creditworthiness, or if we fail or are perceived to fail to effectively manage the default risks of loans facilitated through our platform for any other reason, our business and results of operations may be adversely affected.

Our ability to attract borrowers and funding partners and build trust in our platform is significantly dependent on our ability to effectively evaluate borrowers’ credit profiles and manage default risks. We continuously refine the algorithms, data processing and other technologies underlying our credit assessment and risk management model, but if any of these decision-making and scoring systems contain programming or other errors, or are ineffective or the data provided by borrowers or third parties are incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans. In addition, if we fail to discover borrower fraud or intentional deceit, the quality of our credit management may be compromised and we may be subject to liabilities under the relevant laws and regulations. The Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries have imposed on online lending information intermediaries, including us, additional obligations to verify the truthfulness of the information provided by or in relation to loan applicants and to actively detect fraud. Although we are not subject to contractual obligations to our funding or credit enhancement partners for inaccurate assessment of a borrower’s creditworthiness and we do not bear credit risk for loans that we do not fund or guarantee ourselves, as long as we take reasonable measures to detect fraudulent behaviors, we cannot assure you that we would not be subject to any liabilities under these interim measures or other laws or regulations if we fail to detect any fraudulent behavior. If we incur such liabilities, our results of operations and financial condition could be materially and adversely affected.

The completeness and reliability of consumer credit history information in the PRC is relatively limited. The People’s Bank of China has developed and put into use a national personal and corporate credit information database which remains relatively underdeveloped. The information and data we obtain ourselves or from external parties for credit assessment and risk management purposes may be inaccurate or incomplete. We are also unable to accurately monitor whether a prospective borrower has obtained loans through other retail credit facilitation platforms, creating the risk whereby a borrower may utilize our credit products to pay off loans from other sources. There is also a risk that, following our access to a borrower’s information, the borrower may have become delinquent in the payment of an outstanding obligation, defaulted on a pre-existing debt obligation, taken on additional debt, or sustained other adverse financial events.

In addition, various factors could affect our borrowers’ repayment ability, such as economic and other conditions affecting our borrowers and their businesses and industries, the cash flow of individual borrowers and the amounts and terms of the loans. If a borrower’s financial condition deteriorates after his or her loan application is approved, we may not be able to take sufficient and effective measures in time to prevent default on the part of the borrower. We may also be unable to monitor our borrowers’ actual use of the loans we facilitated, verify if our borrowers have other undisclosed borrowings, or detect our borrowers’ suspicious or illegal transactions, such as money laundering activities in our business, which may expose us to financial and/or reputational damage. Moreover, while third parties bear the credit risks for the substantial majority of the loans we facilitate, we provide guarantees through our subsidiaries on certain loans. We bore credit risk for 5.3%, 2.2% and 6.3% of total outstanding loans facilitated as of December 31, 2018, 2019 and 2020, respectively. Even though part of these loans have been secured by collateral, we may be subject to credit risk or financial loss if the collateral could not be realized or are not sufficient to cover all the debts or claims. If we are unable to effectively maintain a reasonably low default rate for loans facilitated through our platform, our financial condition, results of operations and business prospects may be materially and adversely affected.

Our operations depend heavily on the effectiveness of our KYC (know-your-customer), KYB (know-your-business), KYP (know-your-product), KYI (know-your-intention) and other due diligence efforts. For example, we rely on our KYC and KYB data to assess borrowers’ creditworthiness for our retail credit facilitation business, as well as KYC, KYP and KYI data to understand our platform investors’ financial situation, financial literacy, risk tolerance and specific needs, identify and monitor the risk profile of each product displayed on our platform and ensure we facilitate suitable products to investors. We rely on borrowers and platform investors themselves and our internal and external data sources to conduct due diligence and verify the information obtained. For further information, please refer to the sections titled “Item 4. Information on the Company—B. Business Overview—Retail Credit Facilitation—Risk Management for Retail Credit” and “Item 4. Information on the Company—B. Business Overview—Wealth Management—Risk Management for Wealth Management.” Incomplete or inaccurate information may not only result in additional efforts and related costs, but may also undermine the effectiveness of our KYC, KYB, KYP, KYI and other due diligence efforts. We cannot assure you that we will uncover all material information necessary to make fully informed decisions, nor can we assure you that our KYC, KYB, KYP and KYI will be sufficient to assess borrowers’ creditworthiness, facilitate suitable wealth management products to platform investors or detect fraud committed by borrowers in all cases. Any such failures could have a material adverse effect on our business, financial condition, results of operations and prospects. For example, if we are deemed to be having facilitated wealth management products with risk profiles that do not match a product investor’s risk tolerance in violation of laws and regulations, we may be required by PRC courts to compensate any losses incurred by the investor as a result of investing in such products, and our business, reputation, and financial condition may be materially and adversely affected. See “—The wealth management products displayed on our platform involve various risks, and failure to identify or fully appreciate such risks will negatively affect our reputation, client relationships, operations and prospects. In particular, we are subject to suitability-related risks for our wealth management business and may incur liability for our platform investors’ losses as a result of their investing in the wealth management products displayed on our platform.”

If our ability to collect delinquent loans is impaired, or if there is actual or perceived misconduct in our collection efforts, our business, financial condition and results of operations might be materially and adversely affected.

We have implemented payment and collection policies and practices which are designed to optimize the repayment process while also providing superior borrower experience. Due to the labor intense nature of the work, we retain both an internal collection team and outsource part of collection work to third parties. Despite our servicing and collection efforts, including claims and litigations against delinquent borrowers, we cannot assure you that we will be able to collect payments on the transactions we facilitate as expected. In addition, we aim to control bad debts by utilizing and enhancing our credit assessment system rather than relying on collection efforts to maintain healthy credit performance. As such, our collection team may not possess adequate resources or workforce to collect payment on the loans we facilitated. If we fail to adequately collect amounts owed, payments of principals and retail credit service fees may be delayed or reduced and our results of operations will be adversely affected. If the quality of our loan portfolio were to deteriorate as a result of ineffective collection, our funding and credit enhancement partners may decide not to continue to cooperate with us. See “—If our credit assessment and risk management model is flawed or ineffective, or if the data that we collect for credit analysis inaccurately reflects borrower’s creditworthiness, or if we fail or are perceived to fail to effectively manage the default risks of loans facilitated through our platform for any other reason, our business and results of operations may be adversely affected.” As the volume of transactions facilitated by us continues to grow in the future, we may devote additional resources into our collection efforts. However, there can be no assurance that we would be able to utilize such additional resources in a cost-efficient manner.

Moreover, the current regulatory regime for debt collection in the PRC remains unclear and continues to evolve. Circular 141 and subsequent rules and regulations provide that no institution or third-party agency shall collect loans by actual or threatened violence, intimidation, insult, defamation, harassment, disseminating private information, or other ways that cause harm. The Notice on Strengthening the Supervision and Management of Microloan Companies, issued by the CBIRC in September 2020, provides that microloan companies and third-party loan collection agencies may not collect loans by violence, or threats of violence, or intentionally inflicting bodily injury, or infringing upon personal freedom, or illegally occupying property, or interfering with daily life through insults, slander, harassment, or illegal infringement on privacy, or other illegal methods. However, there is uncertainty with respect to the definition and interpretation of the prohibited conducts. We may also be subject to new regulations that require licenses or certain qualifications for conducting a loan collection business. We have adopted a set of mechanisms and procedures, such as recording and monitoring contact made by collection personnel with borrowers and regularly evaluating agency partners based on their performance, service quality and compliance with laws, to ensure our in-house staff and third-party collection agencies’ collection efforts comply with the relevant laws and regulations in the PRC. Nevertheless, we cannot assure you that our collection team or third-party collection service providers have not engaged in or will not engage in any aggressive practices or misconduct as part of their collection efforts. Any such historical or future misconduct by our collection team or the third-party service providers we work with, or the perception that our collection practices are aggressive or not compliant with the relevant laws and regulations, may result in harm to our reputation and business, which could further reduce our ability to collect payments from borrowers, lead to decrease in the willingness of prospective borrowers to apply for loans, as well as orders of suspension or rectification, cancellation of qualifications or fines and penalties imposed by the relevant regulatory authorities, any of which may have a material adverse effect on our results of operations.

If our historical fee collection method is deemed to be up-front deductions from loans by the relevant regulatory authorities, or if certain fees we charge are deemed to be in violation of any existing or new PRC laws and regulations, we may be required to modify our business practices or be subject to regulatory penalties.

The Civil Code of the PRC provides that no interest shall be deducted from the principal of loans in advance, and if any interest amount is deducted, the amount of principal and interest to be repaid by the borrower shall be calculated based on the actual amount borrowed. The Notice on Specific Rectification Implementation Measures for Risk of Online Microloan Businesses of Microloan Companies further prohibits the upfront deduction of interest, commission fees, management fees or deposits from loans by microloan companies before they are released to the borrowers. Such prohibition is also highlighted by the Notice on Strengthening the Supervision and Management of Microloan Companies issued by the CBIRC in September 2020, which provides that where a microloan company has deducted any upfront fees in violation of rules and regulations, the borrower will only need to repay the actual loan amount after the exclusion of the interests and fees deducted, and the loan’s interest rate shall be calculated accordingly. Furthermore, Circular 141 prohibits third-party platforms that cooperate with banking institutions to facilitate loans from collecting interest or fees from borrowers. Historically, the service fees and interest payment for a small part of our retail credit facilitation services were arranged to be paid by the borrowers simultaneously when the principals of the funds were released to the borrowers. We ceased this upfront deduction collection method in 2018 and, as of December 31, 2020, almost none of our outstanding loans had fees deducted up-front in the past. Since 2018, we have also modified our arrangements of fee collection from borrowers for new loans in response to Circular 141. While we have not been subject to regulatory penalties in connection with such practice, we may be subject to regulatory penalties and actions if our practices are deemed to be up-front deductions from loans released to the borrowers or otherwise violations of Circular 141 and other relevant laws and regulations, and our business, financial condition and results of operations might be materially and adversely affected as a result.

In addition, we charge penalty fees when borrowers make an early or late repayment of the loans. While current regulations on such penalty fees remain unclear, we may be subject to more stringent rules or regulations in the future and may be required to modify our practice.

Our business may be materially and adversely affected by the effects of the outbreak of COVID-19 in China.

Since the beginning of 2020, outbreaks of COVID-19 have resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities across China. Normal economic life throughout China has been sharply curtailed. The population in most of the major cities was locked down to a greater or lesser extent and opportunities for discretionary consumption were extremely limited. These events negatively affected our small business owner borrowers, which led to a temporary and abnormal increase in loan delinquency and indemnity of our loans facilitated in provinces seriously affected by COVID-19.

We have taken a series of measures in response to the outbreak 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. We also empowered our direct sales team with state-of-the-art offline customer acquisition technology and accelerated the launch of our AI underwriting robot.

As COVID-19 has negatively affected the broader Chinese economy and the global economy, China may continue to experience lower domestic consumption, higher unemployment, severe disruptions to exporting of goods to other countries and greater economic uncertainty, which may impact our business in a materially negative way as our users and clients may be less inclined to borrow or invest in wealth management products. Borrowers may also have less propensity or ability to repay their loans as a result of the economic problems caused by COVID-19, which may then impact credit quality. The operations of some of our business partners and service providers have also be constrained and impacted, which may have a negative impact on our business.

While most of the restrictions on movement within China have been relaxed as of the date of this annual report, there is great uncertainty as to the future progress of the virus. Relaxation of restrictions on economic and social life may lead to new cases which may lead to the re-imposition of restrictions. Consequently, the COVID-19 pandemic may materially and adversely affect our business, financial condition and results of operations in the future. The extent to which this pandemic impacts our results of operations will depend on future developments which are highly uncertain and unpredictable, including new outbreaks of COVID-19, the severity of the virus infection, the success or failure of efforts to contain or treat the cases, and future actions we or the authorities may take in response to these developments.

Our cooperation with various third parties are integral to the smooth operation of our business and platform. If these third parties fail to perform or provide reliable or satisfactory services, our business, financial condition and results of operations may be materially and adversely affected.

We rely on third-party business partners and service providers, including Ping An Group, to operate various aspects of our business and platforms. Third parties provide us with funding and credit enhancement for our retail credit facilitation business, wealth management products for our wealth management business, and analytical insights, among other things. Furthermore, third-party service providers maintain part of our technology systems and we rely on third parties for secure fund management and online payment and settlement.

Our relationships with various third parties are integral to the smooth operation of our business and platform. Most of our agreements with third-party service providers are non-exclusive and do not prohibit third-party service providers from working with our competitors or from offering competing services. If our relationships with third-party service providers deteriorate or third-party service providers decide to terminate our respective business relationships for any reasons, such as to work with our competitors on more exclusive or favorable terms or if they themselves become our competitors, our operation may be disrupted. In addition, our third-party service providers may not meet the standards that we expect and require under our agreements, and disagreements or disputes may arise between us and the third-party service providers.

For example, our third-party credit enhancement partners may limit the credit enhancement services available to our borrowers in the future, and regulatory authorities may limit our third-party credit enhancement partners’ ability to provide services to us. In addition, we may be subject to the cyclical fluctuation of the credit enhancement industry. For the most part we rely on Ping An P&C, a member of Ping An Group, to supply credit enhancement. Of the 88.8% of outstanding loans we facilitated as of December 31, 2020 that were guaranteed or insured by third-party credit insurance partners, Ping An P&C provided 85.3% of the third-party credit enhancement, while 3.5% was guaranteed or insured by other third parties. We are not aware of any instance where our partners have ever failed to fulfill their insurance or guarantee obligations. However, if (i) there is a cyclical downturn in the credit enhancement industry, (ii) the credit enhancement costs of our credit enhancement partners increase, or (iii) our partners cannot provide as much credit enhancement as our borrowers need, our business, financial condition and results of operations will be adversely affected.

We rely on third-party payment channels and custodian banks in handling fund transfers and settlements. Third-party payment agents in China are subject to oversight by the People’s Bank of China and must comply with complex rules and regulations, licensing and examination requirements. If our third-party payment agents or the custodian banks we collaborate with are to suspend, limit, adjust or cease their operations or are subject to regulations or regulatory rectifications required by various regulatory authorities, or if our relationships with our third-party payment agents deteriorate or they were to otherwise terminate, we would need to arrange substantially similar arrangements with other third-party payment agents. Negative publicity about our third-party payment agents or the industry in general may also adversely affect funding partners’ or borrowers’ confidence and trust in the use of third-party payment agents to provide payment and custodian services. In addition, our third-party payment channels or custodian banks may fail to function effectively. If any of the foregoing were to happen, our operations could be materially impaired and our results of operations would suffer.

The volume of transactions conducted on our online platform is one of the key metrics to our financial performance. The amount of transactions that we have facilitated for borrowers and platform investors has grown. However, this growth rate may reduce in the future if the market becomes more fragmented and competitive. The success of our business depends on whether we can retain the existing borrowers and platform investors and continuously attract additional borrowers, platform investors, and funding and product partners.

If there are insufficient qualified loan requests or wealth management product providers, funding partners and platform investors may be unable to deploy their capital to our platform in a timely or efficient manner and may seek other investment opportunities, including those offered by our competitors. Conversely, if there are insufficient funding partners’ or platform investors’ commitments, borrowers and product providers may not obtain enough capital through our platform and may turn to other sources for their needs.

The overall transaction volume may be affected by the following factors:

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our brand recognition and reputation;

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the cost the borrowers and product providers bear;

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the return rates offered to funding partners or platform investors relative to market rates;

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the financing service fees charged;

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our efficiency in acquiring and engaging prospective borrowers;

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our ability to convert registered users to active borrowers and platform investors;

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utilization of the credit we approve;

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the effectiveness of our credit assessment model and risk management system;

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our ability to secure sufficient and cost-efficient funding, borrowers’ experience on our platform; and

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the PRC regulatory environment governing our industry and the macroeconomic environment.

In connection with the introduction of new products or in response to general economic conditions, we may impose more stringent borrower or product provider qualifications to ensure the quality of the transactions we facilitate, which may negatively affect the growth of transactions we facilitate. If any of our current user acquisition channels becomes less effective, or if we are unable to continue to use any of these channels, or if we are not successful in using new channels, we may not be able to attract new borrowers, platform investors, and funding and product partners in a cost-effective manner or convert potential borrowers and platform investors into active users of our services, and may lose our existing borrowers and platform investors to our competitors. If any of the above occurs, we may be unable to increase our loan transaction volume, client assets, and income as we expect, and our business and results of operations may be adversely affected.

If the products available on our platform or our services do not maintain or achieve sufficient market acceptance, or if we are unable to effectively manage borrowers’ and platform investors’ complaints and claims, our financial results and competitive position will be harmed.

We have devoted significant resources to, and will continue to put an emphasis on, upgrading and marketing the existing retail credit facilitation and wealth management products available on our platform and our services as well as enhancing their market awareness. We also incur expenses and expend resources to develop and market new products and services that incorporate additional features, improve functionality or otherwise make our platform more attractive to borrowers, platform investors and funding and product providers. Nevertheless, products available on our platform and our services may fail to attain sufficient market acceptance for many reasons, including:

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users may not find the terms of retail credit products or selection of wealth management products available on our platform competitive or appealing;

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we may fail to predict market demand accurately and provide products and services that meet this demand in a timely fashion;

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borrowers, platform investors, funding partners and product providers using our platforms may not like, find useful or agree with the changes we adopt from time to time;

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there may be defects, errors or failures on our platforms;

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there may be negative publicity, including baseless or ill-intentioned negative publicity, about the products or services available on our platform, or our platform’s performance or effectiveness; and

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regulations or rules applicable to us may constrain our operations and growth.

In addition, we have been subject to and may continue to face borrower and client complaints, negative media coverage and claims or litigation. Large scaled complaints and negative publicity about us could materially harm borrowers and platform investors acceptance to the products and services on our platform. Any compliant or claim, with or without merit, could be time-consuming and costly to investigate or defend, and may divert our management’s and employees’ time and attention, draw scrutiny, penalties or other disciplinary actions from regulatory bodies and materially harm our reputation. See “—We have been in the past and may continue to be subject to complaints, claims, controversies, regulatory actions and legal proceedings, which could have a material adverse effect on our results of operations, financial condition, liquidity, cash flows and reputation.” and “—Our business, financial condition, results of operations and prospects may be adversely affected as a result of our failure to protect or promote our brand and reputation, or negative media coverage of our industry or our principal shareholders.” In such events, our competitive position, results of operations and financial condition could be materially and adversely affected.

The retail credit facilitation service fees we charge may decline in the future due to factors beyond our control and any material decrease in such service fees could harm our business, financial condition and results of operations.

We generate a significant part of our income from service fees we charge. For the years ended December 31, 2018, 2019 and 2020, our retail credit facilitation service fees reached RMB29.6 billion, RMB39.3 billion and RMB39.5 billion (US$6.0 billion), respectively, accounting for 73.0%, 82.2% and 75.8% of our total income for the corresponding periods. Any material decrease in our retail credit facilitation service fees would have a substantial impact on our income and profitability. For example, our borrowers’ repayment behaviors and early repayment options affect the effective tenors of the loans we facilitate. Borrowers’ early repayments of loans reduce the number of months that our retail credit facilitation service fees or interest income can be recognized and thus affect the total amount of our fees and interest income in absolute terms. In the event that the amount of retail credit facilitation service fees we charge for loans we facilitated decrease significantly in the future and we are not able to reduce our costs and expenses, our business, financial condition and results of operations will be harmed.

