Qfin (360 Finance)

Prospectus Summary

PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under "Risk Factors," before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by Oliver Wyman, an independent research firm, to provide information regarding our industry and our market position in China.

Overview

We are a leading digital consumer finance platform and the finance partner of the 360 Group, the successor of Qihoo 360 Technology Co. Ltd.'s business after its privatization in 2016 and one of the largest internet companies in China, connecting over one billion accumulated mobile devices. We provide tailored online consumer finance products to prime, underserved borrowers funded primarily by our funding partners. Our proprietary technology platform enables a unique user experience supported by resolute risk management. When coupled with our 360 Group partnership, our technology translates to a meaningful borrower acquisition, borrower retention and funding advantage, supporting the rapid growth and scaling of our business. From our inception to September 30, 2018, we had facilitated over RMB94.4 billion (US$14.3 billion) in loans to 6.4 million of our borrowers.

Our core product is an affordable, unsecured, digital line of credit which our borrowers typically utilize for consumption spending and often as a supplement to credit card debt. To apply, potential borrowers complete a simple online application and, for approximately 95% of recent credit applications, a fully automated credit decision is rendered. Approved borrowers are provided access to funds typically within five minutes and may select the loan structure best suited to their consumption needs.

Our value proposition is an intuitive platform connecting our borrowers and funding partners.

•

Borrowers. Our borrowers tend to be young with demonstrated credit histories, as 74.1% of them hold credit cards. These borrowers are drawn to our platform for instant, transparent access to credit delivered through a simple digital interface. Often we can offer borrowers larger credit balance at lower prices with more variable tenors as compared to other online consumer finance platforms.


•

Funding partners. We enable our funding partners. Majority of our funding comes from our financial institution partners who partner with us for access to our high quality borrower base as well as platform tools including borrower evaluation and matching, workflow automation and enhanced risk management. We delivered value in the form of M3+ delinquency rate of 0.6% as of September 30, 2018 and annual returns typically over 6.5% for our funding partners, materially higher than traditional investment and lending opportunities, according to Oliver Wyman. Our value proposition is further magnified by the repeat lending and cross-sell opportunities we provide to our funding partners. As of September 30, 2018, we had partnership with 18 financial institutions, majority of whom are leading national and regional banks.

We have developed a proprietary technology platform supporting the full transaction lifecycle from credit application through settlement. The brevity, simplicity and speed of our credit decision process reflects the strength of our data analysis, particularly around identifying fraud, which represents approximately 50% of bad debts industry-wide according to Oliver Wyman. For instance, we employ a robust and highly automated identity authentication process based on facial recognition to filter fraudulent credit applications. Further, our advanced analytical capabilities help translate data into actionable insights, where we have found statistical significance leveraging behavioral and social data sets to assess a potential borrower's ability and willingness to repay a loan. As of September 30, 2018, we employed 332 research, development and risk management staff, representing 48.0% of our total employee base, who also collaborate closely with 360 Group, to maintain and enhance our technology leadership.

Since inception we have grown quickly and consistently. As of September 30, 2018, we had 6.4 million cumulative borrowers with RMB94.4 billion (US$14.3 billion) cumulative loan origination and RMB34.7 billion (US$5.2 billion) outstanding balance, representing compound quarterly growth rate of 97.0%, 115.6% and 95.2%, respectively, since the last quarter of 2016. We generate majority of our revenue through loan facilitation service fees and post-origination service fees as a percentage of loan originations. For the year ended December 31, 2017, we earned RMB309.1 million (US$46.7 million) in net revenue, compared to RMB0.06 million for the period from our inception to December 31, 2016. For the six months ended June 30, 2018, our net revenue was RMB742.9 million (US$112.3 million), compared to RMB12.3 million for the same period of 2017, representing a year-over-year growth of 5,939.8%.

