Our
Holding Company Structure and Contractual Arrangements with the Consolidated Variable Interest Entities
The
following diagram illustrates our corporate structure as of the date of this annual report, including our principal subsidiaries and
our principal consolidated variable interest entities and their principal subsidiaries.
Notes:
(1) Beijing Paipairongxin currently has four shareholders: Jun Zhang, our co-founder and director, Tiezheng Li, our co-founder, vice chairman and chief executive officer, Honghui Hu, our co-founder and director, and Shaofeng Gu, our co-founder, chairman and chief innovation officer, each holding 13.22%, 4.81%, 12.85%, and 69.12% of Beijing Paipairongxin’s equity interests, respectively.
(2) Shanghai Zihe currently has four shareholders: Jun Zhang, our co-founder and director, Tiezheng Li, our co-founder, vice chairman and chief executive officer, Honghui Hu, our co-founder and director, Shaofeng Gu, our co-founder, chairman and chief innovation officer, each holding 25% of Shanghai Zihe’s equity interests, respectively.
3
(3) Shanghai Ledao currently has two shareholders: Lizhong Chen, a family relative of Tiezheng Li, and Yejun Jiang, a family relative of Honghui Hu, each holding 50% of Shanghai Ledao’s equity interests, respectively.
(4) The remaining 20% equity interest is held by an unrelated third party.
(5) The remaining 51% equity interest is held by our company through an intermediate entity.
FinVolution
Group is not an operating company in China but a Cayman Islands holding company with no equity ownership in the consolidated variable
interest entities. Our operations in China are primarily through (i) our PRC subsidiaries, (ii) the consolidated variable interest entities
with which we have maintained contractual arrangements, and (iii) the subsidiaries of the consolidated variable interest entities. PRC
laws and regulations restrict and impose conditions on foreign investment in value-added telecommunications services business, such as
the internet content provision services and online data processing and transaction processing services. Accordingly, we operate these
businesses in China through the consolidated variable interest entities and their respective subsidiaries, and rely on contractual arrangements
among our PRC subsidiaries, the consolidated variable interest entities and their respective shareholders to direct the activities of
operation of the consolidated variable interest entities and their respective subsidiaries. This structure provides investors with exposure
to foreign investment in China-based companies where PRC laws and regulations prohibit or restrict direct foreign investment in operating
companies in certain sectors. Revenues contributed by the consolidated variable interest entities and their respective subsidiaries accounted
for 78.6%, 75.0% and 71.1% of our total revenues for 2023, 2024 and 2025, respectively. As used in this annual report, “we,”
“us,” “our company” and “our” refer to FinVolution Group, its subsidiaries, and, in the context of
describing our operations in China and consolidated financial information, the consolidated variable interest entities and their respective
subsidiaries in China, including but not limited to (i) Beijing Paipairongxin Investment Consulting Co., Ltd., or Beijing Paipairongxin,
which was established in June 2012; (ii) Shanghai PPDai Financial Information Service Co., Ltd., or Shanghai PPDai, a subsidiary of Beijing
Paipairongxin, which was established in January 2011 and operates our ppdai.com website and PPDai mobile application; (iii)
Hefei PPDai Information Technology Co., Ltd., a subsidiary of Shanghai PPDai and Beijing Paipairongxin, which was established in December
2016 and holds the value-added telecommunication business operation license for operation of call center services; (iv) Shanghai Erxu
Information Technology Co., Ltd., or Shanghai Erxu, a subsidiary of Shanghai Zihe, which was established in April 2018 and primarily
focuses on partnering with our other subsidiaries to introduce borrowers to institutional funding partners and match transactions; and
(v) Fujian Zhiyun Financing Guarantee Co. Ltd., or Fujian Zhiyun, a subsidiary of Shanghai PPDai, which was established in November 2019
and holds the Financing Guarantee License. The consolidated variable interest entities are PRC companies conducting operations in China,
and their financial results have been consolidated into our consolidated financial statements under U.S. GAAP for accounting purposes.
Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not and may never have direct
or indirect equity interest in the consolidated variable interest entities and their subsidiaries.
A
series of contractual agreements, including loan agreements, business operation agreement, power of attorney, equity pledge agreement,
exclusive technology consulting and service agreement and call option agreement, have been entered into by and among our subsidiaries,
the consolidated variable interest entities and their respective shareholders. Terms contained in each set of contractual arrangements
with the consolidated variable interest entities and their respective shareholders are substantially similar. The contractual arrangements
enable us to direct the activities of operation that most significantly impact the economic performance of the consolidated variable
interest entities and provide us with economic benefits of the consolidated variable interest entities and as such we are the primary
beneficiary of these companies, and we have consolidated the financial results of these companies in our consolidated financial statements.
For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements.”
However,
the contractual arrangements may not be as effective as equity ownership in providing us with control over the consolidated variable
interest entities and we may incur substantial costs to enforce the terms of the arrangements. In addition, these agreements have not
been tested in China courts. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We
rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations,
and such contractual arrangements may not be as effective as equity ownership in providing operational control” and “—The
shareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and
adversely affect our business and financial condition.”
4
There
are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and
rules regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with the
consolidated variable interest entities and their shareholders. It is uncertain whether any new PRC laws or regulations relating to
consolidated variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the
consolidated variable interest entities is 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, the PRC regulatory authorities would have broad discretion to take
action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Our Corporate Structure—If the PRC government deems that the contractual arrangements regarding the consolidated variable
interest entities do not comply with PRC regulatory restrictions on foreign investment in 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.”
Our
corporate structure is subject to risks associated with our contractual arrangements with the consolidated variable interest entities.
If the PRC government deems that our contractual arrangements with the consolidated variable interest entities do not comply with PRC
regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations
change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests
in those operations. Our holding company, our PRC subsidiaries, the consolidated variable interest entities and their respective subsidiaries,
and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability
of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial
performance of the consolidated variable interest entities and our company as a whole. The PRC regulatory authorities could disallow
the contractual arrangements structure, which would likely result in a material change in our operations and cause the value of our securities
to significantly decline or become worthless. For a detailed description of the risks associated with our corporate structure, please
refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We
face various legal and operational risks and uncertainties related to doing business in China. The majority of our business operations
are in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory
approvals on offshore offerings and oversight on cybersecurity and data privacy, which may impact our ability to conduct certain businesses,
accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change
in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to
investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks related
to doing business in China, please refer to risks disclosed under “Item 3.D. Key Information—Risk Factors—Risks Related
to Doing Business in China.”
PRC
government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas
by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to
offer securities to investors. Implementation of industry-wide regulations, including data security related regulations, in this nature
may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation
could result in a material adverse change in our operations and the value of our ADSs.”
Risks
and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly
evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more
details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us” and “—We
may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business
and results of operations.”
5
The
Holding Foreign Companies Accountable Act
Pursuant
to the Holding Foreign Companies Accountable Act, or the HFCA Act, if the SEC determines that we have filed audit reports issued by a
registered public accounting firm that has not been subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit
our shares or the ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate
completely registered public accounting firms headquartered in mainland China and Hong Kong, including our auditor.
In
May 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCA Act following the filing of our annual report
on Form 20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB issued a report that vacated its December 16,
2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate
completely registered public accounting firms. As of the date of this annual report, the PCAOB has not issued any new determination that
it is unable to inspect or investigate completely registered public accounting firms headquartered in any jurisdiction. For this reason,
we do not expect to be identified as a Commission-Identified Issuer under the HFCA Act after we file this annual report on Form 20-F.
Each
year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other
jurisdictions. If PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms
in mainland China and Hong Kong and we continue to use an accounting firm headquartered in one of these jurisdictions to issue an audit
report on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing
of the annual report on Form 20-F for the relevant fiscal year. There can be no assurance that we would not be identified as a Commission-Identified
Issuer for any future fiscal year, and if we were so identified for two consecutive years, we would become subject to the prohibition
on trading under the HFCA Act. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The
PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and
the inability of the PCAOB to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections”
and “—Our ADSs may be prohibited from trading in the United States under the HFCA Act in the future if the PCAOB is unable
to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may
materially and adversely affect the value of your investment.”
Permissions
Required from the PRC Authorities for Our Operations
Our
operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries and the consolidated
variable interest entities and their respective subsidiaries have obtained the requisite licenses and permits from the PRC government
authorities that are material for the business operations of our holding company and the consolidated variable interest entities in China,
except that Shanghai PPDai has not obtained the requisite value-added telecommunication business operation license. Due to the lack of
regulatory authorities’ final interpretation of the applicable laws, there still exists uncertainties on which category of value-added
telecommunication business operation license that may be applicable to Shanghai PPDai as the operator of our ppdai.com website
and PPDai mobile application, and therefore Shanghai PPDai has not obtained any value-added telecommunication business operation
license. We cannot rule out the possibility that Shanghai PPDai may be deemed by certain regulatory authorities as operating our ppdai.com
website and PPDai mobile application without an appropriate value-added telecommunication business operation license, and we may
be subject to regulatory penalties, including, but not limited to, rectification orders and warnings, fines, confiscation of illegal
gains, and suspension or termination of operating of our website and mobile application.
In
addition, given the rapid evolving of the online consumer finance industry and the uncertainties of interpretation and implementation
of applicable laws and regulations and the enforcement practice by government authorities, we may be required to obtain additional licenses,
permits, filings or approvals for the functions and services of our platforms in the future. For example, when facilitating the connection
of borrowers to our institutional funding partners to match transactions, Shanghai Erxu, in partnership with our other subsidiaries,
also provides borrower information and preliminary credit assessment services for the referred borrowers. If regulatory authorities categorize
these services as credit reference business or information provision activities, we may be requested to obtain a license for individual
credit reference business and comply with other requirements. If we cannot obtain the regulatory requisite license in a timely manner
and comply with other requirements, we may be deemed as violating the laws and regulations relating to credit reference services and
subject to regulatory penalties, including cessation of business operations, confiscation of illegal gains, fines from RMB50,000 to RMB500,000,
and even criminal liability. If we, our subsidiaries, the consolidated variable interest entities or their subsidiaries do not receive
or maintain any necessary permissions or approvals from PRC authorities to operate business or offer securities, or if we are required
to obtain additional permissions or approvals in the future due to changes of laws, regulations or interpretations, we cannot assure
you that we will be able to obtain the necessary permissions or approvals in a timely manner, or at all. Any such circumstance could
subject us to penalties, including fines, injunctions, suspension of business and revocation of required licenses, significantly limit
or completely hinder our ability to continue to offer securities to investors, and cause the value of such securities to significantly
decline or become worthless. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Business—The laws and regulations governing online consumer finance industry in China are developing and evolving and subject
to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local
regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.”
6
As
advised by Hui Ye Law Firm, our PRC counsel, in connection with our historical initial public offering of securities to foreign investors,
under current PRC laws, regulations and regulatory rules, as of the date of this annual report, we, our PRC subsidiaries and the consolidated
variable interest entities, (i) are not required to obtain permissions from the China Securities Regulatory Commission, or the CSRC,
(ii) are not required to go through cybersecurity review by the Cyberspace Administration of China, and (iii) have not received or were
denied such requisite permissions by any PRC authority. However, if the PRC governmental authorities determine that our business may
affect national security, they may initiate cybersecurity review against us. For more detailed information, see “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Business—Any failure to comply with existing or future laws and regulations related to
data protection, data security, cybersecurity or personal information protection could lead to liabilities, administrative penalties
or other regulatory actions, which could negatively affect our operating results and business.”
The
PRC government has promulgated certain regulations and rules to exert more oversight and control over offerings that are conducted overseas
or foreign investment in China-based issuers. On February 17, 2023, the CSRC published the Trial Administrative Measures on the Overseas
Issuance and Listing of Securities by Domestic Companies and five supporting guidelines, which are collectively known as the CSRC Filing
Measures, effective on March 31, 2023. Pursuant to the CSRC Filing Measures, domestic companies in the PRC that directly or indirectly
offer or list their securities in an overseas market are required to file with the CSRC. In addition, an overseas listed company must
also submit the filing with respect to its follow-on offerings, issuance of convertible corporate bonds and exchangeable bonds, and other
equivalent offering activities, within a specific time frame requested under the CSRC Filing Measures. Therefore, we will be required
to file with the CSRC for our overseas offering of equity and equity linked securities in the future within the applicable scope of the
CSRC Filing Measures. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to
Doing Business in China—The approval of and filing with the CSRC or other PRC government authorities may be required in connection
with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such
approval or complete such filing.”
Enforceability
of Civil Liabilities
We
are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company,
such as:
● political and economic stability;
● an effective judicial system;
● a favorable tax system;
● the absence of exchange control or currency restrictions; and
● the availability of professional and support services.
7
However,
certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to:
● the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and
● with respect to Cayman Islands companies, plaintiffs may face special obstacles, including but not limited to those relating to jurisdiction and standing, in attempting to assert derivative claims in state or federal courts of the United States.
Our
memorandum and articles of association does not contain provisions requiring that disputes, including those arising under the securities
laws of the United States, between us and our officers, directors and shareholders, be arbitrated.
The
majority of our operations are conducted in China, and a significant portion of our assets are located in China. A majority of our directors
and executive officers are nationals or residents of jurisdictions other than the United States and a significant portion of their assets
are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United
States upon these individuals, or 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 securities laws of the United States or any state in the United States.
Maples
and Calder (Hong Kong) LLP, our legal counsel as to Cayman Islands law, and Hui Ye Law Firm, our legal counsel as to PRC law, have advised
us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:
● recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
● entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
We
have been advised by our Cayman Islands legal counsel, Maples and Calder (Hong Kong) LLP, that the courts of the Cayman Islands are unlikely
(i) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the
securities laws of the United States or any State; and (ii) in original actions brought in the Cayman Islands, to impose liabilities
against us predicated upon the civil liability provisions of the securities laws of the United States or any State, so far as the liabilities
imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands
of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a
foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court
imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met.
For such a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum,
and may not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable
on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the
public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman
Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
Hui
Ye Law Firm has further advised us that 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 based
either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China
does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal
recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC 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 law 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 or the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders
may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have
jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case,
and there must be a concrete claim, a factual basis and a cause for the suit. However, it would be difficult for foreign shareholders
to establish sufficient nexus to the PRC by virtue only of holding our ADSs or ordinary shares.
8
Cash
and Asset Flows Through Our Organization
FinVolution
Group is a holding company with no operations of its own. Our operations in China are primarily through our subsidiaries and the consolidated
variable interest entities and their respective subsidiaries in China. As a result, although other means are available for us to obtain
financing at the holding company level, FinVolution Group’s ability to continue paying dividends to the shareholders and investors
of the ADSs and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and service fees paid by the
consolidated variable interest entities in China. If any of our PRC subsidiaries or the consolidated variable interest entities incurs
debt on its own behalf in the future, the instruments governing such debt may restrict our PRC subsidiaries’ ability to pay dividends
to FinVolution Group or the consolidated variable interest entities’ ability to pay service fees. In addition, our PRC subsidiaries
are permitted to pay dividends to FinVolution Group only out of their retained earnings, if any, as determined in accordance with PRC
accounting standards and regulations. Further, our PRC subsidiaries and the consolidated variable interest entities are required to make
appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable
as cash dividends except in the event of a solvent liquidation of the companies. For more details, see “Item 5. Operating and Financial
Review and Prospects—Liquidity and Capital Resources—Holding Company Structure.”
Under
PRC laws and regulations, our PRC subsidiaries and the consolidated variable interest entities are subject to certain restrictions with
respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned
enterprise out of China is also subject to examination by the banks designated by the State Administration of Foreign Exchange, or SAFE.
The amounts restricted include the paid-up capital and the statutory reserve funds of our PRC subsidiaries and the net assets of the
consolidated variable interest entities in which we have no legal ownership, totaling RMB7.9 billion, RMB8.6 billion and RMB9.3 billion
(US$1.3 billion) as of December 31, 2023, 2024 and 2025, respectively. Furthermore, cash transfers from our PRC subsidiaries and the
consolidated variable interest entities to entities outside of China are subject to PRC government controls on currency conversion. To
the extent cash in our business is in the PRC or a PRC entity, such cash may not be available to fund operations or for other use outside
of the PRC due to restrictions and limitations imposed by the governmental authorities on the ability of us, our subsidiaries, or the
consolidated variable interest entities to transfer cash outside of the PRC. Shortages in the availability of foreign currency may temporarily
delay the ability of our PRC subsidiaries and the consolidated variable interest entities to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. In view of the foregoing, to
the extent cash in our business is held in China or by a PRC entity, such cash may not be available to fund operations or for other use
outside of the PRC. For risks relating to the fund flows of our operations in China, see “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—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” and “—Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the price of our ADSs.”
For
the years ended December 31, 2023, 2024 and 2025, no dividends or distributions were made to FinVolution Group, the parent company, by
our subsidiaries.
Under
PRC law, FinVolution Group may provide funding to our PRC subsidiaries only through capital contributions or loans, and to our PRC consolidated
variable interest entities only through loans, subject to satisfaction of applicable government registration and approval requirements.
As
of December 31, 2025, FinVolution Group, the parent company, had made cumulative capital contribution of RMB1,291.4 million (US$184.7
million) to our PRC subsidiaries through intermediate holding companies.
9
The
consolidated variable interest entities may transfer cash to the corresponding PRC subsidiaries by paying service fees according to the
restated exclusive technology consulting and service agreement or the exclusive technology consulting and service framework agreements,
as applicable. Pursuant to these agreements between each of the consolidated variable interest entities and its corresponding PRC subsidiary,
each of the consolidated variable interest entities agrees to pay the corresponding PRC subsidiary for technology consulting and service
at an amount as determined on a case-by-case basis based on the content of technology consulting and service, level of difficulty and
complexity, time spend by the corresponding PRC subsidiary and its employees, the commercial value of the technology consulting and service
to be provided by the corresponding PRC subsidiary, and the revenue the consolidated variable interest entity generates due to the technology
consulting and service provided by the corresponding PRC subsidiary. For the years ended December 31, 2023, 2024 and 2025, the service
fees paid by the consolidated variable interest entities to the PRC subsidiaries through technical development service arrangements and
technical support service arrangements were RMB2,132.2 million, RMB829.0 million and RMB3,335.1 million (US$476.9 million), respectively.
If there is any amount payable to corresponding PRC subsidiaries under the contractual arrangements, the consolidated variable interest
entities will settle the amount accordingly.
The
following is a summary of cash transfers that have occurred between our subsidiaries and the consolidated variable interest entities:
For the Year Ended December 31,
2023 2024 2025
(RMB in thousands)
Cash paid by the consolidated variable interest entities to our subsidiaries under service agreements(1) (2,132,263 ) (828,977 ) (3,335,129 )
Cash received by the consolidated variable interest entities from our subsidiaries under service agreements(2) 555,623 599,941 438,607
Capital contribution by the consolidated variable interest entities to our subsidiaries for intra-group investing(3) — — —
Cash flow of loans provided by the consolidated variable interest entities to our subsidiaries, net of repayment received, for intra-group investing(4) (285,665 ) 12,273 641,833
Cash flow of loans received by the consolidated variable interest entities from our subsidiaries, net of repayment made, for intra-group financing(5) (310,500 ) (78,696 ) 1,757,933
Notes:
(1) Represents the “cash used in operating activities under service agreements for group companies” line item of the consolidated variable interest entities and their subsidiaries under the condensed consolidating schedule of cash flow data, which represents the cash paid by the consolidated variable interest entities for intercompany services, including technical development services and technical support services.
(2) Represents the “cash provided by operating activities under service agreements for group companies” line item of the consolidated variable interest entities and their subsidiaries under the condensed consolidating schedule of cash flow data, which represents the cash received by the consolidated variable interest entities for intercompany services, including technical development services and technical support services.
(3) Represents the “capital contribution to group companies” line item of the consolidated variable interest entities and their subsidiaries under the condensed consolidating schedule of cash flow data, which represents the capital contribution by the consolidated variable interest entities to group companies.
(4) Represents the “net cash (used in) provided by intra-group investing activities” line item of the consolidated variable interest entities and their subsidiaries under the condensed consolidating schedule of cash flow data, which represents cash paid as loans by the consolidated variable interest entities to group companies, net of repayments received.
(5) Represents the “net cash (used in) provided by intra-group financing activities” line item of the consolidated variable interest entities and their subsidiaries under the condensed consolidating schedule of cash flow data, which represents cash received as loans by the consolidated variable interest entities from group companies, net of repayments made.
For
the years ended December 31, 2023, 2024 and 2025, except as disclosed above, no transfers of other assets, dividends or distributions
were made between the holding company, our subsidiaries, and consolidated variable interest entities.
Our
board of directors declared dividends in every March from 2019 to 2026. In addition, in March 2025, our board of directors approved a
revised annual cash dividend policy, under which we will declare and distribute a recurring cash dividend of between 20% and 30% of the
Company’s net income after tax from the previous fiscal year going forward. See “Item 8. Financial Information—A. Consolidated
Statements and Other Financial Information—Dividend Policy.” For PRC and U.S. federal income tax considerations of an investment
in our ADSs, see “Item 10. Additional Information—E. Taxation.” For the years ended December 31, 2023, 2024 and 2025,
dividends made to U.S. investors were RMB416.5 million, RMB441.3 million and RMB510.2 million (US$73.0 million).