The level of retail credit facilitation service fees we charge may be affected by a variety of factors, including our borrowers’ creditworthiness, the competitive landscape of our industry, the availability of funding and regulatory requirements. Our retail credit facilitation service fees may also be affected by changes in product and service mix and changes to our borrower engagement initiatives. Our competitors may offer more attractive fees, which may require us to reduce our retail credit facilitation service fees to compete effectively. Furthermore, as our borrowers establish their credit profile over time, they may qualify for and develop other consumer financing solutions with lower fees, including those offered by traditional financial institutions. In addition, our retail credit facilitation service fees are sensitive to many macroeconomic factors that are beyond our control, such as inflation, recession, the performance of credit markets, global economic disruptions, unemployment and fiscal and monetary policies. If the service fees we charge decrease significantly due to factors beyond our control, our business, financial condition and results of operations will be materially and adversely affected.

Any material decrease in the fee rates for our wealth management business may have an adverse effect on our income, cash flow and results of operations.

We derive a significant portion of our income from transaction and service fees paid by investment product providers when platform investors invest in the products we display on our platform. For the years ended December 31, 2018, 2019 and 2020, our wealth management transaction and service fees reached RMB2.6 billion, RMB2.6 billion and RMB1.8 billion (US$0.3 billion), respectively, accounting for 6.5%, 5.4% and 3.4% of our total income for the corresponding periods. As the transaction and service fee rates vary from product to product, our wealth management transaction and service fees may be subject to the changes as we adjust our products from time to time as a result of our strategic changes and relevant regulatory requirements. Although the transaction and service fee rates within any given category of the products we facilitated remained relatively stable during the applicable periods referenced in this annual report, future fee rates may be subject to change based on the prevailing political, economic, regulatory, taxation and competitive factors that affect product providers. These factors, which are not within our control, include the capacity of product providers to place new products and realize profits, platform investors’ expectations and needs, risk tolerance and preference for investment products, the availability of comparable products from other product providers at a lower cost, the availability of alternative investment products to platform investors and the tax deductibility of commissions and fees.

The historical fee rates of our wealth management business may not be indicative of our future ability to maintain comparable fee rates. Because we do not determine, and cannot predict, the timing or extent of fee rate changes with respect to the investment products, it is difficult for us to assess the effect any of these changes may have on our operations. In order to maintain our relationships with the product providers and to enter into contracts for new products, we may have to accept lower fee rates or other less favorable terms, which could reduce our income. Although we believe that substitute third-party providers for most of the investment products we display on our platform are generally available, if some of our key investment providers decide not to enter into new contracts with us, or our relationships with them are otherwise impacted, our business and operating results could be materially and adversely affected.

Misconduct and errors by our employees and our third-party business partners and service providers could harm our business and reputation.

We operate in an industry in which integrity and the confidence of our users and clients are of critical importance. During our daily operations, we are subject to the risk of errors, misconduct and illegal activities by our employees and third-party business partners and service providers, including:

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engaging in misrepresentation or fraudulent activities when marketing or performing our services to users and clients;

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improperly acquiring, using or disclosing confidential information of our users and clients or other parties;

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failing to report conflicts of interest accurately or timely;

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concealing unauthorized or unsuccessful illegal activities; or

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otherwise not complying with applicable laws and regulations or our internal policies or procedures.

Errors, misconduct and illegal activities by our employees, or even unsubstantiated allegations of them, could result in a material adverse effect on our reputation and our business. It is not always possible to identify and deter misconduct or errors by employees or third-party partners, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees engages in illegal or suspicious activities or other misconduct, we could suffer economic losses and may be subject to regulatory sanctions and significant legal liability, and our financial condition, client relationships and or ability to attract new clients may be adversely affected as a result. If any sanction was imposed against an employee during his employment with us, even for matters unrelated to us, we may be subject to negative publicity which could adversely affect our brand, public image and reputation, as well as potential challenges, suspicions, investigations or alleged claims against us. We could also be perceived to have facilitated or participated in the illegal activities or misconduct, and therefore be subject to civil or criminal liability. See “—Fraudulent activities on our platform could negatively impact our operating results, brand and reputation and cause the use of our retail credit facilitation products and services to decrease.” In addition, if any third-party business partners or service providers become unable to continue to provide services to us or cooperate with us as a result of regulatory actions, our business, results of operations and financial condition may also be materially and adversely affected.

We have been and may continue to be subject to complaints, claims, controversies, regulatory actions, arbitration and legal proceedings, which could have a material adverse effect on our results of operations, financial condition, liquidity, cash flows and reputation.

We have been and may continue to be subject to or involved in various complaints, claims, controversies, regulatory actions, arbitration, and legal proceedings. Complaints, claims, arbitration, lawsuits, and litigations are subject to inherent uncertainties, and we are uncertain whether the foregoing claims would develop into lawsuits or regulatory penalties and other disciplinary actions. Lawsuits, litigations, arbitration and regulatory actions may cause us to incur substantial costs or fines, utilize a significant portion of our resources and divert management’s attention from our day-to-day operations, or materially modify or suspend our business operations, any of which could materially and adversely affect our financial condition, results of operations and business prospects.

Defending litigations or other claims against us is costly and can impose a significant burden on our management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. For example, we may not have kept sufficient or complete record to defend ourselves against potential claims from borrowers or platform investors who used our services. Such claims may result in liability and harm our reputation. In addition, there can be no assurance that we will be successful in the claims we pursue against delinquent borrowers or other parties. Any resulting liability, losses or expenses, or changes required to our businesses to reduce the risk of future liability, may have a material adverse effect on our business, financial condition and prospects. There remain uncertainties in the interpretation of PRC laws in different jurisdictions, and an adverse outcome of a single claim against us in one jurisdiction regarding our business practices may result in significant negative publicity and heightened scrutiny by regulators and courts of our business and operations across the country, or potential penalties or other regulatory actions against us. Any of such outcomes may cause significant disruptions to our operations and materially and adversely affect our results of operations and financial condition.

We may be subject to claims under consumer protection laws and regulations.

The PRC government, media outlets and public advocacy groups have been increasingly focused on consumer protection, especially on financial consumer protection, in recent years. On November 21, 2020, the Inspection Office of General Office of the State Council and the General Office of the CBIRC issued a public announcement regarding non-compliance by certain banks and financial institutions that increased the financing cost of small and micro business owners. The announcement said that loan products offered to small and micro business owners by a certain bank and facilitated by Puhui, as a cooperative institution, had been compulsorily bundled with insurance products and a high rate of service fees had been charged, resulting in increasing comprehensive financing costs to the borrowers. In order to strengthen the protection of consumers’ rights, we modified our cooperation model with banks, and consequently, loan products issued by such institutions provide several options of insurance companies for borrowers to choose from. Nevertheless, while we have not been subject to fines or other penalties, or suffered material business or reputational harm, as a result of actual or alleged violation of consumer protection laws and regulations in the past, any customer complaints, negative media coverage and claims or litigations as a result of alleged violation of consumer protection laws and regulations may materially harm our reputation and have an adverse impact on our business, results of operations and financial condition. See “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulations—Regulations Relating to Consumers Rights and Interest Protection.”

We are subject to risks related to our investment advisory business.

Some of our consolidated entities have conducted an investment advisory related business in China in the past and we are currently engaging in such a business in Singapore and Hong Kong, and we may be required to indemnify clients to whom we provide investment advisory services in events of breach of contract or default by other parties to the investment agreements as a result of our contractual obligations. If such event occurs, our business, results of operations and financial condition may be materially and adversely affected.

Our international expansion may expose us to additional risks.

While our historical operations have been focused in China, we have expanded our operations internationally in recent years. We launched our operations in Singapore in 2017 to provide multiple investment related services to clients, and we expanded into Hong Kong and Indonesia in 2019. While our income from international operations is not yet material to our company as a whole, our current or future international expansion may expose us to additional risks, including:

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challenges associated with relying on local partners in markets that are not as familiar to us, including local joint venture partners to help us establish our business;

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the burden of compliance with additional regulations and government authorities in a highly regulated industry;

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potentially adverse tax consequences from operating in multiple jurisdictions;

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complexities and difficulties in obtaining protection and enforcing our intellectual property in multiple jurisdictions;

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increased demands on our management’s time and attention to deal with potentially unique issues arising from local circumstances; and

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general economic and political conditions internationally.

We face competition in the retail credit facilitation and wealth management industries.

The retail credit facilitation and wealth management industries in China are becoming increasingly competitive. We compete primarily with online-only TechFin platforms backed by major internet companies, such as Ant Group and Tencent Licaitong, and to a lesser extent with traditional financial institutions, such as banks, which are focused on retail lending or wealth management. Online-only TechFin platforms tend to compete with us in segments of the market that are more amenable to purely technological solutions and do not necessarily require strong financial expertise. Banks may compete with us or cooperate with us as funding partners or wealth management product providers. The overall fee rates charged to our borrowers are higher than those charged by commercial banks. In our wealth management business, we face competition primarily from other wealth management platforms, domestic commercial banks with an in-house sales force and private banking functions and other independent wealth management firms. Some of our larger competitors have significant financial resources to support heavy spending on sales and marketing and to provide more services to customers. We believe that our ability to compete effectively for borrowers and investors depends on many factors, including the variety of our products, user experience on our platform, effectiveness of our risk management, our partnership with third parties, our marketing and selling efforts and the strength and reputation of our brand. Furthermore, as our business continues to grow rapidly, we face significant competition for highly skilled personnel. The success of our growth strategy depends in part on our ability to retain existing personnel and add additional highly skilled employees. Failure to compete effectively in our industry can lead to reduced income and market recognition, and result in material and adverse impact on our business, financial condition and results of operations.

As we continue to expand our business, we may enter into new business lines and offer new products or services. Development and innovation in our business may expose us to new challenges and risks, including regulation or supervision of regulatory authorities.

We may expand into new business lines as we continue to grow, and our retail credit facilitation and wealth management businesses may offer new products and services to our customers in the future. The entry into new areas of business and introduction of new products and services may have inherent and unforeseeable risks and may bring the attention of regulatory authorities. Regulatory measures may impede the conduct of our new businesses and render future innovation unsuccessful. New business operations, products and services also require significant expense and resources to attract and acquire customers, and they may fail to gain market acceptance for a variety of reasons:

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our estimate of market demand may not be accurate so that we may not be able to launch products and services that align with and meet specific market demand, or there may not be sufficient market demand for our new business operations;

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changes on our platform, including the introduction of new platform services and mobile application functions, may not be favorably accepted by existing users;

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we may fail to properly assess creditworthiness of new borrowers, or accurately price new loan products;

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negative publicity or news about our existing products and services may dissuade customers from trying new products and services;

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we may experience delays in launching the new business operations or loan and investment products or services; and

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our competitors may offer products and services that are more attractive.

If our current or future products and services are not sufficiently attractive to our customers, become obsolete or fail to satisfy the demands of borrowers or platform investors, we may be unable to successfully compete. Our market share may decline, and our business, financial condition and results of operations will be materially affected.

Fraudulent activities on our platform could negatively impact our operating results, brand and reputation and cause the use of our retail credit facilitation products and services to decrease.

We are subject to risks associated with fraudulent activities on our platforms as well as risks associated with handling borrower and client information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Fraudulent information such as fake identification information and fraudulent credit card transaction records and statements could compromise the accuracy of our credit analysis and adversely affect the effectiveness of our control over our delinquency rates. See “—If our credit assessment and risk management model is flawed or ineffective, or if the data that we collect for credit analysis inaccurately reflects borrower’s creditworthiness, or if we fail or are perceived to fail to effectively manage the default risks of loans facilitated through our platform for any other reason, our business and results of operations may be adversely affected.” Third parties and our employees may also engage in fraudulent activities, such as conducting organized fraud schemes and fraudulently inducing funding partners to lend. In addition, a significant increase in high profile fraudulent activities could negatively impact our brand name and reputation, discourage funding partners, borrowers and platform investors from extending credit on or using our platform, lead to regulatory intervention, significantly divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing were to occur, our business, results of operations and financial condition could be materially and adversely affected.

Failure to comply with existing or future laws and regulations related to data protection or data security 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 personal data 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 personal 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 Cyber Security Law became effective in June 2017 and requires network operators to follow the principles of legitimacy in collecting and using personal information. In addition, the Personal Information Security Specification came into force in May 2018, and the final amended version of it came into force on October 1, 2020. Although the Personal Information Security Specification is not yet a mandatory regulation, it nonetheless has a key implementing role under China’s Cyber Security Law with respect to protecting personal information in China. Furthermore, it is likely that the Personal Information Security Specification will be relied on by Chinese government agencies as a standard to determine whether businesses have abided by China’s data protection rules. Meanwhile, under the Personal Information Security Specification, the data controller must provide the purpose of collecting and using personal information, as well as the business functions of such purpose, and the Personal Information Security Specification requires the data controller to distinguish its core function from additional functions to ensure the data controller will only collect personal information as needed. In July 2020, the Standing Committee of the National People’s Congress released the Data Security Law (Draft) to solicit public comments. The Data Security Law (Draft) sets forth that a data classification management system based on the importance of the data should be applied, and a risk assessment system, monitoring and early warning system, and emergency disposal system related to data security should be established. On October 21, 2020, the Standing Committee of the National People’s Congress published a consultation draft of the Personal Information Protection Law, which takes revocable consent as its principal basis for processing personal information, and imposes qualifications and restrictions on outbound data transfers.

The relevant regulatory authorities in China continue to monitor websites and apps in relation to the protection of personal data, privacy and information security, and may impose additional requirements from time to time. We believe that we have conformed our practices in line with current requirements. However, we cannot assure that our existing user information protection system and technical measures will be considered sufficient under all applicable laws and regulations. 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. 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 users and clients to lose trust in us, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

The trend of tightening regulations on protection of data security also appear in other jurisdictions. For example, in May 2018, a new data protection regime, the European Union’s General Data Protection Regulation became applicable; the General Data Protection Regulation can apply to the processing of personal data by companies outside of the European Union, including where the processing of personal data relates to the offering of goods and services to, or monitoring the behavior of, individuals in the European Union. The General Data Protection Regulation and data protection laws in other jurisdictions may apply to our processing of personal data in the future. The application of these laws to our business would impose on us more stringent compliance requirements with more significant penalties for non-compliance than PRC data protection laws and regulations, and our compliance with such requirements could require significant resources and result in substantial costs, which may materially and adversely affect our business, financial condition, results of operations and prospects.

We collect, process and store significant amounts of personal data concerning our borrowers and platform investors, as well as personal 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. 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.

If we fail to protect our platform or the confidential information of our users and clients, whether due to cyber-attacks, computer viruses, physical or electronic break-in, breaches by employees and third parties or other reasons, we may be subject to liabilities imposed by relevant laws and regulations, and our reputation and business may be materially and adversely affected.

Our computer system and data storage facilities, the networks we use, the networks of other third parties with whom we interact, are potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems or security breaches. A party that is able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of the information we transmit over the Internet and mobile network or cause interruptions in our operations. We or our service providers may be required to invest significant resources to protect against the threat of security breaches or to alleviate problems caused by any breaches.

In addition, we collect, store and process certain personal and other sensitive data concerning our borrowers and platform investors, which makes us a potentially vulnerable target to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential information that we have access to, our security measures could be breached. Because the techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may not be able to anticipate these techniques or implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our system could cause confidential information to be stolen and used for criminal purposes. Security breaches or unauthorized access to or sharing of confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. In addition, leakages of confidential information may be caused by third-party service providers or business partners. If security measures are breached because of third-party action, employee misconduct or error, failure in information security management, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with users and clients could be severely damaged, we may become susceptible to future claims if our users and clients suffer damages, and could incur significant liability, and our business and operations could be adversely affected.

We are subject to governmental regulation and other legal obligations related to the protection of personal data, privacy and information security in the regions where we do business, and there has been and may continue to be a significant increase in such laws that restrict or control the use of personal data. See “—Failure to comply with existing or future laws and regulations related to data protection or data security could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating results and business.”

Our business, financial condition, results of operations and prospects may be adversely affected as a result of our failure to protect or promote our brand and reputation, or negative media coverage of our industry or our principal shareholders.

Our reputation and brand recognition plays an important role in earning and maintaining the trust and confidence of our existing and potential borrowers, platform investors, funding partners and product providers. Our reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits initiated by borrowers, users or other third parties, employee misconduct, and perceptions of conflicts of interest and rumors, among other things, could substantially damage our reputation, even if they are baseless or satisfactorily addressed. In addition, any perception that the quality of products and services available on our platform may not be the same as or better than those of other retail credit facilitation and wealth management platforms can also damage our reputation. Moreover, any negative media publicity about the retail credit facilitation and wealth management industries in general or product or service quality problems of other platforms in the industries, including our competitors, may also negatively impact our reputation and brand. In addition, Ping An Group, one of our principal shareholders, may from time to time be subject to negative media coverage. If we are unable to maintain a good reputation or further enhance our brand recognition, our ability to attract and retain users, clients, third-party partners and key employees could be harmed and, as a result, our business and income would be materially and adversely affected.

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 have extensive history and business relationships with Ping An Group. Our strategic partnership with Ping An Group has contributed to our growth significantly. We provided a number of services, including loan account management, wealth management product facilitation, technology support and other services, to Ping An Group in 2018, 2019 and 2020. Ping An Group also provided us with technology support, payment, custodian, customer acquisition and other services during the same periods. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Transactions with Ping An Group.”

There can be no assurance that Ping An Group will maintain its influence over us or will continue to support our business. If our relationship with Ping An Group deteriorates and we are no longer able to access Ping An Group’s services or continue to provide our services to them, we may not be able to continue certain of our business lines, which may have significant adverse impact on our business and results of operations. If entities within Ping An Group which serve as our business partners and suppliers modify their fee structures or otherwise change their cooperation model with us, our business, results of operations and financial condition may be adversely affected. We may also face competition in a number of areas, including innovations in our businesses, which may be replicated quickly by our competitors, including members of Ping An Group. Such competition may adversely affect our competitive position and business prospects.

Ping An Group has considerable influence over us and our affairs and strategy and some of their interests may not be aligned with the interests of our other shareholders.

Ping An Group is one of our principal shareholders. As of February 22, 2021, the total of all the ordinary shares beneficially owned by Ping An Group, through An Ke Technology Company Limited and China Ping An Insurance Overseas (Holdings) Limited, is approximately 38.6% of our outstanding ordinary shares. As a result, Ping An Group exerts considerable influence on our board of directors and management. They will continue to have considerable influence over our corporate affairs, including significant corporate actions such as mergers, consolidations, election of directors and amending our constitutional documents. When exercising its rights as our shareholder, Ping An Group may take into account not only the interests of our company and our other shareholders but also its own interests, the interests of its shareholders and the interests of its other affiliates. The interests of our company and our other shareholders may conflict with the interests of Ping An Group and its shareholders and other affiliates. These types of conflicts may result in our losing business opportunities, including opportunities to enter into lines of business that may directly or indirectly compete with those pursued by Ping An Group or the companies within its ecosystem, and will limit your ability to influence corporate matters and may discourage, delay or prevent potential merger, takeover or other change of control transactions, which could have the effect of depriving holders of our ADSs of the opportunity to sell their ADSs at a premium over the prevailing market price.

A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.

COVID-19 had a severe and negative impact on the Chinese and the global economy in 2020. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

If we are unable to provide a high-quality customer experience, our reputation and business may be materially and adversely affected.