Our rapid growth coupled with the leverage in our operating model has allowed us to rapidly achieve profitability. See "—Recent Developments." For the year ended December 31, 2017 we recorded net loss of RMB166.4 million (US$25.1 million) compared to RMB21.8 million for the period from our inception to December 31, 2016. We were only able to grant options to our employees after our Cayman holding vehicle 360 Finance, Inc. was incorporated in April 2018. For the six months ended June 30, 2018, we recorded net loss of RMB572.0 million (US$86.4 million), compared to net loss of RMB67.3 million for the same period of 2017. Excluding the effect of share-based compensation, our adjusted net loss for the six months ended June 30, 2018 was RMB106.0 million (US$16.0 million). See "—Summary Combined and Consolidated Financial and Operating Data—Non-GAAP Measures" for a reconciliation of adjusted net loss to net loss.

The charts below present the number of our cumulative borrowers and our cumulative loan origination volume as of the end of the month indicated, and our net revenue, and our net loss for the periods indicated:

Market Opportunity

We have formulated our growth strategies around the following trends, which we believe are guiding the development of the China online consumer finance market:

•

Unbounded market opportunity. According to Oliver Wyman, the broader consumer finance market is projected to grow by 23% annually from 2017 through 2022, driven by growth in the number of borrowers and increases in personal leverage, each a function of an emerging consumption driven economy with stronger infrastructure, such as credit scores, to facilitate responsible lending.


•

Strong growth of prime borrower segment. The prime borrower population, our target market, is expected to account for 49% of financially active population in 2022, making it the largest borrower segment of the online consumer finance market. The outstanding balance of prime borrowers will grow from RMB3.4 trillion (US$0.5 trillion) in 2017 to RMB10.9 trillion in 2022, at a CAGR of 26% according to Oliver Wyman.


•

Online platforms gaining share. Online consumer lending, today representing 13% of total consumer lending, is projected to grow by 27% annually from 2017 through 2022, according to Oliver Wyman. Over this period, the market share of online lenders is projected to grow to 15%, driven largely by superior borrower experiences. We expect online lenders to continue to take share from traditional lenders at this same pace, or greater, as technology becomes an even greater differentiator over time.


•

Strong market positioning of platforms backed by technology and internet leaders. Online consumer finance platforms associated or affiliated with technology and internet leaders are well positioned for outsized growth versus incumbents, largely on the basis of technology- and data-driven advantages across all functions of consumer finance.


•

Multi-player market. Across developed markets, regulatory bodies have molded regulatory frameworks to promote competition and stability within financial services, and prevent any single provider, or group of providers, from commanding a market share that could be destabilizing to the market in times of stress. We believe the same oversight philosophy will be applied in China as evidenced by recent regulatory actions, including tighter regulations, more stringent risk controls and closer monitoring of large financial service providers. We believe this will contribute to a sustained multi-player market in the future.

Our Partnership with 360 Group

We work closely with 360 Group, collaborating across a number of functions in a mutually beneficial strategic and economic partnership. 360 Group's experience and brand across digital engagement and security in particular have helped to fundamentally shape our platform, including the following:

•

Consumer brand and experience. As the finance partner of 360 Group, we embed 360 Group's core values within our own platform, assuring borrowers of a holistic offering and experience consistent with the quality, user service and security that define 360 Group. We believe this is particularly differentiating in an increasingly crowded market where distinctions between offerings are less and less apparent.


•

Funding. Our collaboration with 360 Group leads to what we view as a sustainable funding advantage, including both cost and access, as compared to other online consumer finance platforms. Our funding partners are drawn to our platform for borrower access and risk adjusted returns. We believe they are also drawn by the solidity of our outlook which is reinforced by 360 Group's ongoing support. This translates into a greater lifetime value proposition for our

funding partners, encouraging growing funding commitments and drawing additional funding partners to our platform.

•

Borrower acquisition. Our products are integrated within 360 Group's platform, providing us access to their one billion accumulated mobile device base. As of September 30, 2018, 22.7% of our accumulated borrowers were sourced through the 360 Group's channel.

We entered into a master business collaboration agreement with 360 Group. Subject to compliance with applicable laws and non-infringement of the legitimate rights of any third party, we and 360 Group agree to continue to collaborate with each other in areas including but not limited to advanced analytical methods driven by artificial intelligence and data security best practices. With regard to data in particular, we will continue to develop algorithms capable of generating risk metrics from 360 Group's user data for the purpose of borrower assessment and risk management, with the borrower's expressed consent.