10
For
purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China, assuming
that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future according to our dividend policy:
Taxation Scenario(i)
Statutory Tax and Standard Rates
Hypothetical pre-tax earnings(ii) 100 %
Tax on earnings at statutory rate of 25%(iii) (25 )%
Net earnings available for distribution 75 %
Withholding tax at standard rate of 10%(iv) (7.5 )%
Net distribution to parent/shareholders 67.5 %
Notes:
(i) For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering timing differences, is assumed to equal taxable income in China.
(ii) Under the terms of contractual arrangements, our PRC subsidiaries may charge the consolidated variable interest entities for services provided to the consolidated variable interest entities. These fees shall be recognized as expenses of the consolidated variable interest entities, with a corresponding amount as service income by our PRC subsidiaries and eliminate in consolidation. For income tax purposes, our PRC subsidiaries and the consolidated variable interest entities file income tax returns on a separate company basis. The fees paid are recognized as a tax deduction by the consolidated variable interest entities and as income by our PRC subsidiaries and are tax neutral.
(iii) Certain of our PRC subsidiaries and the consolidated variable interest entities qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective.
(iv) The Enterprise Income Tax Law of the PRC imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the foreign invested enterprise’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied.
The
table above has been prepared under the assumption that all profits of the consolidated variable interest entities will be distributed
as fees to our PRC subsidiaries under tax neutral contractual arrangements. If, in the future, the accumulated earnings of the consolidated
variable interest entities exceed the fees paid to our PRC subsidiaries (or if the current and contemplated fee structure between the
intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), the consolidated variable interest
entities could, as a matter of last resort, make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash
in the consolidated variable interest entities. This would result in such transfer being non-deductible expenses for the consolidated
variable interest entities but still taxable income for the PRC subsidiaries. Such a transfer and the related tax burdens would reduce
our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that
this scenario would happen.
Financial
Information Related to the Consolidated Variable Interest Entities
The
following table presents the condensed consolidating schedule of financial position for the consolidated variable interest entities and
other entities as of the dates presented.
11
Condensed
Consolidating Statements of Income Information
For the Year Ended December 31, 2025
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Third-party revenues — 3,919,868 2,734 9,646,881 — 13,569,483
Group company revenues(1) — 3,010,303 8,251 584,994 (3,603,548 ) —
Net revenues — 6,930,171 10,985 10,231,875 (3,603,548 ) 13,569,483
Third-party expenses (12,708 ) (1,683,697 ) (11,688 ) (4,341,436 ) — (6,049,529 )
Group company expenses(1) — (592,371 ) (112 ) (3,011,047 ) 3,603,530 —
Related party expenses — — — (29,928 ) — (29,928 )
Provision for accounts receivable and contract assets — (278,434 ) — (147,532 ) — (425,966 )
Provision for loans receivable — (392,491 ) 794 (246,003 ) — (637,700 )
Credit losses for quality assurance commitment — (1,480,516 ) — (1,981,868 ) — (3,462,384 )
Impairment of goodwill, and intangible assets — (50,411 ) — (265 ) — (50,676 )
Total operating expenses (12,708 ) (4,477,920 ) (11,006 ) (9,758,079 ) 3,603,530 (10,656,183 )
Income (loss) from subsidiaries(2) 2,553,551 392,170 3,530,761 24 (6,476,506 ) —
Loss of the consolidated variable interest entities — — 388,405 - (388,405 ) —
Income from operations 2,540,843 2,844,421 3,919,145 473,820 (6,864,929 ) 2,913,300
Net interest expense and other income 1,562 84,753 5,393 96,419 18 188,145
Profit before income tax expenses 2,542,405 2,929,174 3,924,538 570,239 (6,864,911 ) 3,101,445
Income tax expenses — (392,748 ) (1,607 ) (161,888 ) — (556,243 )
Net profit 2,542,405 2,536,426 3,922,931 408,351 (6,864,911 ) 2,545,202
Net profit attributable to non-controlling interest shareholders — 17,125 — (19,946 ) 24 (2,797 )
Net profit attributable to FinVolution Group’s ordinary shareholders 2,542,405 2,553,551 3,922,931 388,405 (6,864,887 ) 2,542,405
Condensed
Consolidating Statements of Income Information
For the Year Ended December 31, 2024
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Third-party revenues — 3,265,730 4,062 9,796,032 — 13,065,824
Group company revenues(1) — 2,413,822 14,071 391,348 (2,819,241 ) —
Net revenues — 5,679,552 18,133 10,187,380 (2,819,241 ) 13,065,824
Third-party expenses (11,636 ) (1,503,781 ) (13,343 ) (3,777,621 ) — (5,306,381 )
Group company expenses(1) — (405,533 ) (112 ) (2,414,323 ) 2,819,968 —
Related party expenses — — — — — —
Provision for accounts receivable and contract assets — (179,728 ) — (137,321 ) — (317,049 )
Provision for loans receivable — (282,357 ) 1,167 (38,823 ) — (320,013 )
Credit losses for quality assurance commitment — (1,002,300 ) — (3,584,954 ) — (4,587,254 )
Total operating expenses (11,636 ) (3,373,699 ) (12,288 ) (9,953,042 ) 2,819,968 (10,530,697 )
Income (loss) from subsidiaries(2) 2,382,621 351,993 1,784,730 6,099 (4,525,443 ) —
Loss of the consolidated variable interest entities — — 348,886 — (348,886 ) —
Income from operations 2,370,985 2,657,846 2,139,461 240,437 (4,873,602 ) 2,535,127
Other income, net 12,161 87,751 1,624 197,116 11,471 310,123
Profit before income tax expenses 2,383,146 2,745,597 2,141,085 437,553 (4,862,131 ) 2,845,250
Income tax expenses — (364,376 ) (4,362 ) (88,667 ) — (457,405 )
Net profit 2,383,146 2,381,221 2,136,723 348,886 (4,862,131 ) 2,387,845
Net profit attributable to non-controlling interest shareholders — 1,400 — — (6,099 ) (4,699 )
Net profit attributable to FinVolution Group’s ordinary shareholders 2,383,146 2,382,621 2,136,723 348,886 (4,868,230 ) 2,383,146
12
Condensed
Consolidating Statements of Income Information
For the Year Ended December 31, 2023
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Third-party revenues — 2,685,155 2,751 9,859,539 — 12,547,445
Group company revenues(1) — 3,542,003 16,158 498,189 (4,056,350 ) —
Net revenues — 6,227,158 18,909 10,357,728 (4,056,350 ) 12,547,445
Third-party expenses (19,446 ) (1,226,081 ) (21,154 ) (3,633,284 ) — (4,899,965 )
Group company expenses(1) — (516,395 ) (2,927 ) (3,542,004 ) 4,061,326 —
Related party expenses — — — — — —
Provision for accounts receivable and contract assets — (175,800 ) — (78,148 ) — (253,948 )
Provision for loans receivable — (557,338 ) 889 (30,394 ) — (586,843 )
Credit losses for quality assurance commitment — (865,628 ) — (3,557,174 ) — (4,422,802 )
Total operating expenses (19,446 ) (3,341,242 ) (23,192 ) (10,841,004 ) 4,061,326 (10,163,558 )
Income (loss) from subsidiaries(2) 2,325,611 (286,503 ) 2,858,976 3,719 (4,901,803 ) —
Loss of the consolidated variable interest entities — — (282,595 ) — 282,595 —
Income from operations 2,306,165 2,599,413 2,572,098 (479,557 ) (4,614,232 ) 2,383,887
Other income, net 34,670 125,117 375 232,074 2,462 394,698
Profit before income tax expenses 2,340,835 2,724,530 2,572,473 (247,483 ) (4,611,770 ) 2,778,585
Income tax expenses — (359,988 ) — (35,112 ) — (395,100 )
Net profit 2,340,835 2,364,542 2,572,473 (282,595 ) (4,611,770 ) 2,383,485
Net profit attributable to non-controlling interest shareholders — (38,931 ) — — (3,719 ) (42,650 )
Net profit attributable to FinVolution Group’s ordinary shareholders 2,340,835 2,325,611 2,572,473 (282,595 ) (4,615,489 ) 2,340,835
13
Condensed
Consolidating Balance Sheets Information
As of December 31, 2025
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Cash and cash equivalents 97,932 2,358,477 136,480 1,692,232 — 4,285,121
Restricted cash — 315,641 — 1,597,209 — 1,912,850
Short-term investments 14,810 1,011,369 70,588 1,918,459 — 3,015,226
Accounts receivable and contract assets — 402,812 — 1,625,773 — 2,028,585
Quality assurance receivable — 868,809 — 446,375 — 1,315,184
Property, equipment and software, net — 160,632 — 480,684 — 641,316
Intangible assets — 210,979 — 59,267 — 270,246
Loans and receivables, net of credit loss allowance for loans receivables — 873,862 — 5,597,757 — 6,471,619
Investments — 217,754 — 924,062 — 1,141,816
Investment in subsidiaries(3) 20,458,617 8,168,589 12,628,774 103,510 (41,359,490 ) —
Net assets of the consolidated variable interest entities — — 6,033,707 — (6,033,707 ) —
Deferred tax assets — 451,674 346 2,540,051 — 2,992,071
Prepaid expenses and other assets 7,267 317,978 146,619 699,202 — 1,171,066
Amounts due from Group companies(4) 950,887 11,820,249 2,080,215 2,380,916 (17,232,267 ) —
Amounts due from related party 16,355 27 — 20,343 — 36,725
Right of use assets — 24,252 — 27,768 — 52,020
Goodwill(9) — 79,759 — — — 79,759
Total assets 21,545,868 27,282,863 21,096,729 20,113,608 (64,625,464 ) 25,413,604
Deferred guarantee income — 225,402 — 893,602 — 1,119,004
Liability from quality assurance commitment — 777,986 — 1,796,856 — 2,574,842
Payroll and welfare payable — 178,568 2,737 179,883 — 361,188
Taxes payable — 74,825 58,582 43,657 — 177,064
Short-term borrowings — 170,408 — — — 170,408
Funds payable to investors of consolidated trusts — — — 778,531 — 778,531
Contract liability — — — 226 — 226
Amounts due to Group companies(4) 3,970,668 4,239,739 58,026 8,963,834 (17,232,267 ) —
Amounts due to related party — 12,891 — 5,809 — 18,700
Deferred tax liabilities — 547,906 — 238,650 — 786,556
Accrued expenses and other liabilities 5,833 456,420 21 967,257 — 1,429,531
Leasing liabilities — 18,291 — 26,420 — 44,711
Convertible senior notes 1,019,266 — — — — 1,019,266
Long-term borrowings — 89,590 — — — 89,590
Total liabilities 4,995,767 6,792,026 119,366 13,894,725 (17,232,267 ) 8,569,617
Total FinVolution Group shareholders’ equity(3) 16,550,101 20,278,614 20,977,363 6,033,710 (47,289,687 ) 16,550,101
Non-controlling interest — 212,223 — 185,173 (103,510 ) 293,886
Total shareholders’ equity 16,550,101 20,490,837 20,977,363 6,218,883 (47,393,197 ) 16,843,987
Total liabilities and shareholders’ equity 21,545,868 27,282,863 21,096,729 20,113,608 (64,625,464 ) 25,413,604
14
Condensed
Consolidating Balance Sheets Information
As of December 31, 2024
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Cash and cash equivalents 76,052 2,252,528 972 2,343,220 — 4,672,772
Restricted cash — 184,635 — 1,889,665 — 2,074,300
Short-term investments 14,566 1,163,969 — 1,653,847 — 2,832,382
Accounts receivable and contract assets — 298,839 — 2,106,533 — 2,405,372
Quality assurance receivable — 538,631 — 1,100,960 — 1,639,591
Property, equipment and software, net — 133,861 — 489,931 — 623,792
Intangible assets — 88,366 — 48,932 — 137,298
Loans and receivables, net of credit loss allowance for loans receivables — 657,954 — 3,499,667 — 4,157,621
Investments — 200,051 — 972,952 — 1,173,003
Investment in subsidiaries(3) 17,900,257 6,018,215 11,796,014 113,571 (35,828,057 ) —
Net assets of the consolidated variable interest entities — — 5,412,470 — (5,412,470 ) —
Deferred tax assets — 470,853 544 2,042,468 — 2,513,865
Prepaid expenses and other assets 34,812 271,715 149,085 816,569 — 1,272,181
Amounts due from Group companies(4) 870,209 10,500,894 701,475 2,457,600 (14,530,178 ) —
Amounts due from related party 16,726 29 — 952 — 17,707
Right of use assets — 12,831 — 23,995 — 36,826
Goodwill(9) — 50,411 — — — 50,411
Total assets 18,912,622 22,843,782 18,060,560 19,560,862 (55,770,705 ) 23,607,121
Deferred guarantee income — 232,950 — 1,283,000 — 1,515,950
Liability from quality assurance commitment — 372,348 — 2,591,768 — 2,964,116
Payroll and welfare payable — 134,415 2,288 153,686 — 290,389
Taxes payable — 84,399 60,054 561,475 — 705,928
Short-term borrowings — 5,594 — — — 5,594
Funds payable to investors of consolidated trusts — 2,402 — 793,720 — 796,122
Contract liability — — — 10,185 — 10,185
Amounts due to Group companies(4) 3,707,065 3,105,832 183,946 7,533,335 (14,530,178 ) —
Amounts due to related party — 13,184 — 130 — 13,314
Deferred tax liabilities — 378,609 — 112,604 — 491,213
Accrued expenses and other liabilities 1,493 351,453 43 878,881 — 1,231,870
Leasing liabilities — 6,092 — 22,673 — 28,765
Total liabilities 3,708,558 4,687,278 246,331 13,941,457 (14,530,178 ) 8,053,446
Total FinVolution Group shareholders’ equity(3) 15,204,064 17,900,257 17,814,229 5,412,470 (41,126,956 ) 15,204,064
Non-controlling interest — 256,247 — 206,935 (113,571 ) 349,611
Total shareholders’ equity 15,204,064 18,156,504 17,814,229 5,619,405 (41,240,527 ) 15,553,675
Total liabilities and shareholders’ equity 18,912,622 22,843,782 18,060,560 19,560,862 (55,770,705 ) 23,607,121
15
Condensed
Consolidating Cash Flows Information
For the Year Ended December 31, 2025
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Cash used in operating activities under service agreements for Group companies(5) — (2,100,890 ) (122 ) (3,335,129 ) 5,436,141 —
Cash provided by operating activities under service agreements for Group companies(5) — 3,335,129 1,662,405 438,607 (5,436,141 ) —
Net cash provided by (used in) operating activities for Third-parties 17,407 137,679 (2,551 ) 1,715,065 — 1,867,600
Net cash provided by (used in) operating activities 17,407 1,371,918 1,659,732 (1,181,457 ) — 1,867,600
Net cash (used in) provided by intra-group investing activities(6) (80,679 ) (1,644,182 ) (1,327,726 ) 641,833 2,410,754 —
Other investing activities 333 (56,646 ) (70,588 ) (2,056,796 ) — (2,183,697 )
Net cash provided by (used in) investing activities (80,346 ) (1,700,828 ) (1,398,314 ) (1,414,963 ) 2,410,754 (2,183,697 )
Net cash provided by (used in) intra-group financing activities(7) 263,602 515,129 (125,910 ) 1,757,933 (2,410,754 ) —
Other financing activities (222,404 ) 132,665 — (104,957 ) — (194,696 )
Net cash provided by (used in) financing activities 41,198 647,794 (125,910 ) 1,652,976 (2,410,754 ) (194,696 )
Condensed
Consolidating Cash Flows Information
For the Year Ended December 31, 2024
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Cash used in operating activities under service agreements for Group companies(5) — (1,860,495 ) (30,653 ) (828,977 ) 2,720,125 —
Cash provided by operating activities under service agreements for Group companies(5) — 2,263,688 (143,504 ) 599,941 (2,720,125 ) —
Net cash provided by (used in) operating activities for Third-parties (14,877 ) (321,544 ) 83,487 3,146,094 — 2,893,160
Net cash provided by (used in) operating activities (14,877 ) 81,649 (90,670 ) 2,917,058 — 2,893,160
Net cash provided by (used in) intra-group investing activities(6) 237,989 (2,009,711 ) 10,029 12,273 1,749,420 —
Other investing activities (14,379 ) 285,026 — (2,566,463 ) — (2,295,816 )
Net cash provided by (used in) investing activities 223,610 (1,724,685 ) 10,029 (2,554,190 ) 1,749,420 (2,295,816 )
Net cash provided by (used in) intra-group financing activities(7) 889,743 860,354 78,019 (78,696 ) (1,749,420 ) —
Other financing activities (1,084,539 ) 121,423 — 340,401 — (622,715 )
Net cash provided by (used in) financing activities (194,796 ) 981,777 78,019 261,705 (1,749,420 ) (622,715 )
16
Condensed
Consolidating Cash Flows Information
For the Year Ended December 31, 2023
FinVolution Group Company Subsidiaries Primary Beneficiary of Consolidated Variable Interest Entities Consolidated Variable Interest Entities and Their Subsidiaries Eliminations Consolidated Total
(RMB in thousands)
Cash used in operating activities under service agreements for Group companies(5) — (1,987,993 ) (59,897 ) (2,132,263 ) 4,180,153 —
Cash provided by operating activities under service agreements for Group companies(5) — 4,111,165 (486,635 ) 555,623 (4,180,153 ) —
Net cash provided by (used in) operating activities for Third-parties 9,545 824,292 (458,067 ) 985,102 — 1,360,872
Net cash provided by (used in) operating activities 9,545 2,947,464 (1,004,599 ) (591,538 ) — 1,360,872
Net cash (used in) provided by intra-group investing activities(6) (466,649 ) (1,992,951 ) 461,054 (285,665 ) 2,284,211 —
Other investing activities — (167,046 ) — 1,579,038 — 1,411,992
Net cash provided by (used in) investing activities (466,649 ) (2,159,997 ) 461,054 1,293,373 2,284,211 1,411,992
Net cash provided by (used in) intra-group financing activities(7) 1,417,139 1,287,903 (110,331 ) (310,500 ) (2,284,211 ) —
Other financing activities (1,110,984 ) 68,761 — (1,462,779 ) — (2,505,002 )
Net cash provided by (used in) financing activities 306,155 1,356,664 (110,331 ) (1,773,279 ) (2,284,211 ) (2,505,002 )
Notes:
(1) Represents the intercompany services eliminated at the consolidation level, including technical development services and technical support services.
17
(2) Represents the elimination of the income from investment among FinVolution Group, equity subsidiaries, and primary beneficiary of consolidated variable interest entities.
(3) Represents the elimination of the investment among FinVolution Group, equity subsidiaries, and primary beneficiary of consolidated variable interest entities.
(4) Represents the elimination of intercompany balances among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries.
(5) Represents the cash received and cash paid for intercompany services, including technical development services and technical support services.
(6) Represents the cash paid as loans to group companies, net of repayments received.
(7) Represents the cash received as loans from group companies, net of repayments made.
(8) In October 2017, one equity subsidiary and one consolidated variable interest entity subsidiary of FinVolution Group entered into a series of share purchase agreements with shareholders of HB micro lending company. After the transactions, FinVolution Group gained control of HB micro lending company. Goodwill and non-controlling interest were recognized in accordance with Accounting Standards Codification 805, “Business Combinations.” In this consolidated variable interest entity’s consolidating schedule, HB micro lending company’s financial information was recorded under the equity subsidiaries. FinVolution Group applied the equity method to account for its investment in the subsidiary of the consolidated variable interest entity in HB micro lending company, as it can exercise significant influence but does not have control. Total assets for HB micro lending company were RMB321,745 and RMB210,344 as of December 31, 2024 and 2025, respectively. Total liabilities for HB micro lending company were RMB131,662 and RMB20,211 as of December 31, 2024 and 2025, respectively.
Summary
of Risk Factors
Investing
in our ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment
in our ADSs. Below please find a summary of the principal risks we face, organized under relevant headings. All the operational risks
associated with being based in and having operations in China also apply to our operations in Hong Kong. With respect to the legal risks
associated with being based in and having operations in China, we expect the laws, regulations and the discretion of the governmental
authorities in China discussed in this annual report to apply to entities and businesses in China, rather than entities or businesses
in Hong Kong, which operate under a different set of laws from China.
Risks
Related to Our Business
● We generate the majority of our revenues from China’s online consumer finance platform market, an emerging and evolving industry, which makes it difficult to evaluate our future prospects.
● The laws and regulations governing online consumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.
● We have modified our business model and practices in the past as a result of changes in laws, regulations, policies, measures and guidance. We may further change our business model or practices in the future, which may not be successful ultimately.
● Our global operations expose us to a number of risks, such as international geopolitical tensions and events, challenges of localizing our products and services for local markets, the need for increased resources to manage regulatory compliance across different markets, exchange rate fluctuations, among others. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our global operations expose us to a number of risks.”
● If we are unable to retain existing borrowers or institutional funding partners or attract new borrowers or institutional funding partners, the volume of loans facilitated through our platforms may not be maintained or increased, which may adversely affect our business and results of operations.
● If our existing and new products and services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.
18
● As we continue to develop our business, we may offer new products or services. Development and innovation in our business may expose us to new challenges and risks.
● Our cooperation with institutional funding partners exposes us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners.
● Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
● We collaborate with third-party trust management companies to set up trusts. We may be deemed to be an illegal financial institution under such trust arrangement, which may materially and adversely affect our business and financial condition.
● Interest rates of certain of our loan products may exceed the statutory interest rate limit and therefore part of the interests may not be enforceable through the PRC judicial system.
● We operate in markets where the credit infrastructure may still be at an early stage of development.
● We bear credit risks for the majority of the loans funded by institutional funding partners to borrowers we introduced. If we fail to effectively manage credit risk of our loans and our overdue loans increase, our business, financial condition and results of operations may be materially adversely affected.
Risks
Related to Our Corporate Structure
● We are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities, and our operations in China are primarily through (i) our subsidiaries in China, (ii) the consolidated variable interest entities with which we have maintained contractual arrangements, and (iii) the subsidiaries of the consolidated variable interest entities. Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest in the consolidated variable interest entities and their subsidiaries. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the consolidated variable interest entities and their respective subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and our company as a whole.
● If the PRC government deems that the contractual arrangements regarding the consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in 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.
● We rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations, and such contractual arrangements may not be as effective as equity ownership in providing operational control.
● Any failure by the consolidated variable interest entities, shareholders of the consolidated variable interest entities or other parties to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
● The shareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
19
Risks
Related to Doing Business in China
● Most of our operations are located in China. Accordingly, our business, prospects, financial conditions and results of operations may be affected to a significant degree by political, economic and social conditions in China generally. In addition, a severe or prolonged downturn in the Chinese or global economy could reduce the demand for consumer loans and investments, which could materially and adversely affect our business and financial condition. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related 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 and results of operations” and “—A severe or prolonged downturn in the Chinese or global economy, any adverse policy change targeting China, protracted geopolitical tensions between China and other countries, or any financial or economic crisis—or even the perceived threat of such a crisis—could materially and adversely affect our business and financial condition.”
● We face risks arising from uncertainties with respect to the PRC legal system. Certain rules and regulations can change quickly and sometimes on short notice, and there may be risks and uncertainties regarding the interpretation and enforcement of PRC laws and regulations. These risks and uncertainties may make it difficult for us to meet or comply with requirements under the applicable laws and regulations. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.”
● 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. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.”
● The PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.”
● Our ADSs may be prohibited from trading in the United States under the HFCA Act in the future if the PCAOB is unable to inspect or fully investigate auditors located in China. The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections” and “—Our ADSs may be prohibited from trading in the United States under the HFCA Act in the future if the PCAOB is unable to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
20
Risks
Related to Our American Depositary Shares
● The market price for our ADSs may be volatile.
● We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct the majority of our operations in China and a significant portion of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and a significant portion of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe 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 the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our American Depositary Shares—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” and “—Certain judgments obtained against us by our shareholders may not be enforceable.”
A. [Reserved]
B. Capitalization and Indebtedness
Not
applicable.
C. Reasons for the Offer and Use of Proceeds
Not
applicable.
D. Risk Factors
Investing
in our ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment
in our ADSs. Below please find the principal risks we face, organized under relevant headings. In the event that PRC regulations become
applicable to companies in Hong Kong, the legal and operational risks associated with operating in China, as discussed in “Item
3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry,” may also apply to our operations in
Hong Kong. These risks are discussed more fully in the section titled “Item 3. Key Information—D. Risk Factors.”
Risks
Related to Our Business
We
generate the majority of our revenues from China’s online consumer finance platform market, an emerging and evolving industry,
which makes it difficult to evaluate our future prospects.
China’s
online consumer finance industry may not develop as expected. The regulatory framework for this industry is evolving and may remain uncertain
for the foreseeable future. China’s online consumer finance industry in general remains at a rather preliminary development stage
and may not develop at the anticipated growth rate. It is possible that the PRC laws and regulations may change in ways that do not favor
our development. If that happens, there may not be adequate loans facilitated on our platforms and our current business model may be
negatively affected. As a new industry, there are very few established players whose business models we can follow or build upon. Potential
borrowers and institutional funding partners may not be familiar with this new industry and may have difficulty distinguishing our services
from those of our competitors. Attracting and retaining borrowers and institutional funding partners is critical to increasing the volume
of loans facilitated through our platforms. The emerging and evolving online consumer finance market makes it difficult to effectively
assess our future prospects. In addition, our business has grown substantially in recent years, but our past growth rates may not be
indicative of our future growth.
You
should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and
rapidly evolving industry. These risks and challenges include our ability to, among other things:
● navigate an evolving regulatory environment;
21
● expand the base of borrowers and institutional funding partners served on our platforms;
● maintain our credit standards;
● enhance our risk management capabilities;
● improve our operational efficiency;
● continue to scale our technology infrastructure to support the growth of our platforms and higher transaction volume;
● broaden our loan product offerings;
● operate without being adversely affected by the negative publicity about the industry in general and our company in particular;
● maintain the security of our platforms and the confidentiality of the information provided and utilized across our platforms;
● cultivate a vibrant consumer finance ecosystem;
● attract, retain and motivate talented employees; and
● defend ourselves in litigation, and against regulatory, intellectual property, privacy or other claims.
If
the market for our platforms does not develop as we expect, if we fail to educate potential borrowers and institutional funding partners
about the value of our platforms and services, or if we fail to address the needs of our target customers, our reputation, business and
results of operations will be materially and adversely affected.
The
laws and regulations governing online consumer finance industry in China are developing and evolving and subject to changes. If our business
practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities,
our business, financial condition and results of operations would be materially and adversely affected.
We
expect the laws, regulations, rules and governmental policies to continue to evolve in China’s online consumer finance
industry. We are unable to predict with certainty the impact, if any, that future legislation, judicial interpretations or
regulations relating to the online consumer finance industry will have on our business, financial condition and results of
operations. To the extent that we are not able to fully comply with any new laws or regulations when they are promulgated, our
business, financial condition and results of operations may be materially and adversely affected.
For instance, in July 2021,
it was reported that the Credit Information System Bureau of the People’s Bank of China notified several internet platforms to complete
the “disconnecting direct connection” process between personal information and financial institutions. This notification implies
that as an online consumer finance platform, we may be prohibited from directly providing borrowers’ personal information to institutional
funding partners. We provide borrower referral and preliminary credit assessment services to our institutional funding partners. The borrower
information provided by us with such institutional funding partners, with due authorization, may be deemed as credit information. We proactively
adjusted our practices for transmission of borrowers’ personal information following the promulgation of regulations related to
“disconnecting direct connection.”
Furthermore, on September 27, 2021, the People’s Bank of China introduced the Measures for Regulating Credit
Reference. These measures state that financial institutions are prohibited from collaborating with any commercial entity lacking a credit
reference license for credit reference services. For further information, please refer to “Item 4. Information on the Company—B.
Business Overview—Regulations in the PRC—Regulations Relating to Credit Reference Activities.” These measures do not
provide clear guidance or rules regarding how and when market participants like us, if deemed to be conducting credit reference business,
could apply for the required licenses or ensure compliance when necessary. If regulatory authorities interpret our information provision
and preliminary credit assessment services to institutional funding partners as credit reference activities, we may need to adjust our
business operations to comply with these regulations. This adjustment may involve obtaining a license for individual credit reference
activities from competent regulatory bodies. Violators of these rules may face penalties, including business cessation, confiscation of
illicit gains, fines ranging from RMB50,000 to RMB500,000, and potential criminal liability. Following the promulgation of these measures,
we have adopted rectification measures and completed our adjustment process to comply with regulatory requirements regarding “disconnecting
direct connections.” We have established collaborations with a licensed credit reference agency and regional financial organizations
to ensure our practices for transmitting personal information comply with laws and regulations. However, there remain uncertainties with
respect to the interpretation and implementation of the Credit Reference Measures, and we cannot guarantee that this approach will be
deemed fully compliant with applicable laws and regulations regarding the “disconnecting direct connection.” As of the date
of this annual report, we have not been subject to any penalties from the People’s Bank of China or any of its branches related
to our cooperation with institutional funding partners.
On April 24, 2026, the People’s Bank of China, National Financial
Regulatory Administration, Cyberspace Administration of China, and five other regulatory authorities jointly promulgated Administrative
Measures for Online Marketing of Financial Products, or the Online Marketing Measures, which will take effect on September 30, 2026. It
provides, among others, that (i) financial products include a wide array of products and services, among which are loan products; (ii)
financial institutions with operational regional restrictions shall identify the client’s region and provide the financial products
only to clients in the permitted regions; (iii) online platforms shall not direct financial clients to other third-party platforms without
financial license; (iv) online platforms are prohibited from inducing clients by preferential initial payment fees, and from using misleading
terms such as “low threshold”, “drawdown in seconds”, “low interest rate”, etc; and (v) online platforms
are prohibited from utilizing algorithm model to induce excessive consumption. The Online Marketing Measures has recently been promulgated
and there are a lot of uncertainties about its interpretations and impact on our business. We may need to adjust our business models with
our institutional funding partners and third-party online lending platforms. We cannot assure you that such adjustments can be made in
a timely or cost-efficient manner, nor that cooperation with third-party platforms will continue in the future. Additionally, we may be
required to change our online ads for compliance with the Online Marketing Measures, which would affect user acquisition. Failure to comply
may result in penalties, including business termination, fines, and potential criminal liability.
Further
regulatory uncertainty, including the potential for new rules, continues to pose a significant risk to us. Failure to meet the requirements
of regulatory authorities may subject us to fines or injunctions, necessitate modifications to our business model, termination of certain
practices, or even cessation of our business operations. Such outcomes could significantly and adversely affect our business, financial
condition, and results of operations. Additionally, our origination, servicing expenses, and other costs of revenue may increase, or
we may need to adjust our current business model to maintain full compliance with laws and regulations applicable to us in the future.
We
have modified our business model and practices in the past as a result of changes in laws, regulations, policies, measures and guidance.
We may further change our business model or practices in the future, which may not be successful ultimately.
Given
the complexities, uncertainties and frequent changes in the laws, rules, regulations, policies and measures within the markets where
we operate, including alterations in their interpretation and implementation, we have a track record of modifying our business models
and practices in response to shifts in regulatory requirements and our strategic plans. For example, we started our business as an online
lending information intermediary, however, we ceased facilitating new loans with funding from individual investors on our platforms since
October 2019 due to shifts in regulatory requirements. Instead, we enhanced our business model by acquiring higher-quality borrowers
and transitioning our funding sources from individual investors to institutional funding partners. We launched our capital light model
in 2020 as part of our strategic transition from a traditional, credit risk-bearing loan facilitator to a technology enabler. Under this
model, we facilitate transactions between prospective borrowers and institutional funding partners without assuming credit risk on the
loans extended by our funding partners to the borrowers we introduce. In connection with these changes in our business model and practices,
we underwent considerable changes, such as offering new products and services, adjusting our business process and model, hiring new employees
and building up new departments, and collaborating with new business partners.
22
We
may further change our business model or practices in the future. If this happens, our business operations may have to go through considerable
changes and we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during the transitional period,
which may cause our competitive position, business, financial condition and results of operations to be materially and adversely affected.
Our
global operations expose us to a number of risks.
We
began our business operations in multiple jurisdictions in December 2018. In December 2018 and June 2019, we established two subsidiaries
in the Philippines, and one of them is authorized to operate as a lending company and the other is authorized to operate as a financing
company. In December 2019, our subsidiary in Indonesia obtained the license for Technology and Information Based Financial Lending Institution
from the Financial Services Authority of Indonesia. In February 2024, one of our Philippine subsidiaries was accredited by the Credit
Information Corporation as a Special Accessing Entity to the Credit Information System. In April 2024, our Indonesian subsidiary acquired
a supermajority stake in a local multi-finance company, followed by the purchase of the remaining equity interest in December 2025 to
diversify our product offerings in the Indonesian market. In October 2025, we acquired a licensed lender in Australia which holds an
Australian Credit Licence from the Australian Securities and Investments Commission (ASIC), to further advance our globalization strategy
into developed markets.
Our
outstanding loan balance in the overseas markets increased from RMB1,262.3 million as of December 31, 2023 to RMB1,696.2 million as of
December 31, 2024 and further to RMB2,570.1 million (US$367.5 million) as of December 31, 2025. In 2023, 2024 and 2025, revenues generated
from the overseas markets amounted to RMB2,136.9 million, RMB2,532.5 million and RMB3,331.5 million (US$476.4 million)), accounting for
17.0%, 19.4% and 24.6% of the respective year’s total net revenues.
As
we continue to expand our global operations, we face risks associated with expanding into markets where we have limited or no experience
and where we may be less well-known or have fewer local resources. We are also be subject to a variety of risks inherent in operating
overseas businesses, including:
● business licensing or certification requirements of local markets;
● compliance challenges due to different laws and regulatory environments, including but not limited to those related to online consumer finance, privacy and data protection, data localization, network security, payments, anti-money laundering, and tax regimes and policies;
● the need for increased resources to manage regulatory compliance across our overseas businesses;
● challenges of localizing our services and products to meet the local needs;
● failure to effectively or efficiently locate and cooperate with local business partners;
● failure to attract and retain capable talent with international perspectives who can effectively manage and operate local businesses;
● higher costs of doing business globally, including increased accounting, travel, infrastructure and legal compliance costs;
● challenges of maintaining efficient and consolidated internal systems, including technology infrastructure, as well as customizing and integrating these systems;
● heightened restrictions and barriers on the transfer of data between different jurisdictions;
23
● exchange rate fluctuations;
● international geopolitical tensions and events; and
● political, social and economic instability of each jurisdiction where we operate.
In
particular, our overseas operations are subject to intensifying regulatory scrutiny and enforcement actions, particularly in key areas
critical to our online consumer finance business, including data privacy and security, mandated interest rate caps, debt collection practices,
anti-competitive conduct, and consumer protection. Regulators in our target markets are increasingly adopting stricter rules and conducting
enforcement, including investigations, fines, and sanctions, and the applicable legal standards may be ambiguous or subject to varying
interpretation. While we endeavor to design our compliance programs to adhere to all applicable local laws and regulations and engage
with relevant regulatory authorities proactively, our limited experience in many of these markets increases the risk of non-compliance,
inadvertent violations, or adverse regulatory judgments. For instance, in March 2026, Indonesia’s antitrust agency, Komisi Pengawas
Persaingan Usaha (“KPPU”), imposed administrative fines on 97 online lending firms operating in Indonesia, alleging violations
of antitrust laws through alleged interest rate coordination. Our operations conducted under the AdaKami brand in Indonesia were among
the sanctioned entities and were fined an aggregate amount of IDR102,300,000,000, approximately RMB41.7 million, in connection with
the alleged coordination. We have filed a formal appeal against the KPPU’s decision; however, the appeal process is subject to
judicial and administrative discretion, and we are currently unable to predict or assess the likelihood of success, the timing of a final
ruling, or the ultimate outcome of such appeal.
Beyond
enforcement actions, the regulatory landscape governing online consumer finance in our overseas markets is evolving rapidly, and inherently
uncertain, with regulators issuing new rules, amendments, guidance, or policy shifts that may directly restrict our business model, pricing,
or operations. For example, the Financial Services Authority of Indonesia (OJK) previously adopted rules to progressively reduce the
interest rate cap for fintech lenders on consumptive loans, from a maximum of 0.4% per day in 2023 to 0.3% in 2024, to 0.2% in 2025,
and further to 0.1% by 2026, posing potential risks to our operations in Indonesia. On December 31, 2024, the Financial Services Authority
of Indonesia (OJK) revised its interest rate policy, which was subsequently reiterated by a regulation issued on July 31, 2025. The earlier
plan to uniformly reduce the cap to 0.2% by 2025 was replaced with differentiated pricing based on loan tenor: loans with a tenor of
six months or less remain capped at 0.3%, while those exceeding six months are capped at 0.2%. As the average tenor of our loans in Indonesia
is three to four months, we anticipate the impact of these revised rules on our business to be limited. In addition, the Philippines
Securities and Exchange Commission has issued a memorandum, effective April 1, 2026, imposing recalibrated ceilings on interest rates
and fees charged by financing and lending companies on small consumer loans, setting a 12% monthly cap on effective interest rates for
loans of up to P10,000 with terms of up to four months. Regulatory authorities may introduce new rules or amendments in the future, which
could materially affect our operations. If our business operations in the overseas markets cannot grow and develop as expected, our results
of operations, financial performance and prospect may be adversely or materially affected.
If
we are unable to navigate these heightened regulatory risks, comply with evolving overseas regulatory requirements, or successfully resolve
regulatory proceedings, our ability to grow, operate, or sustain our overseas business may be materially affected. Any material disruption
to our international operations as a result of regulatory risk could have a material and adverse effect on our overall business, financial
condition, results of operations, and long-term growth prospects. As we pursue further expansion into new and existing international
markets, these regulatory and operational risks could intensify, and our global growth initiatives may not be successful. Failure to
effectively manage the complexity of cross-border regulatory compliance and global operations could materially and adversely affect our
business, financial condition, and results of operations.
If
we are unable to retain existing borrowers or institutional funding partners or attract new borrowers or institutional funding partners,
the volume of loans facilitated through our platforms may not be maintained or increased, which may adversely affect our business and
results of operations.
The
loan origination volume on our platforms was RMB194.3 billion in 2023, RMB206.2 billion in 2024 and RMB200.3 billion (US$28.6 billion)
in 2025. To maintain the growth momentum of our platforms, we must increase the volume of loans by retaining current users and attracting
more users whose needs can be met on our platforms. If there are insufficient qualified loan requests, institutional funding partners
may not be able to deploy their capital or their investors’ capital in a timely or efficient manner and may seek other investment
opportunities. If there are insufficient funding commitments, borrowers may not be able to obtain capital through our platforms and may
turn to other sources for their borrowing needs. If we are unable to attract qualified borrowers and sufficient funding commitments or
if borrowers and institutional funding partners do not continue to participate in our platforms at the current rates due to any change
we may be required to make to the way we conduct our business to ensure compliance with existing or new laws and regulations or due to
any other commercial or regulatory reasons, we may not be able to increase our loan transaction volume and revenues as we expect, and
our business and results of operations may be adversely affected. Normally the borrowers find us by downloading our mobile applications
from application stores or through our Weixin official account, and website or other third-party channels. In response to the general
regulatory environment, the operators of application stores or mobile application distributing channels may adjust their application
exhibition policies or even remove our mobile applications from their application stores or distribution channels, which may materially
and adversely affect our ability to engage new borrowers.
24
Currently,
our institutional funding partners primarily include commercial banks, internet or digital banks, private banks, consumer finance companies,
micro-loan companies and trust management companies. If we are unable to retain our existing institutional funding partners or attract
new institutional funding partners, or if regulatory authorities promulgated new laws and regulations to regulate, limit, or even prohibit
our collaboration with the institutional funding partners, our business, results of operations and financial condition will be adversely
affected. As of December 31, 2025, we had cumulatively cooperated with 115 institutional funding partners in China and 18 institutional
funding partners in the overseas markets. Our success is dependent upon our ability to maintain and expand our cooperation with institutional
funding partners on reasonable commercial terms. If the governmental authorities further tighten the regulations on the online consumer
finance industry, our institutional funding partners would become more selective in choosing partners for referring borrowers and facilitating
loans for them. The competition we face would become even more intensely. Our cooperation with institutional funding partners is not
on an exclusive basis. If we fail to meet their requirements or needs, our financial institution partners may stop cooperating with us
and turn to our competitors, which may also materially and adversely affect our business, financial condition and results of operations.
If
our existing and new products and services do not achieve sufficient market acceptance, our financial results and competitive position
will be harmed.
We
have devoted significant resources to, and will continue to emphasize on, upgrading and marketing our existing products and services
and enhancing their market awareness. We also incur expenses and expend resources upfront to develop, acquire and market new products
and services that incorporate additional features, improve functionality or otherwise make our platforms more desirable to borrowers
and institutional funding partners. New products and services must achieve high levels of market acceptance in order for us to recoup
our investment in developing, acquiring and bringing them to market.
Our
existing and new products and services could fail to attain sufficient market acceptance for many reasons, including:
● borrowers may not find terms of our products, such as costs and credit limit, competitive or appealing;
● our failure to predict market demand accurately and provide products and services that meet this demand in a timely fashion;
● borrowers and institutional funding partners using our platforms may not like, find useful or agree with, any changes;
● defects, errors or failures on our platforms;
● negative publicity about our loan products or our platforms’ performance or effectiveness;
● views taken by regulatory authorities that the new products, services or platform changes do not comply with laws, regulations or rules applicable to us; and
● the introduction or anticipated introduction of competing products by our competitors.
If
our existing and new products and services do not achieve adequate acceptance in the market, our competitive position, results of operations
and financial condition could be harmed.
25
As
we continue to develop our business, we may offer new products or services. Development and innovation in our business may expose us
to new challenges and risks.
We
have invested, and intend to continue to invest, significantly in product development. The 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 products and services and render future innovation unsuccessful. New products and services also require significant expense
and resources to attract and acquire users, and they may fail to gain market acceptance for a variety of reasons. See “Item 3.
Key Information—D. Risk Factors—Risks Related to Our Business—If our existing and new products and services do not
achieve sufficient market acceptance, our financial results and competitive position will be harmed.”
If
our future products and services fail to meet the expectations of borrowers or institutional funding partners, become obsolete, or do
not address their needs, we may struggle to remain competitive. This could result in a decline in market share, materially affecting
our business, financial condition, and operating results.
Additionally,
the development of new products or services may require collaboration with third-party business partners. While we mandate that our partners
comply with all applicable laws and regulations, we have limited control over their operations. Consequently, if our third-party partners
fail to adhere to legal and regulatory requirements, it could negatively impact our reputation and business.
Our
cooperation with institutional funding partners exposes us to regulatory uncertainties and we may be required to obtain additional government
approval or license due to our cooperation with institutional funding partners.
In
2023, 2024 and 2025, our loan origination volume in China was RMB186.4 billion, RMB196.1 billion and RMB186.3 billion (US$26.6 billion),
all of which was funded by institutional funding partners or our own microloan companies. We carry out our cooperation with institutional
funding partners through Shanghai Erxu, a subsidiary of one of the consolidated variable interest entities. Shanghai Erxu, in partnership
with our other subsidiaries, focuses on providing services to our institutional funding partners, including borrower referrals and preliminary
credit assessments, to facilitate their involvement in our online lending operations.
The
online consumer finance industry in China is evolving. Regulatory authorities’ interpretations of the laws governing this industry
are subject to uncertainty. As such, there are uncertainties regarding whether our business practices will be deemed fully compliant
with all applicable laws and regulations. With the regulatory environment of the consumer finance industry continually evolving, regulatory
authorities may introduce new requirements, potentially including a new licensing regime to oversee the type of business activities conducted
by Shanghai Erxu and our other subsidiaries. If such new regulatory rules are enacted, we cannot guarantee our ability to obtain the
necessary licenses or regulatory approvals in a timely manner, or at all. Failure to do so may materially and adversely affect our business
and our ability to sustain operations.
As
of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations,
including those governing the online consumer finance industry in China, except for those that did not have a material adverse effect
on the business, operations or financial conditions of our PRC subsidiaries, the consolidated variable interest entities and their respective
subsidiaries taken as a whole. However, if governmental authorities adopt a more stringent regulatory framework for the online consumer
finance industry in the future, we may become subject to additional requirements. Compliance with applicable laws and regulations can
be costly. Moreover, if our business practices are found to violate any existing or future laws and regulations, we may face injunctions,
including orders to cease illegal activities, and other penalties determined by the government authorities.
In addition,
institutional funding partners are also subject to evolving regulations concerning online consumer finance industry. For instance,
on April 3, 2025, the National Administration of Financial Regulation issued the Notice on Strengthening the Supervision of Online
Lending Business and Promoting Financial Services, effective from October 1, 2025. It mandates, among others, the following key
provisions: (i) bank headquarters shall maintain and publicly disclose on their official websites and mobile applications a whitelist of partnered online lending platforms; (ii) banks shall implement risk-based pricing mechanisms aligned with borrowers’
credit risks; (iii) online lending platforms are prohibited from charging interest or other fees to borrowers; (iv) credit
enhancement service providers are prohibited from charging service fees or consultation fees, as such practices are deemed to
increase credit enhancement fees in a disguised form; and (v) banks and online lending platforms must fully disclose key
information, including but not limited to lenders, annualized interest rates, credit enhancement providers and fees, annualized
funding costs, post-default interest and costs, and must clearly state that no other fees will be charged to borrowers. These
requirements also apply to consumer finance companies and trust companies engaged in online lending business. The notice may
necessitate further revisions to our cooperation model with funding partners and service providers, and could also impact our
business operations, financial performance, and compliance strategy—especially
with respect to the disclosure of fee collection information and credit risk control procedures. Furthermore, on March 15, 2026, the
National Financial Regulatory Administration and the People’s Bank of China jointly promulgated the Provisions on Disclosure
of the Comprehensive Borrowing Costs for Personal Loan Business, effective from August 1, 2026. The provisions require financial
institutions to itemize items such as interest rates, installment fees, credit enhancement fees, and contingent costs arising from
defaults, as well as identify the financial institutions or their cooperating entities that collect such interest and fees. Failure
to fully comply with these detailed disclosure requirements may result in regulatory measures, and achieving compliance may involve
additional costs.
26
Regulatory
restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to
funding.
In
our collaboration with institutional funding partners, we engage licensed third-party financing guarantee companies to offer guarantees
for the majority of loans funded by our institutional funding partners. In case of borrower default, these companies are obliged to repay
the overdue amount to the corresponding institutional funding partner. Subsequently, we purchase creditor’s rights from these guarantee
companies. Additionally, we may provide security deposits to these third-party financing guarantee companies.
Furthermore,
we established three financing guarantee subsidiaries, namely Fujian Zhiyun Financing Guarantee Co., Ltd., Zhiyun (Tianjin) Financing
Guarantee Co., Ltd., and Hainan Shenxin Financing Guarantee Co., Ltd., in 2019 and 2020. Under some circumstances, these subsidiaries
provide financing guarantee services directly to our institutional funding partners for loans they fund. However, under the Regulations
on the Administration of Financing Guarantee Companies, as promulgated by the State Council on June 21, 2017, a financing guarantee company’s
outstanding guarantee liabilities may not exceed ten times its net assets. As of March 31, 2026, the net assets of Fujian Zhiyun Financing
Guarantee Co., Ltd., Zhiyun (Tianjin) Financing Guarantee Co., Ltd., and Hainan Shenxin Financing Guarantee Co., Ltd. were RMB1,832.4
million (US$262.0 million), RMB1,026.6 million (US$146.8 million), and RMB288.9 million (US$41.3 million), respectively. Therefore, the
maximum outstanding guarantee liabilities our own guarantee companies can provide may not meet all the needs of our institutional funding
partners. Consequently, we will need to continue engaging third-party guarantee companies to provide quality assurance commitments to
our institutional funding partners.
The
Notice on Regulating and Rectifying “Cash Loan” Business, issued in December 2017, prohibits banks, trust management companies,
and consumer finance companies from accepting credit enhancement services or assuming default risks from unlicensed third parties involved
in loan facilitation transactions. Additionally, the Regulations on the Supervision and Administration of Financing Guarantee Companies,
issued in August 2017, mandate that entities engaging in financing guarantee business must obtain approval from local regulatory authorities.
Failure to comply may result in penalties, including business termination, fines, and potential criminal liability. Moreover, the Supplemental
Rules to the Administration of Financing Guarantee Companies, issued in October 2019, state that entities providing client referral or
credit assessment services to lending institutions are prohibited from offering financing guarantee services without proper regulatory
approval. Non-compliance may lead to business operation bans and the requirement to settle existing business. For more detailed information,
please refer to “Item 4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations Relating
to Online Consumer Finance Services.”
Despite
our efforts to mitigate regulatory risks, we cannot guarantee that regulatory authorities will not interpret or perceive the quality
assurance commitments we provide to our institutional funding partners as engaging in financing guarantee business without approval.
If we are unable to provide these quality assurance commitments due to regulatory restrictions, we may struggle to maintain our institutional
funding partner base, leading to adverse effects on our liquidity, business operations, financial condition, and results. As of the date
of this annual report, we have not faced any administrative penalties related to the quality assurance commitments provided to our institutional
funding partners. However, if government authorities deem these commitments as unauthorized provision of financing guarantee business,
we may face fines and other administrative penalties, significantly impacting our liquidity, business operations, financial condition,
and results.
Moreover,
on December 31, 2021, the People’s Bank of China published the Regulations on Local Financial Supervision and Administration (Draft
for Comments), outlining several key provisions. These include prioritizing local clients for local financial organizations, requiring
guidance from the State Council or designated financial regulatory authorities for conducting business outside registered provinces,
designating six types of financial organizations, including financing guarantee companies and micro-lending companies, as local financial
organizations, providing a transition period for organizations operating outside provinces before the draft’s effectiveness, and
imposing penalties, such as correction orders, confiscation of illegal gains or fines, cessation of business operations, and revocation
of business licenses, on organizations conducting business outside provinces without approval from competent provincial regulatory authorities.
Currently, both the third-party guarantee companies we engage and our own guarantee companies provide nationwide services. However, uncertainties
persist regarding when the Regulations on Local Financial Supervision and Administration (Draft for Comments) will become effective and
how they will be implemented. Therefore, we cannot guarantee full compliance with these regulations in a timely manner or at all, and
we may be required to rectify or terminate any actions deemed illegal by regulatory authorities.
27
We
collaborate with third-party trust management companies to set up trusts. We may be deemed to be an illegal financial institution under
such trust arrangement, which may materially and adversely affect our business and financial condition.
Our
collaboration with third-party trust management companies involves setting up trusts, in some of which we invested to provide loans to
borrowers we introduce. These trusts are managed by third-party trust management companies. Once we introduce suitable borrowers to these
companies, they conduct their own credit assessments to determine whether to approve the loan applications. If a borrower’s application
is approved, the trust management company directly disburses the funds from the trust to the borrower’s bank account.
Under
the Measures for Banning of Illegal Financial Institutions and Illegal Financial Business Operations, issued by the State Council on
July 13, 1998, any entity engaging in financial activities without approval from the People’s Bank of China may be classified as
an illegal financial institution. This includes providing loans without the necessary approval from the People’s Bank of China,
which is considered an illegal financial business operation. Given the rapid evolution of the online consumer finance industry and the
changing regulatory landscape since the enactment of these measures, there is ambiguity surrounding their interpretation and applicability
to our operations. While the trust management companies overseeing these trusts are licensed and approved by financial regulatory authorities,
and we believe that these companies, rather than us, are the lenders of the loans, there is no guarantee that our interpretation aligns
with that of the authorities. We cannot rule out the possibility that our investments in these trusts may be considered as providing
loans to the borrowers. Consequently, we may be classified as an illegal financial institution or as engaging in illegal financial business,
potentially subjecting us to penalties. These penalties could include the confiscation of illegal gains, along with fines ranging from
one to five times the illegal gains, or a fine of RMB100,000 to RMB500,000 if there are no illegal gains, and criminal liability if the
violation constitutes a criminal offense.
In
addition, the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security, and the Ministry
of Justice jointly issued the Guidance on Several Issues for Illegal Lending Regarding Criminal Cases on July 23, 2019. This guidance
provides, among others, that if any entity or individual is engaged in providing loans to unspecified individuals consistently for the
purpose of profits and without the approval from the regulatory authorities or outside its business scope, which disturbs the stability
of financial markets, such entity or individual may face a criminal charge of unfair competition and may be imposed criminal liability
in accordance with the applicable laws and regulations. “Providing loans to unspecified individuals consistently” refers
to providing loans to entities and individuals no less than ten times within two years.
On September 11, 2025, the National Financial Regulatory
Administration promulgated the Measures for the Administration of Trust Companies,
which came into force on January 1, 2026. The Measures for the Administration of Trust Companies
requires, among others, that trust companies are prohibited from conducting channel business, and trust companies shall establish
their own risk management systems. Currently we refer borrowers to trust companies, and the trust companies, at their sole
discretion, determine whether to draw down. We believe that our business model with the trust companies does not constitute
channel business. However, we cannot assure you that the regulatory authorities will share our view. If the regulatory authorities were
to take a different view than ours, we may not be able to adjust our business model in a timely or cost-efficient manner, or at all.
There are uncertainties as to the interpretation
of this guidance, and it is still unclear how the regulatory authorities will interpret and implement it in the future. We cannot rule
out the possibility that regulatory authorities may deem our operation activities under the trust arrangements as unfair competition
and impose criminal liability on us. If that happens, our business, results of operations and financial condition would be materially
and adversely affected.
Interest
rates of certain of our loan products may exceed the statutory interest rate limit and therefore part of the interests may not be enforceable
through the PRC judicial system.
Our
revenue, to the extent they are deemed to be or related to loan interest and expense incurred by the borrower for the loan, is
subject to interest rate restrictions imposed by various regulatory authorities in China. According to the Notice on Regulating and
Rectifying Cash Loan Business, promulgated by the Internet Finance Rectification Office and the Online Lending Rectification Office
in December 2017, in the context of cash loans provided by various types of institutions, the total borrowing costs, including
interest and various fees charged to borrowers, must adhere to the upper limit on interest rates for private lending as outlined in
the judicial interpretations issued by the Supreme People’s Court. At the time of the promulgation of this notice, the then
effective upper limit on interest rates for private lending was 24% per annum, as judicially protected by the PRC court, while
interest rates ranging from 24% to 36% per annum were considered legally permissible but unenforceable, and any interest rate
exceeding 36% per annum was deemed illegal. Meanwhile, the Supreme People’s Court promulgated the Circular of Several
Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases on August 4, 2017, which provides, among
others, that the claim of a borrower under a financial loan agreement to adjust or cut down the part of interest exceeding 24% per
annum on the basis that the aggregate amount of interest, compound interest, default interest, liquidated damages and other fees
collectively claimed by the lender is overly high should be supported by the PRC courts. For more details, see “Item
4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations Relating to Online Consumer
Finance Services—Regulations on lending activities.”
28
The
Supreme People’s Court subsequently approved two amendments to the Provisions on Several Issues Concerning Laws Applicable to Trials
of Private Lending Cases on August 19, 2020 and December 29, 2020, pursuant to which the PRC courts will support a non-financial institution’s
claim for interest on loans if their annual interest rate does not exceed four times the one-year Loan Prime Rate at the time of the
establishment of the loan agreements. 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. As of the date of this annual report, the most recent one-year loan market
quoted interest rate issued by the National Bank Interbank Funding Center was 3.00%. The one-year loan market quoted interest rate may
decrease in the future.
Also
on December 29, 2020, the Supreme People’s Court further issued the Reply Regarding the Scope of Application of the New Private
Lending Judicial Interpretation, which provides that the amended Provisions of the Supreme People’s Court on Several Issues Concerning
the Application of Law in the Trial of Private Lending Cases are not applicable to disputes arising from the financial business of microloan
companies, financing guarantee companies, and five other types of local financial organizations which are regulated by local financial
authorities.
Currently,
substantially all of the institutional funding partners funding new loan originations on our platform in China are financial institutions
licensed by regulatory authorities. We believe that the interest rate limit in the regime of private lending, as stipulated by the Supreme
People’s Court and the subsequent amendments does not apply to loans funded by these financial institutions. However, regulatory
authorities may have broad discretion in the administration, interpretation, and enforcement of laws and regulations. Therefore, it is
possible that they may hold different opinions. In early 2026, certain local financial regulatory authorities required that, no later than the end of 2027, the interest
rates on the loans newly funded by local micro-loan companies should not exceed four times the LPR. Although loans funded by micro-loan companies on our platform currently
account for a relatively small proportion of our total loan volume, and the immediate impact on us is not significant, these regulatory
requirements may negatively affect our cooperation with micro-loan companies. As a result, we may be required to adjust our business model
with such companies, which could impact our financial results.
Furthermore,
on March 31, 2021, the People’s Bank of China issued its No. 3 announcement of 2021, commonly referred to as PBOC No. 3 Announcement.
This announcement includes provisions specifying that the annual interest rate of a loan should be calculated as the annualized ratio
of all expenses charged from the borrower for the borrowing to the principal actually borrowed. These expenses encompass both interest
and various other fees directly related to the borrowing. Compound interest rates and simple interest rates are both permitted for calculating
the annual interest rate, provided that if a simple interest rate is used, it must be explicitly disclosed to the borrower. PBOC No.
3 Announcement applies to deposit-taking financial institutions, consumer finance companies, microloan companies, and internet platforms
providing loan application services like ours. Before the promulgation of PBOC No. 3 Announcement, no rules or regulations explicitly
defined the calculation method for the maximum interest rates permitted by the laws. Following the issuance of the No. 3 Announcement,
we adjusted our calculation method for loan interest rates on our platform in China accordingly and explicitly disclosed the adjusted
calculation method to our borrowers.
On
April 3, 2025, the National Administration of Financial Regulation issued the Notice on Strengthening the Supervision of Online Lending
Business and Promoting Financial Services, effective from October 1, 2025. It mandates, among others, that (i) banks shall make sure
in the cooperative agreements that online lending platforms are prohibited from charging borrower interest or other fees, and credit
enhancement service providers are prohibited from charging service fees or consultation fees, as such practices are deemed to increase
credit enhancement fees in a disguised form; and (ii) banks shall ensure that borrowers’ comprehensive costs are in compliance
with Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases promulgated by the Supreme
People’s Court. For further information, please refer to “Item 4. Information on the Company—B. Business Overview—Regulations
in the PRC—Regulations Relating to Lending Activities.” Historically, some of our institutional funding partners, or financial
guarantee companies they engage, may charge additional service fees exceeding 24%. As of December 31, 2025, for the substantial majority
of the outstanding balance of loans facilitated on our platform in China, the interest rates did not exceed 24%. If any of the loans
with an interest rate over 24% become delinquent, we may be unable to collect the portion of interest exceeding 24% annually through
PRC judicial enforcement. Moreover, if a borrower prepays the loan, or defaults in his payment obligation, the annualized cost, including
liquidated damage, default interest, and collection fee if applicable, may exceed 24%. The regulatory authorities may deem the portion
of the interest rate exceeding 24% annually to be invalid, which could adversely and materially affect our business, results of operations,
and financial condition.
Furthermore,
the laws, regulations, and governmental policies governing the online consumer finance industry are evolving. The regulatory authorities
may impose more requirements on the interest rates to further regulate the industry. For example, on March 15, 2026, the National Financial
Regulatory Administration and the People’s Bank of China jointly promulgated the Provisions on Disclosure of the Comprehensive
Borrowing Costs for Personal Loan Business, effective from August 1, 2026. It requires the financial institutions to itemize the interest
rates, instalment fees, credit enhancement fees, and the contingent costs in the event of default, etc., as well as the financial institutions
or the partnering entities who charge such interest or fees. If we fail to comply with any regulatory requirements, our business, financial
condition, results of operations, and cooperation with business partners could be materially and adversely affected.
29
We
operate in markets where the credit infrastructure may still be at an early stage of development.
We
operate in markets where the credit infrastructure may still be in the early stages of development. In these markets, the systems and
frameworks required to assess creditworthiness, aggregate data, and facilitate lending decisions may not be fully established or efficient.
The ability of the credit infrastructure to effectively aggregate data from various online databases, including those with differing
formats and standards, remains uncertain. Additionally, the accuracy and reliability of the aggregated data may be challenged by the
lack of standardized processes and the evolving nature of digital financial systems. As the infrastructure develops, we may face challenges
in ensuring that data is accurate, comprehensive, and properly integrated into our lending models, which could impact our ability to
operate effectively.
We
bear credit risks for the majority of the loans funded by institutional funding partners to borrowers we introduced. If we fail to effectively
manage credit risk of our loans and our overdue loans increase, our business, financial condition and results of operations may be materially
adversely affected.
We
provide our institutional funding partners with quality assurance commitments for a majority of the loans they have funded. See “Item
4. Information on the Company—B. Business Overview—Quality Assurance Commitments for Our Institutional Funding Partners.”
As a result, we are subject to credit risk for such loans.
Any
deterioration in our loan portfolio quality and increase in default risks could materially adversely affect our results of operations.
We may not be able to effectively control the level of our overdue loans in the future. Our default risks may increase in the future
due to a variety of factors, including factors beyond our control, such as a slowdown in economic growth, a deepening of a credit crisis
or other adverse macroeconomic trends. Such factors may cause operational, financial and liquidity issues for our borrowers and affect
their ability to make loan repayments in a timely manner. Also, our financing guarantee subsidiaries may face a potential reduction in
its assets if our institutional funding partners claim substantial repayments due to defaults, and we may need to provide additional
capital injections into our financing guarantee subsidiaries, which may adversely affect our financial condition. If we fail to effectively
manage credit risk of our loans and our overdue loans increase, our business, financial condition and results of operations may be materially
adversely affected.
We
are subject to credit cycle and the risk of deterioration of credit profiles of borrowers.
Our
business is subject to credit cycle associated with the volatility of general economy. If economic conditions deteriorate, we may face
increased risk of default or delinquency of borrowers, which will result in lower returns or losses. In the event that the creditworthiness
of our borrowers deteriorates or we cannot 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 subsequently rendered ineffective. This in
turn may lead to higher default rates and adverse impacts on our reputation, business, results of operations and financial positions.
If
we are unable to accurately assess the creditworthiness of the borrowers on our platforms or if we fail to accurately anticipate and
manage the delinquency rates of the loans funded by our institutional funding partners, we will not be able to maintain our credit risk
exposure within acceptable parameters. If we are unable to effectively collect these delinquent loans, our liquidity, business operations,
financial condition and results of operations would be materially and adversely affected.
30
We
rely on our proprietary credit-scoring model in assessing the creditworthiness of our borrowers and the risks associated with loans.
If our credit-scoring model is flawed or ineffective, or if we otherwise fail or are perceived to fail to manage the default risks of
loans facilitated through our platforms, our reputation and market share would be materially and adversely affected, which would severely
impact our business and results of operations.
Our
ability to attract borrowers and institutional funding partners to, and build trust in, our platforms is significantly dependent on our
ability to effectively evaluate borrowers’ credit profiles and likelihood of default. To conduct this evaluation, we utilize our
proprietary credit assessment model, known as the Magic Mirror Model, which is built based on data from multiple sources, including credit
reference agency, and strengthened by our sophisticated artificial intelligence and advanced machine learning techniques. The Magic Mirror
Model categorizes borrowers into different credit ratings according to their risk profiles, based on which our risk pricing system assigns
them appropriate interest rates, credit limits and loan durations. However, the Magic Mirror Model may not effectively predict future
loan losses. Subject to credit assessment result for each loan application, a borrower is allowed to take out multiple loans at a time
on our platforms if their existing loans are not in default and the total outstanding balance is within the approved credit limit for
the type of loan the borrower applies for. Credit limits are set by loan products, and thus a borrower may have a credit limit for each
type of loans on our platforms. A borrower’s credit limit for a particular type of loan is determined considering a range of factors,
including (i) the borrower’s credit level based on their Magic Mirror score—borrowers with better Magic Mirror credit scores
are generally given higher credit limits, (ii) the borrower’s credit needs, such as the type of loans being applied for, (iii)
the borrower’s credit limits and credit performance for other types of loans on our platforms, and (iv) overall investment demand
from investors. A new Magic Mirror credit score is generated each time a borrower applies for a loan, which may change the borrower’s
credit limit for that type of loan. As such, it is possible that borrowers may take out new loans on our platforms to pay off their other
existing loans we facilitated or for other purposes. Given the practical difficulty in tracking and controlling the usage of borrowed
funds, we are not able to effectively prevent borrowers from “rolling over” their loans on our platforms. Although the Magic
Mirror Model looks less favorably upon borrowers who have high credit line utilization ratios, it may not be able to timely and accurately
adjust down the credit rating assigned to a borrower if such borrower masks their deteriorating creditworthiness by refinancing existing
loans with new loans on our platforms. If we are unable to effectively classify borrowers into the relative risk categories, we may be
unable to offer attractive interest rates for borrowers and returns for investors and effectively manage the default risks of loans facilitated
through our platforms. We consistently refine the algorithms, data processing and machine learning used by the Magic Mirror Model, but
if any of these decision-making and scoring systems contain programming or other errors, 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.
For
loans funded by our institutional funding partners, they will review borrowers’ applications and may make use of our preliminary
credit assessment we provide to them and then decide if to provide loans to such borrower as well as the credit limit after their independent
credit review. If any data provided by borrowers or third parties are incorrect or stale or our preliminary credit assessment service
is not effective, our cooperation with institutional funding partners could be negatively affected. In addition, we bear credit risks
for the majority of the loans funded by institutional funding partners to borrowers we introduced. If our ability to provide preliminary
credit assessment is not as effective or efficient as expected, our liquidity, financial conditions and results of operations may be
materially and adversely affected.
In
addition, if a borrower’s financial condition deteriorates after their loan application is approved, we may not be able to take
measures to prevent such borrower’s default and thereby maintain a reasonably low default rate for loans facilitated through our
platforms.
Credit
and other information that we receive from prospective borrowers and third parties about a borrower may be inaccurate or may not accurately
reflect the borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.
We
obtain certain information from prospective borrowers and third parties for the purpose of credit assessment, which may not be complete,
accurate, or reliable. A credit score assigned to a borrower may not reflect that particular borrower’s actual creditworthiness
because the credit score may be based on outdated, incomplete or inaccurate borrower information. Additionally, once we have obtained
a borrower’s information, the borrower may subsequently (i) become delinquent in the payment of an outstanding obligation; (ii)
default on a pre-existing debt obligation; (iii) take on additional debt; or (iv) sustain other adverse financial events, making the
information we have previously obtained inaccurate.
31
To
better assess borrowers’ creditworthiness, we joined the National Internet Finance Monitoring Platform, a credit and information
sharing system set up by the National Internet Finance Association of China. A participant of this sharing system can obtain a borrower’s
credit information shared by other participants. However, there are a limited number of participants and limited amount information on
the platform. As a result, we cannot determine whether borrowers have outstanding loans through other consumer finance platforms not
participating in this sharing system at the time they obtain a loan from us. This creates the risk that a borrower may borrow money through
our platforms in order to pay off loans on other consumer finance platforms and vice versa. If a borrower incurs additional debt before
fully repaying any loan such borrower takes out on our platforms, the additional debt may impair the ability of that borrower to make
payments on their loan. In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could
result in the financial distress or insolvency of the borrower. To the extent that a borrower has or incurs other indebtedness and cannot
repay all of their indebtedness, the obligations under the loans will rank pari passu to each other and the borrower may choose to make
payments to other creditors rather than to institutional funding partners on our platforms.
Furthermore,
the Notice on Regulating and Rectifying “Cash Loan” Business provided, among others, that funds from banks cannot be used
for “campus loan” business. See “Item 4. Information on the Company—B. Business Overview—Regulations in
the PRC—Regulations Relating to Online Consumer Finance Services—Regulations on lending activities.” We have adopted
several measures to identify college students and try to prevent them borrowing money from our platforms. However, we cannot assure that
those measures are able to identify all college students on our platforms.
Such
inaccurate or incomplete borrower information could compromise the accuracy of our credit assessment and adversely affect the effectiveness
of our risk management, which could in turn harm our reputation, and as a result our business and results of operations could be materially
and adversely affected.
Loss
of or failure to maintain relationship with our strategic partners may materially and adversely affect our business and results of operations.
We
currently rely on a number of strategic partners in various aspects of our business. For example, we rely
on some third-party payment companies to handle payment clearance. In this process, borrowers first repay into a third-party payment
system, and then the third-party payment company and we work together to split the total repayment amount, including principals, interests
and service fees, and allocate the respective portions to the institutional funding partners and to us. Furthermore, our institutional
funding partners may engage financial guarantee companies to provide credit enforcement service when doing business with us. We anticipate
that we will continue to leverage strategic relationships with existing strategic partners to grow our business while pursuing new relationships
with additional strategic partners.
Pursuing,
establishing and maintaining relationships with strategic partners require significant time and resources as does integrating third-party
data and services with our system. Our current agreements with partners generally do not prohibit them from working with our competitors
or from offering competing services. Our competitors may be more effective in providing incentives to our partners to favor their products
or services, which may in turn reduce the volume of loans facilitated through our platforms. In addition, the regulatory authorities
of our strategic partners may intervene in their operations or prohibit them from doing business with us. If we cannot successfully enter
into and maintain effective strategic relationships with strategic partners, our business will be harmed.
In
addition, if any of our partners fails to perform properly, we cannot assure you that we will be able to find an alternative in a timely
and cost-efficient manner or at all. Any of these occurrences could result in our diminished ability to operate our business, potential
liability to borrowers and institutional funding partners, inability to attract borrowers and institutional funding partners, reputational
damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.
32
We
have obligations to verify information relating to borrowers and detecting fraud. If we fail to perform such obligations to meet the
requirements of laws and regulations, we may be subject to liabilities.
In
China, our business involves connecting institutional funding partners and borrowers, which constitutes an intermediary service. Our
contracts with institutional funding partners and borrowers are considered intermediation contracts under the Civil Code of the PRC.
According to this code, an intermediary who intentionally conceals material information or provides false information in connection with
the conclusion of an intermediation contract, resulting in harm to the client’s interests, may not claim any service fee for its
intermediary services and is liable for any damage incurred by the client. Therefore, if we fail to provide any material information
to institutional funding partners and are found to be at fault, for failure or deemed failure to exercise proper care, to conduct adequate
information verification or supervision, we could be subject to liabilities as an intermediary under the Civil Code of the PRC.
We
leverage a large database of past fraud accounts information and sophisticated rule-based detection technology in detecting fraudulent
behaviors. Based on new data collected and fraudulent behaviors detected during our daily business operations, we update our database
on an as-needed basis. However, as the laws, regulations, rules, and governmental policies governing the online consumer finance industry
are evolving, it remains unclear to what extent online consumer finance platforms should exercise care in detecting fraud. For the capital
light model, although we believe that as an information intermediary, we should not bear the credit risk for institutional funding partners
exceeding the portion that we agreed to bear, 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 the current laws, regulations, rules, and governmental policies governing the
online consumer finance industry if we fail to detect any fraudulent behavior. If that were to occur, our results of operations and financial
condition could be materially and adversely affected.
We
may be deemed to use our own funds to finance certain loans and therefore be subject us to regulatory risks.
Under
the Measures for Banning of Illegal Financial Institutions and Illegal Financial Business Operations, issued by the State Council on
July 13, 1998, any entity engaging in financial activities without approval from the People’s Bank of China may be classified as
an illegal financial institution. This includes providing loans without the necessary approval from the People’s Bank of China,
which is considered an illegal financial business operation. See “Item 4. Information on the Company—B. Business Overview—Regulations
in the PRC—Regulations Relating to Online Consumer Finance Services—Regulations on illegal financial institutions and intermediaries.”
In
connection with our quality assurance commitments provided through third-party financing guarantee companies, when a borrower defaults,
the third-party financing guarantee companies will repay the full overdue amounts to our institutional funding partners. Subsequently,
we will purchase the creditors’ rights from these third-party financing guarantee companies, and the borrowers are required to
repay the remaining principal and interest to us. We cannot rule out the possibility that regulatory authorities may view this business
practice as constituting the provision of loans without the permission of the People’s Bank of China, potentially leading to our
classification as an illegal financial institution. If found in violation of these measures, we would be subject to fines, penalties,
or other liabilities, which could materially and adversely affect our business, financial condition, and prospects.
Our
failure to compete effectively could adversely affect our results of operations and market share.
The
online consumer finance industry in the markets where we operate is competitive and evolving. We compete with financial products and
companies that attract borrowers and institutional funding partners. Primarily, we compete with leading online consumer finance companies
in the markets where we operate. Additionally, concerning borrowers, we also compete with traditional financial institutions, such as
consumer finance business units in commercial banks, credit card issuers, and other consumer finance companies. With respect to institutional
funding partners, our product offerings also compete with other products and asset classes, such as equities, bonds, investment trust
products, bank savings accounts, real estate, and alternative asset classes.
Our
competitors operate with different business models, have different cost structures, or participate selectively in different market segments.
Ultimately, they may prove more successful or adaptable to new regulatory, technological, and other developments. Some of our current
and potential competitors have significantly more financial, technical, marketing, and other resources than we do and may be able to
devote greater resources to the development, promotion, sale, and support of their platforms. Moreover, our competitors may possess more
extensive borrower or funding sources, greater brand recognition and loyalty, and broader partner relationships than us. Additionally,
a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of
our competitors. Any of the foregoing could adversely affect our business, results of operations, financial condition, and future growth.
33
Furthermore,
our competitors may excel at developing new products, responding faster to new technologies, and undertaking more extensive marketing
campaigns. When new competitors seek to enter our target market or existing market participants seek to increase their market share,
they sometimes undercut the pricing and/or terms prevalent in that market, which could adversely affect our market share or ability to
exploit new market opportunities. Also, since the online consumer finance industry in the markets where we operate is evolving, potential
institutional funding partners and borrowers may not fully understand how our platforms work and may not fully appreciate the additional
customer protections and features that we have invested in and adopted on our platforms compared to others. Our pricing and terms could
deteriorate if we fail to meet these competitive challenges. Furthermore, to the extent that our competitors can offer more attractive
terms to our cooperation partners, such cooperation partners may choose to terminate their relationships with us. If we are unable to
compete with such companies and meet the need for innovation in our industry, the demand for our platforms could stagnate or substantially
decline, resulting in reduced revenues or our platforms failing to achieve or maintain more widespread market acceptance, any of which
could harm our business and results of operations.
If
we fail to promote and maintain our brand in a cost-efficient way, our business and results of operations may be harmed.
We
believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers
and institutional funding partners to our platforms. This depends largely on the effectiveness of our marketing efforts and the success
of the channels we use to promote our platforms. If any of our current marketing channels become less effective, if we are unable to
continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful
in generating new channels, we may not be able to attract new borrowers and institutional funding partners in a cost-effective manner
or convert potential borrowers and institutional funding partners into active borrowers and institutional funding partners on our platforms.
Our
efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require
us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and,
even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our
brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may
impair our ability to grow our business.
Any
negative publicity with respect to us, the online consumer finance industry in general and our third-party partners may materially and
adversely affect our business and results of operations.
Reputation
of our brand is critical to our business and competitiveness. Factors that are vital to our reputation include but are not limited to
our ability to:
● maintain the quality and reliability of our platforms;
● provide borrowers and institutional funding partners with a superior experience on our platforms;
● enhance and improve our credit assessment and risk-pricing models;
● effectively manage and resolve borrower and institutional funding partner complaints; and
● effectively protect personal information and privacy of borrowers and institutional funding partners.
Any
malicious or negative allegation made by the media or other parties about the foregoing or other aspects of our company, including but
not limited to our management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely
compromise our reputation and harm our business and operating results.
34
As
the online consumer finance industry is relatively new in certain markets where we operate, and the regulatory framework for this industry
is also evolving, negative publicity about this industry may arise from time to time. Negative publicity about the online consumer finance
industry in general may have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities.
Governmental authorities in the markets where we operate have also instituted specific rules to develop a more transparent regulatory
environment for the online consumer finance industry. See “Item 4. Information on the Company—B. Business Overview—Regulations
in the PRC—Regulations Relating to Online Consumer Finance Services” for details. Non-compliance with these regulations by
any players in the online consumer finance industry within our market may adversely impact the reputation of the industry as a whole.
Any negative development in, or negative perception of, the online consumer finance industry as a whole, even if factually incorrect
or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established, and impose a negative
impact on our ability to attract new borrowers and institutional funding partners. Negative developments in the online consumer finance
industry, such as widespread borrower defaults, aggressive practices, or misconduct in loan collection, fraudulent behavior, and/or the
closure of other online consumer finance platforms, may also lead to tightened regulatory scrutiny of the sector and limit the scope
of permissible business activities that may be conducted by online consumer finance platforms like us.
In
addition, negative publicity about our partners, outsourced service providers, or other counterparties, such as negative publicity about
their loan collection practices and any failure by them to adequately protect the information of our borrowers, comply with applicable
laws and regulations, or otherwise meet required quality and service standards, could harm our reputation. If any of the foregoing takes
place, our business and results of operations could be materially and adversely affected.
Fraudulent
activity on our platforms could negatively impact our operating results, brand and reputation and cause the use of our loan products
and services to decrease.
We
are subject to the risk of fraudulent activity both on our platforms and associated with borrowers, institutional funding partners and
other third parties handling borrower information. Our resources, technologies and fraud detection tools may be insufficient to accurately
detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, result in losses
suffered by the institutional funding partners, reduce the volume of loans facilitated through our platforms and lead us to take additional
steps to reduce fraud risk, which could increase our costs and expenses. High profile fraudulent activity could even lead to regulatory
intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing
were to occur, our results of operations and financial condition could be materially and adversely affected.
Our
current level of fee rates may decline in the future. Any material reduction in our fee rates could reduce our profitability.
We
earn a substantial majority of our revenues from the service fees that we collect from institutional funding partners or third-party
guarantee companies on loans facilitated through our platforms, as well as the fees that we charge borrowers as guarantee fees. The fee
rates may vary among different business models and third-party guarantee companies or institutional funding partners. Any material reduction
in our fee rates could have a significant adverse effect on our business, results of operations and financial condition.
Fluctuations
in interest rates could negatively affect transaction volume facilitated through our platforms.
All
loans facilitated through our platforms are issued with fixed interest rates. We determine the interest rates of the loans on our platforms
primarily based on market conditions and the general interest rate environment, rather than by referencing a specific benchmark rate.
Fluctuations in interest rates may affect the demand for loan services on our platforms. For example, a decrease in interest rates may
cause potential borrowers to seek lower-priced loans from other channels. A high-interest-rate environment will likely increase the funding
costs for our institutional funding partners, which may lead to a higher rate of return required by such institutional funding partners
and thereby dampen their desire to fund borrowers on our platforms. If we fail to respond to fluctuations in interest rates promptly
and adjust our loan product offerings, potential and existing investors may lose potential interest returns on our platforms and products,
delay or reduce future loan investments, and potential and existing borrowers may show less interest in our loan products and platforms.
Consequently, fluctuations in the interest rate environment may discourage institutional funding partners and borrowers from participating
in our platforms, adversely affecting our business.
35
We
may not be able to obtain additional capital on favorable terms or at all, and we may issue additional equity or debt securities that
may have an adverse effect on our shareholders or may otherwise adversely affect our business.
We
need to make continued investments in facilities, hardware, software and technology systems and to retain talents to remain competitive.
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 have rights, preferences
or privileges senior to those of existing shareholders.
Furthermore,
the terms of any additional debt securities we may issue in the future may impose restrictions on our operations, which may include limiting
our ability to incur additional indebtedness, pay dividends on or repurchase our share capital, or make certain acquisitions or investments.
In addition, we may be subject to covenants requiring us to satisfy certain financial tests and ratios, and our ability to satisfy such
covenants may be affected by events outside of our control.
The
terms of the convertible notes we issued could delay or prevent an attempt to take over our company. The terms of the 2030 Notes require
us to repurchase the respective notes in the event of a fundamental change. A takeover of our company would constitute a fundamental
change. This could have the effect of delaying or preventing a takeover of our company that may otherwise be beneficial to our shareholders.
In addition, the holders of the 2030 Notes shall have the right, at such holder’s option, to convert their notes any time prior
to the close of business on the third scheduled trading day immediately preceding the maturity date. Holders of the 2030 Notes may require
us to repurchase all or part of their notes for cash on July 3, 2028 or in the event of certain fundamental changes, in each case, at
a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to,
but excluding, the relevant repurchase date. If we do not have adequate cash available or cannot obtain additional financing, or our use
of cash is restricted by applicable law, regulations or agreements governing our current or future indebtedness, we may not be able to
fulfill our obligations thereunder, including the repurchase any of these notes when required under the transaction documents, which would
constitute an event of default under the transaction documents. An event of default could also lead to a default under other agreements
governing our current and future indebtedness, and if the repayment of such other indebtedness were accelerated, we may not have sufficient
funds to repay the indebtedness and repurchase the notes or make cash payments upon conversion of any of these notes.
Misconduct,
errors and failure to function by our employees and third-party service providers could harm our business and reputation.
We
are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-party service
providers. Our business depends on our employees and third-party service providers to interact with potential borrowers and institutional
funding partners, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure
of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly
executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing
of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems.
In addition, the manner in which we store and use certain personal information and interact with borrowers and institutional funding
partners through our platforms is governed by various laws. It is not always possible to identify and deter misconduct or errors by employees
or third-party service providers, 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 or third-party service providers take, convert or misuse funds, documents
or data or fail to follow protocol when interacting with borrowers and institutional funding partners, we could be liable for damages
and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation
of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability. In addition
to our own collecting team, we also use certain third-party service providers for loan collection services. Aggressive practices or misconduct
by any of our third-party service providers in the course of collecting loans could damage our reputation.
Any
failure to comply with existing or future laws and regulations related to data protection, data security, cybersecurity or personal information
protection could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating
results and business.
The
regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of data and personal information worldwide
is rapidly evolving and is likely to remain uncertain for the foreseeable future. As the regulations regarding data protection, data
security, cybersecurity and personal information protection are quickly evolving in China and globally, we may become subject to new
laws and regulations applying to the solicitation, collection, processing or use of personal information that could affect how we store,
process and share data of our borrowers.
36
In
particular, the PRC government has tightened the regulation of the storage, sharing, use, disclosure and protection of personal data
and user data in recent years. 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. For details of these regulations,
please refer to “Item 4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations Relating
to Internet Companies—Regulations on internet security.”
On
May 1, 2021, the Regulations on the Scope of Necessary Personal Information Collected by the Frequently Used Mobile Applications came
into effect. See “Item 4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations
Relating to Internet Companies—Regulations on internet security.” In 2021, the Ministry of Industry and Information Technology
and its local branch decided that our PPDai mobile application was collecting users’ personal information in a non-compliance way.
We had taken remedial measures in a timely manner and reported our rectification measures to the governmental authorities. The authorities
did not take any further follow-up inquiries or investigations into the identified issues after our adoption of remedial measures. However,
if the authorities identify any new non-compliance issues related to data protection or cybersecurity in the future, they may order us
to make additional rectifications. If our remedial measures at that time are not satisfactory to them, we may be subject to government
fines, penalties, suspension of our non-compliant operations, or removal of our app from application stores, which could materially and
adversely affect our business and operating results.
On
August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection
Law, effective on November 1, 2021, which further details the general rules and principles on personal information processing and further
increases the potential liability of personal information processor. See “Item 4. Information on the Company—B. Business
Overview—Regulations in the PRC—Regulations on internet security.” Our mobile apps and websites only collect user personal
information that we believe is necessary to provide the corresponding services. We update our privacy policies from time to time to meet
the latest regulatory requirements of the Cyberspace Administration of China and other authorities and adopt technical measures to protect
data and ensure cybersecurity in a systematic way. Nonetheless, the Personal Information Protection Law raises the protection requirements
for processing personal information, and many specific requirements of the Personal Information Protection Law remain to be clarified
by the Cyberspace Administration of China, other regulatory authorities, and courts in practice. If the Cyberspace Administration of
China or other governmental authorities deem us as collecting excessive personal information, including the sensitive personal information,
that beyond the necessity to provide the corresponding services, we will have to make adjustments to our business practices to comply
with the personal information protection laws and regulations.
On
January 4, 2022, the Cyberspace Administration of China, the National Development and Reform Commission, the Ministry of Industry and
Information Technology, and several other administrations jointly published the amended Measures for Cybersecurity Review, which became
effective on February 15, 2022. The amended Measures for Cybersecurity Review further restates and expands the applicable scope of the
cybersecurity review.
On
September 24, 2024, the State Council promulgated the Regulations on Network Data Security, which came into effect on January 1, 2025.
These regulations introduce a new requirement for conducting risk assessments of important data. Failure to comply with these requirements
could result in service suspensions, fines, revocation of relevant business permits or licenses, and other penalties.
As
of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the Cyberspace
Administration of China on such basis. In anticipation of the strengthened implementation of cybersecurity laws and regulations and the
continued expansion of our business, we face potential risks if we are deemed as a critical information infrastructure operator, or if
our data processing activities raise “national security” concern under the amended Measures for Cybersecurity Review. In
such case, if we are not able to comply with the cybersecurity and network data security requirements in a timely manner, or at all,
we may be subject to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations,
or removal of our app from the application stores, among other sanctions, which could materially and adversely affect our business and
results of operations.
37
As
we expand our business globally, we are subject to laws, regulations, contractual obligations and industry standards relating to privacy,
data protection and information security, which are evolving and subject to potentially differing interpretations. There are uncertainties
as to the interpretation and application of laws in one jurisdiction which may be interpreted and applied in a manner inconsistent to
another jurisdiction and may conflict with our current policies and practices or require changes to the features of our system. As a
result, we cannot assure that our existing user information protection system and technical measures will be considered sufficient under
all applicable laws and regulations. If we are unable to address information protection concerns, manage any compromise of security that
results in unauthorized disclosure or transfer of personal data, or to comply with the then applicable laws and regulations, we may incur
additional costs and liabilities, leading to governmental enforcement actions, litigation, fines and penalties or adverse publicity.
Any of these outcomes could harm our reputation, brand and business, cause us to incur significant expenses in defense of such proceedings,
distract our management, increase our costs of doing business, or cause our borrowers and institutional partners to lose trust in us.
Our business, results of operations, financial condition and prospects may be materially adversely affected as a result.
We
face indirect technology, cybersecurity and operational risks relating to third parties.
We
also face indirect technology, cybersecurity and operational risks relating to the third parties upon whom we rely to facilitate or enable
our business activities, such as third-party online payment service providers who manage accounts for certain borrower and institutional
funding partner funds. As a result of increasing consolidation and interdependence of technology systems, a technology failure, cyber-attack
or other information or security breach that significantly compromises the systems of one entity could have a material impact on its
counterparties. Although our agreements with third-party payment service providers provide that each party is responsible for the cybersecurity
of its own systems, any cyber-attack, computer viruses, physical or electronic break-ins or similar disruptions of such third-party payment
service providers could, among other things, adversely affect our ability to serve our users, and could even result in misappropriation
of funds of our borrowers and institutional funding partners. If that were to occur, both we and third-party payment service providers
could be held liable to borrowers and institutional funding partners who suffer losses from the misappropriation.
In
addition, we use open-source software and external models, such as third-party AI solutions in our technology systems and will continue
to do so in the future. Our use of open-source software and external models, including third-party AI solutions also introduces additional
challenges, such as potential intellectual property disputes regarding model-generated outputs, dependence on external models whose terms
or availability may change unexpectedly, quality control risks from algorithmic biases or inaccuracies and evolving regulatory requirements
for AI deployment. Should these risks materialize, we may incur substantial compliance costs, face service disruptions, or need to rapidly
modify our technology—any of which could adversely affect our operations and financial performance.
Our
business depends on third-party service providers to interact with potential borrowers and institutional funding partners, process large
numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information.
Compliance with applicable data protection laws and regulations is a rigorous and time-intensive process.
For
credit assessment purposes, we obtain borrowers’ credit and behavioral data information from the licensed credit reference agencies.
The licensed credit reference agencies undertake that the products and service it provides to us is in compliance with applicable laws
and regulations. If the licensed credit reference agencies or any of their products fails to comply with applicable data protection laws
and regulations, our reputation could suffer and we could become subject to regulatory intervention.
If
our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.
We
primarily rely on our in-house collection team to handle the collection of delinquent loans. We also engage certain third-party collection
service providers to assist us with loan collection. If our or third-party agencies’ primary collection methods, such as phone
calls, text messages, legal letters and legal proceedings, are not as effective as they were and we fail to respond quickly and improve
our collection methods, our delinquent loan collection rate may decrease, and our investors may suffer loss. In addition, we bear credit
risks for the majority of the loans funded by our institutional funding partners to borrowers we introduced. If our ability to collect
delinquent loans is not as effective or efficient as expected, our liquidity, financial conditions and results of operations could be
materially and adversely affected.
38
Moreover,
according to the Notice on Regulating and Rectifying “Cash Loan” Business, promulgated by the Internet Finance Rectification
Office and the Online Lending Rectification Office in December 2017, delinquent loans in China may not be collected by means of violence,
intimidation, insult, defamation, or harassment. Any violation of this notice may result in penalties, including but not limited to suspension
of operation, orders to make rectification, condemnation, revocation of license, orders to cease business operations, and even criminal
liabilities. If the collection methods we use in collecting delinquent loans are viewed by the borrowers or regulatory authorities as
harassments, threats or other illegal conducts, we may be subject to lawsuits initiated by the borrowers or prohibited by the regulatory
authorities from using certain collection methods. If this were to happen and we fail to adopt alternative collection methods in a timely
manner or the alternative collection methods are proven not effective, we might not be able to maintain our delinquent loan collection
rate and the investors’ confidence in our platforms may be negatively affected.
In
recent years, governmental authorities have implemented a more stringent regulatory framework for loan collection activities. Several
public security authorities in different provinces of China took actions against some loan collection outsourcing companies, and even
criminal cases were reported to have been charged against some of them. More recently, on February 1, 2026, the China Banking Association
issued the Guidelines for Financial Institutions on the Collection of Personal Consumer Loans (Interim), which, with limited exceptions,
prohibits contacting the designated liaison persons of defaulting borrowers and imposes restrictions on the timing and frequency of communications
with them. We have established strict implementation policies to ensure that our collection personnel and third-party collection service
providers do not engage in aggressive practices. However, our in-house collection team is large, and we cannot assure that each member
will strictly comply with our policies. Furthermore, we have no direct control over the management of third-party collection service
providers. If any practices by our in-house collection team members or our third-party collection service providers are deemed by governmental
authorities as aggressive collection or soft violence, our reputation and business could be materially and adversely affected. If any
of the foregoing takes place and impairs our ability to cooperate with our institutional funding partners, the transaction volumes on
our platforms will decrease, and our business and results of operations could be materially and adversely affected.
Cyber-attacks,
computer viruses, physical or electronic break-ins or similar disruptions of us or of a third party could result in disclosure or misuse
of confidential information and misappropriation of funds of our borrowers and institutional funding partners, subject us to liabilities,
cause reputational harm and adversely impact our results of operations and financial condition.
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, our platforms collect, store, and process certain personal and other sensitive data from our borrowers. The data that we have
processed and stored makes us or third-party service providers who host our servers a target and potentially vulnerable 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 and put in place internal reporting procedures relating to cybersecurity incidents, our security measures could
be breached. As of the date of this annual report, we have not experienced any material cyber security incidents. However, we cannot
assure you that our security measures will not be breached in the future. Because 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 be unable to anticipate
these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access
to our platforms could cause confidential borrower and institutional funding partner information to be stolen and used for criminal purposes.
39
We
also face indirect technology, cybersecurity and operational risks relating to the third parties upon whom we rely to facilitate or enable
our business activities, including, among others, third-party online payment service providers who manage accounts for certain borrower
and institutional funding partner funds. As a result of increasing consolidation and interdependence of technology systems, a technology
failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material
impact on its counterparties. Although our agreements with third-party payment service providers provide that each party is responsible
for the cybersecurity of its own systems, any cyber-attack, computer viruses, physical or electronic break-ins or similar disruptions
of such third-party payment service providers could, among other things, adversely affect our ability to serve our users, and could even
result in misappropriation of funds of our borrowers and institutional funding partners. If that were to occur, both we and third-party
payment service providers could be held liable to borrowers and institutional funding partners who suffer losses from the misappropriation.
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 borrowers, institutional funding partners and business partners could be severely damaged,
we may become susceptible to future claims if our borrowers, institutional funding partners or business partners suffer damages, and
could incur significant liability, and our business and operations could be adversely affected.
Any
failure by our institutional funding partners or third-party service providers to comply with applicable anti-money laundering and anti-terrorism
financing laws and regulations could damage our reputation.
If
any of our institutional funding partners fails to comply with applicable anti-money laundering laws and regulations, it could become
subject to regulatory intervention or sanction and its business may be adversely affected, which could further have a material adverse
effect on our reputation, business financial condition and results of operations.
In
addition, we currently rely on the third-party service providers, in particular payment companies, that manage the transfer of funds
between borrowers and institutional funding partners, to appropriately design and adopt their own appropriate anti-money laundering policies
and procedures. The payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and
regulations and are regulated by competent regulatory authorities. If any of our third-party service providers fails to comply with applicable
anti-money laundering laws and regulations, our reputation could suffer and we could become subject to regulatory intervention, which
could have a material adverse effect on our business, financial condition and results of operations.
If
we fail to maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results
of operations, meet our reporting obligations or prevent fraud.
We
are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of
2002, adopted rules requiring every public company to include a management report on such company’s internal control over financial
reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial
reporting. As we are no longer an emerging growth company, we are subject to the requirement that an independent registered public accounting
firm must attest to and report on the effectiveness of our internal control over financial reporting.
Our
management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) as of the end of the period covered by this annual report, as required by Rule
13a-15(b) through (c) under the Exchange Act. Based upon that evaluation, our management has concluded that our internal control over
financial reporting was effective as of December 31, 2025. Our independent registered public accounting firm, PricewaterhouseCoopers
Zhong Tian LLP, also attested and reported our internal control over financial reporting. See the attestation report on page F-2 issued
by our independent registered public accounting firm for further details. However, if we fail to maintain effective internal control
over financial reporting in the future, 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.
40
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 Ministry of Industry and Information Technology. 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 platforms. 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 results of operations 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.
Any
significant disruption in service on our platforms, in our computer systems or third-party service providers’ systems, including
events beyond our control, could prevent us from processing or posting loans on our platforms, reduce the attractiveness of our platforms
and result in a loss of borrowers or investors.
In
the event of a platform outage and physical data loss, our ability to perform our servicing obligations, process loan applications or
make funds available on our platforms would be materially and adversely affected. The satisfactory performance, reliability and availability
of our platforms and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability
to retain existing and attract new borrowers and institutional funding partners. Much of our system hardware is hosted in a leased facility
located in Shanghai that is operated by our IT staff. We also maintain a real-time backup system in the same facility and a remote backup
system at a separate facility also located in Shanghai. 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 attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to our leased facilities
in Shanghai, we could experience interruptions and delays in our service and may incur additional expense in arranging new facilities.
Any
interruptions or delays in our service, whether as a result of third-party or our error, natural disasters or security breaches, whether
accidental or willful, could harm our relationships with our borrowers and institutional funding partners and our reputation. Additionally,
in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. 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. These factors could prevent us from processing or posting payments on loans, damage our brand
and reputation, divert our employees’ attention, subject us to liability and cause borrowers and institutional funding partners
to abandon our platforms, any of which could adversely affect our business, financial condition and results of operations.
41
Our
platforms and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be
adversely affected.
Our
platforms and internal systems rely on software that is highly technical and complex. In addition, our platforms and internal systems
depend on the ability of such 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 external or internal use. Errors or other design defects within the software on which we rely may result in a negative
experience for borrowers and institutional funding partners using our platforms, delay introductions of new features or enhancements,
result in errors or compromise our ability to protect borrower or investor 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 borrowers or investors or liability for damages,
any of which could adversely affect our business, results of operations and financial condition.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We
regard our 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, invention assignment
and non-compete agreements with our employees and others to protect our proprietary rights. See also “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. In addition, because of the rapid pace of technological change in our industry, 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
may be difficult to maintain and enforce intellectual property rights in certain markets where we operate. Statutory laws and regulations
may be subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory
interpretation. Confidentiality, invention assignment 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 certain markets where we operate. 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 do not or will not infringe upon or otherwise violate trademarks,
patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future
subject to legal proceedings and claims 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 our products, services 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 the markets where we operate. 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 intellectual property right laws and the procedures and standards for granting trademarks, patents,
copyrights, know-how or other intellectual property rights in certain markets where we operate are still evolving and are uncertain,
and we cannot assure you that the courts or regulatory authorities in certain markets where we operate would agree with our analysis.
If we were found to have violated the intellectual property rights of others, we may be subject to liability 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.
42
We
may be held liable for information or content displayed on, retrieved from or linked to our mobile applications, which may materially
and adversely affect our business and operating results.
We
offer consumer finance products in China mainly through our mobile applications, which are regulated by the Administrative Provisions
on Mobile Internet Applications Information Services. This regulation was promulgated by the Cyberspace Administration of China on June
28, 2016, and amended on June 14, 2022. It states that providers of mobile applications may not create, copy, publish, or distribute
information and content prohibited by laws and regulations. We have implemented internal control procedures to screen the information
and content on our mobile applications to ensure compliance with this regulation. However, we cannot assure that all information or content
displayed on, retrieved from, or linked to our mobile applications complies with the requirements at all times. If our mobile applications
were found to violate any requirement under this regulation, we may be subject to administrative penalties, including warnings, service
suspension, or removal of our mobile applications from mobile application stores, which could materially and adversely affect our business
and operating results.
We
may from time to time be subject to claims, controversies, lawsuits and legal proceedings, which could have a material adverse effect
on our financial condition, results of operations, cash flows and reputation.
We
may from time to time become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. See “Item
8. Financial Information—Legal Proceedings” for more details. Claims, lawsuits, and litigations are subject to inherent uncertainties,
and we are uncertain whether the foregoing claim would develop into a lawsuit. Lawsuits and litigations may cause us to incur defense
costs, utilize a significant portion of our resources and divert management’s attention from our day-to-day operations, any of
which could harm our business. Any settlements or judgments against us could have a material adverse impact on our financial condition,
results of operations and cash flows. In addition, negative publicity regarding claims or judgments made against us may damage our reputation
and may result in material adverse impact on us.
From
time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management
attention and adversely affect our financial results.
We
may, from time to time, identify strategic partners to form strategic alliances, invest in or acquire additional assets, technologies
or businesses that are complementary to our existing business. These transactions may involve minority investments in other companies,
acquisitions of controlling stakes in other companies or acquisitions of selected assets. In October 2025, we acquired a licensed lender
in Australia which holds an Australian Credit Licence from the Australian Securities and Investments Commission (ASIC), to further advance
our globalization strategy into developed markets.
Any
strategic alliances, investments or acquisitions and the subsequent integration of the new assets and businesses obtained or developed
from such transactions into our own businesses will involve risks commonly encountered in business relationships, including:
● regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;
● difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, rights, platforms, products and services of the acquired business;
● inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
● difficulties in retaining, training, motivating and integrating key personnel;
43
● diversion of management’s time and resources from our daily operations;
● difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
● difficulties in retaining relationships with customers, employees and business partners of the acquired business;
● risks of entering markets in which we have limited or no prior experience;
● assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;
● failure to successfully further develop the acquired technology;
● liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;
● potential disruptions to our ongoing businesses; and
● unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.
We
may choose not to pursue investments or acquisitions, or any future investments or acquisitions we undertake may fail to achieve their
intended objectives. These efforts might not align with our business strategy, generate sufficient revenue to offset associated costs,
or deliver the expected benefits. Furthermore, we cannot guarantee that future investments in or acquisitions of new businesses or technologies
will successfully lead to the development of new or improved loan products and services. Even if such products or services are developed,
there is no assurance they will gain market acceptance or prove profitable.
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 different incentives to our management, we cannot assure you that we can continue to retain their services.
If any key executives were unable or unwilling to continue in their present positions, we may 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, and we may incur additional expenses to recruit, train and retain qualified personnel. 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 or we may be unable to enforce
them at all.
Competition
for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We
believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and
marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled
employees. Competition for highly skilled technical, risk 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.
44
In
addition, we invest significant time and expenses in training 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 new employees, and the
quality of our services and our ability to serve borrowers and institutional funding partners could diminish, resulting in a material
adverse effect to our business.
Increases
in labor costs may adversely affect our business and results of operations.
As
of December 31, 2025, we had 3,869 employees, and most of them were based in China. We may need to increase our employee compensation
and benefits levels and offer more favorable working conditions to remain competitive in attracting and retaining talented employees.
In addition, we are required to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related
injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees in
China. We expect that our labor costs, including wages and employee benefits, may continue to increase. Unless we are able to control
our labor costs or pass on these increased labor costs to our borrowers or institutional funding investors by increasing the fees of
our services, our financial condition and results of operations may be adversely affected.
We
are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased
both our costs and the risk of non-compliance.
We
are subject to rules and regulations by various governing bodies, including, for example, the SEC, which is charged with the protection
of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China and
the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws
and regulations have resulted in and are likely to continue to result in, increased expenses and a diversion of management time and attention
from revenue-generating activities to compliance activities.
Moreover,
because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time
as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations
and any subsequent changes, we may be subject to penalty and our business may be harmed.
If
we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We
believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and
cultivates creativity. As we continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture.
Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees,
encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We
do not have any business insurance coverage.
Insurance
companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies.
Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of
insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical
for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of
resources, which could have an adverse effect on our results of operations and financial condition.
We
face risks related to widespread health epidemics or other outbreaks or natural disasters, which could significantly disrupt our operations.
Our
business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as COVID-19, swine flu, avian
influenza, severe acute respiratory syndrome, Ebola and Zika. Such an outbreak could require our employees to be quarantined or our offices
to be disinfected or temporarily closed. Our operations could also be disrupted if any of our employees are suspected of having contracted
any of the foregoing diseases, as this could trigger quarantine measures and office disinfection requirements. In addition, our results
of operations could be adversely affected to the extent that any such epidemic harms the Chinese economy or the global economy more broadly.
Outbreaks in China or globally may negatively impact overall economic conditions and businesses, leading to reduced consumer spending,
particularly on discretionary items. Any epidemic may cause reduced domestic consumption, higher unemployment, significant disruptions
in exports, and increased economic uncertainty in the countries and regions where we operate, all of which could materially impact our
business. Furthermore, individuals may be less inclined to borrow, and borrowers may have a reduced ability or willingness to repay their
loans due to the economic challenges caused by an epidemic, which could in turn affect our credit quality.
45
We
are also vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures,
break-ins, war, riots, terrorist attacks or similar events 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 affect our ability to provide products and services on our platforms. In addition, our revenue and profitability could be
materially reduced to the extent that a natural disaster, health epidemic or other outbreak or any change in policy in response to such
event harms the global or local economy in general.
In
addition, our headquarters are located in Shanghai, where most of our directors and management and a large majority of our employees
currently reside. Most of our system hardware and back-up systems are hosted in leased facilities located in Shanghai. Consequently,
we are highly susceptible to factors adversely affecting Shanghai. If any of the abovementioned natural disasters, health epidemics or
other outbreaks were to occur in Shanghai, our operation may experience material disruptions, such as temporary closure of our offices
and suspension of services, disruption of communications between our headquarters and overseas operations, which may materially and adversely
affect our business, financial condition and results of operations.
Risks
Related to Our Corporate Structure
If
the PRC government deems that the contractual arrangements regarding the consolidated variable interest entities do not comply with PRC
regulatory restrictions on foreign investment in 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.
Foreign
ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws
and regulations. For example, except otherwise regulated, foreign investors are not allowed to own more than 50% of the equity interests
in a value-added telecommunications service provider (except for e-commerce, domestic multi-party communications, storage and forwarding
classes, and call centers).
We
are a Cayman Islands company and our PRC subsidiaries are considered foreign invested enterprises. There has been no official guidance
or interpretation from the PRC government clarifying which category of value-added telecommunication services our business falls into.
However, we believe the online consumer finance services we provide in China may constitute a type of value-added telecommunication service
that is subject to restrictions on foreign ownership and investment. Therefore, 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, the consolidated variable interest entities,
and their shareholders to conduct some of our operations in China. For more detailed about these contractual arrangements, see “Item
4. Information on the Company—C. Organizational Structure—Contractual Arrangements.” As a result of these contractual
arrangements, we are able to direct the activities of the operation of the consolidated variable interest entities and their subsidiaries
and consolidate their operating results in our financial statements under U.S. GAAP.
In
the opinion of our PRC counsel, Hui Ye Law Firm, our current structures of the consolidated variable interest entities and our WFOEs
are not in violation of existing PRC laws, regulations and rules, and these contractual arrangements are valid, binding and enforceable
in accordance with their terms and applicable PRC laws and regulations currently in effect.
We
are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities, and our operations in China
are primarily through the consolidated variable interest entities with which we have maintained contractual arrangements. Holders of
our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest
in the consolidated variable interest entities and their subsidiaries. If the PRC government deems that our contractual arrangements
with the consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant
industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future,
we could be subject to severe penalties or be forced to relinquish our interests in those operations. We may not be able to repay the
notes and other indebtedness, and our ADSs may decline in value or become worthless, if we are unable to assert our contractual control
rights over the assets of the consolidated variable interest entities, which contribute to 71.1% of our revenues in 2025. Our holding
company in the Cayman Islands, the consolidated variable interest entities, and investors of our company face uncertainty about potential
future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable
interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and
our company as a group.
46
However,
our PRC counsel, Hui Ye Law Firm, has also advised us that there are uncertainties regarding the interpretation and application of current
or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent
with the opinion of our PRC counsel.
Although
we believe we, our PRC subsidiaries and the consolidated variable interest entities comply with current PRC laws and regulations, we
cannot assure you that the PRC government would agree that our contractual arrangements comply with PRC licensing, registration or other
regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. The PRC government
may have broad discretion in determining rectifiable or punitive measures for non-compliance with or violations of PRC laws and regulations.
If the PRC government determines that we or the consolidated variable interest entities do not comply with applicable law, it could revoke
the consolidated variable interest entities’ business and operating licenses, require the consolidated variable interest entities
to discontinue or restrict the consolidated variable interest entities’ operations, restrict the consolidated variable interest
entities’ right to collect revenues, block the consolidated variable interest entities’ websites, require the consolidated
variable interest entities to restructure our operations, impose additional conditions or requirements with which the consolidated variable
interest entities may not be able to comply, impose restrictions on the consolidated variable interest entities’ business operations
or on their customers, or take other regulatory or enforcement actions against the consolidated variable interest entities that could
be harmful to their business. Any of these or similar occurrences could significantly disrupt our or the consolidated variable interest
entities’ business operations or restrict the consolidated variable interest entities from conducting a substantial portion of
their business operations, which could materially and adversely affect the consolidated variable interest entities’ business, financial
condition and results of operations. If any of these occurrences results in our inability to direct the activities of operation of any
of the consolidated variable interest entities that most significantly impact its economic performance, or our failure to receive the
economic benefits from any of the consolidated variable interest entities, we may not be able to consolidate these entities in our consolidated
financial statements in accordance with U.S. GAAP.
We
face uncertainties with respect to the implementation of the Foreign Investment Law of the PRC and how it may impact the viability of
our current corporate structure, corporate governance and business operations.
On
March 15, 2019, the National People’s Congress enacted the Foreign Investment Law of the PRC, which replaced the previous laws
regulating foreign investment in China. The Foreign Investment Law of the PRC embodies an expected trend in PRC regulatory policy to
rationalize its foreign investment regulatory regime in line with prevailing international practices and legislative efforts to unify
corporate legal requirements for both foreign and domestic investments. However, uncertainties still exist regarding its interpretation
and implementation. In particular, under the Foreign Investment Law of the PRC, “foreign investment” refers to investment
activities directly or indirectly conducted by foreign individuals, enterprises, or other entities in China. Though it does not explicitly
classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement
would not be interpreted as a type of indirect foreign investment activity under the definition in the future. Additionally, the definition
contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative
regulations or other methods prescribed by the State Council. On December 26, 2019, the State Council promulgated the Implementation
Regulations on the Foreign Investment Law of the PRC, but this regulation still does not explicitly define whether contractual arrangements
would be deemed as a form of foreign investment. Therefore, it still leaves leeway for future laws, administrative regulations, or provisions
promulgated by the State Council to provide for contractual arrangements as a form of foreign investment.
47
We
cannot rule out the possibility that control through contractual arrangement may be regarded as a form of control made by foreign investors,
and therefore require approval from the competent governmental authorities. In any of these cases, it will be uncertain whether our contractual
arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations.
Furthermore, if future laws, administrative regulations or provisions promulgated by the State Council 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, corporate governance and business operations.
We
rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations,
and such contractual arrangements may not be as effective as equity ownership in providing operational control.
We
have relied and expect to continue to rely on contractual arrangements with the consolidated variable interest entities to operate our
online consumer finance platform business in China. For a description of these contractual arrangements, see “Item 4. Information
on the Company—C. Organizational Structure.” Revenues contributed by the consolidated variable interest entities and their
respective subsidiaries accounted for 78.6%, 75.0% and 71.1% of our total revenues for 2023, 2024 and 2025, respectively. These contractual
arrangements may not be as effective as equity ownership in providing us with control over the consolidated variable interest entities.
For example, the consolidated variable interest entities and its shareholders could breach their contractual arrangements with us by,
among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.
If
we had direct ownership of the consolidated variable interest entities, we would be able to exercise our rights as a shareholder to effect
changes in the board of directors of the consolidated variable interest 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 of obligations under the contractual arrangements by the consolidated variable interest entities, shareholders of
the consolidated variable interest entities, and other parties to the contractual arrangements to direct the activities of operation
of the consolidated variable interest entities. The shareholders of the consolidated variable interest entities may not act in the best
interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which
we intend to operate our business through the contractual arrangements with the consolidated variable interest entities. Although we
have the right to replace any shareholder of the consolidated variable interest entities under the contractual arrangements, if any of
these shareholders are uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights
under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings, the outcome of which
will be subject to uncertainties. See “—Any failure by the consolidated variable interest entities, shareholders of the consolidated
variable interest entities or other parties to perform their obligations under our contractual arrangements with them would have a material
adverse effect on our business.” Therefore, our contractual arrangements with the consolidated variable interest entities and shareholders
of the consolidated variable interest entities may not be as effective in ensuring our control over our business operations as equity
ownership would be.
Any
failure by the consolidated variable interest entities, shareholders of the consolidated variable interest entities or other parties
to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
If
the consolidated variable interest entities or their shareholders fail to perform their respective obligations under the contractual
arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on
legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure
you will be effective under PRC laws. For example, if the shareholders of the consolidated variable interest entities were to refuse
to transfer their equity interests in the consolidated variable interest entities to us or our designee when 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.
48
All
the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration
in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is evolving rapidly. The interpretations of many laws, regulations, and rules
may exhibit inconsistencies, and the enforcement of these laws, regulations, and rules may also involve uncertainties. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and
little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted
or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action
become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court
unless such rulings are revoked or determined unenforceable by a competent court. 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 that 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 direct the activities of operation of the consolidated variable interest entities and their respective subsidiaries, and
our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business in China—Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.”
The
shareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and
adversely affect our business and financial condition.
The
equity interests of the consolidated variable interest entities are held by Mr. Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu and Mr. Shaofeng
Gu, our co-founders and shareholders, as well as a few of their family relatives. Their interests in the consolidated variable interest
entities may differ from the interests of our company as a whole. These shareholders may breach, or cause the consolidated variable interest
entities to breach, the existing contractual arrangements we have with them and the consolidated variable interest entities, which would
have a material adverse effect on our ability to direct the activities of operation of the consolidated variable interest entities and
their subsidiaries and receive economic benefits from them. For example, the shareholders of Beijing Paipairongxin, one of the consolidated
variable interest entities, may be able to cause our agreements with Beijing Paipairongxin and Shanghai PPDai, a major subsidiary of
Beijing Paipairongxin, to be performed in a manner adverse to us by, among other things, 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 call option agreement with these shareholders to request them to transfer all of their equity
interests in the consolidated variable interest entities to a PRC entity or individual designated by us, to the extent permitted by PRC
laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of the consolidated variable interest
entities, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial
uncertainty as to the outcome of any such legal proceedings.
Contractual
arrangements with the consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine
that we or the consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition and
the price of our ADSs.
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 may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements
among the consolidated variable interest entities, shareholders of the consolidated variable interest entities and us as well as other
parties 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, regulations and rules, and adjust the consolidated variable interest entities’ income 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
the consolidated variable interest entities for PRC tax purposes, which could in turn increase their tax liabilities without reducing
our tax expenses. In addition, if we request the shareholders of the consolidated variable interest entities to transfer their equity
interests in the consolidated variable interest entities at nominal or no value pursuant to these contractual arrangements, such transfer
could be viewed as a gift and subject us to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other
penalties on the consolidated variable interest entities for the adjusted but unpaid taxes according to the applicable regulations. Our
financial position could be materially and adversely affected if the consolidated variable interest entities’ tax liabilities increase
or if they are required to pay late payment fees and other penalties.
49
We
may lose the ability to use and enjoy assets held by the consolidated variable interest entities that are material to the operation of
our business if any consolidated variable interest entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
The
consolidated variable interest entities and their subsidiaries hold certain assets that are material to the operation of our business,
including, among others, intellectual properties, hardware and software. Under the contractual arrangements, the consolidated variable
interest entities may not, and the shareholders of the consolidated variable interest entities may not cause them to, in any manner,
sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without our prior consent.
However, in the event that the shareholders of the consolidated variable interest entities breach the these contractual arrangements
and voluntarily liquidate the consolidated variable interest entities, or the consolidated variable interest entities 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 or all of our business activities, which could materially and adversely affect our business,
financial condition and results of operations. If the consolidated variable interest entities undergo a voluntary or involuntary liquidation
proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate
our business, which could materially and adversely affect our business, financial condition and results of operations.
Risks
Related 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
and results of operations.
The
majority of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations
may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth
in China as a whole.
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
through 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, the growth rate has gradually slowed since 2010, and 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. 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.
A
severe or prolonged downturn in the Chinese or global economy, any adverse policy change targeting China, protracted geopolitical tensions
between China and other countries, or any financial or economic crisis—or even the perceived threat of such a crisis—could
materially and adversely affect our business and financial condition.
Developments
regarding tariffs between China and other countries and regions may potentially affect our business development and performance in the
countries and regions where we operate. In particular, tensions between the United States and China in recent years have led to additional
or higher tariffs imposed by the United States on products imported from China and restrictions on the sale of certain products into
the United States. China has responded by imposing, and proposing to impose, additional or higher tariffs on products imported from the
United States, among other measures. There remains considerable uncertainty regarding future tariff rates and the trajectory of U.S.-China
trade relations.
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Furthermore,
COVID-19 had a severe and negative impact on the Chinese and the global economy from 2020 through 2022, and the global macroeconomic
environment still faces numerous challenges. The growth rate of the Chinese economy has been slowing since 2010 and the Chinese population
began to decline in 2022. The Russia-Ukraine conflict, the Hamas-Israel conflict, the conflict in the Persian Gulf and surrounding areas,
and the restrictions at various times on shipping through the straits of Hormuz and the Red Sea have heightened geopolitical tensions
across the world. Regional conflicts have contributed to increases in food and energy prices and thus to inflation more generally. Economic
conditions in China are sensitive to global economic trends, as well as to 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 reduce
demand for consumer loans and investments, and could materially and adversely affect our business, results of operations, and financial
condition.
On
October 28, 2024, the U.S. Department of the Treasury issued a final rule on outbound investment, or the Outbound Investment Rule, to
implement the executive order of August 9, 2023 which became effective on January 2, 2025. The Outbound Investment Rule imposes investment
prohibition and notification requirements on U.S. persons for a wide range of investments in entities associated with China (including
Hong Kong and Macau), collectively defined as “Covered Foreign Persons,” that are engaged in activities relating to three
sectors: (i) semiconductors and microelectronics, (ii) quantum information technologies, and (iii) artificial intelligence systems. U.S.
persons subject to the Outbound Investment Rule are prohibited from making, or required to report, certain investments in Covered Foreign
Persons, which are defined as “covered transactions.” If we were to be deemed a Covered Foreign Person, our ability to raise
capital would be significantly and negatively affected. In such case, the trading prices of our ADSs and/or our Class A ordinary shares
may be materially and adversely affected and the value of our securities may decline significantly. In addition, on December 18, 2025,
the Comprehensive Outbound Investment National Security Act of 2025, or the COINS Act, was enacted as part of the National Defense Authorization
Act for Fiscal Year 2026. The COINS Act largely preserves the core framework of the Outbound Investment Rule while expanding its scope
and coverage in certain respects such as expanding covered activities in high-performance computing and supercomputing and hypersonic
systems and including more countries of concern. The COINS Act will not become effective until the U.S. Department of the Treasury issues
implementing regulations, which must be promulgated through notice-and-comment rulemaking and no later than March 13, 2027. Accordingly,
the Treasury may amend, expand or otherwise modify existing outbound investment prohibitions and restrictions pursuant to the COINS Act.
Furthermore,
there have been media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies
from accessing U.S. capital markets, and delisting China-based companies from U.S. national securities exchanges. If any such deliberations
were to materialize, the share price of China-based issuers listed in the United States such as us would be materially and adverse affected.
The risk and uncertainty associated with such deliberations could also have a negative impact on the price of our ADSs and/or the notes.
Also, a prohibition against our securities trading in the United States or any threat thereof could significantly affect our ability
to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition,
and prospects.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.
The
PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since the PRC legal system
continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these
laws, regulations and rules involves uncertainties.
In
particular, PRC laws and regulations concerning the online consumer finance industry are still developing and evolving. Although we have
taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles
raised by the China Banking and Insurance Regulatory Commission, and avoid conducting any non-compliant activities under the applicable
laws and regulations, such as providing guarantee to institutional funding partners or sharing borrowers’ personal information
with institutional funding partners directly, the PRC government authority may promulgate new laws and regulations regulating the online
consumer finance industry in the future. We cannot assure you that our business operations would not be deemed to violate any new PRC
laws or regulations relating to online consumer finance. Moreover, developments in the online consumer finance 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 online consumer finance platforms like us and could materially and adversely affect our business and operations.
51
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative
and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult
to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal
systems. 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. Such uncertainties, including uncertainty over the scope and effect of our contractual, property
(including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to
continue our operations.
The
PRC government has significant oversight over the conduct of our business and it has exerted more oversight over offerings that are conducted
overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability
to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
We
may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business
and results of operations.
The
PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the internet industry. These internet-related laws and regulations are 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 the consolidated variable interest entities. Such corporate structure may subject us to sanctions,
compromise the enforceability of related contractual arrangements, which may result in significant disruption to our business or have
other harmful effects on us.
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 Cyberspace Administration of China (with the involvement of the State Council
Information Office, the Ministry of Industry and Information Technology, and the Ministry of Public Security). The primary role of this
agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with different departments
in connection with online content administration and to deal with cross-ministry regulatory matters for the internet industry.
Our
ppdai.com website and PPDai mobile application, operated by Shanghai PPDai, a subsidiary of Beijing Paipairongxin, one of the consolidated
variable interest entities, may be considered to provide internet content provision services, as well as online data processing or transaction
processing services. As a result, Shanghai PPDai may need to obtain certain value-added telecommunications business licenses. For more
detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any failure
to comply with existing or future laws and regulations related to data protection, data security, cybersecurity or personal information
protection could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating
results and business.”
The
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 has the power, among other things, to levy fines, confiscate our income, revoke our
business licenses, and require us to discontinue the related business or impose restrictions on the affected portion of our
business. Any of these actions by the PRC government may have a material adverse effect on our business and results of
operations.
52
The
PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in
our operations and the value of our ADSs.
The
majority of our operations are located in China, which are governed by PRC laws and regulations. The PRC government has significant oversight
and discretion over the conduct of our business, and may influence our operations as the government deems appropriate to advance regulatory
and societal goals and policy positions. Historically, the PRC government had published new regulations and policies that significantly
affected our industry. For example, we modified our business model and practices in the past as a result of changes in laws, regulations.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We have modified our business model
and practices in the past as a result of changes in laws, regulations, policies, measures and guidance. We may further change our business
model or practices in the future, which may not be successful ultimately.” Additionally, we have adjusted our practices for transmission
of borrowers’ personal information following the promulgation of regulations related to “disconnecting direct connection.”
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—The laws and regulations governing
online consumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to
violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial
condition and results of operations would be materially and adversely affected.”
We
cannot rule out the possibility that the PRC government will release additional regulations or policies in the future that directly or
indirectly affect our industry or require us to seek additional permission to continue our operations, which could result in a material
adverse change in our operation and/or the value of our ADSs. In addition, implementation of industry-wide regulations directly targeting
our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business
face potential uncertainty from actions taken by the PRC government affecting our business.
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 holding company, and we may rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we
may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their
ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiaries to
adjust its taxable income under the contractual arrangements it currently has in place with the consolidated variable interest entities
in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us. See “Item
3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—Contractual arrangements with the consolidated
variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or the consolidated variable
interest entities owe additional taxes, which could negatively affect our financial condition and the price of our ADSs.”
Under
PRC laws and regulations, our PRC subsidiaries, which are foreign-owned enterprises, 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 substantially 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 its Renminbi revenues to pay dividends
to us.
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The
PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward
by the State Administration of Foreign Exchange, or SAFE, for cross-border transactions falling under both the current account and the
capital account. For instance, the People’s Bank of China issued the Circular on Further Clarification of Relevant Matters Relating
to Offshore RMB Loans Provided by Domestic Enterprises on November 22, 2016, which stipulates that offshore RMB loans provided by a domestic
enterprise to offshore enterprises in which it holds equity interests may not exceed 30% of such equity interests. Such regulations may
constrain the ability of our PRC subsidiaries to provide offshore loans to us. 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 of the PRC 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.
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 offshore financing to make loans to or make additional capital contributions to
our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any
funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval
by or registration with governmental authorities in China. According to the PRC regulations on foreign-invested enterprises in China,
capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the foreign investment comprehensive
management information system, and registration with other governmental authorities in China. In addition, any foreign loan procured
by our PRC subsidiaries is required to be registered with SAFE, or its local branches, and each of our PRC subsidiaries may not procure
loans which exceed the difference between its registered capital and its total investment amount as recorded in the foreign investment
comprehensive management information system. Any medium-term or long-term loan to be provided by us to any of the consolidated variable
interest entities must be recorded and registered by the National Development and Reform Committee and SAFE or its local branches.
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.
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On
October 25, 2019, SAFE promulgated the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, 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 this regulation 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
or filings on a timely basis, if at all, with respect to future loans that we provide to our PRC subsidiaries or the consolidated variable
interest entities or with respect to future capital contributions that we provide to our PRC subsidiaries. If we fail to complete such
registrations or obtain such approvals, our ability to use the proceeds from our offshore financing 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 other 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.
We
receive the majority of our net revenues in Renminbi. Any significant appreciation or depreciation of Renminbi may materially and adversely
affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example,
to the extent that we need to convert U.S. dollars we receive into Renminbi to pay our operating expenses in China, appreciation of Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant
depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could
adversely affect the price of our ADSs.
We
hold not only Renminbi but also other foreign currencies. Very limited hedging options are available in China to reduce our exposure
to exchange rate fluctuations. In 2025, we did not enter into hedging transactions in an effort to reduce our exposure to foreign currency
exchange risk. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk” for
more details. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges
may be limited and we may not be able to adequately hedge our exposure 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. As a result, fluctuations in
exchange rates may have a material adverse effect on your investment.
In
addition, our operations in the overseas markets expose us to the effects of fluctuations in currency exchange rates as we report our
financials and key operational metrics in Renminbi. With respect to our operations in the overseas markets, we earn revenue denominated
in local currencies of the overseas markets, while some of our costs and expenses are paid in the U.S. dollar. Fluctuations in the exchange
rates of local currencies of the overseas markets against Renminbi and the U.S. dollar could cause fluctuations in our operational and
financial results.
55
Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the price of our ADSs.
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 the majority of our net revenues in RMB. Under our current corporate structure, our holding company
in the Cayman Islands may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have.
Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. Specifically, under the existing exchange restrictions, cash generated from the operations of our PRC subsidiaries 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 subsidiaries and the consolidated variable interest entities 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.
The
PRC government may, from time to time, impose more restrictive foreign exchange policies or step up scrutiny of major outbound capital
movements. More restrictions and substantial vetting processes are put in place by SAFE to regulate cross-border transactions falling
under the capital account. The PRC government may, at its discretion, further restrict access in the future to foreign currencies for
current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy
our foreign currency demands, we may not be able to pay dividends in foreign currency to our shareholders, including holders of our ADSs.
Failure
to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required
by PRC regulations 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.
We have not made adequate employee benefit payments for some employees. With respect to the underpaid employee benefits, we may be required
to make supplemental contributions for these plans as well as pay late fees and fines. With respect to the underwithheld 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 for the
underpaid employee benefits and underwithheld individual income tax, our financial condition and results of operations may be adversely
affected.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
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 additional
procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, 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, amended by the Standing Committee
of the National People’s Congress on June 24, 2022, 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, or other means of obtaining control or a decisive influence over another entity, collectively referred
to as a “concentration of undertakings,” involves any consolidated variable interest entities, such consolidated variable
interest 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. Due to the enhanced implementation of the Anti-Monopoly Law, we may be under heightened regulatory
scrutiny, which will increase our compliance costs and subject us to heightened risks and challenges.
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In
addition, the security review rules issued by the Ministry of Commerce of the PRC that 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 of the PRC, and the rules prohibit any activities attempting to bypass a security
review, including by structuring the transaction through a proxy or contractual control arrangement. On December 19, 2020, the National
Development and Reform Commission and the Ministry of Commerce jointly promulgated the Measures on the Security Review of Foreign Investment,
which became effective on January 18, 2021. These measures stipulate 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 are required to report to the office in advance for a security review. See “Item 4. Information on the Company—B. Business
Overview—Regulations in the PRC—Regulations Relating to Foreign Investment.”
In
the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations
and other applicable rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
clearance or approval from the competent government authorities may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market share.
PRC
regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their
registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties
under PRC law.
SAFE
promulgated the Circular on Relevant Issues Relating to PRC Resident’s Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, commonly known as SAFE Circular 37, in July 2014. This replaced the former circular, commonly known as “SAFE
Circular 75,” promulgated by SAFE on October 21, 2005.
SAFE
Circular 37 mandates that PRC residents or entities register with SAFE or its local branch for the establishment or control of offshore
entities intended for overseas investment or financing. Additionally, these residents or entities must update their SAFE registrations
for material events such as changes in basic information, investment amounts, share transfers, or mergers. If our shareholders who are
PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from
distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted
in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Mr.
Jun Zhang, Mr. Tiezheng Li, Mr. Honghui Hu, and Mr. Shaofeng Gu, who are known to us as being PRC residents and who directly or indirectly
hold shares in our Cayman Islands holding company, have completed the foreign exchange registrations in accordance with SAFE Circular
75 then in effect. They are now in the process of updating their registration required in connection with corporate restructuring. Ms.
Wei Luo, who indirectly hold shares in our Cayman Islands holding company and previously known to us to be a mainland China resident,
has changed her citizenship to Hong Kong. Ms. Wei Luo registered in accordance with SAFE Circular 75 previously.
However,
we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor
can we compel our beneficial owners to comply with the requirements of SAFE Circular 37. As a result, we cannot assure you that all of
our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any
applicable registrations or approvals required by, SAFE Circular 37. These shareholders’ or beneficial owners’ failure to
comply with SAFE Circular 37, or our failure to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make
distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
57
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC
plan participants or us to fines and other legal or administrative sanctions.
Pursuant
to SAFE Circular 37, PRC residents who participate in stock incentive plans in overseas non-publicly-listed companies are required to
submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose vehicles.
In the meantime, our directors, officers and other employees who are PRC citizens, subject to limited exceptions, and who have been granted
stock options by us, are required to follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, promulgated by SAFE in February 2012. Pursuant to this notice,
PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who 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. Failure
to complete the 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. See “Item 4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations
Relating to Foreign Exchange—Regulations on employee stock incentive plans of overseas publicly-listed company.”
The
State Administration of Taxation has issued certain circulars concerning employee stock options and restricted shares. Under these circulars,
our employees working in China who exercise stock options or are granted restricted shares will be subject to PRC individual income tax.
Our PRC subsidiaries have obligations to file documents related to employee stock options 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 applicable laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental
authorities. See “Item 4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations
Relating to Foreign Exchange—Regulations on employee stock incentive plans of overseas publicly-listed 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 Enterprise Income Tax Law of the PRC and its implementation rules, an enterprise established outside of the PRC with a “de
facto management body” within the PRC 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 over and overall management of the business, productions, personnel, accounts and properties of an enterprise.
In April 2009, the State Administration of Taxation issued the Circular of the State Administration of Taxation on Issues Concerning
the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards
of Organizational Management, 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 this regulation only applies to offshore enterprises
controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set
forth in the circular may reflect the general position of the State Administration of Taxation on how the “de facto management
body” test should be applied in determining the tax resident status of all offshore enterprises. According to this regulation,
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.
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We
believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Item 10. Additional Information—E.
Taxation—People’s Republic of China Taxation.” 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.”
As the majority of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If
the PRC tax authorities determine that FinVolution Group or any of our subsidiaries outside of China is a PRC resident enterprise for
PRC enterprise income tax purposes, then FinVolution Group or such subsidiary could be subject to PRC tax at a rate of 25% on worldwide
income, which could materially reduce our net income, and we will also be subject to PRC enterprise income tax reporting obligations.
Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized
on the sale or other disposition of our ADSs or ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises
or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed
to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties
between their country 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 the investment in our ADSs.
We
may not be able to obtain certain benefits under tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary.
We
are a holding company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity
from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the Enterprise Income Tax Law of the PRC, a withholding
tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless
any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment.
Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and Tax Evasion on Income, and the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend
Clauses of Tax Agreements issued by the State Administration of Taxation, such withholding tax rate may be lowered to 5% if the PRC enterprise
is at least 25% held by a Hong Kong enterprise for at least 12 consecutive months prior to distribution of the dividends and is determined
by the PRC tax authority to have satisfied other conditions and requirements under the above arrangement and other applicable PRC laws.
Furthermore, under the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective
in August 2015, the non-resident enterprises shall determine whether they are qualified to enjoy the preferential tax treatment under
the tax treaties and file their report and materials with the tax authorities. There are also other conditions for enjoying the reduced
withholding tax rate according to other tax rules and regulations. See “Item 10. Additional Information—E. Taxation—People’s
Republic of China Taxation.” We cannot assure you that we will be able to complete the necessary filings with the PRC tax authority
and enjoy the preferential withholding tax rate of 5% under the arrangement with respect to dividends to be paid by our PRC subsidiaries
to our Hong Kong subsidiaries.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On
February 3, 2015, the State Administration of Taxation issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect
Transfer of Properties by Non-Resident Enterprises, or SAT Public Notice 7. Pursuant to this notice, 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 SAT Bulletin 37. It further clarifies the practice and procedure
of the withholding of non-resident enterprise income tax.
We
face uncertainties on the reporting and consequences of past or future private equity financing transactions, offshore restructuring,
or other transactions involving the transfer of ordinary 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
obligations, 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 SAT Public Notice 7 and SAT 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.
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The
PRC tax authorities have the discretion under SAT Public Notice 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 SAT Public Notice 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.
The
approval of and filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under
PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.
The
M&A Rules require an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies
and controlled by PRC persons or entities to obtain the approval of the CSRC prior to the listing and trading of such special purpose
vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and our
offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain whether we can or how
long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to
obtain or delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission post-approval, would subject us to
sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China,
restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely
affect our business, financial condition, and results of operations.
On
February 17, 2023, the CSRC published the Trial Administrative Measures on the Overseas Issuance and Listing of Securities by Domestic
Companies, or the CSRC Filing Measures, and five supporting guidelines, effective on March 31, 2023. The CSRC Filing Measures establish
a new filing-based regime to regulate overseas offerings and listings by domestic companies. According to the CSRC Filing Measures, PRC
domestic companies that seek to offer and list securities in overseas markets, either in direct or indirect means, are required to fulfill
the filing procedure with the CSRC and report relevant information. Failure to comply with the filing or reporting requirements for any
offering, listing or any other capital raising activities, may result in fines and other penalties on the companies, the controlling
shareholder and other responsible persons. On February 17, 2023, the CSRC also issued the Notification to the Administrative Arrangement
of the Overseas Issuance and Listing of Securities by Domestic Companies, which, among others, clarifies that domestic companies already
listed overseas before March 31, 2023, are not required to complete filing procedures immediately. However, they will be required to
file with the CSRC when subsequent matters such as refinancing are involved. Furthermore, regarding the overseas listing of companies
with contractual arrangements (also known as VIE structures), the CSRC will solicit opinions from relevant regulatory authorities. The
CSRC will then complete the filing of the overseas listing for companies meeting compliance requirements, supporting their development
and growth by enabling them to utilize both markets and their resources. For more details of the CSRC Filing Measures and other related
regulations, see “Item 4. Information on the Company—B. Business Overview—Regulations in the PRC—Regulations
Relating to Overseas Listing and M&A.”
If
it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, including
the cybersecurity review under the amended Measures for Cybersecurity Review, are required for our offerings, it is uncertain whether
we can or how long it will take us to obtain such approval or complete such filing procedures. Any failure to obtain (including possible
rescission of any approvals that had been obtained) or delay in obtaining such approval or completing such filing procedures for our
offerings could subject us to penalties and sanctions such as fines and penalties on our operations in China, orders limiting our ability
to pay dividends outside of China, reduction of our operating privileges in China, or delay or restrictions on repatriation of the proceeds
from our offshore offerings into China. These penalties and sanctions could materially and adversely affect our business, financial condition,
results of operations, and prospects, as well as the trading price of our securities. Similarly, the CSRC or other PRC regulatory authorities
could also require us to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors
engage in trading or hedging activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement
and delivery may not occur. In addition, if the CSRC or other regulatory authorities subsequently promulgate new rules or explanations
requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior offshore offerings,
we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any
uncertainties or negative publicity regarding such approval requirement could materially and adversely affect our business, prospects,
financial condition, reputation, and the trading price of our listed securities.
60
The
PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and
the inability of the PCAOB to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections.
Our
auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, 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.
The auditor is located in mainland China, a jurisdiction where the PCAOB was historically unable to conduct inspections and investigations
completely before 2022. As a result, we and investors in the ADSs were deprived of the benefits of such PCAOB inspections. The inability
of the PCAOB to conduct inspections of auditors in China in the past has made 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. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021
determination and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely
registered public accounting firms. However, if the PCAOB determines in the future that it no longer has full access to inspect and investigate
completely accounting firms in mainland China and Hong Kong, and we use an accounting firm headquartered in one of these jurisdictions
to issue an audit report on our financial statements filed with the SEC, we and investors in the ADSs would be deprived of the benefits
of such PCAOB inspections again, which could cause investors and potential investors in our ADSs to lose confidence in our audit procedures
and reported financial information and the quality of our financial statements.
Our
ADSs may be prohibited from trading in the United States under the HFCA Act in the future if the PCAOB is unable to inspect or investigate
completely auditors located in China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely
affect the value of your investment.
Pursuant
to the HFCA Act, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been
subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares or ADSs from being traded on a national
securities exchange or in the over-the-counter trading market in the United States.
On
December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate
completely registered public accounting firms headquartered in mainland China and Hong Kong and our auditor was subject to that determination.
In May 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCA Act following the filing of our annual report
on Form 20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the
list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. As of the date of this
annual report, the PCAOB has not issued any new determination that it is unable to inspect or investigate completely registered public
accounting firms headquartered in any jurisdiction. For this reason, we do not expect to be identified as a Commission-Identified Issuer
under the HFCA Act after we file this annual report on Form 20-F.
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Each
year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other
jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting
firms in mainland China and Hong Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report
on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the
annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCA Act, our securities would be prohibited from being
traded on a national securities exchange or in the over-the-counter trading market in the United States if we are identified as a Commission-Identified
Issuer for two consecutive years in the future. If our shares and ADSs are prohibited from trading in the United States, there is no
certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States.
A prohibition of being able to trade in the United States would substantially impair your ability to sell or purchase our ADSs when you
wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such
a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material
adverse impact on our business, financial condition, and prospects.
Risks
Related to Our American Depositary Shares
The
market price for our ADSs may be volatile.
The
trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because
of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business
operations located in China that have listed their securities in the United States. The trading performances of these other companies’
securities, including internet and fintech companies, may affect the attitudes of investors toward similar companies listed in the United
States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition,
any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters
of these other companies may also negatively affect the attitudes of investors towards companies with business operations in China in
general, including us, regardless of our conduct. In addition, securities markets may from time to time experience significant price
and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States
at the beginning of the COVID-19 pandemic, which may have a material and adverse effect on the trading price of our ADSs. In addition
to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following
conditions in the online consumer finance industries:
● announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;
● changes in the economic performance or market valuations of other online consumer finance platforms;
● actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
● changes in financial estimates by securities research analysts;
● announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;
● additions to or departures of our senior management;
● detrimental negative publicity about us, our management or our industry;
● fluctuations of exchange rates between the RMB and the U.S. dollar;
● release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
● sales or perceived potential sales of additional ordinary shares or ADSs.
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If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market
price for our ADSs and trading volume could decline.
The
trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or
our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover
us downgrade our ADSs or publish inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline.
If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in
the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.
Substantial
future sales or perceived potential sales of our ADSs in the public market could cause the price of 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. 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.
Techniques
employed by short sellers may drive down the market price of the ADSs.
Short
selling is the practice of selling securities that a seller does not own but rather has borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. Short sellers hope to profit from a decline in the value
of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as short sellers expect to
pay less in that purchase than they received in the sale. As it is in short sellers’ interest for the price of the security to
decline, many short sellers publish, or arrange for the publication of, negative opinions and allegations regarding an issuer and its
business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These
short attacks have, in the past, led to selling of shares in the market.
We
may be subject to short seller attacks from time to time in the future. If we were to become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we may have to expend a significant amount of resources to investigate such
allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the
manner in which we can proceed against the short sellers by principles of freedom of speech, applicable law or issues of commercial confidentiality.
Such a situation could be costly and time-consuming, and could divert management’s attention from the day-to-day operations of
our company. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact the market
price of our ADSs and our business operations.
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
direct the voting of the underlying Class A ordinary shares which are represented by your ADSs.
As
a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such
meetings. You will only be able to exercise the voting rights which attach to the underlying Class A ordinary shares which are represented
by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under
the deposit agreement, you may vote only by giving voting instructions to the depositary, as the holder of the underlying Class A ordinary
shares which are represented by your ADSs. Upon receipt of your voting instructions, the depositary will endeavor to vote the underlying
Class A ordinary shares in accordance with your instructions in the event voting is by poll, and in accordance with instructions received
from a majority of holders of ADSs who provide instructions in the event voting is by show of hands. The depositary will not join in
demanding a vote by poll. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary
shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting.
Under our currently effective memorandum and articles of association, the minimum notice period required to be given by our company to
our registered shareholders for convening a general meeting is seven days. When a general meeting is convened, you may not receive sufficient
advance notice to enable you to withdraw the underlying shares which are represented by your ADSs and become the registered holder of
such shares prior to the record date for the general meeting to allow you to attend the general meeting or to vote directly with respect
to any specific matter or resolution which is to be considered and voted upon at the general meeting.
63
In
addition, under our currently effective memorandum and articles of association, for the purposes of determining those shareholders who
are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record
date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing
the underlying shares which are represented by your ADSs and becoming the registered holder of such shares prior to the record date,
so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general
meeting, the depositary will, if we request, and subject to the terms of the deposit agreement, endeavor to notify you of the upcoming
vote and 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 the underlying shares which are represented by your ADSs. 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 direct the voting of the underlying shares which are represented by your
ADSs, and you may have no legal remedy if the underlying shares are not voted as you requested.
Except
in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying
your ADSs if you do not instruct the depositary how to vote such shares, which could adversely affect your interests.
Under
the deposit agreement for our ADSs, and in the event voting takes place at a shareholders’ meeting by poll, the depositary will
give us (or our nominee) a discretionary proxy to vote our Class A ordinary shares underlying your ADSs at such shareholders’ meeting
if you do not give voting instructions to the depositary as to how to vote the Class A ordinary shares underlying your ADSs at any such
shareholders’ meeting, unless:
● we have instructed the depositary that we do not wish a discretionary proxy to be given;
● we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
● a matter to be voted on at the meeting may have a material adverse impact on shareholders; or
● voting at the meeting is made on a show of hands.
The
effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary as to how to vote the Class A ordinary
shares underlying your ADSs at any particular shareholders’ meeting, you cannot prevent our Class A ordinary shares underlying
your ADSs from being voted at that meeting, absent the situations described above, and it may make it more difficult for shareholders
to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.
Your
rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement and the deposit
agreement may be amended or terminated without your consent.
Under
the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement
or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted by you in a state or federal court in
the city of New York and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of
venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding
instituted by any person. Also, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs
after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. See “Item 12. Description
of Securities Other Than Equity Securities—D. American Depositary Shares” for more information.
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Your
right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We
may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make such
rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the
Securities Act of 1933, as amended, or the Securities Act, or an exemption from the registration requirements is available. Under the
deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed
to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation
to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement
to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly,
you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.
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 to you the cash dividends or other distributions it or the custodian receives on our Class A
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 Class A 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 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 transfer books at any time or from time to
time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer
or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary
deems it 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.
Certain
judgments obtained against us by our shareholders may not be enforceable.
We
are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct the majority of our operations
in China and a significant portion of our assets are located in China. In addition, a majority of our directors and executive officers
reside within China, and a significant portion of the assets of these persons are located within China. As a result, it may be difficult
or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us
or against these individuals in the United States in the event that you believe 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 the
PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
There
is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the
Cayman Islands is not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in
such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the
merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided
such judgment is final and conclusive and for a liquidated sum, and may not be in respect of taxes or a fine or penalty, inconsistent
with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be
of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or
multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent
proceedings are being brought elsewhere.
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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 based either on treaties between China and the
country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms
of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition,
according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our director 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.
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 limited by shares 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 duties 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 duties 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, with respect to Cayman Islands companies, plaintiffs may face special obstacles, including
but not limited to those relating to jurisdiction and standing, in attempting to assert derivative claims in state or federal courts
of the United States.
Shareholders
of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than
the memorandum and articles of association, any special resolutions passed by such companies, the registers of mortgages and charges
of such companies and a list of the names of the current directors of such companies upon payment of a fee to the Cayman Registrar) or
to obtain copies of lists of shareholders of these companies. Our directors have discretion under our current amended and restated memorandum
and 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 resolution or to solicit proxies from other shareholders in connection with a proxy
contest.
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.
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Our
dual-class share structure will limit your ability to influence corporate matters and could discourage others from pursuing any change
of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
We
have adopted a dual-class share structure. Our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders
of Class A ordinary shares are entitled to one vote per share in respect of matters requiring the votes of shareholders, while holders
of Class B ordinary shares are entitled to twenty votes per share. Each Class B ordinary share is convertible into one Class A ordinary
share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.
Due to the disparate voting powers associated with our two classes of ordinary shares, the voting power attached to our Class B ordinary
shares accounted for 94.9% of our company’s aggregate voting power as of March 31, 2026. In particular, one of the holders of our
Class B ordinary shares beneficially owned 66.4% of the aggregate voting power of our company as of the same date. As a result, the existing
holders of our Class B ordinary shares will have decisive influence over matters such as electing directors and approving material mergers,
acquisitions or other business combination transactions. This concentrated control will limit your ability to influence corporate matters
and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have
the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium
over the prevailing market price or the opportunity to receive a premium for their shares as part of a sale of our company. These shareholders
may also take actions that are not in the best interest of us or our other shareholders even if they are opposed by our other shareholders,
including holders of our ADSs. In addition, the significant concentration of share ownership may adversely affect the trading price of
the ADSs due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal
shareholders and their affiliated entities, see “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
Our memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us and
adversely affect the rights of holders of our ordinary shares and ADSs.
Our
memorandum and articles of association contain certain provisions that could limit the ability of others to acquire control of our company,
including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of
preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights
of that series. These provisions could have the effect of depriving our shareholders and ADS holders of the opportunity to sell their
shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company
in a tender offer or similar transactions.
We
have granted, and may continue to grant, share incentive awards, which may result in increased share-based compensation expenses.
We
adopted a share incentive plan in October 2017, which we refer to as the 2017 Plan. Under the 2017 Plan, we are authorized to grant options,
restricted shares, and restricted share units to employees, officers, directors and individual consultants who render services to us.
The maximum number of Class A ordinary shares which may be issued pursuant to all awards under the 2017 Plan is 1,000,000,000. As of
March 31, 2026, options to purchase a total of 3,858,450 Class A ordinary shares were outstanding under the 2017 Plan, and restricted
share units to receive a total of 65,672,795 Class A ordinary shares were outstanding under the 2017 Plan.
We
incurred RMB149.0 million (US$21.3 million) share-based compensation expenses in 2025 relating to share incentive awards. We believe
the granting of share incentive awards is of significant importance to our ability to attract and retain employees, and we will continue
to grant share incentive awards to employees in the future. As a result, our expenses associated with share-based compensation may increase,
which may have an adverse effect on our results of operations.
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 U.S. domestic public companies.
Because
we qualify as 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 with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
● the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;
● 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 as 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 compared to 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.
As
a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices for corporate governance matters
that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders
than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As
a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit
a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices
in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards. For
example, we are not required to (i) have a majority of independent directors in our board of directors, (ii) have a minimum of three
members in our audit committee, or (iii) hold annual shareholders meetings. See “Item 16G. Corporate Governance.” Since we
have chosen to follow certain home country practice, our shareholders may be afforded less protection than they otherwise would enjoy
under the NYSE corporate governance listing standards applicable to U.S. domestic issuers.
We
believe that we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the taxable year ended December 31,
2025, which could subject United States investors in our ADSs or ordinary shares to significant adverse U.S. federal income tax consequences.
We
will be a “passive foreign investment company,” or PFIC, if, in any particular taxable year, either (i) 75% or more of our
gross income for such year consists of certain types of “passive” income or (ii) 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. Although the
law in this regard is unclear, we intend to treat the consolidated variable interest entities (including their respective subsidiaries)
as being owned by us for U.S. federal income tax purposes, not only because we are able to direct the activities of 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. Based upon the nature and composition of our income and assets (in particular
the retention of a substantial amount of cash and investments) and the market price of our ADSs, we believe that we were a PFIC for U.S.
federal income tax purposes for the taxable year ended December 31, 2025, and we will likely be a PFIC for our current taxable year unless
the market price of our ADSs increases and/or we invest a substantial amount of the cash and other passive assets we hold in assets that
produce or are held for the production of active income.
If
we or any of our subsidiaries are a PFIC for any taxable year during which a U.S. holder (as defined in “Item 10. Additional Information—E.
Taxation—U.S. Federal Income Tax Considerations”) holds our ADSs or ordinary shares, the U.S. holder may be subject to certain
adverse U.S. federal income tax consequences. Additionally, if we are a PFIC for any taxable year during which U.S. holders hold our
ADSs or ordinary shares, we would generally continue to be treated as a PFIC with respect to such U.S. holders even if we do not satisfy
either of the above tests to be classified as a PFIC in any subsequent year. See “Item 10. Additional Information—E. Taxation—U.S.
Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”