The success of both of our retail credit facilitation and wealth management businesses largely depends on our ability to provide a high-quality customer experience, which in turn depends on factors such as our ability to provide a reliable and easy-to-use customer interface for our users, our ability to further improve and streamline our service process and our ability to continue to make available products and services at competitively low costs or high returns for our borrowers and platform investors. If borrowers and platform investors are not satisfied with our services, or if our system is severely interrupted or otherwise fails to meet their demand, our reputation could be adversely affected and we could fail to maintain user loyalty.

Our ability to provide high-quality customer experience also depends on the quality of the products and services provided by our business partners, such as third-party product providers who provide the wealth management products on our platform, service providers who maintain our security systems and ensure confidentiality and security, and other third-party partners and service providers over which we have limited or no control. In the event that a user is dissatisfied with the quality of the products and services provided by our business partners, we have limited means to directly make improvements in response to customer complaints, and our business, reputation, financial performance and prospects could be materially and adversely affected.

Furthermore, we depend on our customer service hotlines and online customer service centers to provide certain services to our users. If our customer service representatives fail to provide satisfactory services, or if waiting time is too long due to the high volume of calls from users at peak times, our brands and user loyalty may be adversely affected. In addition, any negative publicity or poor feedback regarding our customer service may harm our brands and reputation and in turn cause us to lose users and market share. As a result, if we are unable to continue to maintain or enhance our user experience and provide a high quality customer service, we may not be able to retain borrowers and platform investors or attract prospective borrowers and platform investors, which could have a material adverse effect on our business, financial condition and results of operations.

Our success and future growth depend significantly on our marketing efforts, and if we are unable to promote and maintain our brands in an effective and cost-efficient way, our business and financial results may be harmed.

Our brand and reputation are integral to our acquisition of borrowers, investors, funding partners and product providers. We intend to invest in marketing and brand promoting efforts, especially in connection with the growth of our multi-channel platform and introduction of new loan products and investment products. Our marketing channels include traditional marketing media, social media, word of mouth and channel partners. If our current marketing efforts and channels are less effective or inaccessible to us, or if the cost of such channels significantly increases or we cannot penetrate the market with new channels, we may not be able to promote and maintain our brands and reputation to maintain or grow the existing app user base.

Our efforts to build our brands have caused us to incur significant expenses. For the years ended December 31, 2018, 2019 and 2020, our sales and marketing expenses reached RMB10.8 billion, RMB14.9 billion and RMB17.8 billion (US$2.7 billion), respectively. It is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased income in the immediate future or at all and, even if they do, any increases in income may not offset the expenses incurred. If we are unable to promote and maintain our brands and reputation in a cost-efficient manner, our market share could diminish or we could experience a lower growth rate than we anticipated, which would harm our business, financial condition and results of operations.

We may not be able to prevent others from making unauthorized use of our intellectual property, which could harm our business and competitive position.

We regard our software registrations, trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality and non-compete agreements with our employees and others, to protect our proprietary rights. See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. For example, we regularly file applications to register our trademarks in China, but these applications may not be timely or successful and may be challenged by third parties. Meanwhile, intellectual property rights and confidentiality protections in China may not be as effective as those in the U.S. or other countries for many reasons, including lack of procedural rules for discovery and evidence, and low damage awards. Implementation and enforcement of China intellectual property laws have historically been deficient and ineffective. As a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our income and competitive position. In addition, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

It is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

We cannot be certain that our operations or any aspects of our business have not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. From time to time in the future, we may be subject to legal proceedings, claims or penalties relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by the products and services available on our platform or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability and penalties for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

If we fail to effectively manage our growth, our business and operating results could be harmed.

We continue to experience rapid growth in our business and operations, which will continue to place significant demands on our management, operational and financial resources. We may encounter difficulties as we expand our operations, data and technology, sales and marketing, and general and administrative capabilities. We expect our expenses to continue to increase in the future as we expand our products and service offerings, increase our sales and market efforts and enhance our technology infrastructure. Continued growth could also strain our ability to maintain the quality and reliability of our platform and services, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Our expenses may grow faster than our income, and our expenses may be greater than we anticipate. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition could be harmed.

Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of the software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for use. Errors or other design defects within the software on which we rely may result in a negative experience for users and our funding and other business partners, delay introductions of new features or enhancements, result in errors or compromise our ability to protect data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of users or financial service provider partners or liability for damages, any of which could adversely affect our business, results of operations and financial conditions.

Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could reduce the attractiveness of our platform, services and solutions and result in a loss of users or financial service provider partners.

In the event of a system outage and physical data loss, the performance of our platform, services and solutions would be materially and adversely affected. The satisfactory performance, reliability and availability of our platform, services and solutions and the technology infrastructure that underlies them are critical to our operations and reputation and our ability to retain existing and attract new users and partners. 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. Our operations depend on our ability to protect our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or other attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to our facilities, we could experience interruptions and delays in our service and may incur additional expense in arranging new facilities.

Any interruptions or delays in the availability of our platform or solutions, whether accidental or willful, and whether as a result of our own or third-party error, natural disasters or security breaches, could harm our reputation and our relationships with users and partners. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage, and such recovery may take a prolonged period of time. These factors could damage our brand and reputation, divert our employees’ attention and subject us to liability, any of which could adversely affect our business, financial condition and results of operations.

Our operations depend on the performance of the internet infrastructure and telecommunications networks in China.

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage. In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our financial performance may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

Our services depend on the effective use of mobile operating systems and the efficient distribution through mobile application stores, which we do not control.

Our platform is available through our mobile apps. It is difficult to predict the problems we may encounter in developing mobile apps for newly released devices and mobile operating systems, and we may need to devote significant resources to the development, support and maintenance of such apps. We are dependent on the interoperability of providing our services on popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade the accessibility of our services or give preferential treatment to competing products and services could adversely affect the usability of our services on mobile devices. In addition, we rely upon third-party mobile app stores for users to download our mobile apps. Consequently, the promotion, distribution and operation of our mobile apps are subject to app stores’ standard terms and policies for application developers. Our future growth and results of operations could suffer if it is difficult for our users to access and utilize our services on their mobile devices.

We may be subject to domestic and overseas anti-money laundering and anti-terrorist financing laws and regulations and any failure by us, funding partners or payment agents to comply with such laws and regulations could damage our reputation, expose us to significant penalties, and decrease our income and profitability.

Our platform is subject to anti-money laundering and anti-terrorist laws and regulations in PRC and other jurisdictions where we operate. We have implemented various policies and procedures in compliance with all applicable anti-money laundering and anti-terrorist financing laws and regulations, including internal controls and KYC procedures, for preventing money laundering and terrorist financing. In addition, we rely on our funding partners and payment agents, in particular banks and online payment companies that handle the transfer of funds from funding partners to the borrowers, to have their own appropriate anti-money laundering policies and procedures. Certain of our funding partners, including banks, are subject to domestic and overseas anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the People’s Bank of China, the Hong Kong Monetary Authority, the Monetary Authority of Singapore or the Indonesia Financial Services Authority.

We have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged money laundering or terrorist financing activities in the past. However, our policies and procedures may not be completely effective in preventing other parties from using us, any of our users, clients or third-party partners as a conduit for money laundering (including illegal cash operations), terrorist financing or sanctioned activities without our knowledge. If we were to be associated with money laundering (including illegal cash operations), terrorist financing or sanctioned activities, our reputation could suffer and we could become subject to regulatory fines, sanctions, or legal enforcement, including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us, all of which could have a material adverse effect on our financial condition and results of operations. In addition, the laws and regulations on anti-money laundering and anti-terrorist financing might be tightened in the future, which may impose more obligations on us and our users, clients and third-party partners. Even if we, our users, clients and business partners comply with the applicable domestic and overseas anti-money laundering laws and regulations, we may not be able to fully eliminate money laundering and other illegal or improper activities in light of the complexity and the secrecy of these activities. Any negative perception of the industry, such as that arises from any failure of other retail credit facilitation and wealth management platforms to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established, and negatively impact our financial condition and results of operations.

We may need additional capital to accomplish our business objectives, pursue business opportunities and maintain and expand our business, and financing may not be available on terms acceptable to us, or at all.

Historically, we have issued equity and convertible debt securities to support the growth of our business. As we intend to continue to make investments to support the growth of our business, we may require additional capital to accomplish our business objectives and pursue business opportunities, and maintain and expand our business, including developing new products and services, further enhancing our risk management capabilities, increasing our marketing expenditures to improve brand awareness, enhancing our operating infrastructure, acquiring complementary businesses and technologies, obtaining necessary approvals, licenses or permits and pursuing international expansion.

We anticipate that our current cash, cash provided by operating activities and funds available through our bank loans and credit facilities will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. However, due to the unpredictable nature of the capital markets and our industry, we cannot assure you that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited, which would adversely affect our business, financial condition and results of operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may also have rights, preferences or privileges senior to those of existing shareholders.

We may be subject to requirements on capital adequacy, which may make it difficult for us to operate our sustainable capital-light business model.

Since the requirements on capital adequacy in the online financial service have been strengthened recently, the regulatory authorities in China may further require that companies in the online financial service industry follow capital adequacy requirements in the future. We currently operate our business through a capital-light business model. If we are required to follow any capital adequacy requirements, we may need to increase our capital and raise new funds, which may make it difficult for us to continue to operate our capital-light business model, increase our cost of capital, and dilute your equity investment in us.

In addition, our business growth and our financial performance may be adversely affected if we could not meet the capital requirements on our subsidiaries engaging in microloan, financing guarantee and consumer finance businesses set by of PRC laws and regulations, such as the capital requirement on limited liability microloan companies in Shenzhen. See “—Our business is subject to laws, regulation, and supervision by national, provincial and local government and judicial authorities, industry associations and other regulatory bodies. The laws, regulations and official guidance relating to our business are complex, evolving rapidly and may be subject to further changes. Non-compliance with any existing or new regulation may result in penalties, limitations and prohibitions on our business activities, and we have been modifying and may need to continue to modify our business operations in response to changes in laws and regulations.”

We continually evaluate and consummate strategic investments, acquisitions and strategic alliances and investments, which could be difficult to integrate and could require significant management attention, disrupt our business and adversely affect our financial results if such investment fails to meet our expectations.

We evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our platforms and better serve borrowers, platform investors, funding partners and wealth management product providers. If we fail to identify or secure suitable acquisition and business partnership opportunities or our competitors capitalize on such opportunities before we do, it could impair our ability to compete with our competitors and adversely affect our growth prospects and results of operations.

Even if we are able to identify an attractive business opportunity, we may not be able to successfully consummate the transaction or may need to compete with other participants. In addition, investments or acquisitions may be subject to PRC and overseas regulation and supervision, and might be vetoed by regulatory agencies. Even if we do consummate such transactions, they may not be successful. They may not benefit our business strategy or generate sufficient income to offset the associated acquisition costs.

In addition, strategic investments and acquisitions will involve risks commonly encountered in business relationships. If we fail to properly evaluate and manage the risks, our business and prospects may be seriously harmed and the value of your investment may decline. Such risks include:

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difficulties in assimilating and integrating the operation, personnel, systems, data, technologies, products and services of the acquired business;

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inability of the acquired technologies, products or businesses to achieve expected levels of income, profitability, productivity or other benefits;

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difficulties in retaining, training, motivating and integrating key personnel;

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diversion of management’s time and resources from our normal daily operations and potential disruptions to our ongoing business;

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difficulties in successfully incorporating licensed or acquired technology and rights into our platform;

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difficulties in maintaining uniform standards, controls, procedures and policies within the combined organization;

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difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

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risks of entering markets in which we have limited or no prior experience;

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regulatory risks, including remaining in good standing with existing regulatory bodies or being subject to new regulators with oversight over an acquired business;

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assumption of contractual obligations that contain terms that are not beneficial to us;

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liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, labor disputes, regulatory actions and penalties and other known and unknown liabilities; and

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unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Generally, our business experiences transaction volume growth before the Chinese Spring Festival and interest and service fee growth one month after the Chinese Spring Festival. This is primarily due to the increase of the borrowing demands of our customers for the Chinese Spring Festival. As a result, our operations and financial performance during these periods might not be indicative of the full year’s results. Our quarterly operational results, including the levels of our income, expenses and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful, especially given our relatively limited operating history.

Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this annual report. While we have provided incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may not be able to enforce them at all.

We compete for skilled and quality employees, and failure to attract and retain them may adversely affect our business and prevent us from achieving our intended level of growth.

We believe our success depends on the efforts and talent of our employees, including sales and marketing, technology and product development, risk management, operation management and finance personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled sales, technical, risk management, operation management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

In addition, we invest significant time and resources in the training of our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve users and clients could diminish, resulting in a material adverse effect to our business.

If labor costs in the PRC increase substantially, our business and costs of operations may be adversely affected.

The Chinese economy has experienced inflation and labor cost increases in recent years. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2018, 2019 and 2020 were increases of 1.9%, 4.5% and 0.2%, respectively. Average wages are projected to continue to increase. For the years ended December 31, 2018, 2019 and 2020, our employee benefit expenses reached RMB10.1 billion, RMB12.4 billion and RMB14.1 billion (US$2.2 billion), respectively. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs, our financial condition and results of operations may be adversely affected.

Certain of our leased properties may have defective titles and we may be forced to relocate certain of our operations, which could result in disruptions to our business.

We operated our businesses primarily in leased properties in Shenzhen, Shanghai, Chongqing and other cities in China. With respect to a portion of such leased properties, the lessors failed to provide title certificates evidencing property ownership of these lessors. According to PRC laws and regulations, where a landlord lacks title evidence or rights to lease, the relevant lease contracts may be terminated or deemed unenforceable under PRC laws and regulations, and may also be subject to challenge by third parties. Moreover, a small portion of the leased properties are mortgaged by the lessors. In case the mortgagees enforce the mortgage, we may not be able to continue using our leased properties. In addition, a portion of our lease contracts have not been registered with the relevant regulatory authorities. According to PRC laws and regulations, failure to register lease contracts will not affect their effectiveness. However, landlords and tenants may be subject to administrative fines for such failure. We and our lessors are required to comply with various laws and regulations to enable them to lease effective titles of their properties for our use. Their failure to do so may lead to the invalidation or termination of our leases by authorities, and therefore may adversely affect our ability to use the leased properties.

As of the date of this annual report, we are not aware of any material action, claim or investigation being conducted or threatened by the relevant regulatory authorities with respect to defects in our leased contracts or leased properties. However, we cannot assure you that such defects will be cured in a timely manner, or at all. Our business may be interrupted and additional relocation costs may be incurred if we are required to relocate operations affected by such defects. Moreover, if our lease contracts are challenged by third parties, it could result in diversion of management attention and cause us to incur costs associated with defending such actions, even if such challenges are ultimately determined in our favor.

We have limited insurance coverage which could expose us to significant costs and business disruption.

We maintain various insurance policies to safeguard against risks and unexpected events. Additionally, we provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance, maternity insurance and medical insurance for our employees. However, as the insurance industry in China is still evolving, insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be in line with that of other companies in the same industry of similar size in China, but we cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policies on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.

We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

Prior to our initial public offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the year ended December 31, 2020, we and our independent registered public accounting firm have not identified any material weakness in our internal control over financial reporting as of December 31, 2020 in accordance with the standards established by the Public Company Accounting Oversight Board of the United States. However, we cannot assure you that we will not identify material weaknesses in the future.

We are now a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting and that our independent registered public accounting firm attest to and report on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as we are now a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.

Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

We face risks related to natural disasters and health epidemics.

In addition to the impact of COVID-19, our business could be materially and adversely affected by natural disasters, other health epidemics or other public safety concerns affecting the PRC, and particularly Shanghai. Natural disasters may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware, as well as adversely affecting our ability to operate our platforms and provide services and solutions. Our business could also be adversely affected if our employees are affected by health epidemics. In addition, our results of operations could be adversely affected to the extent that any health epidemic harms the Chinese economy in general. Our headquarters are located in Shanghai, where most of our directors and management and many of our employees currently reside. Most of our system hardware and back-up systems are hosted in facilities located in Shanghai, Shenzhen and Hebei. Consequently, if any natural disasters, health epidemics or other public safety concerns were to affect Shanghai, Shenzhen or Hebei, our operation may experience material disruptions, which may materially and adversely affect our business, financial condition and results of operations.

Risks Relating to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

PRC laws and regulations impose restrictions on foreign ownership and investment in certain internet-based businesses. We are an exempted company incorporated in the Cayman Islands and our PRC subsidiaries are considered foreign-invested enterprises. To comply with PRC laws, regulations and regulatory requirements, we set up a series of contractual arrangements entered into among some of our PRC subsidiaries, consolidated affiliated entities, and their shareholders to conduct some of our operations in China. For a detailed description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Our Principal Consolidated Affiliated Entities.” As a result of these contractual arrangements, we exert control over our consolidated affiliated entities and their subsidiaries and consolidate their operating results in our financial statements under IFRS.

In the opinion of our PRC counsel, Haiwen & Partners, (i) the ownership structures of our consolidated affiliated entities and our wholly foreign-owned enterprises, or WFOEs, currently do not result in violation of PRC laws and regulations currently in effect; and (ii) except for certain clauses regarding the remedies or reliefs that may be awarded by an arbitration tribunal and the power of courts to grant interim remedies in support of the arbitration and winding-up and liquidation arrangements, the agreements under the contractual arrangements between our WFOEs, our consolidated affiliated entities and their shareholders governed by PRC law are valid, binding and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect, and do not result in violation of PRC laws or regulations currently in effect. See “—We conduct a part of our business operations in the PRC through our consolidated affiliated entities and their subsidiaries by way of our contractual arrangements, but certain of the terms of our contractual arrangements may not be enforceable under PRC laws.” However, we have been further advised by our PRC counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Thus, the PRC regulatory authorities may take a view contrary to or otherwise different from the opinion of our PRC legal counsel stated above. It is also uncertain whether any new PRC laws, regulations or interpretations relating to consolidated affiliated entity structure will be adopted or if adopted, what they would provide. If we or our consolidated affiliated entities are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals to operate our business, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

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revoking the business licenses and/or operating licenses of such entities;

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imposing fines on us;

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confiscating any of our income that they deem to be obtained through illegal operations;

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discontinuing or placing restrictions or onerous conditions on our operations;

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placing restrictions on our right to collect income;

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shutting down our servers or blocking our app/websites;

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requiring us to restructure our ownership structure or operations;

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restricting or prohibiting our use of the proceeds from our initial public offering or other of our financing activities to finance the business and operations of our consolidated affiliated entities and their subsidiaries;

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imposing conditions or requirements with which we may not be able to comply; or

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taking other regulatory or enforcement actions that could be harmful to our business.

Any of these events could cause disruption to some of our business operations and damage our reputation, which would in turn have an adverse effect on our financial condition and results of operations. If occurrences of any of these events results in our inability to direct the activities of our consolidated affiliated entities in China that most significantly impact its economic performance, and/or our failure to receive the economic benefits and residual returns from our consolidated affiliated entities, and we are not able to restructure our ownership structure and operations in a satisfactory manner, we may not be able to consolidate the financial results of our consolidated affiliated entities in our consolidated financial statements in accordance with IFRS. It is also uncertain whether any new PRC laws, regulations or rules relating to such contractual arrangements will be adopted or if adopted, what they would provide. In particular, in March 2019, the National People’s Congress passed the PRC Foreign Investment Law, which became effective as of January 1, 2020. For the effect of the PRC Foreign Investment Law on us, see “—Our current corporate structure and part of our business operations may be affected by the newly enacted Foreign Investment Law.”

The contractual arrangements with our consolidated affiliated entities and their shareholders may not be as effective as direct ownership in providing operational control or enabling us to derive economic benefits.