Our Strengths

We are a technology company, a function of our 360 Group heritage and the team and infrastructure we have built. Technological expertise is fundamental to each dimension of our differentiation, which is highlighted as follows:

Partnership with 360 Group

We are the finance partner of 360 Group. This provides a unique opportunity to collaborate across core platform functions, including data and analytics, artificial intelligence, cloud computing and risk management. It also provides us a marketing opportunity with regards to 360 Group's user base, including over 500 million monthly active users connected through one billion accumulated mobile devices. Collectively, we believe our partnership with 360 Group helps drive a growth, risk management and funding advantage.

Differentiated borrower acquisition

We believe we have a meaningful borrower acquisition advantage over both online consumer finance platforms and traditional financial institutions. This advantage is a function of both high quality traffic, in part through collaboration with 360 Group, as well as a data-driven technology infrastructure allowing us to precisely target borrowers and quickly and confidently arrive at an automated credit decision. This benefit has led to a 53.1% conversion rate since inception and through September 30, 2018.

Intuitive product and user experience

We have built a product, 360 Jietiao, to seamlessly match prime borrowers with funding partners. We offer a single product with transparent features and a simple interface to provide a straightforward and inviting user experience for borrowers and funding partners alike. We have taken this approach strategically, believing a single-product offering allows us to be uniquely focused on product development, earning the trust of our borrowers and funding partners alike. This serves as a critical step in establishing a platform for broader offerings and points of monetization, and materially differentiates us from the traditional financial institution experience which remains cumbersome and disjointed.

Market leading risk management and fraud prevention

The confidence and speed with which we can deliver a credit decision is determined by our risk management, particularly our fraud prevention infrastructure. The foundation of this infrastructure is a massive user data set accumulated in collaboration with 360 Group and incorporating social, behavioral and financial elements. Upon this foundation we apply various artificial intelligence tools while also drawing upon years of internet security expertise and experience from 360 Group, delivering an M3+ delinquency rate of 0.6% and a 0.2% loss rate due to fraudulent application as of September 30, 2018.

Distinct funding advantage

We have the benefit of a large, diverse and relatively low cost funding base across funding partners compared to other online consumer finance companies, according to Oliver Wyman. We offer our funding partners a distinct value proposition including access to an otherwise difficult-to-reach borrower base, above market realized returns of typically over 6.5% and an opportunity to cross-sell borrowers, enhancing the lifetime value of the borrower. This dynamic, in turn, draws steady funding supply to our platform in the form of both new funding partners and stronger funding support, which is important in controlling our cost of funds.

Rapid growth with long term operating leverage

We had 9.6 million users with an approved credit line over the 27 months since our inception, representing a compound quarterly growth rate of 90.5% from the fourth quarter of 2016 to the third quarter of 2018. This growth coupled with the operating leverage within our business model has allowed us to rapidly achieve profitability. We are able to scale our business so efficiently by maintaining low borrower acquisition costs and delinquency rates, a function of a deliberate growth strategy where we remain committed to sustainable unit economics. This disciplined approach to building our business will permit us to organically fund our growth strategy and expand our operating margins as we grow our borrower base.

Uniquely diverse management team

The collective experience of our management team is unprecedented in our industry. Our chairman of the board, Mr. Zhou, played critical roles in developing 360 Group's market leading internet security product and growing its one billion accumulated mobile device base as of the end of 2017. Our chief executive officer, Mr. Xu, has 17 years experience in the banking and financial services industries. Our president, Mr. Wu, has over ten years of experience overseeing internet product management and operations. Around this foundation, we have assembled a management team with a diversity of skills and experiences across technology, financial services, risk management, regulation and data science.

Our Growth Strategies

We have significant opportunities to expand our business. Our growth strategy focuses on the following efforts to continue to deliver value for our constituents and shift our use case from a supplement to a replacement for credit card debt:

Deepen our relationship with existing borrowers

We intend to enhance our relationships with existing borrowers who represent meaningful loan origination volume. Loan origination contributed by repeat borrowers represented 58.8% of our total loan origination volume for the third quarter of 2018. Our strategy is rooted in data, where increasingly detailed borrower profiles, including on-going repayment activity, are subject to ever more advanced analytical methods to improve our understanding of our borrowers' needs. When coupled with an evolving suite of loan products, we believe our platform will enable us to deepen our relationship with existing borrowers. As such, our goal is to encourage repeat borrowings where appropriate and set the stage for expanded borrower relationships as our product portfolio broadens outside of lending over time.