We have relied and expect to continue to rely on the contractual arrangements with our consolidated affiliated entities and their shareholders to operate our business in areas where foreign ownership is restricted. These contractual arrangements, however, may not be as effective as direct ownership in providing us with control over our consolidated affiliated entities. For example, our consolidated affiliated entities and their shareholders could breach their contractual arrangements with us by failing to conduct the operations of our consolidated affiliated entities in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our consolidated affiliated entities in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our consolidated affiliated entities, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our consolidated affiliated entities and their shareholders of their obligations under the contracts to exercise control over our consolidated affiliated entities. The shareholders of our consolidated affiliated entities may not act in the best interests of our company or may not perform their obligations under these contracts. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system.

Any failure by our consolidated affiliated entities or their shareholders to perform their obligations under our contractual arrangements with them would have an adverse effect on our business.

If our consolidated affiliated entities or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders of our consolidated affiliated entities or our consolidated affiliated entities were to refuse to transfer their equity interests in or assets of our consolidated affiliated entities to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. These arbitration provisions relate to claims arising from the contractual relationship created by the VIE agreements, rather than claims under U.S. federal securities laws, and they do not prevent our shareholders or ADS holders from pursuing claims under U.S. federal securities laws in the United States. See “—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.” Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated affiliated entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties generally cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be negatively affected.

The shareholders of our consolidated affiliated entities may have actual or potential conflicts of interest with us, which may adversely affect our business and financial condition.

The shareholders of our consolidated affiliated entities may have actual or potential conflicts of interest with us. These shareholders may breach, or cause our consolidated affiliated entities to breach, or refuse to renew, the existing contractual arrangements we have with them and our consolidated affiliated entities, which would have an adverse effect on our ability to effectively control our consolidated affiliated entities and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our consolidated affiliated entities to be performed in a manner adverse to us by failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive equity interest option agreements and exclusive asset option agreements with the consolidated affiliated entities and their shareholders to request them to transfer all of their equity interests in or assets of the consolidated affiliated entities to PRC entities or individuals designated by us, to the extent permitted by PRC law. The shareholders of our consolidated affiliated entities have executed powers of attorney to appoint our WFOEs or a person designated by our WFOEs to vote on their behalf and exercise voting rights as shareholders of our consolidated affiliated entities. If we cannot resolve any conflict of interest or dispute between us and the shareholders of our consolidated affiliated entities, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to uncertainty as to the outcome of any such legal proceedings.

The indirect shareholders of our consolidated affiliated entities may be involved in personal disputes with third parties or other incidents that may have an adverse effect on their respective equity interests in our consolidated affiliated entities and the validity or enforceability of our contractual arrangements with our consolidated affiliated entities and their shareholders. For example, in the event that any of the individual shareholders who indirectly holds any equity interests in some of our consolidated affiliated entities divorces his or her spouse, the spouse may claim that the equity interest of the consolidated affiliated entities held by such shareholder is part of their community property and should be divided between such shareholder and his or her spouse. If such claim is supported by the court, the relevant equity interest may be indirectly held by the shareholder’s spouse or another third party who is not subject to obligations under our contractual arrangements, which could result in a loss of the effective control over those consolidated affiliated entities by us. Similarly, if any of the equity interests of some of our consolidated affiliated entities is inherited by a third party with whom the current contractual arrangements are not binding, we could lose our control over the consolidated affiliated entities or have to maintain such control by incurring unpredictable costs, which could cause disruption to our business and operations and harm our financial condition and results of operations.

Although under our current contractual arrangements, (i) the spouses of some of the indirect shareholders of some of our consolidated affiliated entities has respectively executed a spousal consent letter, under which each spouse agrees that he/she will not raise any claims against the equity interest, and will take every action to ensure the performance of the contractual arrangements, and (ii) the consolidated affiliated entities and their shareholders shall not assign any of their respective rights or obligations to any third party without the prior written consent of our WFOEs or their subsidiaries, we cannot assure you that these undertakings and arrangements will be complied with or effectively enforced. In the case any of them is breached or becomes unenforceable and leads to legal proceedings, it could disrupt our business, distract our management’s attention and subject us to uncertainties as to the outcome of any such legal proceedings.

We conduct a part of our business operations in the PRC through our consolidated affiliated entities and their subsidiaries by way of our contractual arrangements, but certain of the terms of our contractual arrangements may not be enforceable under PRC laws.

All the agreements that constitute our contractual arrangements with our consolidated affiliated entities, their respective subsidiaries and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these agreements would be interpreted in accordance with PRC laws, and disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions and uncertainties in the PRC legal system could limit our ability to enforce the contractual arrangements. If we are unable to enforce the contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing them, it would be very difficult to exert effective control over our consolidated affiliated entities and their subsidiaries, and our ability to conduct a part of our business and our financial condition and results of operations may be adversely affected.

The contractual arrangements contain provisions to the effect that the arbitral body specified in them may award remedies over the equity interest, assets or properties of our consolidated affiliated entities, their subsidiaries, and/or shareholders; provide compulsory relief (for example, for the conduct of business or to compel the transfer of assets); or order the winding-up of our consolidated affiliated entities, their subsidiaries, and/or shareholders. These agreements also contain provisions to the effect that courts of competent jurisdiction are empowered to grant interim relief to a party when requested, for the purpose of preserving the assets and properties, or grant enforcement measures, subject to the requirements under PRC laws. However, under PRC laws, these terms may not be enforceable. Under PRC laws, an arbitral body does not have the power to grant injunctive relief or to issue a provisional or final liquidation order for the purpose of protecting the assets of or equity interest in our consolidated affiliated entities in case of disputes. In addition, interim remedies or enforcement orders granted by overseas courts such as the United States and the Cayman Islands may not be recognizable or enforceable in the PRC. PRC laws may allow the arbitral body to grant an award of transfer of assets of or equity interests in our consolidated affiliated entities in favor of an aggrieved party.

Furthermore, the contractual arrangements provide that (i) in the event of a mandatory liquidation required by PRC laws, our consolidated affiliated entities will sell all of their assets to the extent permitted by PRC law to our WFOEs, respectively, or the entity designated by them, at the lowest price permitted under applicable PRC laws; and (ii) our consolidated affiliated entities or their respective shareholders will pay to our WFOEs, or the entity designated by them any payments they receive from such transaction, and any profits arising from such a transaction shall be paid to our WFOEs, or the entity designated by them in satisfaction of the service fees under the exclusive business cooperation agreements. These provisions may not be enforceable under PRC laws in the event of a mandatory liquidation required by PRC laws or bankruptcy liquidation.

Therefore, in the event of a breach of any agreements constituting the contractual arrangements by the consolidated affiliated entities, their respective subsidiaries and/or shareholders, we may not be able to exert effective control over our consolidated affiliated entities due to the inability to enforce the contractual arrangements, which could adversely affect our ability to conduct a part of our business.

There may be an impact on our company if our contractual arrangements with our consolidated affiliated entities, their respective subsidiaries and shareholders are not treated as domestic investment.

If the operation of our businesses conducted through our consolidated affiliated entities is subject to any restrictions pursuant to the Special Administrative Measures for Foreign Investment Access (Negative List 2020) jointly promulgated by the Ministry of Commerce and the NDRC, or any successor regulations, and the contractual arrangements are not treated as domestic investment, the contractual arrangements may be regarded as invalid and illegal. If this were to occur, we would not be able to operate the relevant businesses through the contractual arrangements and would lose our rights to receive the economic benefits of the consolidated affiliated entities. As a result, we would no longer consolidate the financial results of the consolidated affiliated entities into our financial results and we would have to derecognize their assets and liabilities according to the relevant accounting standards. If we do not receive any compensation, we would recognize an investment loss as a result of such derecognition.

Contractual arrangements with our consolidated affiliated entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our consolidated affiliated entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements with our consolidated affiliated entities were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of our consolidated affiliated entities in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our consolidated affiliated entities for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiaries’ tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our consolidated affiliated entities for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our consolidated affiliated entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

Our current corporate structure and part of our business operations may be affected by the newly enacted Foreign Investment Law.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, substantially uncertainties exist with regards to its interpretation and implementation. The Foreign Investment Law does not explicitly classify whether consolidated affiliated entities that are controlled through contractual arrangements would be deemed as foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if yes, how our contractual arrangements should be dealt with. Therefore, there is no guarantee that our contractual arrangements, the business of our consolidated affiliated entities and our financial conditions will not be materially and adversely affected.

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Special Administrative Measures (Negative List) for Foreign Investment Access jointly promulgated by the Ministry of Commerce and the NDRC and took effect in July 2020. The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over our consolidated affiliated entities through contractual arrangements are deemed as foreign investment in the future, and any business of our consolidated affiliated entities is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our consolidated affiliated entities may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have an adverse effect on our business operation. If our company no longer has a sustainable business after an unwinding or disposal or when such requirements are not complied with, the SEC, and/or the NYSE may take enforcement actions against us, which may have a material adverse effect on the trading of our shares or even result in delisting our company.

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and part of our business operations.

We may lose the ability to use and enjoy assets held by our consolidated affiliated entities that are critical to the operation of our business if our consolidated affiliated entities declare bankruptcy or become subject to a dissolution or liquidation proceeding.

Our consolidated affiliated entities hold certain assets that may be critical to the operation of part of our business. If the shareholders of our consolidated affiliated entities breach the contractual arrangements and voluntarily liquidate the consolidated affiliated entities or their subsidiaries, or if our consolidated affiliated entities or their subsidiaries declare bankruptcy and all or part of their assets become subject to liens or rights of third-party creditors or are otherwise disposed of without our consent, we may be unable to continue some of our business activities, which could adversely affect our business, financial condition and results of operations. In addition, if our consolidated affiliated entities or their subsidiaries undergo involuntary liquidation proceedings, third-party creditors may claim rights to some or all of their assets, thereby hindering our ability to operate part of our business, which could adversely affect our business, financial condition and results of operations.

If we exercise the option to acquire equity interest of the consolidated affiliated entities, the equity interest transfer may subject us to certain limitations and substantial costs.

Pursuant to the contractual arrangements, our WFOEs or their subsidiaries have the irrevocable and exclusive right to purchase all or any part of the relevant equity interests in our consolidated affiliated entities from our consolidated affiliated entities’ shareholders at any time and from time to time in their absolute discretion to the extent permitted by PRC laws. This equity transfer may be subject to approvals from, filings with, or reporting to competent PRC authorities, such as the Ministry of Commerce, the MIIT, the State Administration for Market Regulation, and/or their local competent branches. In addition, the equity transfer price may be subject to review and tax adjustment by the relevant tax authorities. The equity transfer price to be received by our consolidated affiliated entities under the contractual arrangements may also be subject to enterprise income tax, and these amounts could be substantial.

In addition, the main foreign investor who invests in a value-added telecommunications business in the PRC must be qualified and have prior experience in operating value-added telecommunications businesses and a proven track record of business operations overseas. Currently no applicable PRC laws or regulations provide clear guidance or interpretation on these requirements. If PRC laws change to allow foreign investors to invest in value-added telecommunications enterprises in the PRC, we may be unable to unwind our contractual arrangements with the consolidated affiliated entities or their shareholders before we are able to comply with these and other requirements.

Risks Relating to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial conditions and results of operations.

Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be affected to a significant degree by political, economic and social conditions in China generally.

The Chinese economy differs from the economies of most developed countries in many respects, including the degree of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China are still owned or controlled by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. The growth rate of the Chinese economy has gradually slowed since 2010, and COVID-19 has had significant impact on the Chinese economy in 2020 and such impact is likely to continue in 2021. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is a civil law system based on written statutes, where prior court decisions have limited precedential value. The PRC legal system is evolving rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

In particular, PRC laws and regulations concerning the internet-related industries and financial services industry are developing and evolving. Although we have taken measures to comply with the laws and regulations applicable to our business operations and to avoid conducting any non-compliant activities under these laws and regulations, the PRC governmental authorities may promulgate new laws and regulations regulating internet-related and financial services industries. We cannot assure you that our business operations would not be deemed to violate any such new PRC laws or regulations. Moreover, developments in the internet-related industries and financial services industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies, which in turn may limit or restrict us, and could materially and adversely affect our business and operations.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of a judicial or administrative proceeding than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.

Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation of these policies and rules. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could adversely affect our business and impede our ability to continue our operations.

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies.

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies operating in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

We only have contractual control over our consolidated affiliated entities. Such corporate structure may subject us to sanctions and compromise the enforceability of related contractual arrangements, which may result in significant disruption to our business.

The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of the State Internet Information Office (with the involvement of the State Council Information Office, the MIIT and the Ministry of Public Security). The primary role of the State Internet Information Office is to facilitate policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters relating to the internet industry.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it may levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our business or impose restrictions on the affected portion of our business. Any of these actions may have a material adverse effect on our business and results of operations. For details on PRC regulations which may affect our business, see “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulations.”

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the annual report 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 named in the annual report inside mainland China. It may also be difficult for you to enforce in U.S. courts of the judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

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 our 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 the United States. Furthermore, class action lawsuits, which are available in the United States for investors to seek remedies, are generally uncommon in China.

It may be difficult for overseas regulators to conduct investigations or collect evidence within China.

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. In addition, entities or 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. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—Risks Relating to Our ADSs—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within China is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. The Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, which was issued by the State Administration of Taxation on April 22, 2009 and further amended on December 29, 2018, or Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we could be subject to PRC tax at a rate of 25% on our worldwide income, which could materially reduce our net income, and we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders (including our ADS holders) that are non-resident enterprises, subject to any reduction set forth in applicable tax treaties. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 10% in the case of non-PRC enterprises or a rate of 20% in the case of non-PRC individuals unless a reduced rate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country or area of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

We face uncertainties with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.

We face uncertainties regarding the reporting on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our company by non-resident investors. In February 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7. Pursuant to Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

On October 17, 2017, the State Administration of Taxation issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or Bulletin 37, which came into effect on December 1, 2017. Bulletin 37 further clarifies the practice and procedure of the withholding of nonresident enterprise income tax.

We face uncertainties on the reporting and consequences of past or future private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under Bulletin 7 and Bulletin 37, and may be required to expend valuable resources to comply with them or to establish that we and our non-resident enterprises should not be taxed under these regulations, which may have a material adverse effect on our financial condition and results of operations.

The PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Bulletin 7, our income tax costs associated with such transactions will be increased, which may have an adverse effect on our financial condition and results of operations. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance to them for the investigation of any transactions we were involved in. Heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

If our preferential tax treatments and government subsidies are revoked or become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions.

The Chinese government has provided various tax incentives to our PRC subsidiary, primarily in the form of reduced enterprise income tax rates. For example, under the Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%. However, the income tax of an enterprise that has been determined to be a high and new technology enterprise can be reduced to a preferential rate of 15%. In addition, certain of our PRC subsidiaries enjoy local government subsidies. Any increase in the enterprise income tax rate applicable to our PRC subsidiary in China, or any discontinuation, retroactive or future reduction or refund of any of the preferential tax treatments and local government subsidies currently enjoyed by our PRC subsidiary in China, could adversely affect our business, financial condition and results of operations.

Further, in the ordinary course of our business, we are subject to complex income tax and other tax regulations, and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.

Failure to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations or comply with laws and regulations on other employment practices may subject us to penalties.

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Companies operating in China are also required to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. With respect to the underpaid employee benefits, we may be required to complete registrations, make up the contributions for these plans as well as to pay late fees and fines. With respect to the under-withheld individual income tax, we may be required to make up sufficient withholding and pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits and under-withheld individual income tax, our financial condition and results of operations may be adversely affected. We may also be subject to regulatory investigations and other penalties if our other employment practices are deemed to be in violation of relevant PRC laws and regulations.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may subject us to penalties or liabilities.

The PRC Labor Contract Law, which was enacted in 2008 and amended in 2012, introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign a non-fixed term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have non-fixed term, subject to certain exceptions. With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In addition, the PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law.

These laws and regulations designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.

The M&A Rules and certain other PRC regulations may make it more difficult for us to pursue growth through acquisitions.

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established complex procedures and requirements for acquisition of Chinese companies by foreign investors, including requirements in some instances that the Ministry of Commerce of the PRC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress, which became effective in 2008, requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the Ministry of Commerce before they can be completed. On February 7, 2021, the Anti-Monopoly Committee of the State Council published the Anti-Monopoly Guidelines for the Internet Platform Economy Sector, which stipulates that if any mergers, acquisitions, and obtaining control or a decisive influence over another entity (collectively, “concentration of undertakings”) involves any consolidated affiliated entities, such consolidated affiliated entities shall fall within the scope of anti-monopoly review. If a concentration of undertakings meets the criteria for declaration as stipulated by the State Council, an operator shall report such concentration of undertakings to the anti-monopoly law enforcement agency under the State Council in advance.

In addition, the security review rules issued by the Ministry of Commerce and became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. These laws and regulations are continually evolving as the Foreign Investment Law was newly enacted on January 1, 2020. On December 19, 2020, the Measures for the Security Review for Foreign Investment were jointly issued by the NDRC and Ministry of Commerce, which stipulates detailed rules for foreign investment that is subject to security review. Furthermore, this new rule provides that if foreign investors or relevant parties in China intend to invest in crucial information technology and internet products and services, or in crucial financial services, or in other fields which relate to national security, they shall report to the office in advance for a security review.

In the future, we may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of the above-mentioned regulations and other rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the Ministry of Commerce and obtaining approval from or reporting to the anti-monopoly law enforcement agency, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. Furthermore, according to the M&A Rules, if a PRC entity or individual plans to merger or acquire its related PRC entity through an overseas company legitimately incorporated or controlled by such entity or individual, such a merger and acquisition will be subject to examination and approval by the Ministry of Commerce. The application and interpretations of M&A Rules are still uncertain, and there is possibility that the PRC regulators may promulgate new rules or explanations requiring that we obtain approval of the Ministry of Commerce for our completed or ongoing mergers and acquisitions. There is no assurance that we can obtain such approval from the Ministry of Commerce for our mergers and acquisitions, and if we fail to obtain those approvals, we may be required to suspend our acquisition and be subject to penalties. Any uncertainties regarding such approval requirements could have a material adverse effect on our business, results of operations and corporate structure.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to change their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC laws. In addition, any failure to comply with PRC regulations with respect to registration requirements for offshore financing may subject us to legal or administrative sanctions.

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 further requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

Under these foreign exchange regulations, PRC residents who make, or have previously made, prior to the implementation of these foreign exchange regulations, direct or indirect investments in offshore companies are required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update its previously filed SAFE registration, to reflect any material change involving its round-trip investment. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiary of that offshore parent company may be restricted from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may also be restricted from injecting additional capital into its PRC subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions, including (i) the requirement by SAFE to return the foreign exchange remitted overseas or into the PRC within a period of time specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas or into PRC and deemed to have been evasive or illegal and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive or illegal.

We are committed to complying with and to ensuring that our shareholders who are subject to these regulations will comply with the SAFE rules and regulations. However, due to the inherent uncertainty in the implementation of the regulatory requirements by the PRC authorities, such registration might not be always practically available in all circumstances as prescribed in those regulations. In addition, we may not always be able to compel them to comply with SAFE Circular 37 or other related regulations. We cannot assure you that SAFE or its local branches will not release explicit requirements or interpret the PRC laws and regulations otherwise. We may not be fully informed of the identities of all our shareholders or beneficial owners who are PRC residents, and we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other requirements under SAFE Circular 37 or other related rules in a timely manner.

Because there is uncertainty concerning the reconciliation of these foreign exchange regulations with other approval requirements, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the governmental authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

In addition, our offshore financing activities, such as the issuance of foreign debt, are also subject to PRC laws and regulations. In accordance with such laws and regulations, we may be required to complete filing and registration with the NDRC prior to such activities. Failure to comply with the requirements may result in administrative meeting, warning, notification and other regulatory penalties and sanctions.

We may be materially and adversely affected if our shareholders and beneficial owners who are PRC entities fail to comply with the PRC overseas investment regulations.

On December 26, 2017, the NDRC promulgated the Administrative Measures on Overseas Investments, which took effect as of March 1, 2018. According to this regulation, non-sensitive overseas investment projects are subject to record-filing requirements with the local branch of the NDRC. On September 6, 2014, the Ministry of Commerce promulgated the Administrative Measures on Overseas Investments, which took effect as of October 6, 2014. According to this regulation, overseas investments of PRC enterprises that involve non-sensitive countries and regions and non-sensitive industries are subject to record-filing requirements with a local branch of Ministry of Commerce. According to the Circular of the State Administration of Foreign Exchange on Issuing the Regulations on Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions, which was promulgated by the State Administration of Foreign Exchange, or SAFE, on July 13, 2009 and took effect on August 1, 2009, PRC enterprises must register for overseas direct investment with a local SAFE branch.

We may not be fully informed of the identities of all our shareholders or beneficial owners who are PRC entities, and we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC entities will comply with our request to complete the overseas direct investment procedures under the aforementioned regulations or other related rules in a timely manner, or at all. If they fail to complete the filings or registrations required by the overseas direct investment regulations, the authorities may order them to suspend or cease the implementation of such investment and make corrections within a specified time, which may adversely affect our business, financial condition and results of operations.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject our plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year and participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in China for a continuous period of not less than one year and who have been granted options are subject to these regulations since our company is an overseas-listed company. Failure to complete SAFE registrations may subject them to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

In addition, the State Administration of Taxation has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options and/or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options and/or restricted shares with tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.

We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.

We are a Cayman Islands exempted company which acts as a holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiary for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders for services of any debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiary, which is a foreign-owned enterprise, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Such reserve funds cannot be distributed to us as dividends. Some of our subsidiaries are required to allocate general risk reserves prior to the distribution of dividends.

Our PRC subsidiaries generate essentially all of their revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiary to use their Renminbi revenues to pay dividends to us.

The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiary to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of our ADSs.

Under the Enterprise Income Tax Law and its implementation rules, PRC withholding tax at a rate of 10% is generally applicable to dividends from PRC sources paid to investors that are resident enterprises outside of China and that do not have an establishment or place of business in China, or that have an establishment or place of business in China if the income is not effectively connected with the establishment or place of business. Any gain realized on the transfer of shares by such investors is subject to 10% PRC income tax if this gain is regarded as income derived from sources within China. Under the PRC Individual Income Tax Law and its implementation rules, dividends from sources within China paid to foreign individual investors who are not PRC residents are generally subject to a PRC withholding tax at a rate of 20% and gains from PRC sources realized by these investors on the transfer of shares are generally subject to 20% PRC income tax. Any such PRC tax liability may be reduced by the provisions of an applicable tax treaty.

Although substantially all of our business operations are in China, it is unclear whether the dividends we pay with respect to our shares or ADSs, or the gains realized from the transfer of our shares or ADSs, would be treated as income derived from sources within China and as a result be subject to PRC income tax if we are considered a PRC resident enterprise. If PRC income tax is imposed on gains realized through the transfer of our ADSs or on dividends paid to our non-resident investors, the value of your investment in our ADSs may be materially and adversely affected. Furthermore, our shareholders whose jurisdictions of residence have tax treaties or arrangements with China may not qualify for benefits under these tax treaties or arrangements.

In addition, pursuant to the Double Tax Avoidance Arrangement between Hong Kong and China, if a Hong Kong resident enterprise owns more than 25% of the equity interest of a PRC company at all times during the twelve-month period immediately prior to obtaining a dividend from such company, the 10% withholding tax on the dividend is reduced to 5%, provided that certain other conditions and requirements are satisfied at the discretion of the PRC tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, issued in 2009 by the State Administration of Taxation, if the PRC tax authorities determine, in their discretion, that a company benefits from the reduced income tax rate due to a structure or arrangement that is primarily tax-driven, the PRC tax authorities may adjust the preferential tax treatment. If our Hong Kong subsidiaries are determined by PRC government authorities as receiving benefits from reduced income tax rates due to a structure or arrangement that is primarily tax-driven, the dividends paid by our PRC subsidiaries to our Hong Kong subsidiaries will be taxed at a higher rate, which will have a material adverse effect on our financial performance.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering to make loans or additional capital contributions to our PRC subsidiaries and our consolidated affiliated entities in China, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiary, our consolidated affiliated entities and its subsidiaries. We may make loans to our PRC subsidiary, our consolidated affiliated entities and its subsidiaries, or we may make additional capital contributions to our PRC subsidiary, or we may establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or we may acquire offshore entities with business operations in China in an offshore transaction.

Most of these ways are subject to PRC regulations and approvals or registration. For example, loans by us to our wholly owned PRC subsidiary to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE. If we decide to finance our wholly owned PRC subsidiary by means of capital contributions, these capital contributions are subject to registration with the State Administration for Market Regulation or its local branch, reporting of foreign investment information with the PRC Ministry of Commerce, or registration with other governmental authorities in China. Due to the restrictions imposed on loans in foreign currencies extended to PRC domestic companies, we are not likely to make such loans to our consolidated affiliated entities, which is a PRC domestic company. Further, we are not likely to finance the activities of our consolidated affiliated entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in certain businesses.

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from our initial public offering, to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China. On October 25, 2019, the SAFE promulgated the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, or SAFE Circular 28, which allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment. However, since SAFE Circular 28 is newly promulgated, it is unclear how SAFE and competent banks will carry this out in practice.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans to our PRC subsidiary or consolidated affiliated entities or future capital contributions by us to our PRC subsidiary. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiary or consolidated affiliated entities when needed. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received from our initial public offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

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 into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would reduce the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of paying dividends or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the 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.

Governmental control of currency conversion may limit our ability to utilize our income effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our income in Renminbi. Under our current corporate structure, our holding company, which is incorporated in the Cayman Islands as an exempted company, may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements payable outside of China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company without prior approval of SAFE. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and Consolidated affiliated entity to pay any debts they may incur in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

In addition, if any of our shareholders who is subject to SAFE regulations fails to satisfy the applicable overseas direct investment filing or approval requirement, the PRC government may restrict our access to foreign currencies for current account transactions. If we are prevented from obtaining sufficient foreign currency to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the ADSs.

Recent litigation and negative publicity surrounding China-based companies listed in the United States may negatively impact the trading price of our ADSs.

We believe that recent litigation and negative publicity surrounding companies with operations in China that are listed in the United States have negatively impacted stock prices of these companies. Certain politicians in the United States have publicly warned investors to shun China-based companies listed in the United States. The SEC and the Public Company Accounting Oversight Board (United States), or the PCAOB, also issued a joint statement on April 21, 2020, reiterating the disclosure, financial reporting and other risks involved in the investments in companies that are based in emerging markets, and the limited remedies thereof. Furthermore, various equity-based research organizations have recently published reports on China-based companies after examining their corporate governance practices, related party transactions, sales practices and financial statements, and these reports have led to special investigations and listing suspensions on U.S. national exchanges. Any similar scrutiny on us, regardless of its lack of merit, could cause the market price of our ADSs to fall, divert management resources and energy, cause us to incur expenses in defending ourselves against rumors, and increase the premiums we pay for director and officer insurance.

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB.

The SEC has not yet proposed rules relating to the implementation of the HFCAA. There could be additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCAA and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCAA are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCAA. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

Proceedings instituted by the SEC against the China-based “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

Starting in 2011, the China-based “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or, in extreme cases, the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the China-based “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, or the Exchange Act.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined not to be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

Risks Relating to Our ADSs

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

The trading price of our ADSs has been volatile and has ranged from a low of US$11.56 to a high of US$20.17 since our ADSs started to trade on the NYSE on October 30, 2020. 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 the United States. A number of Chinese companies have listed or are in the process of listing their securities on 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 the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

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

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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 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 ADSs trade.

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 ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our 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 ADSs, the market price for our 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 ADSs to decline.

Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in our initial public offering are freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and 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 Securities Act and the applicable lock-up agreements. As of February 22, 2021, we had 1,231,150,560 ordinary shares outstanding, of which 474,905,000 ordinary shares, or 38.6%, were held by members of the Ping An Group. Ordinary shares that were converted from shares held prior to our initial public offering will no longer be subject to lock-up agreements beginning on April 28, 2021. Furthermore, the underwriters for our initial public offering may release these ordinary shares from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. In addition, 50% of the ordinary shares that were received from the conversion of Automatically Convertible Notes upon our initial public offering will no longer be subject to the lock-up clause in our securityholders agreement beginning on April 30, 2021, and the remainder, plus any ordinary shares that may be received from the conversion of Optionally Convertible Notes, will no longer be subject to the lock-up clause in our securityholders agreement beginning on October 30, 2021. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.

Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on such things as our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ADSs or ordinary shares to significant adverse United States income tax consequences.

We will be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (generally determined on the basis of a quarterly average) during such year produce or are held for the production of passive income. We refer to the latter test as the asset test. Although the law in this regard is unclear, we intend to treat our consolidated affiliated entities (including their subsidiaries, if any) as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our consolidated affiliated entities (including their subsidiaries, if any) for United States federal income tax purposes, we do not believe we were a PFIC for the taxable year ended December 31, 2020 and we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets. In addition, the composition of our income and assets will also be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial public offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of our consolidated affiliated entities for United States federal income tax purposes, our risk of being a PFIC may substantially increase. It is also possible that the IRS may challenge our classification of certain income and assets as non-passive, which may result in our company being or becoming a PFIC for the current or future taxable years. Because PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such distribution is treated as an “excess distribution” under the United States federal income tax rules, and such U.S. Holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares, unless we were to cease to be a PFIC and the U.S. Holder were to make a “deemed sale” election with respect to the ADSs or ordinary shares. For more information see “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” and “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

Our memorandum and articles of association and the deposit agreement purport to limit the jurisdiction of courts for lawsuits relating to U.S. federal securities law, which could limit the ability of holders of our ordinary shares, the ADSs or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the depositary, and potentially others.

Our memorandum and articles of association provide that the United States District Court for the Southern District of New York (or, if the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts of New York County, New York) shall be the exclusive forum within the United States for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than us. Our deposit agreement also provides that holders and beneficial owners of ADSs agree that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) shall have exclusive jurisdiction over any suit, action or proceeding against or involving us or the depositary, arising out of or relating in any way to the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs. However, the enforceability of similar choice of forum provisions in other companies’ organizational documents has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. If a court were to find the choice of forum provision contained in our memorandum and articles of association to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection clause in our memorandum and articles of association and deposit agreement may limit a security-holder’s ability to bring a claim against us, our directors and officers, the depositary and potentially others in a his or her preferred judicial forum, and this limitation may discourage such lawsuits.

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

We are an exempted company 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 our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our 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. 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 the United States. Currently, we do not plan to rely on home country practice with respect to any corporate governance matter. However, if we choose to follow home country practice 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, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Act (As Revised) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Differences in Corporate Law.”

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 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 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 the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

We will incur increased costs as a result of being a public company.

We are now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NYSE, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, we expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

•

the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;

•

the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

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the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

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the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely than that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote the underlying ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the ordinary shares. Under our memorandum and articles of association, the minimum notice period required for convening a general meeting is 14 days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested. Furthermore, as a Cayman Islands exempted company, we are not obliged by the Companies Act (As Revised) of the Cayman Islands to call shareholders’ annual general meetings.

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not timely provide voting instructions to the depositary in accordance with the deposit agreement, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not timely provide voting instructions to the depositary, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings unless:

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we have failed to timely provide the depositary with notice of the meeting and related voting materials;

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we have instructed the depositary that we do not wish a discretionary proxy to be given;

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we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

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we have informed the depositary that a matter to be voted on at the meeting may have an adverse impact on shareholders; or

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the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not timely provide voting instructions to the depositary in the manner required by the deposit agreement, you cannot prevent our ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiffs in any such action.

The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by applicable law, holders and beneficial owners of ADSs irrevocably waive the right to a jury trial of any claim that they may have against us or the depositary arising from or relating to our ordinary shares, our ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. The waiver continues to apply to claims that arise during the period when a holder holds the ADSs, even if the ADS holder subsequently withdraws the underlying ordinary shares. However, you will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder. In fact, you cannot waive our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder.

If we or the depositary opposed a demand for jury trial relying on the above-mentioned jury trial waiver, it is up to the court to determine whether such waiver is enforceable considering the facts and circumstances of that case in accordance with the applicable state and federal law.

If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court or by the United States Supreme Court. Nonetheless, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York. In determining whether to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable in the case of the deposit agreement or the ADSs. If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary relating to the matters arising under the deposit agreement or our ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not have the right to a jury trial regarding such claims, which may limit and discourage lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary according to the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may have different outcomes compared to that of a jury trial, including results that could be less favorable to the plaintiffs in any such action.

Moreover, as the jury trial waiver relates to claims arising out of or relating to the ADSs or the deposit agreement, we believe that, as a matter of construction of the clause, the waiver would likely continue to apply to ADS holders who withdraw the ordinary shares from the ADS facility with respect to claims arising before the cancelation of the ADSs and the withdrawal of the ordinary shares, and the waiver would most likely not apply to ADS holders who subsequently withdraw the ordinary shares represented by ADSs from the ADS facility with respect to claims arising after the withdrawal. However, to our knowledge, there has been no case law on the applicability of the jury trial waiver to ADS holders who withdraw the ordinary shares represented by the ADSs from the ADS facility.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

You may experience dilution of your holdings due to inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless we indicate that we wish such rights to be made available to holders of ADSs and the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Item 4.

Information on the Company

A.	History and Development of the Company

The history of our retail credit facilitation business dates back to August 2005, when Ping An Group launched a consumer loan business in Shenzhen, China. The history of our wealth management business dates back to September 2011, when Ping An Group established its wealth management subsidiary in Shanghai.

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 facilitation business from Ping An Group.

Prior to our initial public offering, 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.”

In order to comply with PRC laws and regulations, we carry out our wealth management business primarily through consolidated affiliated entities. We use two wholly foreign-owned entities in China, namely Weikun (Shanghai) Technology Service Co., Ltd, or Weikun (Shanghai) Technology, and Lufax Holding (Shenzhen) Technology Service Co., Ltd., or Lufax (Shenzhen) Technology, to obtain effective control over our consolidated affiliated entities and their subsidiaries. Weikun (Shanghai) Technology has a series of contractual arrangements with Shanghai Xiongguo Corporation Management Co., Ltd., or Shanghai Xiongguo, and its shareholders, and a series of contractual arrangements with Shanghai Lujiazui International Financial Asset Exchange Co., Ltd., or Shanghai Lufax, and its shareholders. Lufax (Shenzhen) Technology has a series of contractual arrangements with Shenzhen Lufax Enterprise Management and its shareholders. We refer to Weikun (Shanghai) Technology and Lufax (Shenzhen) Technology as our WFOEs and Shanghai Xiongguo, Shanghai Lufax and Shenzhen Lufax Enterprise Management as our consolidated affiliated entities in this annual report. See “—Contractual Arrangements with Our Principal Consolidated Affiliated Entities” below.

We conduct our retail credit facilitation business primarily through Ping An Puhui Enterprises Management Co., Ltd. and its subsidiaries as well as Ping An Puhui Financing Guarantee Co., Ltd. and Chongqing Jin An Microloan Limited. These entities are collectively known as Puhui. Shenzhen Ping An Puhui Microloan Co., Ltd., Hunan Ping An Puhui Microloan Co., Ltd. and Chongqing Jin An Microloan Limited have received regulatory approvals to provide microloan services. Ping An Puhui Financing Guarantee Co., Ltd. and Ping An Financing Guarantee (Tianjin) Co., Ltd. hold licenses for providing financing guarantee services. Ping An Consumer Finance Co., Ltd. is licensed to provide consumer finance services. We do not conduct our retail credit facilitation business through consolidated affiliated entities.

Our principal executive offices are located at No. 1333 Lujiazui Ring Road 15/F, Shanghai, People’s Republic of China. Our telephone number at this address is +86 21-3863-2121. Our registered office in the Cayman Islands is located at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on www.sec.gov. You can also find information on our website ir.lufaxholding.com. The information contained on our website is not a part of this annual report.

B.	Business Overview

We are a leading technology-empowered personal financial services platform in China. We primarily address the unmet demand for personal lending among small business owners as well as salaried workers in China through our retail credit facilitation business, and we provide wealth management solutions to China’s middle class and affluent population through our wealth management business. As of December 31, 2020, our total balance of retail credit facilitated reached RMB545.1 billion (US$83.5 billion), and the total client assets generated through our online wealth management platform reached RMB426.6 billion (US$65.4 billion).

Retail Credit Facilitation

We provide retail credit facilitation services to high-quality borrowers in China under the Puhui brand. Our retail credit facilitation business connects borrowers, funding partners and credit enhancement partners, with our purpose-built end-to-end technology platform at the hub. At each stage of the customer journey from origination to servicing and collection, we apply advanced technology, including big data, AI and blockchain technology, to provide an elegant user experience for borrowers, ecosystem partners and sales teams. The entire loan application, fraud detection and credit approval process for general unsecured loans can be as fast as 20 minutes, compared to days or weeks for many Chinese commercial banks. Such efficiency is made possible by an extensive range of data sets that we have accumulated and can access under proper authorization and within lawful parameters. Our direct sales force and channel partners leverage data analytics and AI to target high quality borrowers with larger ticket size relative to other non-traditional financial service providers and with a faster loan approval process than traditional financial institutions. Integration of our direct salesforce and channel partners into our end-to-end technology platform helps us deepen our customer relationships to effectively manage the risk of larger ticket size loans while delivering the efficiencies afforded by digital technology.

We primarily target small business owners and to a lesser extent salaried workers in China who have residential property, financial assets or some access to commercial bank credit and yet are underserved by traditional financial institutions. Our borrowers use the proceeds of loans we facilitate primarily for working capital purposes in small businesses and to a lesser extent personal consumption.

We facilitate a diversified suite of loan products, including both unsecured loans and secured loans. The products we facilitate offer flexibility in ticket size and loan tenor to address different borrower needs. The average ticket size for general unsecured loans was RMB141,070 in 2019 and RMB164,483 (US$25,208) in 2020, while average contractual tenor was 35.2 and 35.3 months, respectively. The average ticket size for secured loans was RMB486,611 in 2019 and RMB390,467 (US$59,842) in 2020, while average contractual tenor was 35.9 months and 36.0 months, respectively. In 2019, general unsecured loans represented 76.0% and secured loans 23.8% of the volume of new loans we facilitated, with the remaining 0.2% consisting of legacy loans. In 2020, general unsecured loans represented 77.2% and secured loans 21.7% of the volume of new loans we facilitated, with our consumer finance subsidiary accounting for the remaining 1.2%.

We acquire borrowers through a combination of direct sales, channel partners, and online and telemarketing channels. Our offline-to-online model is the key to opening up the small business owner segment of the loan market. We had over 58,000 full-time employees in an extensive direct sales network covering more than 280 cities across all provinces in China except Tibet as of December 31, 2020. Our channel partners include the Ping An ecosystem, through which we may access a nationwide distribution network and approximately 218 million financial services customers, as well as over 280 active third-party channel partner entities. Our channel partners introduce borrowers and are paid referral fees for each loan originated. In addition, we had around 4,000 employees engaged in targeted online and telemarketing campaigns, mainly directed at existing and past customers.

We cooperated with 51 banks and 6 trust companies as of December 31, 2020 in funding the loans we originate. We also make a small but growing number of loans using funds from our own licensed consumer finance subsidiary, and in 2020 we made loans using funds from our own licensed microloan subsidiaries, though we no longer do so now. Banks, trust plans run by trust companies, and our microloan and consumer finance subsidiaries funded 63.3%, 35.1% and 1.6%, respectively, of the volume of new loans we facilitated in 2020. We have transitioned smoothly to obtaining all of our third-party funding from banks and trust plans run by trust companies. In 2020, we obtained third-party funding for new loans we facilitated from a diversified range of banks and trusts, with no single bank, trust, or other funding source accounting for more than 10% of the funding for the loans originated through our platform.

We utilize third-party credit enhancement to limit our credit risk exposure. Of the outstanding balance of loans we had facilitated as of December 31, 2020, third-party credit enhancement partners insured or guaranteed 88.8%, our subsidiaries bore credit risk on 6.3%, and funding partners bore credit risk on the remaining 4.9%. Of the 88.8% guaranteed or insured by third-party credit insurance partners, Ping An P&C, which is a member of Ping An Group, provided 85.3% of the third-party credit enhancement for the loans that we facilitated, while 3.5% was guaranteed or insured by other third parties.

By making use of third-party funding and third-party credit enhancement, we have implemented an asset-light and capital-light business model. In 2020, we funded 1.6% of the new loans we facilitated, and we bore credit risk for 6.3% of the outstanding balance of loans we facilitated as of December 31, 2020. Our ability to identify, acquire and manage creditworthy borrowers has made us a trusted partner for funding partners and credit enhancement partners alike. As of December 31, 2018, 2019 and 2020, the DPD 30+ delinquency rate for secured loans we facilitated was 0.5%, 0.6% and 0.7%, respectively, and the DPD 30+ delinquency rate for general unsecured loans we facilitated was 1.8%, 1.8% and 2.3%, respectively.

As of December 31, 2018, 2019 and 2020, the outstanding balance of loans we facilitated was RMB375.0 billion, RMB462.2 billion and RMB545.1 billion (US$83.5 billion), respectively, representing a CAGR of 20.6% from 2018 to 2020. The number of cumulative borrowers was 10.3 million, 12.4 million and 14.5 million as of December 31, 2018, 2019 and 2020, respectively. In 2018, 2019 and 2020, the total volume of new loans we facilitated was RMB397.0 billion, RMB493.7 billion and RMB565.0 billion (US$86.6 billion), respectively, representing a CAGR of 19.3% from 2018 to 2020. We recognized retail credit facilitation service fees across all products of RMB29.6 billion, RMB39.3 billion and RMB39.5 billion (US$6.0 billion) in 2018, 2019 and 2020, respectively, representing a CAGR of 15.5% from 2018 to 2020.

Our Borrowers

We target high-quality borrowers in China, primarily small business owners and to a lesser extent salaried workers who have residential property, financial assets and some access to commercial bank credit and yet are underserved by traditional financial institutions. As of December 31, 2020, we had 14.5 million cumulative borrowers and 4.4 million borrowers who have loans currently outstanding.

For our new general unsecured and secured loan customers in 2020, our platform borrowers average 40 years of age, and approximately 44% are female. Data we access from the People’s Bank of China indicates that approximately 91% of them have at least one credit card but 59% of them have no outstanding unsecured bank loans. Based on data they have provided voluntarily, 52% have a life insurance policy and 43% own residential property, though the actual numbers should be higher since not all of them chose to supply this information.

Small business owners accounted for approximately 59%, 63% and 72% of all new general unsecured and secured loans we facilitated in 2018, 2019 and 2020, respectively. In 2020, they accounted for approximately 99% of the new secured loans and 65% of the new general unsecured loans we facilitated. Many of our small business owner borrowers have fewer than 30 employees and annual revenues of less than RMB5 million. The small businesses for whose owners we facilitate loans are engaged in a very diverse set of businesses. These include retail, wholesale, manufacturing, construction, and services. This diversity in economic activity, coupled with geographical diversity, diversifies our risk. Some of the small businesses are separate legal persons from their owners and some are not, but in either case 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.

Small business owners often need larger ticket size loans on short notice for imminent operating needs. Their demand is underserved by traditional commercial banks in China, which typically cannot provide larger ticket size loans to individuals without collateral, and by online-only TechFin and smaller fintech platforms, which typically do not facilitate larger ticket size loans. As we continue to target small business owners, we expect them to account for an even larger percentage of all new loans we facilitate going forward.

In addition, we facilitate loans to salaried workers who need large ticket size consumption loans for purposes such as education, home decoration, and purchase of consumer durables. In June 2020, we also started to serve consumers under our newly established consumer finance subsidiary. As of December 31, 2020, our consumer finance subsidiary had approximately 0.2 million cumulative customers. In 2020, the average age of consumers served by our consumer finance subsidiary was 33 years old. These consumers usually use the loans to resolve emergency cash flow needs or use it for small ticket size consumption.

Our Loan Products

We facilitate secured loans and unsecured loans. 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. Substantially all the collateral is residential property. The following chart summarizes some of the characteristics of borrowers and the loans we facilitate for them in 2020:


	General Unsecured Loans		Secured Loans
Typical Borrower Profile	• Small business owners	• Salaried workers	• Small business owners
Use of Proceeds	• Small business operations	• Personal consumption	• Small business operations
Credit Risk Assessment	• Individual, business	• Individual	• Individual, business, collateral
Average Ticket Size	• RMB182,501 (US$27,970)	• RMB139,411 (US$21,366)	• RMB390,467 (US$59,842)
Average Contractual Tenor	• 35.4 months	• 35.2 months	• 36.0 months
APR	• 26.7%	• 26.8%	• 17.4%
Annualized Nominal Borrowing Cost	• 15.4%	• 15.5%	• 11.6%
Repayment Schedule	• Fixed installments	• Fixed installments	• Fixed installments or balloon payment

In addition to general unsecured loans and secured loans, we began to facilitate consumer finance loans in June 2020 through our licensed consumer finance subsidiary.

The outstanding balance of loans we facilitated has grown year over year. The following table shows the outstanding balance of loans facilitated by product as of the dates indicated.


	As of December 31,
	2018				2019				2020
	(RMB millions)		(%)		(RMB millions)		(%)		(RMB millions)		(%)
Outstanding Balance of Loans Facilitated
Current products:
General unsecured loans		266,219		71.0		366,486		79.3		447,466		82.1
Secured loans		65,400		17.4		88,599		19.2		93,737		17.2
Consumer finance loans		—		—		—		—		3,580		0.7

Total current products		331,619		88.4		455,085		98.5		544,783		99.9
Legacy unsecured loans		43,387		11.6		7,158		1.5		367		0.1

Total		375,006		100.0		462,243		100.0		545,150		100.0

The following table sets forth the percentage of the outstanding balance of general unsecured and secured loans with fixed installment and balloon payment repayment schedules as of December 31, 2018, 2019 and 2020. 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.


	As of December 31,
	2018		2019		2020
	(%)
Fixed installments		99.8		94.3		91.0
Balloon payments		0.2		5.7		9.0

Total		100.0		100.0		100.0

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


	For the Year Ended December 31,
	2018				2019				2020
	(RMB millions)		(%)		(RMB millions)		(%)		(RMB millions)		(%)
Volume of New Loans Facilitated
Current products:
General unsecured loans		275,214		69.3		375,343		76.0		436,137		77.2
Secured loans		51,630		13.0		117,312		23.8		122,320		21.7
Consumer finance loans		—		—		—		—		6,506		1.2

Total current products		326,843		82.3		492,656		99.8		564,963		100.0
Legacy unsecured loans		70,119		17.7		1,068		0.2		—		—

Total		396,962		100.0		493,723		100.0		564,963		100.0

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

The maximum permitted ticket size in 2020 was RMB10 million for secured loans and RMB1 million for unsecured loans. Average loan size was considerably smaller. The following table shows the average ticket size for loans we facilitated, for both general unsecured loans and secured loans.


	For the Year Ended December 31,
	2018		2019		2020
	(RMB)
Average Ticket Size
General unsecured loans		127,778		141,070		164,483
Secured loans		656,773		486,611		390,467

The maximum contractual tenor for loans we facilitated in 2020 was 36 months, and most borrowers chose the maximum tenor. The following table shows the average contractual tenor for loans we facilitated, for both general unsecured loans and secured loans.


	For the Year Ended December 31,
	2018		2019		2020
	(months)
Average Contractual Tenor
General unsecured loans		34.8		35.2		35.3
Secured loans		35.7		35.9		36.0

Due to customer behavior and early repayment options, the effective tenor will be shorter than the average contractual tenor. We are taking measures to mitigate the impact of early repayment. We started to charge early repayment fees for a majority of newly facilitated secured loans in November 2018 and for a substantial majority of newly facilitated general unsecured loans in May 2019 if borrowers early repay during the first few months. Since then, we have observed a modest improvement in early repayment behavior of borrowers, although it is unclear if this trend will continue considering the limited track record we have for loans originated after we implemented the new policies, and given that borrowers’ early repayment behavior may also be affected by a number of other factors. Since we implemented early repayment fees, we have not observed any material impact on the volume of new loans facilitated or borrowers’ re-borrowing behavior. Since September 11, 2020, we have also started to charge monthly service fees for general unsecured and secured loans based on outstanding loan balance, which decreases with each repayment, instead of a fixed monthly number based on the loan principal at origination. It is too early for us to assess the impact of this new policy on borrowers’ early repayment behavior due to the limited track record after implementation. See “Item 5. Operating and Financial Review and Prospects—Key Components of Our Results of Operations—Income—Technology platform-based income—Retail credit facilitation service fees” for disclosure regarding estimated effective tenor.

The table below sets forth the gross amount of early repayment applied against the loan principal for secured and general unsecured loans in the years ended December 31, 2018, 2019, and 2020.


			Early Repayment Amount
	Loan Principal at Origination		For the Year Ended December 31,
Vintage	Loan Principal at Origination		2018		2019		2020
			(RMB millions)
Before 2017		—		12,998		1,979		—
2017		279,462		60,778		19,493		2,353
2018		326,843		48,630		75,470		24,728
2019		492,656		—		89,026		123,599
2020		558,457		—		—		83,233

Total				122,406		185,968		233,912

Secured loans have both fixed installment and balloon payment schedules, whereas general unsecured loans typically have fixed installment repayment schedules. Early repayment options are available for the loan products on our platform. We do not permit borrowers to refinance their loans to a lower interest rate without early repayment. Certain high-quality borrowers of general unsecured loans may be offered an additional loan before their original loan is completely repaid. In 2020, approximately 6.8% of the volume of new general unsecured loans facilitated represented additional loans to existing borrowers.

For 2020, the average APR was 26.7% for general unsecured loans we facilitated and 17.4% for our secured 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 facilitation service fees. The following table shows the average APR for the new loans we facilitated, for both general unsecured loans and secured loans. We reduced our fee rates for certain borrowers and changed certain credit criteria for borrowers in early September. As a result, the APR of all new loans applied for after September 4, 2020 was below 24%.


	For the Year Ended December 31,
	2018		2019		2020
	(%)
APR
General unsecured loans		29.0		29.0		26.7
Secured loans		20.6		18.7		17.4

The following table presents the proportion of volume of new loans we facilitated by APR in 2020, for both general unsecured loans and secured loans.


	Below 24%		24 to 30%		30% to 36%		Total
	(%)
APR
General unsecured loans		53.7		27.0		19.3		100.0
Secured loans		100.0		—		—		100.0

The following table presents the average ticket size of new loans we facilitated by APR in 2020, for both general unsecured loans and secured loans.


Average Ticket Size	Below 24%		24 to 30%		30 to 36%		All
	(RMB)
General unsecured loans		206,538		164,387		104,957		164,483
Secured loans		390,467		—		—		390,467

The following table shows the average annualized nominal borrowing cost for new loans we facilitated, for both general unsecured loans and secured loans. Annualized nominal borrowing cost represents the annualized all-in borrowing cost as a percentage of the original principal amount.


	For the Year Ended December 31,
	2018		2019		2020
	(%)
Annualized Nominal Borrowing Cost
General unsecured loans		16.9		17.0		15.4
Secured loans		11.6		11.5		11.6

General Unsecured Loans

General unsecured loans target both small business owners and salaried workers. In 2020, approximately 65% of the general unsecured loans we facilitated, by volume, were borrowed by small business owners, and 35% by salaried workers. The average contractual tenor of new general unsecured loans we facilitated during this period was 35.3 months and the average ticket size was RMB164,483 (US$25,208). In 2020, 53.7% of the volume of new general unsecured loans we facilitated had an APR lower than 24%, another 27.0% had an APR between 24% and 30%, and 19.3% had an APR between 30% and 36%.

As of December 31, 2018, 2019 and 2020, our outstanding balance of general unsecured loans facilitated was RMB266.2 billion, RMB366.5 billion and RMB447.5 billion (US$68.6 billion), respectively. In 2018, 2019 and 2020, our total volume of general unsecured loans facilitated amounted to RMB275.2 billion, RMB375.3 billion and RMB436.1 billion (US$66.8 billion), respectively.

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


	For the Year Ended December 31,
	2018				2019				2020
	(RMB millions)		(%)		(RMB millions)		(%)		(RMB millions)		(%)
Ticket Size
Up to RMB50,000		12,240		4.4		17,549		4.7		12,913		3.0
RMB50,001 to RMB100,000		55,327		20.1		65,390		17.4		57,673		13.2
RMB100,001 to RMB200,000		167,375		60.8		147,875		39.4		146,153		33.5
RMB200,001 to RMB300,000		39,509		14.4		114,239		30.4		131,391		30.1
RMB300,001 or above		762		0.3		30,291		8.1		88,008		20.2

Total		275,214		100.0		375,343		100.0		436,137		100.0

We focus on facilitating 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 percentage of the general unsecured loans we facilitated had ticket sizes of RMB50,000 or lower. Loans with ticket sizes over RMB200,000 increased substantially from 2018 to 2019 and again from 2019 to 2020.

Secured Loans

Secured loans target small business owners. Approximately 99% of the secured loans we facilitated, by volume, were borrowed by small business owners, and virtually all of the loans were secured by residential property. We offer flexible contractual tenors of up to 36 months, and the vast majority of borrowers choose the longest available contractual tenor. In 2020, the average contractual tenor of new secured loans we facilitated was 36.0 months and the average ticket size was RMB390,467 (US$59,842). All of the secured loans that we facilitated in 2020 had an APR below 24%.

As of December 31, 2018, 2019 and 2020, our outstanding balance of secured loans facilitated was RMB65.4 billion, RMB88.6 billion and RMB93.7 billion (US$14.4 billion), respectively. In 2018, 2019 and 2020, our total volume of secured loans facilitated amounted to RMB51.6 billion, RMB117.3 billion and RMB122.3 billion (US$18.7 billion), respectively.

We focus on facilitating loans collateralized by residential property located in economically more developed cities, given such cities’ relatively stable economic growth and real estate prices. The collaterals are well diversified across China, with a large proportion located in more developed cities. The average loan-to-value ratio at origination for the secured loans we facilitated has been stable at 68%, 67% and 67% in 2018, 2019 and 2020, respectively.

Consumer Finance Loans

We began to facilitate consumer finance loans in June 2020 through our licensed consumer finance subsidiary. Our consumer finance products are primarily revolving credit consumer credit products that support diversified use methods such as cash withdrawal and electronic payment. For the new applicants in 2020, the average credit line was RMB30,717 (US$4,708) and the average APR was 19.1%.

Legacy Unsecured Loans

We previously offered a category of unsecured revolving credit lines which we have phased out for strategic reasons. We treat these credit lines as legacy products and exclude them from the scope of general unsecured loans.

Retail Credit Origination

We had facilitated loans for 14.5 million cumulative borrowers as of December 31, 2020. We acquire borrowers primarily through offline channels, because we focus on loans with larger ticket sizes that often require additional consultation services to be provided to the borrowers during the origination process. The origination of these loans incurs higher costs as compared to the origination of smaller ticket size consumer loans but it also generates more value.

The following table shows the volume of new loans we facilitated by origination channels for the years ended December 31, 2018, 2019 and 2020, excluding legacy products.


	For the Year Ended December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Volume of New Loans Facilitated
Direct sales		147.5		45.1		221.6		45.0		274.6		48.6
Channel partners		117.6		36.0		213.6		43.4		223.9		39.6
Online and telemarketing		61.8		18.9		57.4		11.7		66.5		11.8

Total		326.8		100.0		492.7		100.0		565.0		100.0

The following table shows the origination cost as a percentage of the volume of new loans we facilitated for the years ended December 31, 2018, 2019 and 2020, excluding legacy products.

For the Year Ended December 31,

2018

2019

2020

(%)

Origination Cost

New loan volume based borrower acquisition cost(1)

2.6

2.8

2.4

Retail credit facilitation related general sales and marketing expenses(2)

1.1

0.8

Total

3.7

3.6

3.2

Note:

(1)	New loan volume based borrower acquisition cost is calculated based on cost incurred during the year without considering allocation of the amount over the loan tenure and timing impact of IFRS 15 or IFRS 9.

(2)	Retail credit facilitation related general sales and marketing expenses mainly consisted of salary and premises of our proprietary salesforce, loan related promotion and channel management expenses.

Direct Sales

We have an extensive direct sales network of over 58,000 full-time employees as of December 31, 2020, more than 95% of whom have a junior college education or above. Together they cover more than 280 cities across all provinces in China except Tibet, giving us excellent coverage of areas nationwide with good potential for making loans to small business owners.

Our direct sales force proactively seeks out potential borrowers using their own knowledge and contacts with the help of a specialized mobile application 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 facilitate loans with larger ticket size as these borrowers tend to have more demand for face-to-face consultation.

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 continually improving, as evidenced by the increase in volume of new loans sourced per employee per year from RMB3.2 million in 2018, to RMB4.0 million in 2019, and RMB4.7 million (US$0.7 million) in 2020. Our direct sales channel was responsible for sourcing RMB221.6 billion, or 45.0%, of the new loans we facilitated in 2019 and RMB274.6 billion (US$42.1 billion), or 48.6%, of the new loans we facilitated in 2020.

Channel Partners

We complement our direct sales force with a large and robust set of channel partners. Our channel partners introduce borrowers and are paid referral fees for each loan originated.

We leverage the Ping An ecosystem to acquire borrowers, and pay referral fees for each loan originated. Borrowers from the Ping An ecosystem tend to be relatively well-to-do and they generally have higher credit quality and borrow at larger ticket sizes. As a result, we are able to streamline the application process for them. The Ping An ecosystem was responsible for sourcing RMB197.4 billion, or 40.1%, of the new loans we facilitated in 2019 and RMB204.9 billion (US$31.4 billion), or 36.3%, of the new loans we facilitated in 2020. We set the referral fees at a level that we believe is economical for us and attractive to members of the Ping An ecosystem, who only participate in the referral program to the extent they wish to.

The following table shows the volume of new loans originated from the Ping An ecosystem and other channel partners in 2018, 2019, 2020.


	For the Year Ended December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Volume of New Loans Facilitated
Ping An ecosystem		104.5		88.9		197.4		92.4		204.9		91.5
Other channel partners		13.0		11.1		16.2		7.6		19.0		8.5

Total channel partners		117.6		100.0		213.6		100.0		223.9		100.0

In addition to the Ping An ecosystem, we cooperated with over 280 other active third-party channel partners as of December 31, 2020. An active channel partner is one who introduced borrowers to us in each of the three preceding months. Our channel partners include a wide range of businesses, such as point-of-sale payment agencies, tax system providers and second-hand car transaction platforms. Our channel partners are supported by our proprietary partner management system that helps us allocate resources and design incentive plans more efficiently. Our other third-party channel partners were responsible for sourcing RMB16.2 billion, or 3.3%, of the new loans we facilitated in 2019 and RMB19.0 billion (US$2.9 billion), or 3.4%, of the new loans we facilitated in 2020.

Online and Telemarketing

As of December 31, 2020, we employed around 4,000 employees to engage in targeted online and telemarketing campaigns to reach customers based on their potential need for loans, which we have identified from online behavioral data and other big data techniques. Our online and telemarketing channel primarily facilitates general unsecured loans, and it focuses on helping high-quality borrowers borrow new loans. The productivity of our online and telemarketing channel has been improving with the application of advanced AI technology, as evidenced by the increase in volume of new loans sourced per employee per year from RMB8.0 million in 2018, to RMB9.4 million in 2019 and RMB16.6 million (US$2.5 million) in 2020. Our online and telemarketing channel was responsible for sourcing RMB57.4 billion, or 11.7%, of the new loans we facilitated in 2019 and RMB66.5 billion (US$10.2 billion), or 11.8%, of the new loans we facilitated in 2020. By facilitating new borrowing by existing customers who are eligible based on our credit assessment, we are able to reduce our marginal borrower acquisition cost while maintaining the risk profile of our outstanding balance of loans facilitated.

Borrower Experience

The loan application process is entirely online and paperless. Our mobile application 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 application. Since 2019, all of our transactions have occurred on our mobile application.

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 facial recognition and device fingerprint.

If borrowers wish to provide documentation to support their risk profile and increase their credit limit, our mobile application 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. By 2019, all of our loan applications for both secured and unsecured loans were 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.

We began to roll out a 100% AI application and approval process for select borrowers of general unsecured loans in June 2020. It 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 process typically takes only 20 minutes in total, entirely through one screen interaction, with zero 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. The credit assessment is provided to the funding partner and credit enhancement partner for their evaluation and approval, and the borrower signs the contract online in the app 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.

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.

Loan Underwriting and Collection

Our credit approval process, comprised of anti-fraud and credit assessments, is supported by both financial and behavioral data and managed by our risk management department. In addition to meeting the basic requirements on nationality, age, residency and the availability of credit and other history, a borrower must pass both our anti-fraud and credit assessments to be eligible for our loan products. Our average credit approval time is less than 30 minutes for general unsecured loans and approximately two hours for secured loans in 2020, and funding is generally available on the same day.

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 accumulated over 15 years of through-cycle credit data from approximately 54 million unique individual applicants, supplemented by access to Ping An ecosystem analytics and insights and access to enterprise data for approximately 10 million businesses through external data providers. 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.

Out of over 7,000 variables per borrower, we applied machine learning algorithms and regression analysis to select 1,591 of the most relevant variables to build our anti-fraud models and 1,570 of the most relevant variables to build our loan decision models.

To underwrite 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 a result, credit and financial data comprise approximately 60% of the variables of our anti-fraud assessment and 89% of the variables of our credit assessment, while behavioral data make up the remaining 40% of the variables for our anti-fraud assessment and 11% of the variables of our credit assessment.

Anti-fraud Assessment

Our anti-fraud assessment checks for identity fraud, against negative records and for organized fraud. We verify the borrower’s identity by crosschecking against the National Citizen Identity Information Center’s ID database using facial recognition technology. We also verify the borrower’s identity using device fingerprinting and phone number and bank card verifications. By cross checking within and across data sources, we ensure that the borrower is who he or she claims to be and that the same borrower is completing the application from beginning to end.

Next we check each borrower against blacklists and negative records, including lists that we have built up through our own operations, from third-party sources and from publicized fraud attempts. We also further check if the borrower uses technology to provide falsified information, such as false location information using VPNs or IP address proxies.

Furthermore, we use our social network model built upon graphic computation and machine learning algorithms to identify and screen out organized fraud attempts. We have an extensive database of mobile phone device fingerprint, location and IP data to support our social network model. We check the borrower’s key information using our fraud detection model, which contains over 1,000 expert rules.

Credit Assessment

Borrowers who pass our anti-fraud assessment process move onto our credit assessment process. 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. The applicant must have a risk rating of G8 or above on our rating system to qualify for a loan. In 2020, we gave AI-assisted live interviews or purely AI interviews to 67.8% of borrowers of general unsecured loans, and the other 32.2% of borrowers of general unsecured loans had the interview waived because nothing in their data required further clarification. As described above, we began to roll out a 100% AI application and approval process for select borrowers in July 2020. 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.

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.

Credit Approval by Our Partners

Once a loan application passes our credit assessment process, if funding partners and credit enhancement partners are involved then we will refer the loan to them for them to conduct an independent evaluation of the loan application. We only match borrowers who we believe meet our partners’ lending criteria, and our partners independently review all of the application information before making a lending decision. Loans are disbursed by the funding partner directly to the borrower.

Loan Servicing and Collection Practices

Borrowers can set up automatic repayments on our mobile application. We have established a post-loan servicing model 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 2020, we carried out 57% of our repayment reminders through messages and the other 43% 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 facilitate makes it more cost-efficient for us to escalate the collection process for delinquent loans, as compared to platforms that facilitate 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 saved using blockchain technology 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.

We have established a team of more than 10,000 post-loan servicing professionals as of December 31, 2020. The productivity of our post-loan servicing team has been continually improving, as evidenced by the increase in average outstanding loan balance per post-loan servicing employee per year from RMB34.6 million in 2018 to RMB47.8 million in 2019 and RMB54.1 million (US$8.3 million) in 2020.

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.

In addition to the collection efforts described above, we have an additional foreclosure procedure for our secured loans. Acting as an agent for the credit enhancement partner, 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 lender.

Consumer Finance Loans

For consumer finance loans, the borrower initiates the fully online application process through client application modules such as our Ping An Consumer Finance App, in the course of which a number of technical means such as OCR ID verification and facial recognition are used to complete the verification of the identity of the borrower. Combining various types of credit information, we comprehensively judge the applicant’s qualifications and provide the successful applicant with a credit line. Over 80% of the applicants can get a credit result in about 20 minutes. We primarily outsource collection efforts for overdue loans.

Funding Sources

Funding sources for the loans we facilitate include banks, trusts, and our own microloan and consumer finance subsidiaries. Historically, we also funded loans through individual investors on our peer-to-peer platform, though we stopped doing so in August 2019.

The following table shows the volume of new loans facilitated in each period by funding source:


	For the Year Ended December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Volume of New Loans Facilitated by Funding Source
Banks		186.2		46.9		312.0		63.2		357.6		63.3
Trusts		5.0		1.3		104.9		21.2		198.2		35.1
Microloan and consumer finance subsidiaries		12.7		3.2		0.8		0.2		9.2		1.6
Peer-to-peer individual investors		193.0		48.6		76.0		15.4		—		—

Total		397.0		100.0		493.7		100.0		565.0		100.0

As the numbers above show, we have successfully managed two major changes in the sources of our funding in recent years. The decrease in the funding from peer-to-peer individual investors in 2019 was due to a series of government regulatory initiatives that prompted us to cease using such funding in August 2019. We compensated by increasing funding from banks and trusts.

We are continually refining our funding mix. Our ability to facilitate loans has not been constrained by our funding supply. We have strong relationships with 51 banks and 6 trust companies as of December 31, 2020, and we only utilized 53% of the credit facility that banks were prepared to make available to our borrowers and 37% of the credit facility that trust companies were prepared to make available to our borrowers. We believe our relationships with banks and trust companies are sustainable as our ability to help them generate interest income by facilitating loans from our high quality borrowers makes us a valuable partner to them. In 2020, no single funding source accounted for more than 10% of the funding for the loans originated through our platform.

We enter into trilateral agreements with each funding partner and credit enhancement partner that contain the principal terms governing funding arrangements and credit enhancement for the loans that we facilitate with them. These agreements will generally include provisions specifying the proportion of loans to be insured or guaranteed by the credit enhancement partner and the geographical scope of the collaboration, and some of them set out the rate of interest to be charged by the funding partner for the loans. They also provide that each party will perform its own credit assessment of the borrowers, that the funding partner will enter into the loan agreement with the borrower, and that the credit enhancement partner will reimburse the lending partner for each loan that is 80 days past due. Under these agreements, each party has the right to perform post loan services or delegate them to another party. Typically no party has the right to market anything to the customers other than the loan-related services that are covered by the agreement.

Banks

Under the bank funding model, a third-party bank lends directly to the borrower. We provide loan facilitation services for borrowers and facilitate borrowers to obtain loans from third-party banks.

We partnered with 47 banks in 2019 and 51 banks in 2020. These banks included national joint-stock banks, city commercial banks, rural commercial banks and others. The banks determine the creditworthiness of borrowers that we refer, though we help gather the information our bank partners need. Banks funded approximately 63.2% of the new loans we facilitated in 2019 and 63.3% of the new loans we facilitated in 2020. Among the new loans we facilitated that were funded by our bank funding partners in 2020, 46.7% of the funding was from national joint-stock banks, 35.7% of the funding was from city commercial banks, and 17.6% of the funding was from rural commercial banks and others. Maintaining stable and long-term relationships with banks is an important factor in sustainable funding.

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, including retail funding directed by private banks, institutional funding from banks, securities and insurance companies, and funding from open market issuance. We provide loan facilitation services for borrowers and facilitate borrowers to obtain loans from trusts. We perform credit assessments and match borrowers to the trust plans. In a small percentage of cases we also provide financing guarantee services in connection with the loans. The trust plans to which we contribute funds are fully consolidated on our balance sheet as consolidated trusts, as are some trust plans for which we act as the asset manager even when we do not contribute any funds. Since we normally use third-party credit enhancement when we do contribute funds, we are not exposed to credit risk for most of the trusts that we consolidate.

We partnered with three trust companies in 2019 and six trust companies in 2020. Trusts funded approximately 21.2% of the new loans we facilitated in 2019 and 35.1% of the new loans we facilitated in 2020. The loans funded by consolidated trusts appear on our balance sheet, and those funded by unconsolidated trusts do not. See “Item 5. Operating and Financial Review and Prospects —On– and Off–Balance Sheet Treatment of Loans and Risk Exposure.”

Microloan and Consumer Finance Subsidiaries

We have three microloan subsidiaries and a licensed consumer finance subsidiary that have made loans in a small number of cases from our own funds. Our microloan and consumer finance subsidiaries collectively funded 0.2% of the new loans we facilitated in 2019 and 1.6% of the new loans we facilitated in 2020. On November 2, 2020, the CBIRC, the People’s Bank of China and other regulatory authorities released a consultation draft of the Interim Measures for the Administration of Online Microloan Business, 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 response to this, we have ceased to use our microloan subsidiaries to fund new loans since December 2020. On the other hand, our consumer finance subsidiary began operation in June 2020 and funded 1.2% of the loans facilitated on our platform in 2020, and we expect that this will gradually increase going forward.

Peer-to-Peer Individual Investors

Historically, we also funded loans through individual investors on our peer-to-peer platform. Under this model, we sourced borrowers, sourced lenders and matched borrowers and lenders, facilitated applications by borrowers for loans online, and helped with the transfer of funds between lenders and borrowers. We also collected service fees from lenders for loan facilitation services. Peer-to-peer individual investors funded approximately 15.4% of the new loans we facilitated in 2019, but none of the new loans we facilitated in 2020. While we no longer facilitate new loans under this model since August 2019, we will continue to collect service fees and guarantee fees on outstanding loans as long as they remain outstanding. The last of these loans matures in 2022.

Credit Enhancement Arrangements and Risk Exposure

We arrange for credit enhancement, including insurance and guarantees, to protect the lenders of the loans we facilitate. We worked with ten credit enhancement partners in 2020, including six credit insurance companies and four guarantee companies. The proportion of loans facilitated that were insured or guaranteed by third parties was 94.1%, 95.6% and 88.8% of the outstanding balance as of December 31, 2018, 2019 and 2020, respectively. In response to regulatory changes in 2020, we have reduced the proportion of credit enhancement from third parties, encouraged lenders to bear more risk themselves and provided a larger proportion of credit enhancement ourselves than we previously had.

All of our credit enhancement partners, both insurance companies and financing guarantee companies, 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 relevant 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 partners. 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.

The following table shows the outstanding balance of loans we facilitated by guarantee status as of the dates indicated.


	As of December 31,
	2018		2019		2020
	(%)
Guarantee Status
Insured or guaranteed by third parties		94.1		95.6		88.8
Not insured nor guaranteed by third parties		5.9		4.4		11.2
Credit risk borne by us		5.3		2.2		6.3
Credit risk borne by funding partners		0.6		2.2		4.9

Total		100.0		100.0		100.0

Insured or Guaranteed by Third Parties

We utilize third-party credit enhancement to limit credit risk exposure for funding parties through cooperation with insurance and guarantee companies. As of December 31, 2020, 88.8% of the outstanding balance of loans we facilitated are insured and guaranteed by third parties, and we do not bear any credit risk on them. Most importantly, we work together with Ping An P&C, which has provided credit enhancement on standard commercial arm’s-length terms for loans we facilitate. Ping An P&C insured 85.3% of the outstanding balance of loans we had facilitated as of December 31, 2020. No other credit enhancement partner insured or guaranteed more than 1.6% of the outstanding balance of loans we facilitated as of December 31, 2020. For loans we facilitate 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 partners provide credit guarantee insurance or guarantees on the loans we facilitate and will repay the lenders if a loan becomes sufficiently delinquent. We are not aware of any instance where our credit enhancement partners have ever failed to fulfill their insurance or guarantee obligations. Our credit enhancement partners 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.

We have established a highly automated claims process with our funding and credit enhancement partners. Once a loan becomes delinquent for 80 days, a notice of claim will be automatically sent to the third party credit enhancement provider. In 2020, we were the funding source for only 1.6% of the new loans we facilitated, so 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 partners for the loans consolidated on our balance sheet and the amount of claims reimbursed during each period. The discrepancies in amounts submitted and amounts reimbursed are mainly due to timing differences. When we make a claim, the credit enhancement provider will typically complete its review and make the payment to us within one business day.


	In the Year Ended December 31,
	2018		2019		2020
	(RMB millions)
Amount of claims submitted		1,813.9		805.1		1,938.8
Amount of claims reimbursed		1,817.2		801.3		1,940.1

Not Insured nor Guaranteed by Third Parties

As of December 31, 2020, 11.2% of the outstanding balance of loans we facilitated were not insured or guaranteed by third parties. As of December 31, 2020, we had credit risk exposure to 6.3% of the outstanding balance of loans we facilitated. We will adjust the amount of credit risk that we bear ourselves from time to time, in line with other leading platforms in the retail credit facilitation industry, consistent with our capital-light business model.

As of December 31, 2020, our funding partners had the credit risk exposure to the remaining 4.9% of the outstanding balance of loans we facilitated. We plan to introduce new models for credit enhancement to meet varying risk appetites among our funding partners, so that funding partners can choose the level of risk and return they prefer. Under these new models, we would bear up to 30% of the risk on the loans that we facilitate and we would encourage our funding partners to also bear more risk in lieu of relying on credit enhancement partners. We believe that the accuracy and effectiveness of our credit assessment and risk management will persuade more funding partners to accept more of the risk and more of the returns on the loans that we facilitate, rather than relying on credit enhancement partners.

Risk Management for Retail Credit Facilitation

Risk management is a core tenet of our management philosophy and permeates all of our operations. We have developed comprehensive risk management and internal control systems to address credit risk and operational risk that we face. We start with more than 7,000 predictive variables for each borrower and narrow down to 1,570 key variables that are used for our loan decisions, of which approximately 89% are credit and financial data.

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. This directly impacts us for the loans guaranteed by our subsidiaries.

We manage credit risk through anti-fraud assessment, credit assessment and loan servicing and collections. See “—Loan Underwriting and Collection.”

For the general unsecured loans we facilitate, G1 is the lowest risk, and G8 is the highest risk among qualified borrowers. 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.

The following table shows the percentage of new general unsecured loans and the DPD 30+ delinquency rate for general unsecured loans at each risk level in 2018, 2019 and 2020, excluding legacy products. We define the DPD 30+ delinquency rate as the outstanding balance of loans for which any payment is 30 to 179 calendar days past due divided by the outstanding balance of loans. This reflects a comprehensive picture of credit quality for all the loans we facilitate on a whole portfolio basis, not just the loans that are consolidated on our balance sheet.


	For the Year Ended December 31,						DPD 30+ Delinquency Rate
	For the Year Ended December 31,						As of December 31,		As of December 31,
	2018		2019		2020		2019		2020
G1		10.2		13.3		17.1		0.6		0.8
G2		18.2		23.0		23.6		0.7		1.4
G3		18.7		22.2		22.7		1.3		2.0


	For the Year Ended December 31,						DPD 30+ Delinquency Rate
	For the Year Ended December 31,						As of December 31,		As of December 31,
	2018		2019		2020		2019		2020
G4		28.1		19.7		19.4		2.2		2.6
G5		14.7		13.3		11.1		2.7		3.8
G6		6.4		7.2		5.3		3.4		5.2
G7		3.5		1.2		0.9		9.8		7.5
G8		0.1		0.1		0.0		11.4		12.2

Total		100.0		100.0		100.0		1.8		2.3

The following table shows the DPD 30+ delinquency rates for general unsecured loans and secured loans as of December 31, 2018, 2019 and 2020.

As of December 31,

DPD 30+ Delinquency Rates by Type of Loan

2018

2019

2020

General unsecured loans

1.8

2.3

Secured loans

0.5

0.6

0.7

Total

1.5

1.6

2.0

The following table presents the DPD 30+ delinquency rates for general unsecured loans by APR as of December 31, 2018, 2019 and 2020.


	As of December 31,
DPD 30+ Delinquency Rates by APR	2018		2019		2020
Below 24%		0.6		0.7		0.4
24-30%		1.0		1.4		3.2
Above 30%		3.3		3.0		4.9

Total general unsecured loans		1.8		1.8		2.3

The following table presents the DPD 90+ delinquency rates for general unsecured loans and secured loans as of December 31, 2018, 2019 and 2020. 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 reflects a comprehensive picture of credit quality for all the loans we facilitate 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 partner, 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 partner acquires the creditor rights after reimbursing the funding provider and we continue to provide post-loan services to the credit enhancement partner.

As of December 31,

DPD 90+ Delinquency Rates by Type of Loan

2018

2019

2020

(%)

General unsecured loans

1.0

1.3

Secured loans

0.3

0.4

Total

0.9

0.8

1.2

The following chart shows the DPD 90+ delinquency rates by vintage as of December 31, 2020, on general unsecured loans that we have facilitated. 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.

LOGO

The following chart shows the DPD 90+ delinquency rates by vintage as of December 31, 2020 on secured loans that we have facilitated.

LOGO

The borrowers are diversified by geography and industry. Excluding legacy loans, no city accounted for more than approximately 3.5% of the outstanding balance of loans as of December 31, 2020. The small businesses for whose owners we facilitate loans include businesses in the retail, wholesale, manufacturing, construction, and services sectors of the economy.

The following chart shows the flow rates for the general unsecured loans we have facilitated that became delinquent for 1 to 89 days. 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.

LOGO

The following chart shows the flow rates for the secured loans we have facilitated that became delinquent for 1 to 89 days.

LOGO

Wealth Management

We provide wealth management services to middle class and affluent people in China under the Lufax brand. Our wealth management business connects investors with approximately 9,500 products from 436 third-party institutional financial product providers through our highly personalized services hub. As of December 31, 2020, we connect 14.9 million active investors with products supplied by 436 third-party product providers, including 102 asset management companies, 44 banks, 27 trust companies, 105 private investment fund management companies, 124 mutual fund companies, and 34 other product providers such as securities companies and insurance companies. With such a vast portfolio of products and product providers, we leverage technology and extensive data analytics to facilitate the right investments with the right investors at the right time. Our analytics are also predictive, seeking to anticipate investors’ real-time intentions and likely next steps, such as the propensity to purchase certain wealth management products, viewing the latest financial market information, or planning for portfolio rebalancing. Through our technology platform, we seamlessly connect investors to an end-to-end digital solution across the entire investment cycle. Dedicated account managers offer priority opportunity to purchase popular products and personalized consultations for complex products. In addition to personalized services facilitating the right products to specific investors, our end-to-end solution encompasses automated portfolio investment tools provided by our business partner, integrated smart accounts, portfolio tracking and statements, special risk alerts and high end investor services as well as overall risk management. Our end-to-end technology platform also integrates with our offline-to-online customer acquisition capabilities. We recently launched an end-to-end digital wealth management enablement solution to empower small and medium-size financial institutions.

We target Chinese middle class and affluent investors who have massive demand for wealth management services but are currently underserved by traditional financial institutions. They have significant investable funds but are not wealthy enough to qualify for private banking services at the traditional banks and they are dissatisfied with the basic and undifferentiated investment opportunities that are offered to them. They need a wide range of options to diversify their risks and achieve stable returns, but they also need assistance in selecting ones that are suitable for their investing goals, as well as the assurance that they are investing on a reputable platform.

We source our platform investors through Ping An ecosystem, direct online marketing and member referral channels, and through our experience, we have been able to optimize our acquisition focus and enhance cost efficiency. Our average client assets per active investor was RMB28,663 (US$4,393) as of December 31, 2020, and 75.5% of our total client assets were contributed by investors with client assets over RMB300,000 as of the same date.

Our services and risk management capabilities are critical in enabling us to provide personalized investment experiences and deliver products in a convenient and customized manner to our platform investors. We use big data technology and analytics to develop a risk management system comprised of proprietary KYC, KYP and matching systems. We match investor risk tolerance with product and portfolio risk profiles based on KYC and KYP ratings to ensure suitability of our offerings. Our risk matching capabilities serve as the foundation of our personalized services, including an integrated smart account, proprietary product selections, post-investment risk monitoring and real-time updates.

We operate a capital-light model where we source and facilitate distribution of third-party financial products and do not assume product risks or obligations to meet any implicit guarantee expectations. We are committed to reducing suitability-related risk by matching the right products to the right investors at the right time through our proprietary LuFlex system. Our operating efficiency is enhanced by our ever growing understanding of customers through more data, optimized acquisition channels and growing economies of scale.

We have begun to expand internationally to tap into the large pool of investable funds controlled by overseas Chinese. In September 2017, we began doing business in Singapore. In September 2019, we began to develop an online wealth management platform for investors in Hong Kong as well. With a presence in both Singapore and Hong Kong, we believe we can effectively target a large proportion of the overseas Chinese investors in the region.

We have been successful in attracting a large and fast growing base of active investors. We had 11.2 million, 12.5 million and 14.9 million active investors as of December 31, 2018, 2019 and 2020, respectively. We define active investors as investors who have made at least one investment through our wealth management platform or have had client assets with us above zero in the past twelve months. Our total wealth management client assets were RMB369.4 billion, RMB346.9 billion and RMB426.6 billion (US$23.0 billion) as of December 31, 2018, 2019 and 2020, respectively. Excluding legacy products, our total wealth management client assets were RMB182.5 billion, RMB243.6 billion and RMB407.2 billion (US$67.2 billion) as of December 31, 2018, 2019 and 2020, respectively.

Meanwhile, our broad spectrum of investment products, technology-driven investment service and premier investment experience have enabled us to maintain high investor stickiness and service our customers’ full life span investment demands. The average number of investment products held per investor was 6.6 for investors with client assets between RMB300,001 and RMB1,000,000, and 11.0 for investors with client assets above RMB1,000,000 as of December 31, 2020. We believe that high investor stickiness to our platform will contribute to an expansion in unit economics and help maximize our investors’ lifetime value to us.

Our Platform Investors

We serve the Chinese middle class and affluent investors with ample investable assets, whose investment demand is not sufficiently addressed by the traditional wealth management industry in China. Our platform investors average 38 years of age, and approximately 54% are female. We have a large and growing investor base, and a large proportion of our total client assets come from those investors who invest with us on a larger scale. Our active investors have been registered on our platform for an average of more than three and a half years.

The table below presents information about our platform investors and client assets as of the dates indicated.


	As of December 31,
	2018		2019					2020
					YOY%					YOY%
Number of registered users (millions)		40.4		44.0		8.9			46.2		4.9
Number of active investors (millions)		11.2		12.5		11.6			14.9		19.0
Total client assets (RMB billions)		369.4		346.9		(6.1	)		426.6		23.0
Current products (RMB billions)		182.5		243.6		33.5			407.2		67.2
Legacy products (RMB billions)		186.9		103.3		(44.7	)		19.4		(81.3	)
Average client assets in total products per active investor (RMB)		33,067		27,743		(16.1	)		28,663		3.3
Average client assets in current products per active investor (RMB)		16,637		19,774		18.9			27,671		39.9
Contribution of client assets from active investors with client assets over RMB300,000 (%)		73.2		73.1					75.5

Note:

The two columns marked “YOY%” show the percentage increase or decrease in the absolute numbers compared to the corresponding numbers from one year earlier.

We target investors with higher investable assets. As shown above, our platform investors with client assets over RMB300,000 contributed 73.2%, 73.1% and 75.5 % of total client assets on our platform as of December 31, 2018, 2019 and 2020, respectively. In addition to investing more on the platform, our higher end investors are also active and hold a broader set of products. Almost all of our platform investors with client assets greater than RMB300,000 have opened an integrated smart account as of December 31, 2020.

The table below shows the breakdown of our total client assets by investor category as of the dates indicated, excluding legacy products.


	As of December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Total Client Assets for Current Products
Up to RMB100,000		23.6		13.0		22.8		9.4		21.1		5.2
RMB100,001 to RMB300,000		39.5		21.6		47.9		19.7		50.0		12.3
RMB300,001 to RMB1,000,000		47.6		26.1		69.8		28.7		95.7		23.5
RMB1,000,001 or more		66.8		36.6		96.2		39.5		210.5		51.7
Others⁽¹⁾		5.0		2.7		6.8		2.8		29.9		7.4

Total		182.5		100.0		243.6		100.0		407.2		100.0

(1)	Others includes stocks and recent cooperation with third parties where detailed breakdowns of average customer client assets is not yet available to us.

The table below shows the average client assets in current products categorized by investor client assets in total products, including both current and legacy products, as of the dates indicated.


	As of December 31,
	2018		2019		2020
			(RMB)
Average Client Assets in Current Products per Active Investor
Up to RMB100,000		2,294		1,944		1,488
RMB100,001 to RMB300,000		105,035		140,317		167,404
RMB300,001 to RMB1,000,000		224,128		362,274		510,520
RMB1,000,001 or more		912,243		1,468,741		2,693,993
Average client assets in current products per active investor		16,637		19,774		27,671

The table below shows the average number of products held categorized by investor client assets in total products as of the dates indicated, excluding investors who only hold legacy products.


	As of December 31,
	2018		2019		2020
Average Number of Products Held per Active Investor
Up to RMB100,000		1.4		1.3		1.2
RMB100,001 to RMB300,000		3.5		3.8		4.0
RMB300,001 to RMB1,000,000		4.6		5.8		6.6
RMB1,000,001 or more		5.8		8.5		11.0
Average number of products held		1.7		1.6		1.5

Many of our platform investors are qualified investors as defined by Chinese regulations. We offer a broad suite of product selections catering to the needs of qualified investors and are able to facilitate suitable products to them. See “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulations—Regulations Relating to Wealth Management Business”.

Although we primarily target the middle class and affluent, we also focus on growing the overall scale of our investor base. We believe that investors in the lower categories of average client assets have the potential to increase their client assets invested on our platform over time and generate greater value in the future.

We have attracted investors with diversified demographics, age and gender. Our platform investors have a variety of investment purposes, including preservation of wealth, stable growth and higher returns. The table below shows the top 10 provinces where our platform investors are located in by total client assets as of December 31, 2020.


	Total Client Assets		Active Investors		Average Client Assets per Active Investor
Province	(RMB billions)		(thousands)		(RMB)
Guangdong		56.6		1,783		31,744
Shanghai		42.8		680		62,941
Jiangsu		33.1		1,079		30,677
Beijing		32.8		820		40,000
Zhejiang		32.3		585		55,214
Shandong		23.2		1,184		19,595
Liaoning		21.3		609		34,975
Heilongjiang		14.8		503		29,423
Fujian		13.1		412		31,796
Hubei		12.9		648		19,907
Other		143.7		6,579		21,836

Total		426.6		14,882		28,663

Products and Product Partners

We facilitated the offering of 9,515 products on our platform as of December 31, 2020, including 2,943 asset management plans, 326 bank products, 5,197 mutual fund products, 193 private investment fund products and 691 trust products, among others.

Given the recent changes in regulatory landscape, we have experienced major shifts in our product mix since 2017. 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. We focus on proactively expanding our current product offerings. Client assets invested in our current products have grown from RMB182.5 billion as of December 31, 2018 to RMB243.6 billion as of December 31, 2019, and to RMB407.2 billion (US$62.4 billion) as of December 31, 2020. In line with the industry-wide shift from fixed-return products towards net asset value-based products, the percentage of client assets invested in net asset value-based products was 9.8%, 12.3% and 15.9% as of December 31, 2018, 2019 and 2020, respectively.

We have been able to help our platform investors navigate these major shifts while maintaining positive returns and staying loyal to our platform. We have generally been successful in retaining active investors from year to year. Our retention rate, which we define as the percentage of the active investors as of one year earlier who were still active investors at the end of that year, has shown steady improvement at 91.0% as of December 31, 2018, 93.3% as of December 31, 2019, and 96.8% as of December 31, 2020.

The table below shows the client assets for each product category as of the dates indicated. As we have discontinued our facilitation of legacy products, we have focused on retaining our platform investors by offering an increasing number and selection of additional investment products.


	As of December 31,
	2018				2019				2020
	(RMB billions)		(% of total)		(RMB billions)		(% of total)		(RMB billions)			(% of total)
Client Assets by Product Category
Asset management plans		85.2		23.1		94.2		27.2		95.3			22.3
Bank products		6.8		1.8		49.2		14.2		177.1	⁽¹⁾		41.5
Private investment funds		19.3		5.2		26.4		7.6		26.3			6.2
Mutual funds, excluding money market funds		16.9		4.6		22.6		6.5		30.3			7.1
Money market funds		38.9		10.5		18.1		5.2		22.8			5.3
Trust products		0.6		0.2		16.0		4.6		36.8			8.6
Others⁽²⁾		14.7		4.0		17.0		4.9		18.5			4.3

Total of Current Products		182.5		49.4		243.6		70.2		407.2			95.5
Legacy Products		186.9		50.6		103.3		29.8		19.4			4.5

Total of All Products		369.4		100.0		346.9		100.0		426.6			100.0

(1)	Bank products include online deposit products, Ping An Bank flagship store products within the Lufax App and wealth management products from subsidiaries of commercial banks.

(2)	Others includes stocks, insurance products and cash balance in accounts.

Our full-suite product offerings are supported by strong product sourcing capabilities. As of December 31, 2020, we have relationships with 436 third-party product providers, including 44 banks, 27 trust companies, 124 mutual fund companies, 105 private investment fund management companies, 102 asset management companies, and 34 others such as securities companies and insurance companies.

We require our investment product providers to maintain the requisite licenses to issue their products in compliance with relevant regulations to our platform investors.

Most of our current wealth management products generate fees in proportion to the client asset balance. For 2020, 38% of our wealth management transaction and service fees were collected from platform investors, and the other 62% were collected from asset providers. The annualized take rate for current wealth management products and services on our platform, which represents our total wealth management transaction and service fees for current products divided by our average current product client assets, was 26.4, 21.5 and 31.4 basis points in 2018, 2019, and 2020, respectively.

Asset Management Plans

Asset management plans include a variety of products issued by securities companies and pension insurance companies. As of December 31, 2020, we facilitated the offering of 2,943 asset management plan products from 102 suppliers. Total client assets held in asset management plan products were RMB85.2 billion, RMB94.2 billion and RMB95.3 billion (US$14.6 billion) as of December 31, 2018, 2019 and 2020, respectively. Asset management plans have minimum investment thresholds between RMB1,000 and RMB1,000,000.

Bank Products

Bank products grew rapidly in popularity on our platform between 2018 and 2020. Total client assets held in bank products were approximately RMB6.8 billion, RMB49.2 billion and RMB177.1 billion (US$27.1 billion) as of December 31, 2018, 2019 and 2020, respectively. In response to regulatory changes, we ceased to facilitate the bank deposit products provided by our bank partners in December 2020, but we continue to help our bank partners to distribute other bank wealth management products. As of December 31, 2020, we helped 44 banks to distribute 203 bank products.

Private Investment Funds

We facilitate the distribution of private investment fund products, including securities investment funds, private equity and venture capital funds and others. Securities investment funds are private funds and funds of funds that invest in public securities or in asset management plans that invest in such public securities. Private equity and venture capital fund products include private equity funds, venture capital funds and funds of funds that invest in equity securities acquired outside of public trading markets or asset management plans that invest in such equity securities. As of December 31, 2020, we facilitated the offering of 193 private investment fund products from 105 suppliers. Total client assets held in private investment fund products were RMB19.3 billion, RMB26.4 billion and RMB26.3 billion (US$4.0 billion) as of December 31, 2018, 2019 and 2020, respectively. The following table shows the breakdown of client assets in private investment funds by fund type as of the dates indicated.

As of December 31,

2018

2019

2020

(RMB billions)

(%)

(RMB billions)

(%)

(RMB billions)

(%)

Client Assets by Category

Securities investment

13.4

69.4

21.0

79.5

20.5

77.9

Private equity and venture capital

5.9

30.6

5.4

20.5

5.8

22.1

Total Private Investment Funds

19.3

100.0

26.4

100.0

26.3

100.0

Private investment funds are sold to qualified investors and have a minimum investment threshold of RMB1,000,000.

Mutual Funds

We facilitate the distribution of mutual fund products, including a variety of money market, hybrid, fixed income, equity and other funds that are publicly available to all investors. As of December 31, 2020, we facilitated the offering of 5,197 mutual fund products from 124 suppliers. Total client assets held in mutual fund products were RMB55.9 billion, RMB40.7 billion and RMB53.2 billion (US$8.1 billion) as of December 31, 2018, 2019 and 2020, respectively. As the following table shows, the distribution of client assets between different types of mutual funds became considerably more diverse in 2019 and 2020. The client assets of money market funds decreased from December 31, 2018 to December 31, 2020 as our platform investors diversified their assets into more sophisticated products offered on our platform.


	As of December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Client Assets by Mutual Fund Type
Money market funds		38.9		69.7		18.1		44.5		22.8		42.9
Hybrid funds		7.1		12.6		10.0		24.6		17.6		33.1
Fixed income funds		7.2		12.8		9.6		23.5		7.2		13.5
Equity funds		1.6		2.9		2.9		7.0		5.0		9.4
Other		1.1		1.9		0.1		0.4		0.4		0.8

Total Mutual Funds		55.9		100.0		40.7		100.0		53.2		100.0

The majority of client assets held in money market fund products are linked to automatic investments made by our integrated smart account using idle investor funds it holds. See “—Integrated Account”.

Trust Products

We help our trust company partners to distribute their products by providing information technology services. The duration of the trust plan may be six months, one year, two years, or longer. As of December 31, 2020, we helped 27 suppliers to distribute 691 trust products. The minimum ticket size is typically RMB1,000,000, though trusts with standard bond products may have a minimum ticket size as low as RMB300,000. Total client assets held in trusts were RMB0.6 billion, RMB16.0 billion and RMB36.8 billion (US$5.6 billion) as of December 31, 2018, 2019 and 2020, respectively.

Others

We also facilitate the distribution of a wide variety of other products, including stocks and insurance products. As of December 31, 2020, we facilitated the offering of 165 other products from 34 suppliers. The cash balance in accounts is also included here in the category of “others.” Total client assets held in other products were RMB14.7 billion, RMB17.0 billion and RMB18.5 billion (US$2.8 billion) as of December 31, 2018, 2019 and 2020, respectively. The following table shows the breakdown of client assets in other products by product type as of the dates indicated.


	As of December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Client Assets by Category
Stocks		3.6		24.5		5.2		30.7		7.4		40.0
Insurance products		2.6		17.6		3.2		19.0		4.7		25.4
Cash balance in accounts		8.5		57.9		8.5		50.3		6.3		34.1

Total Others		14.7		100.0		17.0		100.0		18.5		100.0

Legacy Products

We stopped facilitating the offer of B2C products in the second half of 2017 and peer-to-peer products in August 2019, primarily due to changes in strategy and regulatory requirements. For a further description of the changes in regulations, see “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulations—Regulations Relating to Online Lending Information Intermediary Services”. Since peer-to-peer products have a tenor of up to 36 months, the last of the legacy products will have run off of our platform by 2022.

As legacy products have matured or been redeemed, we have endeavored to retain the investors and shift the client assets to our current product categories by leveraging our diversified product offering, our matching capabilities and our personalized investment services. As of December 31, 2019, legacy products as a percentage of total client assets had fallen to 29.8%, and by December 31, 2020, they had fallen to 4.5%.

Platform Investor Acquisition

We acquire our platform investors through three channels: Ping An ecosystem, online direct marketing and member referral channel.

The following table shows total client assets by channel, excluding legacy products:


	As of December 31,
	2018				2019				2020
	(RMB billions)		(%)		(RMB billions)		(%)		(RMB billions)		(%)
Total Client Assets by Channel
Ping An ecosystem		77.4		43.5		102.4		43.2		186.5		49.4
Online direct marketing		69.4		39.0		90.8		38.3		134.7		35.7
Member referral		31.1		17.5		43.6		18.4		56.1		14.9

Total		177.8		100.0		236.9		100.0		377.3		100.0

Note: Excludes “others”.

The following table shows active investors by channel, excluding investors who only held legacy products:


	As of December 31,
	2018				2019				2020
	(millions)		(%)		(millions)		(%)		(millions)		(%)
Active Investors by Channel
Ping An ecosystem		3.2		28.8		4.3		34.9		4.6		31.3
Online direct marketing		3.6		32.7		3.8		30.9		5.4		36.7
Member referral		4.2		38.2		4.2		33.8		4.7		32.0

Total		11.0		100.0		12.3		100.0		14.7		100.0

Note: Excludes “others”.

The following table shows average client assets per active investor by channel, excluding legacy products and investors who only held legacy products:

As of December 31,

2018

2019

2020

(RMB)

Average Client Assets per Active Investor

Lufax Holding Ltd [LU] Filings
20-F	[2021-03-11]
F-1	[2020-10-07]