Broaden and diversify borrower acquisition channels

While we expect in the near term to continue collaborating with 360 Group, who has contributed to 22.7% of our accumulated borrowers as of September 30, 2018, we are at the same time expanding our referral partnership network. We have meaningful existing relationships with market leading referral partners through app stores, web feeds, search engine marketing and other third-party marketing channels. We are also experimenting with new referral partners through other channels where we have seen encouraging early results. Lastly, 8.4% of our new borrowers come from our borrower referral program cumulatively as of September 30, 2018.

Expand funding partners and diversity

We will expand our sources of funding, as we continue to receive significant interest from funding partners on the strength of the risk adjusted returns we facilitate and our association with 360 Group. We intend to diversify our institutional funding partner base, aiming to add two to three partners per quarter in the near term. We will continue to surround these partners with increasingly sophisticated technology tools, reinforcing our enablement model. At the same time, we will continue to evaluate our retail funding strategy based on market condition. In addition, we are experimenting with other funding sources, including but not limited to asset-based securities and off-shore funding upon our offering. We expect these initiatives will improve our funding stability and the stickiness of capital.

Expand product offerings

Our singular focus on 360 Jietiao has provided the expertise and trust to effectively broaden our product suite and introduce more scenario-based products. For our current product suite, we believe we can leverage our established infrastructure to provide borrowers using our platform with more tailored loan products, such as larger loans with longer tenors, more diversified payment schemes and customized pricing where a borrower can transparently control the interest rate by adjusting certain loan features. In addition, we will also launch more scenario-based products to capture various consumption needs of a larger borrower base. We believe this will attract a greater number of borrowers while also allowing our offering set to evolve alongside the consumer finance needs of our existing borrower base.

Continue to develop and deploy artificial intelligence and risk management

We continue to invest in artificial intelligence and view more extensive deployment as a means to grow our addressable market. We will continue to develop and apply artificial intelligence across all business functions, to achieve more efficient and precise borrower acquisition, more optimal risk management, and higher operational efficiency. For instance, the percentage of applicants for whom we are unable to approve due to lack of data has fallen as we have developed and applied artificial intelligence and other advanced analytical methods to our underwriting process. We expect continued investment will expand our approved application pool even further, while also helping to manage operating costs as we further implement automated borrower and collection services.

Opportunity to grow capital light origination model

We intend to develop a technology services offering for our funding partners under a capital and guarantee light model under which we assume no guarantee liability. We recently launched such an offering whereby we provide technology support and expertise to funding partners for a fixed or floating fee based on loan origination volumes, without retaining credit risk exposure associated with the loans. This model will allow us to diversify our revenue streams and reduce the capital intensity of our growth strategy over time. The proportion of new loan origination under such capital and guarantee light model has been increasing. In the third quarter of 2018, approximately 11.0% of loan originations were capital and guarantee light. We intend to further explore such capital light model in the future.

Our Challenges

Our ability to achieve our mission and execute our strategies is subject to risks and uncertainties, including those relating to our ability to:

•

maintain our strategic collaborative and mutually beneficial relationship with 360 Group;


•

continuingly improve and upgrade our risk management model to accurately price our loan products and effectively manage delinquency performance;


•

acquire and retain borrowers in an effective and efficient way;


•

increase the volume of loans facilitated through our platform;


•

achieve and maintain compliance with the applicable regulations and rules relating to online consumer finance industry, particularly with respect to our guarantee practice, and provision of value-added telecommunications services, the failure of which may lead to fines, confiscation of our income, revocation of our business licenses or even discontinuation of our relevant businesses;


•

maintain and continuously develop relationships with our funding partners;


•

compete effectively; and


•

promote and maintain our brand and reputation.

In addition, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including: