CNFinance Holdings Limited
Annual Report 2022

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F (Mark One) ☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR For the fiscal year ended December 31, 2022. OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . OR ☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report For the transition period from to Commission file number: 001-38726 CNFinance Holdings Limited (Exact name of Registrant as specified in its charter) N/A (Translation of Registrant’s name into English) Cayman Islands (Jurisdiction of incorporation or organization) 44/F, Tower G, No. 16 Zhujiang Dong Road Tianhe District, Guangzhou City, Guangdong Province 510620 People’s Republic of China (Address of principal executive offices) Bin Zhai, Chief Executive Officer and Chairman Tel: +86-20-62316688 E-mail: ir@cashchina.cn At the address of the Company set forth above (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class American depositary shares, each ADS representing 20 ordinary shares, par value US$0.0001 per share Ordinary shares, par value US$0.0001 per share* Trading Symbol CNF Name of each exchange on which registered The New York Stock Exchange The New York Stock Exchange * Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares. Securities registered or to be registered pursuant to Section 12(g) of the Act: Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class) None (Title of Class) Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 1,371,643,240 ordinary shares, par value US$0.0001 per share, as of December 31, 2022. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒ Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ☐ Accelerated Filer ☒ Non-accelerated Filer ☐ Emerging growth company ☒ If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☒ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: ☒ U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ Other If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Item 17 ☐ Item 18 Yes ☐ No ☒ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. † The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. Yes ☐ No ☐ TABLE OF CONTENTS INTRODUCTION FORWARD-LOOKING INFORMATION PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE ITEM 3. KEY INFORMATION 3.A. [Reserved] 3.B. Capitalization and Indebtedness 3.C. Reason for the Offer and Use of Proceeds 3.D. Risk Factors ITEM 4. INFORMATION ON THE COMPANY 4.A. History and Development of the Company 4.B. Business Overview 4.C. Organizational Structure 4.D. Property, Plant and Equipment ITEM 4A. UNRESOLVED STAFF COMMENTS ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 5.A. Operating Results 5.B. Liquidity and Capital Resources 5.C. Research and Development 5.D. Trend Information 5.E. Critical Accounting Estimates ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.A. Directors and Senior Management 6.B. Compensation 6.C. Board Practices 6.D. Employees 6.E. Share Ownership 6.F. Disclosure of a Registrant's Action to Recover Erroneously Awarded Compensation ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7.A. Major Shareholders 7.B. Related Party Transactions 7.C. Interests of Experts and Counsel ITEM 8. FINANCIAL INFORMATION 8.A. Consolidated Statements and Other Financial Information 8.B. Significant Changes ITEM 9. THE OFFER AND LISTING 9.A. Offering and Listing Details 9.B. Plan of Distribution 9.C. Markets 9.D. Selling Shareholders 9.E. Dilution 9.F. Expenses of the Issue ITEM 10. ADDITIONAL INFORMATION 10.A. Share Capital 10.B. Memorandum and Articles of Association 10.C. Material Contracts 10.D. Exchange Controls 10.E. Taxation 10.F. Dividends and Paying Agents 10.G. Statement by Experts i Page iii v 1 1 1 1 4 4 4 5 46 46 46 82 83 83 83 83 106 111 112 112 113 113 114 117 120 120 121 122 122 122 122 122 122 123 123 123 123 123 123 123 123 124 124 124 124 124 124 130 130 10.H. Documents on Display 10.I. Subsidiary information 10.J. Annual Report to Security Holders ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 12.A. Debt Securities 12.B. Warrants and Rights 12.C. Other Securities 12.D. American Depositary Shares PART II ITEM 13. ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 14.A.-14.D. Material Modifications to the Rights of Security Holders 14.E. Use of Proceeds ITEM 15. CONTROLS AND PROCEDURES ITEM 16. [Reserved] 16.A. Audit Committee Financial Expert 16.B. Code of Ethics 16.C. Principal Accountant Fees and Services 16.D. Exemptions from the Listing Standards for Audit Committees 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 16.F. Change in Registrant’s Certifying Accountant 16.G. Corporate Governance 16.H. Mine Safety Disclosure 16.I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 16.J. Insider trading policies PART III ITEM 17. FINANCIAL STATEMENTS ITEM 18. FINANCIAL STATEMENTS ITEM 19. EXHIBITS ii 130 130 130 131 131 131 131 131 132 134 134 134 134 134 134 135 135 136 136 136 137 137 137 138 138 138 139 139 139 139 Except where the context otherwise indicates and for the purpose of this annual report only: ● “ADSs” refers to the American depositary shares, each representing 20 of our ordinary shares; INTRODUCTION ● “allowance ratio” of a particular date refers to amount of allowance for loan principal, interest and financing service fee receivables as a percentage of the outstanding loan principal, interest and financing service fee receivables as of the date; ● “China” or “the PRC” refers to the People’s Republic of China, including Hong Kong and Macau and, only for the purpose of this annual report, excluding Taiwan; the only instances in which “China” or “the PRC” do not include Hong Kong or Macau are when used in the case of laws and regulations, including, among others, tax matters, adopted by the People’s Republic of China; the legal and operational risks associated with operating in China also apply to our operations in Hong Kong; ● “contractual interest rate” refers to the interest rate prescribed under loan agreements; ● “CNFinance” refers to CNFinance Holdings Limited, a Cayman Islands exempted company with limited liability; ● “Credit Risk Mitigation Position” or “CRMP” refers to the amount contributed by the sales partners equal to 10% to 25% of the loans issued to the borrowers introduced by the sales partners to share the credit risk with the Company; ● “delinquency ratio” of a particular date refers to total balance of outstanding loan principal for which any installment payment is one or more days past-due as a percentage of the outstanding loan principal as of the date; ● “effective interest rate” refers to the annualized internal rate of return based on initial outlay of loan principal, initial inflow of financing service fees (if applicable) and expected monthly inflow of repayments; ● “effective sales partners” refers to the sales partners who have introduced at least one borrower to us that was approved by our trust company partners for loan facilitation; ● “leverage ratio” refers to the ratio of total assets to total shareholders’ equity; ● “charge-off ratio” refers to the ratio of charge-offs during a period over the average beginning and ending balances of outstanding loan principal of the same period; ● “loan-to-value ratio” or “LTV ratio” refers to the ratio of loan amount to the value of asset collateral; the loan amount is calculated as the amount of all outstanding loans to be secured by the collateral; ● “NPL” refers to a loan being delinquent for over 90 days; ● “NPL provision coverage ratio” of a particular date refers to amount of allowance for loan principal, interest and financing service fee receivables as a percentage of the outstanding balance of NPL principal as of the date; ● “NPL ratio” as of a particular date represents total balance of outstanding loan principal for which any installment payment is over 90 calendar days past-due as a percentage of the outstanding loan principal as of the date; ● “ordinary shares” refers to our ordinary shares of par value US$0.0001 per share; ● “Pearl River Delta region” refers to Dongguan, Zhongshan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhuhai and Zhaoqing; ● “quick disposal plans” refers to the mechanisms that we utilize to quickly dispose of delinquent loans or collateral to recover potential losses, including selling the delinquent loans to third parties or disposal of collateral without going through judicial proceedings; ● “RMB” or “Renminbi” refers to the legal currency of the People’s Republic of China; iii ● “senior units” refers to the senior units and intermediate units, if applicable, in a trust plan; ● “structural leverage ratio” refers to the ratio of the total amount of senior units and subordinated units; intermediate units are included as senior units for the purpose of calculation; ● “Tier 1 cities” refers to Beijing, Shanghai, Shenzhen and Guangzhou; ● “Tier 2 cities” refers to Dongguan, Foshan, Nanjing, Nanchang, Nantong, Xiamen, Hefei, Dalian, Tianjin, Changzhou, Xuzhou, Huizhou, Chengdu, Wuxi, Kunming, Hangzhou, Wuhan, Ji’nan, Zhuhai, Shijiazhuang, Fuzhou, Suzhou, Xi’an, Zhengzhou, Chongqing, Changsha, Qingdao, Shaoxing, Ningbo, Wuxi, Harbin, Changchun, Nanning, Wenzhou, Quanzhou, Guiyang, Taiyuan, Jinhua, Yantai, Jiaxing, Taizhou, Zhongshan, Baoding, Lanzhou and Langfang; ● “total operating income” refers to the sum of (i) net interest and fees income after collaboration cost and (ii) total non-interest income; ● “US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States; ● “we,” “us,” “our company,” “the Company,” “the Group,” and “our” refer to CNFinance Holdings Limited, a Cayman Islands exempted company with limited liability and its subsidiaries and consolidated affiliated entities, including but not limited to Shenzhen Fanhua United Investment Group Co., Ltd. and Guangzhou Heze Information Technology Co., Ltd., as a group; and ● “Yangtze River Delta region” refers to Shanghai, Nanjing, Nantong, Hefei, Yixing, Changzhou, Yangzhou, Wuxi, Hangzhou, Jiangyin, Taizhou, Shaoxing, Suzhou, Jiaxing and Zhenjiang. We present our financial results in RMB. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. This annual report contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at the rate at RMB6.8972 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect as of December 30, 2022. On April 21, 2023, the noon buying rate for Renminbi was RMB6.8920 to US$1.00. iv FORWARD-LOOKING INFORMATION This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provision under Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, you can identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward- looking statements include, but are not limited to: ● our goals and growth strategies; ● our future business development, results of operations and financial condition; ● relevant government policies and regulations relating to our business and industry; ● status of the COVID-19 pandemic and its impact on our business and industry; ● general economic and business conditions in China; and ● assumptions underlying or related to any of the foregoing. We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information—D. Risk Factors” of this annual report and other risks outlined in our other filings with the Securities and Exchange Commission, or the SEC. Those risks are not exhaustive. We operate in an evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements. You should not rely upon forward-looking statements as predictions of future events. We do not undertake any obligation to update or revise the forward- looking statements except as required under applicable law. You should read this annual report and the documents that we reference in this annual report completely and with the understanding that our actual future results may be materially different from what we expect. v ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE PART I Not applicable. ITEM 3. KEY INFORMATION Risks Associated with Being Based in or Having the Majority of the Operations in China We are exposed to legal and operational risks associated with our operations in China. The PRC government has significant authority to exert influence on the ability of a company with operations in China, including us, to conduct its business. Changes in China’s economic, political or social conditions or government policies could materially and adversely affect our business and results of operations. We are subject to risks due to the uncertainty of the interpretation and the application of the PRC laws and regulations, including but not limited to the risks of uncertainty about any future actions of the PRC government on U.S. listed companies. We may also be subject to sanctions imposed by PRC regulatory agencies, including the China Securities Regulatory Commission (“CSRC”), if we fail to comply with their rules and regulations. Any actions by the PRC government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in companies having operations in China, including us, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors, and cause the value of our securities to significantly decline or become worthless. These China-related risks could result in a material change in our operations and/or the value of our securities, or could significantly limit or completely hinder our ability to offer securities to investors in the future and cause the value of such securities to significantly decline or become worthless. The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, require an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission (“CSRC”) prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for future offerings of securities overseas or to maintain the listing status of our ADSs would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China- based overseas-listed companies. On February 17, 2023, the CSRC, promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Overseas Listing Trial Measures”), and five supporting guidelines, which became effective on March 31, 2023. The Overseas Listing Trial Measures will comprehensively improve and reform the existing regulatory regime for overseas offering and listing of PRC domestic companies’ securities and will regulate both direct and indirect overseas offering and listing of PRC domestic companies’ securities by adopting a filing-based regulatory regime. According to the Overseas Listing Trial 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. If a company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, it may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. The Overseas Listing Trial Measures also provide that a company in mainland China must file with the CSRC within three business days for its follow-on offering of securities after it is listed in an overseas market. On February 17, 2023, the CSRC also issued the Notice on Administration of the Filing of Overseas Offering and Listing by Domestic Companies and held a press conference for the release of the Overseas Listing Trial Measures, which, among others, clarified that the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC immediately, but these companies should complete filing with the CSRC for their financing activities in accordance with the Overseas Listing Trial Measures. Based on the foregoing, as an issuer that has been listed overseas before the effective date of the Overseas Listing Trial Measures, we are not required to complete filing with the CSRC for our prior offshore offerings at this stage, but we may be subject to the filing requirements for our future capital raising activities under the Overseas Listing Trial Measures. 1 In addition, the Data Security Law was promulgated on June 10, 2021 and became effective in September 2021. The Personal Information Protection Law was promulgated on August 20, 2021 and officially implemented on November 1, 2021. The Data Security Law stipulates that the data handling activities that affect or may affect the national security should undergo national security review, and the Personal Information Protection Law stipulates that critical information infrastructure (“CII”) operators, or personal information processors whose processing of personal information reaches the threshold amount prescribed by the national cyberspace authority, shall store the personal information collected or generated by them within the territory of the PRC. If it is necessary to provide the data overseas, the organization is required to pass the security assessment organized by the national cyberspace authority. The Measures for Cyber Security Review published by Cyberspace Administration of China (CAC) in December 2021 provides that a network platform operator that has the personal information of more than one million users must apply to the Cybersecurity Review Office (the “CRO”) for a cybersecurity review when it seeks to list overseas. Also, a CII operator, when procuring a network product or service, shall predict any national security risk that may arise after the use of such product or service. If national security will be affected or may be affected, the CII operator shall apply to the CRO for a cybersecurity review. Although we do not believe we are a CII operator or a network platform operator, the PRC authorities could interpret such term broadly. If our company is deemed to be a CII operator or a network platform operator under such rules, we could be subject to cybersecurity review by the CAC and other relevant PRC regulatory authorities and be required to change our existing practices in data privacy and cybersecurity matters at substantial costs. During such cybersecurity review, we may be required to stop providing services to our customers. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for future offerings of securities overseas or to maintain the listing status of our ADSs or if the CSRC or any other PRC government authorities promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for future offerings of securities overseas or to maintain the listing status of our ADSs, we may not be able to proceed with future offerings of securities overseas or to the listing of our ADSs on the New York Stock Exchange, face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from future offerings of securities overseas into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as our ability to complete future offerings of securities overseas or to maintain the listing status of our ADSs. We also cannot rule out the possibility that certain of our customers may be deemed as CII operators, in which case our products or services or data processing activities, if being deemed as related to national security, will need to be submitted for cybersecurity review before we can enter into agreements with such customers, and before the conclusion of such procedure, the customers will not be allowed to use our products or services. If the reviewing authority considers that the use of our services by certain of our customers involves risk of disruption, is vulnerable to external attacks, or may negatively affect, compromise, or weaken the protection of national security, we may not be able to provide our products or services to such customers, which could have a material adverse effect on our results of operations and prospects. Uncertainties also exist regarding the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure and the viability of business operation. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the People’s Republic of China (“PRC Foreign Investment Law”), and the State Council promulgated the Implementing Regulations to the PRC Foreign Investment Law (“Implementing Regulations”) on December 26, 2019, both of which came into effect on January 1, 2020. The PRC Foreign Investment Law and its Implementing Regulations replaced the trio of previous laws regulating foreign investment in China, namely, the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Chinese-foreign Cooperative Joint Ventures, and the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, together with their implementation rules and ancillary regulations. 2 PRC Foreign Investment Law and its Implementing Regulations specify that foreign investments shall be conducted in line with the negative list issued by or approved to be issued by the State Council. If a foreign investment enterprise (the “FIE”) proposes to conduct business in an industry subject to foreign investment “restrictions” in the negative list, the FIE must meet certain conditions under the negative list before being established. If an FIE proposes to conduct business in an industry subject to foreign investment “prohibitions” in the “negative list,” it must not engage in the business. Investments made in Mainland China by investors from the Hong Kong Special Administrative Region and the Macao Special Administrative Region shall be governed by the PRC Foreign Investment Law and its Implementing Regulations. On December 27, 2021, the NDRC and the MOFCOM promulgated the Special Administrative Measures (Negative List) for Access of Foreign Investments (2021 Edition), as came into effect on January 1, 2022, according to which the industry of loan service has not been subject to foreign investment “restrictions” or “prohibitions” in the Negative List. Our PRC legal advisor, Merits & Tree Law Offices, advises us that according to the PRC Foreign Investment Law and the Implementing Regulations, the PRC regulatory agencies shall, considering the needs for further foreign opening and economic and social development, adjust the Negative List where appropriate. Therefore, if the industry of loan service is subject to the foreign investment restrictions or prohibitions under the negative list issued subsequently, our 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. As there are still uncertainties regarding these new laws and regulations as well as the amendment, interpretation and implementation of the existing laws and regulations related to cybersecurity and data protection, we cannot assure you that we will be able to comply with these laws and regulations in all respects. The regulatory authorities may deem our activities or services non-compliant and therefore require us to suspend or terminate its business. We may also be subject to fines, legal or administrative sanctions and other adverse consequences, and may not be able to become in compliance with relevant laws and regulations in a timely manner, or at all. These may materially and adversely affect its business, financial condition, results of operations and reputation. Since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, our ability to accept foreign investments and conduct follow- on offerings, and listing or continuing listing on a U.S. or other foreign exchanges. In addition, the PRC government has recently published new policies that significantly affected certain industries such as the real estate, education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding any other industry including the industry in which we operate, which could adversely affect our business, financial condition and results of operations. See “Item 3. Key Information—D. Risk Factors—Risk Factors—Risks Related to Doing Business in China” for more details. Risks Associated with Our Corporate Structure CNFinance Holdings Limited is a holding company with no operations of its own. It conducts substantially all of its operations in China primarily through its subsidiaries in China, in particular Shenzhen Fanhua United Investment Group Co., Ltd., Guangzhou Heze Information Technology Co., Ltd., and their subsidiaries and consolidated affiliated entities, and substantially all of its assets and operations are located in China. With a holding company structure, we principally rely on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. If these subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In 2020, 2021 and 2022, CNFinance has not transferred any cash proceeds to any of its PRC subsidiaries. For instance, cash proceeds raised from overseas financing activities, may be transferred by CNFinance through China Financial Services Group Limited, our Hong Kong subsidiary, to Fanhua Chuangli Information Technology (Shenzhen) Company Limited (“Fanhua Chuangli”), a PRC subsidiary, via capital contribution and shareholder loans, as the case may be. Fanhua Chuangli then will transfer funds to its subsidiaries to meet the capital needs of business operations. None of our PRC subsidiaries have issued any dividends or distributions to respective holding companies, including CNFinance, or any investors as of the date of this annual report. Our subsidiaries in the PRC generate and retain cash generated from operating activities and re-invest it in business operations. In this annual report, “we,” “us,” “our company,” and “our” refer to CNFinance Holdings Limited, a Cayman Islands exempted company with limited liability and its subsidiaries and consolidated affiliated entities, including but not limited to Shenzhen Fanhua United Investment Group Co., Ltd. and Guangzhou Heze Information Technology Co., Ltd., as a group. 3 Financial Information Related to the Consolidated Affiliated Entities Loans that we facilitate are granted to borrowers through structured funds set up by our trust company partners, such as the series of FOTIC Jinghua structured funds. Each structured trust fund has a separate bank account, and the assets of the structured funds can only be used to settle obligations under the respective structured fund. Under most trust plan agreements, we subscribe to all of the subordinated units of each structured trust plan and provide credit strengthening services as the subordinated unit holder. This requires us to ensure sufficient capital to repay the principal amount and the agreed financing costs for the senior unit holders. We are designated as the service provider to assist our trust company partners acquire and screen borrowers and perform credit assessment pursuant to collaboration agreements with our trust company partners. We provide loan facilitation and post-loan management services for service fees charged directly to the trust plans. As a result, we are deemed as the primary beneficiary of the funds from the accounting perspective as we have the power to direct the activities of the structured funds and have obligation to absorb losses of the funds or right to receive benefits. Under Accounting Standards Codification (ASC) Topic 810, the structured funds are considered as variable interest entities (VIEs) which need to be consolidated on our balance sheet. However, as advised by our PRC counsel, such structured funds are not considered as separate legal entities or VIEs under the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75. We subscribe to the subordinated units and act as the service provider under the trust plans through our wholly-owned subsidiaries. Risks Associated with the Holding Foreign Companies Accountable Act In recent years, U.S. regulatory authorities have continued to express their concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. More recently, as part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, the United States enacted the Holding Foreign Companies Accountable Act, or the HFCAA, in December 2020. Trading in our securities on U.S. markets, including the NYSE, may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor for two consecutive years. On December 16, 2021, the PCAOB issued the HFCAA Determination Report to notify the SEC of its determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong, or the 2021 Determinations, including our auditor. On May 26, 2022, we were conclusively identified by the SEC under the HFCAA as having filed audit reports issued by a registered public accounting firm that cannot be inspected or investigated completely by the PCAOB in connection with the filing of our 2021 Form 20-F. On December 15, 2022, the PCAOB announced that it was able to conduct inspections and investigations completely of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong in 2022. The PCAOB vacated its previous 2021 Determinations accordingly. However, whether the PCAOB will continue to conduct inspections and investigations completely to its satisfaction of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control, including positions taken by authorities of the PRC. The PCAOB is required under the HFCAA to make its determination on an annual basis with regards to its ability to inspect and investigate completely accounting firms based in the mainland China and Hong Kong. The possibility of being a Commission-Identified Issuer and risk of delisting could continue to adversely affect the trading price of our securities. For the details of the risks associated with the enactment of the HFCAA, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our auditor, like other independent registered public accounting firms operating in China, was historically not permitted to be subject to inspection by the PCAOB, and consequently, investors were deprived of the benefits of such inspection in the past. Trading in our securities may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor, and as a result, U.S. national securities exchanges, such as the NYSE, may determine to delist our securities.” 3.A. [Reserved] 3.B. Capitalization and Indebtedness Not applicable. 3.C. Reason for the Offer and Use of Proceeds Not applicable. 4 3.D. Risk Factors The PRC government has significant authority to exert influence on the ability of a company based in China, such as ours, to conduct its business, accept foreign investments or list on U.S. or other foreign exchanges. We face risks associated with regulatory approvals of overseas offerings, anti-monopoly regulatory actions, oversight on cybersecurity and data privacy. For example, in recent years, regulatory actions undertaken by China’s government, including the enactment of China’s new Data Security Law, amended Cybersecurity Review Measures, Personal Information Protection Law, and any other future laws and regulations may require us to incur significant expenses and could materially affect our ability to conduct our business, accept foreign investments or list on a U.S. or foreign exchange. The PRC government also has significant oversight and discretion over the conduct of our business and as such may influence our operations at any time, which could result in a material adverse effect on our operations. The PRC government has published new policies that significantly affected certain industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding the industry where we operate, which could adversely affect our business, financial condition and results of operations. For example, the PRC anti-monopoly enforcement agencies have in recent years strengthened enforcement under the anti-monopoly law. Although we do not believe the current antimonopoly laws and regulations have a material adverse impact on our business and results of operations, any failure or perceived failure by us to comply with the relevant anti-monopoly laws and regulations may result in governmental investigations, enforcement actions or lawsuits and could have an adverse impact on our business and results of operations. Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over overseas securities offerings and other capital markets activities and foreign investment in China-based companies like ours. These risks could result in a material change in our operations and the value of our ordinary shares or the ADSs, or 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 become worthless. Additionally, trading in our securities on U.S. markets, including the NYSE, may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor for two consecutive years. On December 16, 2021, the PCAOB issued the HFCAA Determination Report to notify the SEC of its determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong (the “2021 Determinations”), including our auditor. On May 26, 2022, we were conclusively identified by the SEC under the HFCAA as having filed audit reports issued by a registered public accounting firm that cannot be inspected or investigated completely by the PCAOB in connection with the filing of our 2021 Form 20-F. The inability of the PCAOB to conduct inspections in the past also deprived our investors of the benefits of such inspections. On December 15, 2022, the PCAOB announced that it was able to conduct inspections and investigations completely of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong in 2022. The PCAOB vacated its previous 2021 Determinations accordingly. As a result, we do not expect to be identified as a Commission-Identified Issuer under the HFCAA for the fiscal year ended December 31, 2022 after we file our annual report on Form 20-F for such fiscal year. However, whether the PCAOB will continue to conduct inspections and investigations completely to its satisfaction of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control, including positions taken by authorities of the PRC. The PCAOB is expected to continue to demand complete access to inspections and investigations against accounting firms headquartered in mainland China and Hong Kong in the future and states that it has already made plans to resume regular inspections in early 2023 and beyond. The PCAOB is required under the HFCAA to make its determination on an annual basis with regards to its ability to inspect and investigate completely accounting firms based in the mainland China and Hong Kong. The possibility of being a Commission-Identified Issuer and risk of delisting could continue to adversely affect the trading price of our securities. If the PCAOB determines in the future that it no longer has full access to inspect and investigate accounting firms headquartered in mainland China and Hong Kong and we continue to use such accounting firm to conduct audit work, we would be identified as a Commission-Identified Issuer under the HFCAA following the filing of the annual report for the relevant fiscal year, and if we were so identified for two consecutive years, trading in our securities on U.S. markets would be prohibited. Such risk could result in a material change in our operations and/or the value of the ADSs or could significantly limit or completely hinder our ability to offer or continue to offer ADSs and/or other securities to investors and cause the value of such securities to significantly decline or be worthless. See “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China—Our auditor, like other independent registered public accounting firms operating in China, was historically not permitted to be subject to inspection by the PCAOB, and consequently, investors were deprived of the benefits of such inspection in the past. Trading in our securities may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor, and as a result, U.S. national securities exchanges, such as the NYSE, may determine to delist our securities.” You should carefully consider all of the information in this annual report before making an investment in the ADSs. Below please find a summary of the principal risks and uncertainties we face, organized under relevant headings. In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to subsections headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China.” Below please find a summary of the principal risks we face, organized under relevant headings. 5 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 operations. ● Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and unexpected changes in laws and regulations in China could adversely affect us and limit the legal protections available to you and us. ● The PRC government has significant oversight over the conduct of our business and as such may influence our operations, which may potentially result in a material adverse effect on our operations. ● The oversight of the China Securities Regulatory Commission, Cybersecurity Administration of China or other governmental authorities may adversely affect our business and their approval may be required in connection with future offerings of securities overseas or to maintain the listing status of our ADSs, and, if required, we cannot predict whether we will be able to obtain such approval. ● 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. ● PRC regulations of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of our public offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business. ● The collaboration model we have in place with our sales partners to acquire borrowers might be regarded as financial marketing and might face compliance risks. ● Our auditor, like other independent registered public accounting firms operating in China, was historically not permitted to be subject to inspection by the PCAOB, and consequently, investors were deprived of the benefits of such inspection in the past. Trading in our securities may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor, and as a result, U.S. national securities exchanges, such as the NYSE, may determine to delist our securities. Risks Related to Our Business ● We have a limited operating history and our business practice continues to evolve, which makes it difficult to evaluate our future prospects. ● Our credit strengthening services to the trust plans as the subordinated unit holder might be subject to challenges by relevant regulatory authorities, and we may potentially be required to obtain licenses. ● Our trust company partners operate in a strictly regulated industry. If the practice of our trust company partners, including the cooperation arrangements with us, is challenged under any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected. ● Our business may be adversely affected if we are unable to secure funding on terms acceptable to us or our borrowers, or at all. ● We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases. ● Our collaboration model with our sales partners might be subject to challenges by relevant regulatory authorities. ● Some of our funding sources are highly regulated and are subject to the changing regulatory environment. If any of the funding sources is deemed to violate the PRC laws and regulations, we may need to secure new funding-failure of which may result in material and adverse impact on our business, financial condition, results of operations and prospects. ● Our high leverage ratio may expose us to liquidity risk and we may not have sufficient capital reserve to manage losses. 6 ● Our business depends on our ability to collect payment on and service the transactions we facilitate. ● The foreclosure action and enforcement process may be time-consuming, difficult and uncertain for legal and practicable reasons, which could adversely affect our liquidity, business, financial condition and results of operations. ● Credit and other information that we or our trust company partners or our commercial bank partners receive from prospective borrowers and third parties about a borrower and the collateral may not accurately reflect the borrower’s creditworthiness or the collateral’s fair/recoverable value, which may compromise the accuracy of our and our trust company partners’ credit assessment. ● We primarily rely on our trust company partners and our commercial bank partners to fund loans to borrowers, which may constitute provision of intermediary service, and our agreements with these partners and borrowers may be deemed as intermediation contracts under the Civil Code of the People’s Republic of China (the “Civil Code”). Risks Related to Our American Depositary Shares ● The trading price of our ADSs may be volatile, which could result in substantial losses to investors. ● If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline. ● Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline. ● Although the matter is not entirely clear, we were likely a passive foreign investment company (a “PFIC”) for our 2023 taxable year, and we will likely be a PFIC for 2023 and our future taxable years, which could result in adverse U.S. federal income tax consequences to U.S. taxpayers. 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 operations. Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level 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 is still owned 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 past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. 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. In addition, in the past, the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results. Recent international trade tensions, or a severe or prolonged downturn in the Chinese or global economy in general, could materially and adversely affect our business and financial condition. Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect micro- and small-enterprise owners’ willingness to seek credit and our partners’ ability and desire to invest in loans. Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions in the past, including the recent international trade disputes and tariff actions announced by the United States, the PRC and certain other countries, as well as the recent banking turmoil in the United States and European Union. For instance, the U.S. administration has imposed significant amount of tariffs on Chinese goods, and the PRC government has imposed tariffs on certain goods manufactured in the United States. There is no assurance that the list of goods impacted by additional tariffs will not be expanded or the tariffs will not be increased materially. 7 There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. Recently, the Russia-Ukraine war has caused, and continues to intensify, significant geopolitical tensions in Europe and across the globe. The resulting sanctions are expected to have significant impacts on the economic conditions of the targeted countries and markets. If present Chinese and global economic uncertainties persist, we may have difficulty in obtaining funding sources to fund the credit utilized by borrowers. Adverse economic conditions could also reduce the number of quality micro- and small-enterprise owners seeking credit from us, as well as their ability to make payments. Should any of these situations occur, the amount of loans facilitated to borrowers and, therefore, our operating income will decline, and our business and financial condition will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs. The recent regulatory development has also imposed challenges to our future business and operations. On August 20, 2020, the Supreme People’s Court announced an amendment to the judicial interpretation of China’s private lending, which reduces the maximum annual interest rate allowed on private lending to four times of the latest one-year loan prime rate (LPR) (the “Amendment”). Although we do not believe we are regulated by the Amendment as a loan facilitator in collaboration with licensed trust company partners, our trust company partners have voluntarily adjusted the interest rates on some loan products we facilitate to comply with the new standards under the Amendment with some trust company partners to prevent the compliance risks due to the uncertainty of regulatory enforcement. As a result, our profit margin, results of operations and financial position were adversely impacted in 2022, and may continue to be adversely impacted. Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and unexpected changes in laws and regulations in China could adversely affect us and limit the legal protections available to you and us. Our operations in China are governed by the PRC laws and regulations. The PRC legal system is a civil law system based on written statutes. Prior court decisions under the civil law system may be cited for reference but have limited precedential value. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Since these laws and regulations are relatively new and may be amended from time to time, and the PRC legal system continues to rapidly evolve, the interpretations of many laws and regulations are not always uniform and enforcement of these laws and regulations involves uncertainties. In addition, any new PRC laws or changes in PRC laws and regulations related to, among other things, foreign investment and business activities in China could have a material adverse effect on our business and our ability to operate our business in China. From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may impede our ability to enforce contracts in China and could materially and adversely affect our business and results of operations. Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis, or at all, and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such uncertainty towards the scope and effect of our contractual, property (including intellectual property) and procedural rights and any failure to quickly respond to changes in the regulatory environment in the PRC could adversely affect our business, and impede our ability to continue our operations and proceed with our future business plans. The PRC government has significant oversight over the conduct of our business and as such may influence our operations, which may potentially result in a material adverse effect on our operations. The PRC government has exercised and continues to exercise substantial control over the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. The central or local PRC governments of may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or specific regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties. The PRC government has recently published new policies that significantly affected certain industries such as real estate and credit industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. For example, on November 1, 2021, the Personal Information Protection Law came into effect. Although we do not believe the current personal information protection laws and regulations have a material adverse impact on our business and results of operations, any failure or perceived failure by us to comply with the relevant personal information protection laws and regulations may result in governmental investigations, enforcement actions or lawsuits and could have an adverse impact on our business and results of operations. Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such intervention in or influence on our business operations or action to exert more oversight and control over securities offerings and other capital markets activities, once taken by the PRC government, could adversely affect our business, financial condition and results of operations and the value of our ordinary shares or the ADSs, or 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 in extreme cases, become worthless. 8 The approval of and/or filing with the CSRC or other PRC government authorities may be required in connection with our issuance of securities overseas or maintenance of the listing status of our ADRs, and, if required, we cannot predict whether we will be able to obtain such approval or complete such filing. The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, require an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals 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. However, the application of the M&A Rules remains unclear. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for future offerings of securities overseas or maintenance of the listing status of our ADSs would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China- based overseas-listed companies. On February 17, 2023, the China Securities Regulatory Commission promulgated the Overseas Listing Trial Measures, and five supporting guidelines, which became effective on March 31, 2023. According to the Overseas Listing Trial 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. If a company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, it may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. The Overseas Listing Trial Measures also provide that a company in mainland China must file with the CSRC within three business days for its follow-on offering of securities after it is listed in an overseas market. On February 17, 2023, the CSRC also issued the Notice on Administration of the Filing of Overseas Offering and Listing by Domestic Companies and held a press conference for the release of the Overseas Listing Trial Measures, which, among others, clarified that the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC immediately, but these companies should complete filing with the CSRC for their financing activities in accordance with the Overseas Listing Trial Measures. Based on the foregoing, as an issuer that has been listed overseas before the effective date of the Overseas Listing Trial Measures, we are not required to complete filing with the CSRC for our offshore offerings prior to the effective date of the Overseas Listing Trial Measures, but we may be subject to the filing requirements for our financing activities under the Overseas Listing Trial Measures. Any securities offerings and listings outside of mainland China by our Company after the effective date of the Overseas Listing Trial Measures, including but not limited to follow on offerings, secondary listings, and going private transactions, will be subject to the filing requirements with the CSRC under the Overseas Listing Trial Measures, and we cannot assure you that we will be able to comply with such filing requirements in a timely manner, or at all. Since the Overseas Listing Trial Measures was newly promulgated, the interpretation, application and enforcement of the Overseas Listing Trial Measures remain unclear. We cannot assure you that we will be able to complete such filing in a timely manner and fully comply with such rules to maintain the listing status of our ADSs and/or other securities, or to conduct any securities offerings in the future. As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection from the CSRC in connection with requirements of obtaining prior approval for the listing of our ADSs. However, since the Overseas Listing Trial Measures was newly promulgated, the interpretation, application and enforcement of the Overseas Listing Trial Measures remain unclear. We cannot assure you that we will be able to complete any required filing in a timely manner and fully comply with such rules to maintain the listing status of our ADSs and/or other securities, or to conduct any securities offerings in the future. On April 2, 2022, the CSRC released the revised Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) , or the Draft Archives Rules. On February 24, 2023, the CSRC, jointly with other relevant governmental authorities, issued the Provisions on Strengthening the Confidentiality and Archive Management Work Relating to the Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality Provisions”), which became effective on March 31, 2023. The Confidentiality Provisions requires, among others, that companies based in mainland China seeking to offer securities in overseas markets, either directly or indirectly, shall establish the confidentiality and archives system, and shall complete approval and filing procedures with competent authorities, if such companies or their overseas listing entities provide or publicly disclose documents or materials involving state secrets and work secrets of PRC government agencies to relevant securities companies, securities service institutions, overseas regulatory agencies and other entities and individuals. It further stipulates that providing or publicly disclosing documents and materials which may adversely affect national security or public interests, and accounting files or copies shall be subject to corresponding procedures in accordance with relevant laws and regulations. Given the Confidentiality Provisions were recently promulgated, there remain substantial uncertainties about how these provisions will be interpreted, or implemented and how it will affect our operations or future securities offerings. 9 As of the date of this annual report, we have not provided files or copies of files outside China that involve national secrets, national security, vital interests, or have important preservation value to the nation and society. However, we cannot guarantee that relevant government agencies of China, including the CSRC, will share the same opinion as ours. The interpretation and implementation of these opinions and new rules remain unclear at this stage. We cannot assure you that we will not be required to obtain the approval of or file with the CSRC or other regulatory authorities to maintain the listing status of our ADSs on NYSE or to conduct offerings of securities in the future. If such approvals are required, it is uncertain whether we can or how long it will take us to obtain such approval or complete such filing procedures and any such approval or filing could be rescinded or rejected. Any failure to obtain or delay in obtaining such approval or completing such filing procedures for our overseas offerings, or a rescission of any such approval or filing if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our listed securities. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other 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 later 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. Our PRC legal advisor, Merits & Tree Law Offices, has advised us, based on their understanding of the current PRC laws, rules and regulations, that no permission is required from any Chinese authorities (including the CSRC and the CAC) for our overseas offerings and maintaining the listing status of the ADSs on the New York Stock Exchange, given that: (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether any offering such as offerings completed or contemplated by our company is subject to the M&A Rules; and (ii) our PRC subsidiaries were either incorporated as wholly foreign-owned enterprises by means of direct investment or by merger or acquisition of equity interest or assets of a PRC domestic company not subject to the M&A Rules. However, there can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal advisor. There are still uncertainties regarding the interpretation and implementation of these opinions, and further explanations or detailed rules and regulations with respect to these opinions may be issued in the future, which may impose additional requirements on us. Uncertainties exist with respect to the interpretation and implementation of cybersecurity related regulations and cybersecurity review as well as any impact these may have on our business operations. The Data Security Law was promulgated on June 10, 2021 and became effective in September 2021, which stipulates that the data handling activities that affect or may affect the national security should undergo national security review. The Personal Information Protection Law was promulgated on August 20, 2021 and officially implemented on November 1, 2021, which stipulates that critical information infrastructure (“CII”) operators, or personal information processors whose processing of personal information reaches the threshold amount prescribed by the national cyberspace authority, shall store the personal information collected or generated by them within the territory of the PRC. If it is necessary to provide the data overseas, the organization is required to pass the security assessment organized by the national cyberspace authority. On August 17, 2021, the State Council issued the Regulations on the Security Protection of Critical Information Infrastructures, which took effect on September 1, 2021. The regulations stipulate that the departments responsible for the security protection of critical information infrastructure (hereinafter referred to as the security protection departments) shall formulate rules for the identification of critical information infrastructure based on the actual situation of the industry and field, and report it to the public security department of the State Council for record. The following factors shall be considered in the formulation of identification rules: (1) the degree of importance of the network facilities and information systems to the core businesses of the industry and area concerned; (2) the degree of damage that may be caused if the network facilities and information systems are under destruction, loss of function or data leakage; and (3) the correlative impact on other industries and areas. The security protection departments shall be responsible for organizing the identification of critical information infrastructure in their respective industries and areas in accordance with the identification rules, timely notify the identification results to the operators and report such results to the public security department under the State Council. In December 2021, the CAC published the amended Cybersecurity Review Measures, or the new measures, which provides that a network platform operator that has the personal information of more than one million users must apply to the Cybersecurity Review Office (the “CRO”) for a cybersecurity review when it seeks to list overseas. Also, a CII operator, when procuring a network product or service, shall predict any national security risk that may arise after the use of such product or service. If national security will be affected or may be affected, the CII operator shall apply to the CRO for a cybersecurity review. 10 Given the nature of our business and as advised by our PRC legal advisor, Merits & Tree Law Offices, we do not believe that our company is either a “CII operator” or a “network platform operator” who possesses personal information of more than one million users, and therefore are not required to file for a cybersecurity review under the new measures, although we cannot guarantee that the relevant PRC regulatory authority will agree with such conclusion reached. If our company is deemed to be a CII operator or a network platform operator under such rules, we could be subject to cybersecurity review by the CAC and other relevant PRC regulatory authorities and be required to change our existing practices in data privacy and cybersecurity matters at substantial costs. During such cybersecurity review, we may be required to stop providing services to our customers. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for future offerings of securities overseas or to maintain the listing status of our ADSs or if the CSRC or any other PRC government authorities promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for future offerings of securities overseas or to maintain the listing status of our ADSs, we may not be able to proceed with future offerings of securities overseas or to the listing of our ADSs on the New York Stock Exchange and face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from future offerings of securities overseas into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as our ability to complete future offerings of securities overseas or to maintain the listing status of our ADSs. We also cannot rule out the possibility that certain of our customers may be deemed as CII operators, in which case our products or services or data processing activities, if being deemed as related to national security, will need to be submitted for cybersecurity review before we can enter into agreements with such customers, and before the conclusion of such procedure, the customers will not be allowed to use our products or services. If the reviewing authority considers that the use of our services by certain of our customers involves risk of disruption, is vulnerable to external attacks, or may negatively affect, compromise, or weaken the protection of national security, we may not be able to provide our products or services to such customers, which could have a material adverse effect on our results of operations and prospects. As of the date of this annual report, we have not been informed or involved in any investigations or become subject to a cybersecurity review initiated by the CAC based on the new measures, and we have not received any inquiry, notice, warning, sanctions in such respect or any regulatory objections to our current NYSE listing status from the CAC as of the date of this annual report. As there are still uncertainties regarding the enactment of these new laws and regulations as well as the amendment, interpretation and implementation of existing laws and regulations, we cannot assure you that we will be able to comply with such laws and regulations in all respects, and we may be ordered to rectify, suspend or terminate any activities or services that are deemed illegal or non-compliant by the regulatory authorities and become subject to fines and/or other penalties. If we fail to address such issue in a timely manner, or at all, we may be required to suspend or terminate our related businesses or face other penalties. This may materially and adversely affect our business, financial condition, results of operations and prospects. You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the annual report based on foreign laws. CNFinance Holdings Limited is an exempted company incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all of our executive officers are located in China. All of our directors who are not our executive officers are located in China, except for one independent director who resides in the United States. Service of court documents on a Cayman Islands company can be effected by serving the documents at the Company’s registered office and it may be possible to enforce foreign judgments in the Cayman Islands against a Cayman Islands company, subject to some exceptions. However, if investors wish to serve documents on and/or enforce foreign judgments against our directors and officers, they will need to ensure that they comply with the rules of the jurisdiction where the directors and officers are located. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. 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. With a holding company structure, we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including for services of any debt we may incur. Our PRC subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to its respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries, as a foreign invested enterprise, or FIE, is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at its discretion. These reserves are not distributable as cash dividends. 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 payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 15% 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. 11 PRC regulations of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of our public offering to make loans or 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 relevant governmental authorities in China. According to the relevant PRC regulations on FIEs in China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the MOFCOM or its local branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches and (ii) any of our PRC subsidiaries may not procure loans which exceed the difference between its total investment amount and registered capital or, as an alternative, only procure loans subject to the calculation approach and limitation as provided in the Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing. For the restriction and limitation on the amount of loans, please refer to “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Exchange—Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents”. We may not be able to complete such registrations on a timely basis, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to complete such registrations, our ability to use the proceeds of our public offerings, and our ability to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect as of June 1, 2015 and was amended on December 30, 2019. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self- discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its nonaffiliated entities. As this circular is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange-related rules. Violations of these circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds of our public offerings to fund the establishment of new entities in China or their subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish variable interest entities in China, which may adversely affect our business, financial condition and results of operations. Fluctuations in the value of the Renminbi could have a material and adverse effect on your investment. The change in value of the Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions in the PRC. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five- year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. While appreciating approximately by 7% against the U.S. dollar in 2017, the Renminbi in 2018 depreciated approximately by 5% against the U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the RMB 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 the Renminbi and the U.S. dollar in the future. Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, our ADSs in foreign currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and adversely affect the price of our ADSs in U.S. dollars without giving effect to any underlying change in our business or results of operations. 12 Governmental control of currency conversion may limit our ability to utilize our operating income effectively and affect the value of your investment. The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our operating income in Renminbi. Under our current corporate structure, our Cayman Islands incorporated holding company primarily relies 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, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. 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 to pay off their respective debt 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 at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs. Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions. Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation stipulates that if a foreign investor acquires a domestic enterprise and obtains actual control, and if it involves key industries, or has factors that affect or may affect national economic security, or causes the transfer of actual control of domestic enterprises with well-known trademarks or Chinese time-honored brands, the parties concerned shall report to MOFCOM. Moreover, the Anti- Monopoly Law promulgated by the Standing Committee of the NPC which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed. In addition, according to the Measures for the Security Review of Foreign Investment, which has been effective since January 28, 2021, a foreign investor or a party concerned in China (hereinafter collectively referred to as “party concerned”) shall take the initiative to make a declaration to the working mechanism office prior to making one of the following investments and the working mechanism office shall be entitled to require the party concerned to make a declaration thereof: (i) investment in any of such fields as the military industry and military-supporting industry that concern state defense and security, as well as military facilities and areas surrounding industrial military facilities; and (ii) investment in any important agricultural product, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technologies and internet products and services, important financial services, key technologies and other important fields that concern state security while obtaining the actual control over the enterprises invested in. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, 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 the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us. In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015 and was amended in 2019. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE. 13 Several of our shareholders that we are aware of are subject to SAFE regulations, and all of these shareholders have completed all necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. We cannot assure you, however, that all of these individuals may continue to make required filings or updates on a timely manner, or at all. We can provide no assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct or indirect interest in our company. Any failure or inability by such individuals to comply with SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected. Furthermore, as the interpretation and implementation of these foreign exchange regulations have been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects. Uncertainties exist regarding the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure and the viability of business operation. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the People’s Republic of China (“PRC Foreign Investment Law”),and the State Council promulgated the Implementing Regulations to the PRC Foreign Investment Law (“Implementing Regulations”) on December 26, 2019, both of which came into effect on January 1, 2020. The PRC Foreign Investment Law and its Implementing Regulations replaced the trio of previous laws regulating foreign investment in China, namely, the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Chinese-foreign Cooperative Joint Ventures and the Law of the People’s Republic of China on Wholly Foreign- Owned Enterprises, together with their implementation rules and ancillary regulations. PRC Foreign Investment Law and its Implementing Regulations specify that foreign investments shall be conducted in line with the negative list issued by or approved to be issued by the State Council. If a foreign investment enterprise (the “FIE”) proposes to conduct business in an industry subject to foreign investment “restrictions” in the negative list, the FIE must meet certain conditions under the negative list before being established. If an FIE proposes to conduct business in an industry subject to foreign investment “prohibitions” in the “negative list,” it must not engage in the business. Investments made in Mainland China by investors from the Hong Kong Special Administrative Region and the Macao Special Administrative Region shall be governed by the PRC Foreign Investment Law and its Implementing Regulations. On December 27, 2021, the NDRC and the MOFCOM promulgated the Special Administrative Measures (Negative List) for Access of Foreign Investments (2021 Edition), as came into effect on January 1, 2022, according to which the industry of loan service has not been subject to foreign investment “restrictions” or “prohibitions” in the Negative List. Our PRC legal advisor, Merits & Tree Law Offices, advises us that according to the PRC Foreign Investment Law and the Implementing Regulations, the PRC regulatory agencies shall, considering the needs for further foreign opening and economic and social development, adjust the Negative List where appropriate. Therefore, if the industry of loan service is subject to the foreign investment restrictions or prohibitions under the negative list issued subsequently, our 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. 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. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year 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. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations after our company becomes an overseas-listed company upon the completion of our initial public offering. Failure to complete the SAFE registrations may subject us or them to fines and legal sanctions, there may be additional restrictions on the ability of us or them to exercise stock options or remit proceeds gained from sale of stock into the PRC. 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—Regulation —Regulations on Foreign Exchange—Regulations on Stock Incentive Plans.” 14 If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders. Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “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 and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular-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 (SAT Circular 82), which was amended on December 29,2017 and 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 circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. We believe our company is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we will be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are nonresident enterprises, including the holders of our ADSs. In addition, nonresident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be able to obtain 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 PRC tax may reduce the returns on your investment in the ADSs or ordinary shares. 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 SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7, which was amended on December 1 and December 29, 2017. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity securities through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Nonresident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017 and was later amended on June 15, 2018. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of nonresident enterprise income tax. Where a nonresident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the nonresident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC 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. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations. 15 Our auditor, like other independent registered public accounting firms operating in China, was historically not permitted to be subject to inspection by the PCAOB, and consequently, investors were deprived of the benefits of such inspection in the past. Trading in our securities may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor, and as a result, U.S. national securities exchanges, such as the NYSE, may determine to delist our securities. Our independent registered public accounting firm that issues the audit report included 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 required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Our auditor is located in China, a jurisdiction where the PCAOB was historically unable to conduct inspections and investigations completely, without the approval of the Chinese authorities. 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. As a result, investors were deprived of the benefits of such PCAOB inspections. In recent years, U.S. regulatory authorities have continued to express their concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. More recently, as part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, the United States enacted the Holding Foreign Companies Accountable Act, or the HFCAA, in December 2020. Trading in our securities on U.S. markets, including the NYSE, may be prohibited under the HFCAA if the PCAOB determines that it is unable to inspect or investigate completely our auditor for two consecutive years. On December 16, 2021, the PCAOB issued the HFCAA Determination Report to notify the SEC of its determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong, or the 2021 Determinations, including our auditor. On May 26, 2022, we were conclusively identified by the SEC under the HFCAA as having filed audit reports issued by a registered public accounting firm that cannot be inspected or investigated completely by the PCAOB in connection with the filing of our 2021 Form 20-F. The inability of the PCAOB to conduct inspections in the past also deprived our investors of the benefits of such inspections. On December 15, 2022, the PCAOB announced that it was able to conduct inspections and investigations completely of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong in 2022. The PCAOB vacated its previous 2021 Determinations accordingly. As a result, we do not expect to be identified as a Commission-Identified Issuer under the HFCAA for the fiscal year ended December 31, 2022 after we file our annual report on Form 20-F for such fiscal year. However, whether the PCAOB will continue to conduct inspections and investigations completely to its satisfaction of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control, including positions taken by authorities of the PRC. The PCAOB is expected to continue to demand complete access to inspections and investigations against accounting firms headquartered in mainland China and Hong Kong in the future and states that it has already made plans to resume regular inspections in early 2023 and beyond. The PCAOB is required under the HFCAA to make its determination on an annual basis with regards to its ability to inspect and investigate completely accounting firms based in the mainland China and Hong Kong. The possibility of being a Commission- Identified Issuer and risk of delisting could continue to adversely affect the trading price of our securities. If the PCAOB determines in the future that it no longer has full access to inspect and investigate accounting firms headquartered in mainland China and Hong Kong and we continue to use such accounting firm to conduct audit work, we would be identified as a Commission-Identified Issuer under the HFCAA following the filing of the annual report for the relevant fiscal year. If we were so identified for two consecutive years, trading in our securities on U.S. markets would be prohibited. This would substantially impair your ability to sell or purchase the ADSs when you wish to do so. Furthermore, such trading 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. 16 Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act. Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC. In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102E of its Rules of Practice and also under the Sarbanes- Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms, including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or, in extreme cases, the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act. In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies, and the market price of our common stock may be adversely affected. If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States. Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website. The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If our website is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected. You may have difficulty enforcing judgments in Hong Kong. Our PRC subsidiaries are wholly owned by our subsidiary incorporated in Hong Kong. You may have difficulties in enforcing court judgments obtained in United States courts against our Hong Kong subsidiary, including judgments relating to the federal securities laws of the United States. There is also doubt as to whether courts in Hong Kong will enforce judgments of United States courts based only upon the civil liability provisions of the federal securities laws of the United States, or the securities laws of any state of the United States. 17 Risks Related to Our Business We have a limited operating history and our business practice continues to evolve, which makes it difficult to evaluate our future prospects. We commenced our loan service business in 2006 and adopted our previous business model in 2014, and introduced our collaboration model in December 2018. We have a limited operating history in the home equity loan market, especially in some aspects of our business operations, such as loan facilitation service and collateral management service, credit analysis and the development of cooperative relationships with funding partners and other business partners. Our ability to continuously attract borrowers and funding sources is critical to our business. We may from time to time introduce new loan services and products, make adjustments to our existing loan facilitation services and products and our risk management system, or make adjustments to our business operations in general. The regulatory framework and market condition for China’s home equity loan market is evolving and may remain uncertain for the foreseeable future. If our business practices or the business practices of our trust company partners are challenged under any PRC laws or regulations, our business, financial condition, results of operations and prospects would be materially and adversely affected. From time to time we may refine existing commercial arrangements in our business operations to comply with changing regulatory focuses. For example, FOTIC, one of our primary trust company partners, amended its loan agreements in 2017 with certain borrowers to add an option for FOTIC to demand payment of outstanding loan principal and interests before the maturity of the underlying trust funding. Starting in March 2018, we have been working with FOTIC to implement a performance-based service fee structure (the “2018 FOTIC Service Fee Structure”). For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Credit Strengthening Services.” We have also been exploring new business model to broaden our prospective borrower bases. Since December 2018, we have sought to collaborate with limited partnerships and certain well-established corporations, where limited partners in such limited partnerships and the established corporations work as our sales partners to introduce prospective borrowers to us. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Collaboration Model.” In order to expand our financing channels, we launched a new funding model in 2021 in collaboration with commercial banks, under which our commercial bank partners are responsible for reviewing and approving the loan while we charge a service fee for our loan facilitation services. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Commercial Bank Partnership.” Unfavorable reception of the new business arrangements and new collaboration and funding model by potential borrowers could have a material adverse impact on our business, results of operations, financial condition and cash flows. We may face the risk of increased borrower complaints, potential supervision, examinations or enforcement actions by regulatory agencies and/or penalties for violation of financial regulations and other applicable laws and regulations. We may not be able to successfully address the risks and difficulties associated with the new business arrangement and new funding model, which could materially harm our business and operating results. The modifications to our business arrangements and business model may also increase the complexity of our business and may present new and significant challenges, as well as strains on our management, personnel, operations, systems, technical performance and financial resources. As a result, past performance of our practice does not necessarily indicate our future prospects and performance. Such past performance may or may not be sustained in the future. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly evolving market in which we operate and our limited operating history in this particular market. These risks and challenges include, among other things, our ability to: ● offer customized and competitive loan services and products; ● increase the utilization of our loan services by existing borrowers as well as new borrowers; ● maintain low delinquency ratio of loans originated by us; ● achieve an effective and efficient collection and foreclosure process to assist our trust company partners to recover delinquent loans in the event of loan default; ● develop sufficient, diversified, cost-efficient and reputable funding sources; ● broaden our prospective borrower base; ● navigate through a complex and evolving regulatory environment; ● improve our operational efficiency; ● promote standardized and disciplined operational procedures in local offices; ● attract, retain and motivate talented employees to support our business growth; ● maintain and enhance relationships with our business partners; ● enhance our technology infrastructure to support the growth of our business and maintain the security of our system and the confidentiality of the information provided and utilized across our system; ● navigate economic condition and fluctuation; and ● defend ourselves against legal and regulatory actions. 18 Our credit strengthening services to the trust plans as the subordinated unit holder might be subject to challenges by relevant regulatory authorities, and we may potentially be required to obtain licenses. The Guiding Opinion on Regulating the Asset Management Business of Financial Institutions (the “Guiding Opinion”) was issued by PBOC, together with China Banking and Insurance Regulatory Commission (“CBIRC”), China Securities Regulatory Commission (“CSRC”) and State Administration of Foreign Exchange on April 27, 2018. The Guiding Opinion prohibits direct or indirect guarantee for the principal and expected investment return of the senior unit holders of structural asset management products. The Guiding Opinion provides a grace period by the end of 2020. During the grace period, existing products not in compliance with the Guiding Opinion shall be gradually phased out. After the grace period, financial institutions shall not issue or renew any asset management products not in compliance with the Guiding Opinion. Our credit strengthening arrangements may be deemed as indirectly guaranteeing senior unit holders’ principal and expected investment return on the investments. As such, we may be required to further modify such arrangements with the trust plans, which could materially and adversely affect our business. As of the date of this annual report, we have not received any notice or been made aware of any issues or concerns raised by regulatory authorities on our credit strengthening arrangements. We cannot guarantee you, however, that the regulatory authorities will hold the opinion that our credit strengthening arrangements are in compliance with the relevant regulations. Our trust company partners operate in a strictly regulated industry. If the practice of our trust company partners, including the cooperation arrangements with us, is challenged under any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected. We provide home equity loan service to borrowers primarily through collaboration with our trust company partners. Our trust company partners operate in a highly regulated industry and, as a result, are required to comply with a wide array of laws and regulations that are continually evolving. If our collaboration arrangement is deemed to violate any of these laws and regulations, we may be required to make significant changes to our business arrangements. These changes may have a material adverse impact on our business, results of operations and financial condition and may not be implemented successfully. For example, according to the Measures for the Administration of Trust Companies’ Trust Plans of Assembled Funds issued by the CBRC, trust companies may not provide loans in excess of 30% of the paid-in balance of all the trust plans under its management. It is our trust company partners’ responsibility to comply with these regulations and we have no specific knowledge as to whether our trust company partners are in compliance. We cannot assure you that our trust company partners have been in compliance at all times. We cannot assure you that relevant regulatory authorities will not impose additional restrictions on our trust company partners’ businesses. This regulation may limit our access to funding from our trust company partners in the future, which may have a material adverse impact on our source of funding and results of operations. While we believe we currently are in compliance with existing PRC regulations, in all material aspects, we cannot assure you that the PRC government authorities would agree with our interpretation of the relevant regulations. It is also possible that new laws and regulations may be adopted which, along with any possible changes needed to fully comply with any existing or newly released regulations, could require us to further modify our business or operations. The cost to comply with such laws or regulations would increase our operating expenses, and modifications of our business may have a material and adverse impact on our business, financial condition and results of operations. If any of our trust company partners are deemed to violate any laws, regulations and rules, they may face, among other things, regulatory warning, correction order, condemnation, fines, suspension of business license and criminal liability, which may have a material adverse impact on our funding source and results of operations. Our business may be adversely affected if we are unable to secure funding on terms acceptable to us or our borrowers, or at all. We fund most of the loans we originate through our trust company partners. Loans funded by our trust company partners are disbursed to borrowers directly through trust plans. 100.0%, 99.8% and 82.7% of our home equity loan origination volume was originated under trust lending model in 2020, 2021 and 2022, respectively. The availability of funding from our trust company partners depends on many factors, such as the availability of investors on their platforms, general economic conditions, change of regulatory requirements, actual and expected delinquency ratio compared to alternative opportunities, some of which are out of our control. Our trust company partners may seek to acquire borrowers independently or through other third parties. In addition, our trust company partners may not be able to adapt their compliance practices with the evolving financial institution licensing and other regulations in the PRC. As a result, our ability to cooperate with our existing trust company partners may be subject to regulatory or other limitations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Some of our funding sources are highly regulated and are subject to the changing regulatory environment. If any of the funding sources is deemed to violate the PRC laws and regulations, we may need to secure new funding, failure of which may result in material and adverse impact on our business, financial condition, results of operations and prospects.” 19 As our business grows, we may need to obtain new funding sources or require current funding partners to increase the amount of funding provided. If there is a sudden or unexpected shortage of funds from our trust company partners or if we fail to maintain or develop relationships with our existing trust company partners or new funding partners, we may not be able to maintain necessary levels of funding without agreeing to less favorable terms, or at all. We may not be able to arrange additional, new or alternative methods of funding on favorable terms, or at all, or ensure that our cooperation with new funding partners will meet our expectations and the expectations of borrowers. Additionally, if there is an unexpected scale of decrease in subordinated units due to a higher NPL ratio, we may not be able to arrange additional capital to increase our subordinated units contribution to satisfy the contractual structural leverage ratio as required by the subordinated units subscription agreement. If we are unable to secure sufficient funding on terms acceptable to us and our borrowers, or at all, we may not be able to provide attractive products and services to our borrowers, and our business, financial condition and results of operations may be materially and adversely affected. We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases. Our business could be adversely affected by natural disasters or outbreaks of epidemics. These natural disasters, outbreaks of contagious diseases, and other adverse public health developments in China or any other market in which we operate and conduct business could severely disrupt our business operations by damaging our network infrastructure or information technology system or affecting the productivity of our workforce. The outbreak of any severe epidemic disease, such as avian flu, H1N1 flu, SARS or coronavirus, may disrupt our operations, which could negatively affect our financial condition and business prospects. Our headquarters are located in Guangzhou, where most of our directors and management and a large majority of our employees currently reside. Consequently, we are highly susceptible to factors adversely affecting Guangzhou. If any of the abovementioned natural disasters, health epidemics or other outbreaks were to occur in Guangzhou, our operation may experience material disruptions, such as temporary closure of our offices and suspension of services, which may materially and adversely affect our business, financial condition and results of operations. The outbreak of the COVID-19 pandemic and subsequent outbreaks driven by new variants of COVID-19 have brought uncertainties and interruptions to China’s macroeconomics and the global economy and may have adverse effects on our operations. After the initial outbreak of COVID-19, from time to time, some instances of COVID-19 or its variants infections have emerged, such as the infections caused by the Omicron variants emerged in late 2021 and spread across the globe including in China in early 2022. The Chinese government as well as many other countries in the world have taken various measures to constrain the outbreak. The COVID-19 pandemic has caused, and may continue to cause, companies in China, including us, to implement temporary adjustment of work schemes allowing employees to work from home and other measures that may impact our operation. We prioritize the health and safety of our employees, and have taken various preventative and quarantine measures across the Company soon after the outbreak. Results of operations for MSEs, whose owners are our primary customer group, were and may continue to be materially and adversely impacted, which will in turn have a material adverse effect on our financial performance and results of operations. As a result of the COVID-19 outbreak and its continued influence, our business involving on-site and offline activities were and may continue to be materially and adversely impacted, including and not limited to inspection of real properties; visits to borrowers in both the risk assessment and the collection and foreclosure process; and developing of prospective borrowers. The COVID-19 outbreak had and may also continue to have a material adverse effect on China’s real estate market, which may increase the risks of the loans we facilitate. While various measures that the Chinese government implemented to constrain the COVID-19 outbreak have been relaxed since the beginning of 2023, many aspects of daily business operations in China gradually returned to a normal routine. However, the situation in China and other countries and regions is still evolving, bringing with it unprecedented levels of macroeconomic disruption and uncertainties across the globe. The extent to which COVID-19 and its variants impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including the possibility of a resurgence of the COVID-19 outbreak in China, the duration and severity of the pandemic, the actions taken to contain the virus or treat its impact, the development and efficiency of vaccines and other actions taken by governments, companies and individuals in response to the virus and resulting economic disruption. We will continue to closely monitor the impacts of COVID-19 pandemic on us. Our trust company partners may need to lower the structural leverage ratio of the trust plans which could materially and adversely affect our business. The Guiding Opinion sets a limit on the contractual structural leverage ratio which is calculated as the total amount of senior units divided by subordinated units, and intermediate units shall be included as senior units for the purpose of this calculation. For a fixed-income product, the structural leverage ratio shall not exceed 3:1. The contractual structural leverage ratio of the trust plans or products set up by our trust company partners is determined pursuant to our collaboration agreements with them, which set the upper limit to such ratio at a range of 3:1 to 9:1. As of the date of this annual report, the actual structural leverage ratio of our trust plans is in compliance with the Guiding Opinion. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Terms of the Trust Plans” and “Item 4. Information on the Company—B. Business Overview—Our Products—Trust Lending—Funding Partners.” We cannot assure you, however, that the actual structural leverage ratio of our trust plans are always in compliance and in the future, we may need to contribute additional funding to maintain a lower structural leverage ratio and our overall cost of funding may increase, which could materially and adversely affect our business. 20 Our concentration of funding provided by our trust company partners and our concentration of borrowers introduced by one sales partner may have a material adverse effect on our financial condition, liquidity and results of operations, if we lose any of our trust company partners or such sales partner either as a result of its decision to acquire services from our competitors or otherwise. 100.0%, 99.8% and 82.7% of our total home equity loan origination volume was originated under trust lending model in 2020, 2021 and 2022, respectively. Among the loans originated through our trust lending model, 69.3%, 62.1% and 62.3%, were funded through FOTIC trust plans in 2020, 2021 and 2022, respectively. We generally acquire borrowers through the collaboration model where we collaborate with sales partners who introduce borrowers and receive incentives. See “Item 4. Information on the Company—B. Business Overview—Our Products—Collaboration Model.” In 2022, we started to collaborate with a sales partner and the balance of outstanding loan principal of the loans issued to borrowers introducted by such sales partner accounted for 19.4% of our total balance of outstanding loan principal as of December 31, 2022. Although we have long-standing relationship with our trust company partners and such sales partner, there is no guarantee as to the continuation of the relationships between our trust company partners, such sales partner and us. We endeavor to diversify our funding source and borrower acquisition channel, but there is no assurance that we will be successful. The loss of any of our trust company partners, in particular FOTIC, or the afore-mentioned sales partner, whether as a result of its decision to acquire services from our competitors, or otherwise, would have a material adverse effect on our financial condition, liquidity and results of operations. Our collaboration model with our sales partners might be subject to challenges by relevant regulatory authorities. Under the collaboration model, sales partners contribute an amount equal to 10% to 25% of the loans issued to the borrowers introduced by them (such contribution, the “Credit Risk Mitigation Position,” or “CRMP”) and will receive incentive fees upon a pre-agreed schedule and other conditions. According to the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fundraising, promulgated by the Supreme People’s Court, whoever meets the following four conditions, may be deemed as “absorbing public savings illegally or in disguised form” as prescribed in Article 176 of the Criminal Law, except as otherwise provided for by the Criminal Law: (i) taking in funds without license of the relevant authority or under the disguise of lawful business operations; (ii) publicizing by means of internet, media, recommendation fairs, leaflets or mobile phone text messages, or other means; (iii) promising to repay the principal and interests or make payments in forms such as currency, real objects or equities, within a certain time limit; and (iv) absorbing funds from the general public, namely unspecified people. According to Regulations on Preventing and Dealing with Illegal Fund-raising, illegal fundraising involves collecting funds from non-specific targets with promised principal and interest or other investment returns, without lawful permission from the State Council’s financial management departments or in violation of China’s financial management rules. The definition above stipulates the three features of illegal fundraising, which are illegal, with pecuniary interest, and targeting unspecified audiences. It is unclear whether the CRMP we received would be deemed as absorbing funds illegally under PRC laws and regulations. As of the date of this annual report, we have not been subject to any fines or penalties under the aforementioned regulations with respect to our collaboration model with sales partners. If we are deemed to be absorbing public savings illegally or in disguised form, we may be subject to fines up to the amount of fund absorbed and criminal penalties, which could materially and adversely affect our business. We are in the process of refining the collaboration model with the sales partnerships under which sales partners will be restricted to qualified persons only. In addition, we have not made any commitments of making repayments within a certain time limit. We also require the sales partners to use their own funds as the source of the CRMP and prohibit collection of public funds from unspecified people. While we believe we are in compliance with the abovementioned laws and regulations, in all material aspects, we cannot assure you that the relevant authorities would agree with our interpretation of the relevant regulations. Our business and results of operations will be materially and adversely affected if our collaboration model with sales partners are deemed as absorbing public savings illegally or in disguised form. According to the Administrative Measures on Assembled Funds Trust Schemes of Trust Companies, which was amended on February 2009, the trustor shall use legitimate funds of its own to subscribe to the trust units, and shall not participate in the trust scheme by illegally pooling funds from any other person. In addition, according to the Guiding Opinions on Regulating Asset Management Business of Financial Institutions, which were promulgated on April 2018, investors may not use loans or funds from third parties raised by issuing bonds to invest in asset management products. As of the date of this annual report, we have not been subject to any fines or penalties under the aforementioned regulations with respect to our collaboration model with sales partners. If the fund we subscribe for the subordinated units of the trust plan is identified as originated from CRMP, we may be subject to fines up to the amount of fund so identified and criminal and administrative penalties, which could materially and adversely affect our business. Our PRC legal advisor, Merits & Tree Law Offices, advises us that the CRMP from sales partners is for the purpose of reducing our own risk exposure, not for the purpose of illegally and publicly absorbing other people’s funds; in addition, the CRMP does not belong to the loans or funds raised by issuing bonds as described in the abovementioned regulations. While we believe we are in compliance with the abovementioned laws and regulations, in all material aspects, we cannot assure you that the relevant authorities would agree with our interpretation of the relevant regulations. Our business and results of operations will be materially and adversely affected if the funds we subscribe for the subordinated units of the trust plan is identified as originating from CRMP. 21 In addition, under our collaboration model, the CRMP paid by the sales partners either through direct contribution or through contribution to limited partnerships may be seen as investment in trust plans which may be identified by PRC regulatory authorities as disguised loans granted by sales partners. According to the Regulation on Private Lending and Maintaining the Economic and Financial Order, which was promulgated on April 2018, no entity or individual may set up an agency that conducts or mainly conducts the granting of loans, or takes the granting of loans as the daily business activities, without the approval of the competent authority in accordance with the law. If the CRMP paid by sales partners either directly or to limited partnerships is identified by PRC regulatory authorities as disguised loans granted by sales partners, they may be subject to fines up to the amount of fund so identified and criminal and administrative penalties. Our PRC legal advisor, Merits & Tree Law Offices, advises us that under the collaboration model, the main business of the sales partners we cooperate with are to introduce real estate mortgage loan projects to third parties, rather than providing loans. Our sales partners do not engage in issuance of loans and have not entered into any loan agreements with us. If the CRMP paid by sales partners either directly or to limited partnerships is identified by PRC regulatory authorities as disguised loans granted by sales partners, our business and results of operations will be materially and adversely affected. Any lack of requisite approvals, licenses or permits applicable to our business may have a material and adverse impact on our business, financial condition and results of operations. Our business is subject to governmental supervision and regulation by the relevant PRC government authorities. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of the home equity loan and finance industries. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Regulation.” Our PRC legal advisor, Merits & Tree Law Offices, advises us that our businesses do not need special approvals or licenses, other than our small loan business and subject to “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our credit strengthening services to the trust plans as the subordinated unit holder might be subject to challenges by relevant regulatory authorities, and we may potentially be required to obtain licenses.” We are further advised that these opinions are subject to uncertainties and the regulatory authorities may hold a different view. As of the date of this annual report, all of our small loan subsidiaries have obtained such approvals or licenses. Some of our funding sources are highly regulated and are subject to the changing regulatory environment. If any of the finding sources is deemed to violate the PRC laws and regulations, we may need to secure new funding failure of which may result in a material and adverse impact on our business, financial condition, results of operations and prospects. We have multiple funding sources to support our business model, including funding sources that are highly regulated. Although we may or may not be subject to any direct material fines or penalties from the relevant regulatory authorities, if our funding sources are deemed to violate any relevant regulations in collaboration with us directly or indirectly, our business, financial condition, results of operations and prospects would be materially and adversely affected. We subscribe to the subordinated units and therefore have rights to the residual earnings under such trust plans. We historically acquire certain funding for the subordinated units by transferring our right to earnings with a repurchase arrangement to private equity funds. According to the regulations on private equity funds, private equity funds shall no longer engage in loan business and starting from April 1, 2020, the Asset Management Association of China (AMAC) will no longer accept new product filings which are not within the permitted investment scope of private equity funds. Private equity funds filed before April 1, 2020 may continue to invest in loan business. Our private equity funding sources’ filing of products in collaboration with us were all accepted before April 1, 2020. Our PRC legal advisor, Merits & Tree Law Offices, advises that the instructions shall come into force as of the date of promulgation. In case of any discrepancy between the self-discipline rules and Q&A issued by the AMAC and the Instructions, the latter shall prevail. To ensure the smooth transition, according to the principle of “separating the existing applications from new ones”, the AMAC shall no longer handle any new and in-process record-filing applications that fail to meet the requirements of the Instructions from April 1, 2020. If a private investment fund which has completed record-filing formalities before April 1, 2020 engages in activities which do not comply with the essence of “fund” in Article 2 of the Instructions, such private investment fund shall not increase its scale of fundraising or its investment after September 1, 2020, and shall be liquidated upon maturity, and shall not be renewed in principle. We are further advised that these opinions are subject to uncertainties and the regulatory authorities may hold a different view. We cannot assure you that the registered channels can satisfy our financing needs, or that such regulations will not impose material restrictions on our future business operations as we continue to grow our business. According to Measures for the Supervision and Administration of the Wealth Management Business of Commercial Banks promulgated in September 2018 (the “Wealth Management Measures”), a commercial bank is subject to certain investment threshold of nonstandardized debt assets. A transition period, starting from the effective date until the end of 2020, will be set for the Wealth Management Measures. During the transition period, new wealth management products introduced by commercial banks shall comply with the Wealth Management Measures. Commercial banks may continue to offer existing products for the undue assets invested in by existing wealth management products, but shall strictly control them within the overall scale of existing products and decrease them progressively in an orderly manner. Neither our trust company partners nor we have specific knowledge on whether a commercial bank investing in the senior units is in compliance with the Wealth Management Measures. As of the date of this annual report, we are not aware of noncompliance by commercial banks as senior unit holders. We cannot assure you, however, that commercial banks as senior unit holders will continue to comply in the future. If commercial banks as senior unit holders violate the Wealth Management Measures, such violation will have a material adverse effect on our trust company partners’ funding sources and our business operations. As of the date of this annual report, we are not aware of any material fines or other penalties under any PRC laws or regulations with respect to the aforesaid funding resources. If our practice, or the practice of our funding partners in collaboration with us, is deemed to violate any laws, regulations and rules, we may face, among other things, regulatory warning, correction order, condemnation, fines, suspension of business license and criminal liability. If such situations occur, our business, financial condition, results of operations and prospects would be materially and adversely affected. 22 We lack product and business diversification. Accordingly, our future operating income and earnings are more susceptible to fluctuations than a more diversified company. Currently, our primary business activities include facilitating home equity loans and providing loan management services to borrowers and trust company partners and to a lesser extent, direct lending through our small loan subsidiaries. If we are unable to maintain and grow the operating income from our current business or develop additional revenue streams, our future operating income and earnings are not likely to grow and could decline. Our lack of product and business diversification could inhibit the opportunities for growth of our business and results of operations. To maintain and increase the amount of loans we originate, we must continue to engage our existing borrowers and attract new borrowers, either by ourselves or through sales partners under our collaboration model, both of which may be affected by several factors, including interest rates of loans we originate, our brand recognition and reputation, our loan services and products offered, our operating efficiency and ability in engaging prospective borrowers, the effectiveness of our credit analysis system, our ability to secure sufficient and cost-efficient funding, service fees we charge to trust plans, our borrower experience and the PRC regulatory environment. In addition, we have also entered into agreements with our sales partners to utilize the offline network they operate to engage some of our prospective borrowers. If these sales partners could not effectively or efficiently introduce borrowers as anticipated, or if we are unable to expand the scale of our sales partners, we may not be able to acquire or engage new and existing borrowers efficiently. In addition, we may also impose more stringent control over borrower qualifications to ensure the quality of the loans we facilitate, which may negatively affect the amount of loans we facilitate. If we are unable to attract borrowers or if borrowers do not continue to use our services, we may be unable to increase our loan origination volume and corresponding income, and our business and results of operations may be materially and adversely affected. As a result of the COVID-19 pandemic, our normal work schedule and results of operations were adversely impacted in 2022 and may continue to be adversely impacted in the future, which may negatively impact our ability to maintain or increase the amount of loans we facilitate. For example, we may not be able to conduct borrower site visits, and the processing time for each loan may be prolonged. For details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.” Our concentration in loans secured by real properties may increase our credit losses in times of deterioration in local or national property markets, which would negatively affect our financial results. The home equity loans we facilitate are secured by residential or commercial properties in our market areas. A significant decrease of property values will cause an increase in LTV ratio, resulting in borrowers having little or negative equity in their property, which may reduce new loan originations and provide incentive to borrowers to strategically default on their loans. Risk of loan defaults and foreclosures are unavoidable in the home equity loan industry. If we are unable to achieve low delinquency ratio for loans originated by us, our business and results of operations may be materially and adversely affected. We may not be able to achieve low delinquency ratio for loans originated by us, or such delinquency ratios may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. The outstanding principal of home equity loans (including loans held for sale) originated by us was RMB9,816 million, RMB10,705 million and RMB11,123 million (US$1,745 million) as of December 31, 2020, 2021 and 2022. The delinquency ratio for loans originated by us increased from 23.70% as of December 31, 2020 to 26.22% as of December 31, 2021, and further increased to 33.22% as of December 31, 2022. Our NPL ratio decreased from 12.89% to 11.93%, and increased to 16.95% as of the same respective dates. The delinquency ratio in 2022 is higher than that in 2021, mainly because the fact that the borrowers’ ability to service their debts was negatively affected in 2022 due to the COVID-19 pandemic. The NPL ratio in 2022 is higher than that in 2021, mainly attributable to the fact that the pandemic prevention and control measures taken in 2022 has negatively impacted the efficiency of bad debt collection and legal proceedings against borrowers at default, and therefore has caused the Company’s NPL ratio to increase. In order to diversify our financing channels to better serve the demands of MSE owners with credible funding sources, we started to collaborate with commercial banks in 2021, under which model we provide guarantees against the potential defaults and such contractual guarantee arrangement is underwritten by the guarantor company to which we provide back- to-back guarantee at request. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Commercial Bank Partnership.” Accordingly, our results of operations, financial position and liquidity could be materially and adversely affected if we cannot achieve low delinquency ratio for the loans generated under such new funding model. Furthermore, our borrower base continues to expand with the growth of our business operations, which may include loan applicants with lower creditworthiness. We may not be able to achieve low delinquency ratio for loans originated by us in the future, or return to the low delinquency ratio or NPL ratio we achieved in the past. Our high leverage ratio may expose us to liquidity risk and we may not have sufficient capital reserve to manage losses. As part of the collaboration we have with our trust company partners, we subscribe to subordinated units in trust plans through our subsidiaries and fund those units with (i) our own funds and (ii) funding from transferring our right to earnings in subordinated units to third parties. We transfer our right to earnings in subordinated units to third parties with a repurchase arrangement, which requires us to repurchase the right to earnings in subordinated units. For details of our repurchase agreements with third parties under the trust lending model, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Funding Sources.” In 2020, 2021 and 2022, we transferred our right of earnings in subordinated units to a certain private equity fund and to a certain third party. Our financing costs under such repurchase arrangement ranged from 10.5% to 13.8% per annum of the transfer prices in 2020, 2021 and 2022. We are required to consolidate all of the results under trust plans on our consolidated financial statements, including those of the senior units. This consolidation is necessary as our trust lending model creates exposure to variability of returns from the activities of the trust plans. 23 We historically operated a small direct lending business through our small loan subsidiaries, financed with our own funds or funds we received from third parties by transferring our rights in the loans together with a repurchase arrangement. As a result of our funding model, we may be exposed to high leverage ratio. Our leverage ratio was 3.3 times, 3.8 times and 3.7 times as of December 31, 2020, 2021 and 2022, respectively. Our high level of borrowings and leverage ratio may adversely affect our liquidity and business operations, including but not limited to increasing our vulnerability under adverse economic condition, potentially limiting our ability to raise more debt and increasing our exposure to interest rate fluctuation. Our business and results of operations also depend on our ability to secure cost-effective financing. The third parties to whom we transfer our right to earnings or small rights to earnings in loans principal, interest and financing service fee receivables may not continue to provide funding at rates acceptable to us, and we may not find alternative financing at similar rates, or at all. If we continue to have a high leverage ratio, our exposure to liquidity risk may restrict our ability to make necessary capital expenditures or develop business opportunities in the future. For the credit strengthening services we provide, we may also be required to provide additional funding when there is an NPL in the loan portfolio. Due to this arrangement and our high leverage ratio, we may not have sufficient capital reserve to manage potential losses in the future, which may adversely affect our results of operations and financial positions. In addition, although we are not currently subject to any capital reserve requirement, we cannot assure you that the regulatory authority will not impose such requirements in the future, which may have a material adverse impact on our results of operations and financial positions due to our high leverage ratio. If our or our trust company partners’ or our commercial bank partners’ risk management system fails to perform effectively, such failure may materially and adversely impact our operating results. Credit assessment of the borrowers we facilitate is conducted by our risk management system, and subject to final risk assessment by our trust company partners or commercial bank partners under different funding models. Our risk management system uses credit analysis and data from prospective borrowers and multiple external sources and might not be effective as we continue to increase the amount of transactions, expand the borrower base and broaden our borrower engagement efforts through different channels in the future. If our system or our trust company partners’ or commercial bank partners’ system is ineffective or if the credit analysis and data we or our trust company partners or our commercial bank partners obtained are incorrect or outdated, the relevant risk management abilities could be negatively affected, resulting in incorrect recommendations or denials of loan applications or mispriced loan products, or eventually loan default. If we are unable to effectively and accurately assess the credit risks of borrowers or price loan products appropriately, we may be unable to offer quality services to our trust company partners, commercial bank partners or borrowers. Our risk and credit assessment may not be able to provide more predictive assessments of future borrower behavior or result in better evaluation of our borrower base when compared to our competitors. Pursuant to the terms of our collaboration agreements with trust company partners and commercial bank partners, trust company partners or commercial bank partners are independently responsible for credit assessment and approving the loans applications and we are not subject to any penalties for inaccurate risk assessment or mispriced loan products. However, we ultimately bear credit risk on loans we facilitate as we have payment obligations under our credit strengthening arrangements or the new funding model with commercial bank partners. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Credit Strengthening Services.” In addition, our performance-based service fee and return under the subordinated units may be reduced as a result of increased NPLs. If our or our trust company partners’ or commercial bank partners’ risk management system fails to perform effectively, our business and results of operations may be materially and adversely affected. As a result of the COVID-19 pandemic, our normal work schedule were adversely impacted and may continue to be adversely impacted in the future. Specifically, we may not be able to conduct site visits, which is an important component of our credit assessment process. For details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.” Our business depends on our ability to collect payment on and service the transactions we facilitate. We offer post-loan management services to our trust company partners. We have implemented payment and collection policies and practices designed to optimize compliant repayment, while also providing superior borrower experience. Our collection process is divided into distinct stages based on the days of delinquency, which dictate the level of collection steps taken. For example, automatic reminders through text, voice and instant messages are sent to a delinquent borrower as soon as the collections process commences. Our collection team will also make phone calls to borrowers following the first missed payment and periodically thereafter. We may also resort to arbitration or litigation to recover delinquent loans or assign those loans to a third party and collect proceeds upfront. Despite our servicing and collection efforts, we cannot assure you that we will be able to collect payments on the transactions we facilitate as expected. As we are exposed to credit risks as the subordinated unit holder and also as a result of credit strengthening services we provide, our failure to collect payment on the transactions will have a material adverse effect on our business operations and financial positions. In addition, our collection team may not possess adequate resource and manpower to collect payment on and service the loans we facilitated. If we fail to adequately collect amounts delinquent or due, then our service fees charged to trust plans may be delayed or reduced and our results of operations will be adversely affected. As the amount of transactions facilitated by us increases in the future, we may devote additional resources into our collection efforts. However, there can be no assurance that we would be able to utilize such additional resources in a cost-efficient manner. 24 Moreover, Circular 141 provides that all types of institutions or entrusted third-party institutions shall not collect loans through violence, intimidation, insult, slander, harassment, etc. Furthermore, according to the Notice on Further Regulating the Personal Trust Loan Business of Trust Companies issued by Beijing Bureau of the China Banking and Insurance Regulatory Commission in August 2020, trust companies within the Beijing jurisdiction shall clarify the list of prohibited behaviors with the institutions they collaborate with and their staff, and must not collect loans through violence, intimidation, insult, slander, harassment, etc. The Amendment XI to the Criminal Law of the People’s Republic of China, which was issued on December 2020 and became effective in March 2021, stipulates that whoever falls under any of the following circumstances when collecting any illegal debts generated from offering loans with high interest shall, if the circumstances are serious, be sentenced to fixed-term imprisonment of no more than three years, criminal detention or public surveillance and shall also, or shall only, be fined: (1) using violence or coercive methods; (2) restricting another person’s personal freedom of movement or trespass to another person’s dwelling; or (3) threatening, stalking, or harassing another person. Although we aim to ensure our collection efforts comply with the relevant laws and regulations in the PRC and we have established strict internal policies that our collections personnel shall not engage in aggressive practices, we cannot assure you that such personnel will not engage in any misconduct as part of their collection efforts. Any such misconduct by our collection personnel or the perception that our collection practices are considered to be aggressive and not compliant with the relevant laws and regulations in the PRC may result in harm to our reputation and business, which could further reduce our ability to collect payments from borrowers, lead to decrease in the willingness of prospective borrowers to apply for the home equity loans we facilitate, or fines and penalties imposed by the relevant regulatory authorities, any of which may have a material adverse effect on our results of operations. As a result of the COVID-19 pandemic, our collection efforts were delayed and may continue to be delayed in the future, which may have a material adverse impact on our results of operations. For details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.” If our allowance for loan losses is not sufficient to cover actual loan losses, our results of operations would be negatively affected. Our business is subject to fluctuations based on local economic conditions. These fluctuations are neither predictable nor within our control and may have a material adverse impact on our operations and financial condition. In determining the amount of the allowance for loan losses, we analyze our loss and delinquency experience by loan categories and we consider the effect of existing economic conditions. In addition, we make various assumptions and judgments about the collectability of loan portfolios, including the creditworthiness of borrowers and the value of real properties serving as collateral for the repayment loans. If the actual results are different from our estimates, or our analysis is incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in a loan portfolio, which would require additions to allowance and would decrease our net income. Our emphasis on loan growth and on increasing portfolio, as well as any future loan deterioration, will require us to increase our allowance further in the future. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities may have a material adverse effect on our results of operations and financial condition. Increases in market interest rates could negatively affect the amount of loans facilitated by us and cost of funds provided to borrowers. Borrowers’ costs of borrowing mainly consist of interest expenses. An increase in prevailing interest rates could result in an increase in the interest rates of loans we facilitate, and borrowers may be less likely to accept such adjusted terms. If borrowers decide not to use the products or services we offer because of such increase in market interest rates, our ability to retain existing borrowers and engage prospective borrowers as well as our competitive position may be severely impaired. If we are unable to effectively manage such market interest rate risk, our business, profitability, results of operations and financial condition could be materially and adversely affected. Our overall funding costs may fluctuate with market interest rates while the interest rates for existing loans are fixed during the terms of the loans. As a result, an increase in the market interest rates may negatively impact the availability and cost of our funding, which may have a material adverse impact on our profitability and results of operations. 25 We are involved in legal proceedings in the ordinary course of our business from time to time. If the outcomes of these proceedings are adverse to us, it could have a material adverse effect on our business, results of operations and financial condition. We are involved in various legal proceedings in the ordinary course of business from time to time. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or results of operations as a whole. However, no assurances can be given as to the outcome of any pending legal proceedings, which could have a material adverse effect on our business, results of operations and financial condition. For debt collection purposes, we initiate legal proceedings against borrowers to recover payments that are delinquent for 30 days if we cannot reach agreement with the default borrowers by then. As of December 31, 2022, we had 5,076 collection legal proceedings pending before courts and arbitration tribunals with amounts in dispute of RMB2,827.1 million, where our trust company partners either directly or with our help sued borrowers of such delinquent loans. We may not be able to obtain or enforce favorable judgments or arbitration awards, or recover the amounts in dispute in full or at all. Furthermore, claims arising out of actual or alleged violations of law could be asserted against us by individuals, governmental or other entities in civil, administrative or criminal investigations and proceedings. These claims could be asserted under a variety of laws and regulations, including but not limited to contract laws, online or private lending laws or regulations, consumer protection laws or regulations, intellectual property laws, information security and privacy laws, and labor and employment laws. For further details, see the section headed “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings.” These actions could expose us to adverse publicity and to monetary damages, fines and penalties, as well as suspension or revocation of licenses or permits to conduct business. Even if we eventually prevail in these matters, we could incur significant legal fees or suffer reputational harm, which could have a material adverse effect on our business and results of operations as well as our future growth and prospects. The foreclosure action and enforcement process may be time-consuming, difficult and uncertain for legal and practicable reasons, which could adversely affect our liquidity, business, financial condition and results of operations. The home equity loans we facilitate are secured by collateral, normally residential or commercial real properties owned by borrowers. In the event that a borrower is in default and the payment is past due for over 30 days or upon the incurrence of unusual situations (such as forfeiture of the collateral), we may need to help our trust company partners initiate judicial or arbitration proceedings against the defaulting borrower and foreclose the real property collateral. Historically, we were able to help our trust company partners enforce their rights to the collaterals through a power of attorney that was signed by the borrower and notarized by a notary public before loan disbursement. This allowed the trust company partners to quickly dispose of the collaterals without having to involve the borrower. Due to recent regulatory development, we have ceased this practice. As a result, we may need to resort to judicial or arbitration proceedings more frequently to help our trust company partners foreclose on the collateral. The judicial or arbitration proceedings may be time-consuming and may not ultimately be possible. In addition, the enforcement process may be difficult in practice. Furthermore, the defaulting borrowers may have concealed, transferred or disposed of their assets beforehand, which make it difficult or impossible for us to apply for attachment. Moreover, if the attached assets are found to be subject to prior mortgage or other third parties’ rights during proceedings, our interests will be ranked lower than these prior parties, thereby limiting or even preventing us from full coverage by the collateral. As a result, in case of defaults we may not be able to recover the full amount of loans and outstanding interests or at all, and in turn our liquidity, business, financial condition and results of operations could be adversely affected. In 2019, courts in certain regions of PRC issued regulations on banning the filings and executions in “trap loans” cases. While we believe our business does not fall into “trap loans” and such regulations are not be applicable to us, the interpretations of such regulations may vary among different courts. We cannot guarantee that the regulatory authority will agree with our interpretation. In 2019, certain court proceedings relating to the loans we facilitated were delayed or suspended due to such regulations. As a result of the COVID-19 pandemic, court proceeding, foreclosure action and enforcement process were delayed and may continue to be delayed in the future, which may have a material adverse impact on our results of operations. For details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.” 26 Credit and other information that we or our trust company partners or our commercial bank partners receive from prospective borrowers and third parties about a borrower and the collateral may not accurately reflect the borrower’s creditworthiness or the collateral’s fair/recoverable value, which may compromise the accuracy of our and our trust company partners’ or our commercial bank partners’ credit assessment. For the purposes of credit risk assessment, we and our trust company partners or our commercial bank partners obtain from prospective borrowers and third parties certain information of the prospective borrowers or the prospective real property collateral, which may not be complete, accurate or reliable. A credit report on a borrower or prospective collateral generated by our third-party sources or our trust company partners’ or our commercial bank partners’ own credit assessment system may not reflect that particular borrower’s actual creditworthiness or the prospective collateral’s actual market value because it may be based on outdated, incomplete or inaccurate information. Additionally, once we and our trust company partners or our commercial bank partners have obtained a borrower’s information, the borrower may subsequently (i) become delinquent in the payment of an outstanding obligation; (ii) default on a preexisting debt obligation; (iii) take on additional debt; or (iv) sustain other adverse financial events, making the information we have previously obtained inaccurate. Such inaccurate or incomplete borrower information could compromise the accuracy of our or our trust company partners’ or our commercial bank partners’ credit assessment and adversely affect the effectiveness of our risk management, which could in turn harm our reputation, lower our service fees charged to trust plans, and as a result, our business and results of operations could be materially and adversely affected. We currently determine the preliminary market value of the prospective real property collateral using external databases at the time borrowers submit their loan applications. We also conduct site visits to cross-check conditions and verify information of the prospective real property collateral. In addition, we compare the preliminary third-party appraiser report with quotes on an anonymous basis from local real estate agencies in the same neighborhood. However, there is no assurance that we have complete and accurate information relating to the prospective real property collateral. In addition, our trust company partners or our commercial bank partners perform their own independent credit assessment and make the decision on loan grants based on their credit assessment results. If we or our trust company partners or our commercial bank partners overestimate market value of the real property collateral, the loans we facilitate may not be fully secured, which could affect the accuracy of our or our trust company partners’ or our commercial bank partners’ credit assessment and the effectiveness of our or our trust company partners’ or our commercial bank partners’ risk management. Therefore, our reputation, and as a result, our business and results of operations could be materially and adversely affected. Our business operations may be negatively impacted if borrowers use loan proceeds to engage in activities prohibited or not encouraged by regulators. Borrowers supply a variety of information that is included in the standardized loan applications prepared by us, including intended use of proceeds. We verify such information by conducting site visits and informal interviews. As our business continues to grow and our borrower base continues to expand, we might not have enough resources to continuously verify or monitor the information provided by the borrowers, such as intended use of loan proceeds. The loan agreements our borrowers enter into limit the use of proceeds to business operation purposes, not purchase of real property or consumption. The trust companies have the right to require early payment if proceeds were not used for business operation purposes. However, we cannot guarantee and may not effectively monitor that the loan is strictly used for business operating purposes. The borrower may use loan proceeds for other purposes with increased risk than as originally provided or use loan proceeds to engage in activities prohibited or discouraged by regulators. Such activities may harm our reputation and negatively impact our business operations. Fraudulent activity could negatively impact our operating results, brand and reputation and cause the use of our loan facilitation services to decrease. We are subject to the risk of fraudulent activity associated with borrowers, our trust company partners and 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, reduce the volume of loan transactions facilitated through us and lead us to take additional steps to reduce fraud risk, which could increase our costs. 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. Although we have not experienced any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that any of the foregoing may occur, causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and financial condition could be materially and adversely affected. 27 We are subject to credit cycle and the risk of deterioration of credit profiles of borrowers. Our business is subject to the credit cycle associated with the volatility of the 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 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 or our trust company partners’ risk management system may be subsequently rendered ineffective. This in turn may lead to higher delinquency ratio and adverse impacts on our reputation, business, results of operations and financial positions. Our current business model has a relatively large exposure to second lien mortgage. In 2021 and 2022, loans secured by second lien interest accounted for 60.5% and 59.8% of our loan origination volume of home equity loans, respectively. For loans secured by second lien interests, our rights over the collateral will be subordinated to other secured creditors with higher priority. If the borrowers default, we may not be able to collect the full amount of our security interests in the collateral due to lien subordination. There is no assurance that we will be able to realize the value of the collateral as we anticipated in a timely manner, or at all. As a result, our business, financial condition, results of operations and prospects may be adversely affected. We primarily rely on our trust company partners and our commercial bank partners to fund loans to borrowers, which may constitute provision of intermediary service, and our agreements with these partners and borrowers may be deemed as intermediation contracts under the Civil Code of the People’s Republic of China (the “Civil Code”). Under the Civil Code, if an intermediary intentionally conceals any material fact or provides false information in connection with the conclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and shall be liable for the damages caused. Therefore, if we intentionally conceal material information or provide false information to our trust company partners and our commercial bank partners and are found at fault, or if we fail to identify false information received from borrowers or others and in turn provide such information to our trust company partners and our commercial bank partners, we could be held liable for damages caused to our trust company partners and our commercial bank partners as an intermediary pursuant to the Civil Code. On the other hand, we do not assume any liability solely on the basis of failure to correctly assign a credit limit or pricing to a particular borrower in the process of facilitating a loan transaction, as long as we do not intentionally conceal any material fact intentionally or provide false information, and are not found to be at fault otherwise. However, due to the lack of detailed regulations and guidance in the area of home equity loans and the possibility that the PRC government authority may promulgate new laws and regulations regulating home equity loans in the future, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations for the home equity loan industry, and there can be no assurance that the PRC government authority will ultimately take a view that is consistent with ours. 28 The personal data and other confidential information of borrowers and our partners which we collect or are provided access to may subject us to liabilities imposed by relevant governmental regulations or expose us to risks of cyberattacks, computer viruses, physical or electronic break-ins or similar disruptions. We receive, transmit and store a large volume of personally identifiable information and other confidential data from borrowers and our partners. There are numerous laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the State Administration for Market Regulation promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance. Personal Information Protection Law stipulates that personal information shall be processed in accordance with the principles of lawfulness, legitimacy, necessity and good faith, and not in any manner that is misleading, fraudulent or coercive. Collection of personal information shall be limited to the minimum scope necessary for achieving the purpose of processing and shall not be excessive. In addition, personal information processing rules should be disclosed to personal information subjects, and the purpose, method and scope of processing should be clearly stated. While we strive to comply with all applicable data protection laws and regulations, as well as our own privacy policies, this regulatory framework for privacy issues in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit the use of our platform and harm our business. In addition, the data we possess may make us an attractive target for and potentially vulnerable to, cyberattacks, computer viruses, physical or electronic break-ins or similar disruptions. Furthermore, some of the data we possess is stored on our servers, which are hosted by third parties. While we and our third-party hosting facilities have taken steps to protect confidential information to which we have access and we store our data in encrypted form, our security measures may be breached in the future. Any accidental or willful security breaches or other unauthorized access to our database could cause confidential borrower, partner information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If our security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, our reputation, business and results of operations may be materially and adversely impacted. 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 and our third-party hosting facilities may be unable to anticipate these techniques or implement adequate preventative measures. In addition, the Administrative Measures for the Security of the International Network of Computer Information Network, effective on December 30, 1997 and amended on January 8, 2011, require us to report any data or security breaches to the local offices of the PRC Ministry of Public Security within 24 hours of any such breach. Any security breach, whether actual or perceived, would harm our reputation, and could cause us to lose borrowers and partners and adversely affect our business and results of operations. We do not have cybersecurity insurance in case of security breach. As of the date of this annual report, we have not experienced any material incidents of security breach. Any failure by us or our third-party service providers to comply with applicable anti-money laundering laws and regulations could damage our reputation. In cooperation with our trust company partners, we have adopted various policies and procedures, including internal controls, “know-your-customer” procedures, customer due diligence and customer screening procedures, for anti-money laundering purposes. In addition, we rely on and may in the future, rely on other third-party service providers, in particular the custody banks and payment agents that handle the transfer of funds between borrowers and lenders, to have their own appropriate anti-money laundering policies and procedures. Custody banks and payment agents are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. If any of our third-party service providers fail 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. Any negative perception of the industry, such as that arising from any failure of other home equity loan service providers to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image or undermine the trust and credibility we have established. 29 The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as nonfinancial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and records and reports on large transactions and suspicious transactions. Measures for the Supervision and Administration of Combating Money Laundering and Financing of Terrorism by Financial Institutions, effective in August 2021, provides that a financial institution shall, according to the provisions, establish and improve the internal control system for combating money laundering and financing of terrorism, assess risks of money laundering and financing of terrorism, establish a risk management mechanism commensurate with the risk status and business scale, build an information system for combating money laundering, and establish or designate a department and appoint corresponding personnel to effectively perform the obligations of combating money laundering and financing of terrorism. However, as the detailed anti-money laundering regulations of home equity loan facilitators have not been published, there is uncertainty as to how the anti- money laundering requirements will be interpreted and implemented, and whether home equity loan service providers like us must abide by the rules and procedures set forth in the PRC Anti-money Laundering Law that are applicable to nonfinancial institutions with anti-money laundering obligations. We cannot assure you that the anti-money laundering policies and procedures we have adopted will be effective in protecting our business from being exploited for money laundering purposes or will be deemed to be following applicable anti-money laundering implementing rules if and when adopted. The collaboration model we have in place with our sales partners to acquire borrowers might be regarded as financial marketing and might face compliance risks. The People’s Bank of China, the China Banking Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange have issued notice on further regulating financial marketing and publicity activities on December 20, 2019, which took effect on January 25, 2020. It is stipulated that financial marketing and publicity activities refer to the activities of financial product or financial service providers using various publicity tools or methods to publicize and promote financial products or financial services, and it is illegal to engage in financial business without a business license or beyond the permitted business scope, and market entities that fail to obtain relevant financial business qualifications shall not conduct marketing and publicity activities relating to the financial business, except that information release platforms and media entrusted by relevant financial business qualifications may carry out financial marketing and publicity activities for them. We currently collaborate with our sales partners on the promotion of real estate mortgage loan projects, and we introduce borrowers to the trust companies. As the above notice is broad in regulatory scope and still evolving, we cannot guarantee you that the marketing activities of us or our sales partners will not be regarded as financial marketing and publicity activities. If the marketing activities of us or our sales partners are found to be in violation of the above notice, we may be penalized by relevant authorities and our marketing activities may be suspended, which could adversely affect our business operations. 30 The collecting, storing and sharing of information among us, our sales partners and the trust companies might face compliance risks. The PBOC and the National Financial Standardization Technical Committee released the Personal Financial Information Protection Technical Specifications (“Specifications”) on February 13, 2020, according to which financial institutions shall not entrust or authorize other institutions, without the qualification for financial business, to collect information such as bank account information, personal identification number, mobile phone number, KYC information, home address and other information that is linked to the identity of a specific individual. Financial institutions shall also forbid outsourcing service agencies and external service agencies through agreements or contracts to store such information. On 26, December, 2022, China Banking and Insurance Regulatory Commission (“CBIRC”) issued the Administrative Measures for the Protection of Consumer Rights and Interests by Banking and Insurance Institutions. According to such Administrative Measures, banking institutions shall establish a management mechanism for the list of cooperating institutions and strengthen the ongoing management of cooperating institutions, and set entry and exit criteria for cooperating institutions on matters involving consumer rights and interests, such as the security of consumers' personal information. As of the date hereof, there is no such terms or provisions that we are entrusted or authorized to collect such information from the borrower by the trust companies and commercial banks in the agreements between us and the trust companies and commercial banks. We have collected information from the borrowers with the borrowers’ express consent. Although the Specifications are a recommended industry standard and have no mandatory legal force, but they might still be referred to by regulatory agencies. Therefore, if our collecting, storing and sharing of the borrower’s above-mentioned information are found to be in violation of the laws, it could have an adverse impact on our business model and adversely affect our business operations, especially in terms of our collaboration model with commercial bank partners. The Administrative Measures for Credit Reporting Business may have a certain negative impact on our business, and we may face challenges from the regulatory authorities. The Administrative Measures for Credit Reporting Business, which were adopted on September 17, 2021, are promulgated for implementation as of January 1, 2022. For the purpose of the measures, credit reporting business refers to activities in which credit information on enterprises and individuals is collected, arranged, preserved, processed, and provided to users; Credit information refers to basic information, loan information, and other relevant information collected in accordance with the law and used to identify and judge the credit status of enterprises and individuals when providing services for financial and other activities, as well as analysis and evaluation information formed based on the foregoing information. Also, an applicant shall obtain the permission for a personal credit reporting agency from the People’s Bank of China in accordance with the law to engage in personal credit reporting business; handle the record-filing of a corporate credit reporting agency in accordance with the law to engage in corporate credit reporting business; or handle the record-filing of a credit rating agency in accordance with the law to engage in credit rating business. Financial institutions, including but not limited to commercial banks and trust companies, shall not carry out commercial cooperation with market institutions that have not obtained the lawful qualifications for credit reporting business in accessing credit information. As we are in the process of loan facilitation for trust companies or commercial banks, we may involve the collection and provision of borrowers’ information. Our PRC legal advisor, Merits & Tree Law Offices, believes that we have not arranged or processed the borrower’s credit information while conducting business, and we are not engaged in personal credit investigation business. However, since the measures are relatively new and the relevant interpretation is uncertain, we are not sure whether the regulatory authorities would take our business as credit investigation service, or would require us to obtain relevant licenses, to cooperate with third-party credit investigation agencies. As of the date of this annual report, we have not received warnings, penalties, or objections to our business. However, if the business we carry out is regarded as credit investigation business by the regulatory authorities, we may be required to adjust our existing business model within certain period to comply with the authorities’ regulations, which may increase our operating cost. If the adjustments and the rectification cannot be completed within the prescribed period, we may face administrative penalties such as being banned in accordance with the law, confiscation of illegal gains, fines, etc. If we are unable to maintain relationships with our third-party service providers, our business will suffer. We rely on third-party service providers to operate various aspects of our business. For instance, third parties supply us with external data including real property valuation, borrowers’ credit histories, government data and blacklists. Furthermore, we engage third-party service providers to maintain our security systems, ensuring confidentiality of data and preventing malicious attacks. 31 Our relationships with various third parties are integral to the smooth operation of our business. Most of our agreements with third-party service providers are nonexclusive and do not prohibit third-party service providers from working with our competitors. If our relationships with third-party service providers deteriorate or third-party service providers decide to terminate our respective business relationships for any reason, such as to work with our competitors on more exclusive or more favorable terms, our operations may be disrupted. In addition, our third-party service providers may not uphold the standard we expect under our agreements. If any of these were to happen, our business operations could be materially impaired and our results of operations would suffer. Misconduct, fraud, errors and failure to function by our employees or third-party service providers could harm our business and reputation We are exposed to the risk of misconduct, fraud and errors by our employees and third-party service providers with whom we collaborate. In addition, we rely on our employees for debt collection. We aim to ensure that our collection efforts comply with the relevant laws and regulations in the PRC and we have established strict policies that our employees should not engage in aggressive practices while performing debt collection. Nevertheless, we do not have full control over our employees. Misconduct and errors by our employees could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm. We cannot always deter misconduct and errors by our employees, and the precautions we take to prevent and detect these activities may not be effective in all cases. There cannot be any assurance that misconduct and errors by our employees will not lead to a material adverse effect on our business. Any of these occurrences could result in our diminished ability to operate our business, potential liability to third parties, inability to attract borrowers and funding sources, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations. Misconduct and errors by our trust company partners, commercial bank partners, sales partners and other parties with whom we collaborate with could harm our business and reputation. We are exposed to the risk of misconduct and errors by our trust company partners, commercial bank partners, sales partners and other business partners with whom we collaborate. We rely on our sales partners for borrower acquisition and we do not have full control over sales partners’ conduct or conduct of their respective acquisition channels while sourcing borrowers. We could be materially and adversely affected 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. Financial products and financial institutions are heavily regulated in China. We are not regulated as a financial institution, but we may be indirectly subject to PRC financial regulations as a result of cooperation with financial institutions as our funding source partners. If any financial product designed by us and our funding partners is deemed to violate any PRC laws or regulations, we may be jointly liable due to the service we provide, or we may have to terminate the relationship with our funding partners. It is not always possible to identify and deter misconduct or errors by our trust company partners, commercial bank partners, sales partners and other business partners, and the precautions we take to detect and prevent such activities may not be effective in controlling unknown or unmanageable risks or losses. If any of our funding partners, sales partners and other business partners misuse or misappropriate funds, commit fraud or other misconduct, or fail to follow our rules and procedures when interacting with our borrowers, 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, and therefore be subject to civil or criminal liability. Any of these occurrences could result in our diminished ability to operate our business, potential liability to third parties, inability to attract third parties, reputational damage, regulatory intervention or financial harm, which could negatively impact our business, financial condition and results of operations. If we do not compete effectively in our target markets, our operating results could be harmed. The PRC’s home equity loan market is rapidly evolving. We compete with financial products and companies that attract potential borrowers or funding sources, or both. Particularly, we compete with other financial service companies that facilitate home equity loans. Some of our current or 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 and distribution channels. Their business models may also ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Our current or potential competitors may also have longer operating histories, a more extensive borrower base, more data and distribution channels, greater brand recognition and brand loyalty and broader partnership relationships than we have. For example, established internet companies, including social media companies that possess large, existing borrower bases, substantial financial resources and established distribution channels, may enter the market. Traditional financial institutions may also focus on the MSE market, which may have a material adverse impact on our business and results of operations as we may not necessarily have competitive advantage. Our competitors may be better at developing new products, responding quickly to new technologies and undertaking more extensive marketing campaigns. If we are unable to compete with such companies or meet the need for innovation in our industry, the demand for our services could stagnate or substantially decline and we could experience reduced operating income, any of which could harm our business. 32 When new competitors seek to enter our target market, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or terms common in that market, which could adversely affect our market share or ability to exploit new market opportunities. In addition, since the home equity loan lending industry is a relatively recent development in China, potential partners and borrowers may not fully understand how our business works and may not be able to fully appreciate the features that we have invested in and adopted on our business as compared to other home equity loan service providers. Our pricing and terms could deteriorate if we fail to act to meet these competitive challenges. Further, to the extent that our competitors are able to offer more attractive terms to our trust company partners, such trust companies may choose to terminate their relationships with us. All of the foregoing could adversely affect our business, results of operations, financial condition and future growth. If negative publicity arises with respect to us or the home equity loan lending industry in general, our employees, our third-party service providers or our trust company partners, our business and operating results could be adversely affected. If negative publicity arises about the home equity loan lending industry or the secured lending industry in general in China or our company, including the quality, effectiveness and reliability of our business, our ability to effectively manage and resolve borrower complaints, privacy and security practices, litigation, regulatory challenges and the experience of borrowers with our services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our services, which could harm our business and operating results. The PRC government has recently instituted general regulations and specific rules, including the Guiding Opinion, to develop a more transparent regulatory environment for assets management products. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our business may be adversely affected if we are unable to secure funding on terms acceptable to us or our borrowers, or at all.” Many companies in China’s home equity loan lending industry have not been fully compliant with these regulations, which prevents these companies from providing home equity loans. To the extent that borrowers associate our company with these failed companies, they may be less willing to use our services. Harm to our reputation can also arise from many other sources, including employee misconduct, misconduct by our partners, or third-party service providers, failure by us, our partners or third-party service providers to meet minimum standards of service and quality, inadequate protection of borrower and partner information and compliance failures and claims. Additionally, negative publicity with respect to our partners or service providers could also affect our business and operating results to the extent that we rely on these partners or if borrowers associate our company with these partners. If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed. Our brand and reputation are integral to our acquisition of borrowers and funding sources, and we intend to invest in marketing and brand promoting efforts. The success of our marketing efforts and borrowing experience with our services are integral to our ability to attract new and retain repeat borrowers. Our marketing channels include traditional media such as telephone marketing and direct sales conducted by sales partners, and marketing campaigns, as well as online media, search engine optimization and search engine marketing. If our current marketing efforts and channels are less effective or inaccessible to us, or if the cost of such channels significantly increases or we cannot penetrate the market with new channels, we may not be able to promote and maintain our brand and reputation to maintain or grow the existing borrower base. If we are unable to promote and maintain our brand and reputation in a cost-efficient manner, our market share could diminish or we could experience a lower growth rate than we anticipated, which would harm our business, financial condition and results of operations. Any failure to protect our own intellectual property rights could impair our brand, negatively impact our business or both. Our success and ability to compete also depend in part on protecting our own intellectual property. We rely on a combination of copyright, trade secret, trademark and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. However, the steps we take to protect our intellectual property rights may be inadequate. Third parties may seek to challenge, invalidate or circumvent our copyright, trade secret, trademark and other rights or applications for any of the foregoing. In order to protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business. 33 We may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing on their intellectual property rights. We may, however, be unaware of the intellectual property rights that others may claim cover some or all of our applications, technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, restrict us from conducting our business or require that we comply with other unfavorable terms. We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management from our business operations. We have existing debts and may incur more in the future, which may adversely affect our financial condition and negatively impact our operations. We have substantial existing debts and we may incur more in the future. The incurrence of debt could have a variety of negative effects, including: ● default and foreclosure on our assets if our operating income is insufficient to repay debt obligations; ● acceleration of obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments when due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; ● our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding; ● diverting a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and ● creating potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate. The occurrence of any of these risks could adversely affect our operations or financial condition. 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 one or more of our 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 noncompetition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all. 34 We may have exposure to greater than anticipated tax liabilities. We are subject to enterprise income tax, value-added tax, and other taxes in each province and city in China where we have operations. Our tax structure is subject to review by various local tax authorities. The determination of our provision for income tax and other tax liabilities requires significant judgment. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. Certain of our leased properties may have defective titles and we may be forced to relocate operations affected by such defects, which could cause disruption to our business and have a negative impact on our business operations and financial condition. As of December 31, 2022, we operated our businesses primarily in over 50 leased properties in Shenzhen, Guangzhou, Chongqing, Beijing and other cities in China. We have not signed lease contracts or not renewed expired lease contracts with respect to a small portion of such leased properties, and we may be forced to relocate if the lessors request us to leave the premises. With respect to a small portion of such leased properties, the lessors failed to provide title certificates evidencing property ownership of these lessors. According to PRC laws and regulations, where a landlord lacks title evidence or rights to lease, the relevant lease contracts may be void or unenforceable under PRC laws and regulations, and may also be subject to challenge by third parties. Moreover, a small portion of the leased properties are mortgaged by the lessors. In case the mortgagees enforce the mortgage, we may not be able to continue using our leased properties. In addition, a small portion of our lease contracts have not been registered with the relevant regulatory authorities. According to PRC laws and regulations, failure to register lease contracts will not affect the effectiveness. However, landlords and tenants may be subject to administrative fines for such failure. As of the date of this annual report, we are not aware of any action, claim or investigation being conducted or threatened by the relevant regulatory authorities with respect to defects in our leased contracts or leased properties. However, we cannot assure you that such defects will be cured in a timely manner, or at all. Our business may be interrupted and additional relocation costs may be incurred if we are required to relocate operations affected by such defects. Moreover, if our lease contracts are challenged by third parties, it could result in diversion of management attention and cause us to incur costs associated with defending such actions, even if such challenges are ultimately determined in our favor. 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. 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 our partner funding sources could diminish, resulting in a material adverse effect to our business. Increases in labor costs in the PRC may adversely affect our business and results of operations. The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations 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. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to borrowers by increasing the fees of our services, our financial condition and results of operations may be adversely affected. 35 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 develop the infrastructure of a public company and 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. If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected. Since the completion of our initial public offering, we have become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include a report from management on our internal control over financial reporting in our annual report on Form 20-F beginning with this annual report for the fiscal year ending December 31, 2022. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, since we have become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation. During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could, in turn, limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We identified a material weakness in our internal control over financial reporting as part of management’s assessment, and if we are unable to remediate and improve our internal controls, we may not be able to accurately or timely report our future financial results. In the course of preparing our consolidated financial statements in the prior years, we identified one material weakness which has not been remediated in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that was identified related to our lack of sufficient financial reporting and accounting personnel with appropriate experience of U.S. GAAP and SEC reporting requirements and our failure to establish and clearly communicate acceptable policies regarding U.S. GAAP financial reporting. We are in the process of implementing a number of measures to address the material weakness that has been identified, including hiring more qualified internal auditors to strengthen our overall governance, and providing relevant training to our accounting personnel. We have been taking other steps to strengthen our internal control over financial reporting, including (i) refining and setting more control points for our main business processes, namely the trust lending process and commercial bank partnership process, (ii) establishing effective oversight and clear reporting requirements for complex transactions, specifically for the personnel in the Finance and Capital Market Departments, and (iii) formalizing a set of comprehensive U.S. GAAP accounting manuals and upgrading our financial reporting system to streamline monthly and year-end closings and integrate financial and operating reporting systems. Although we plan to implement these measures to address the material weakness, implementation of these measures may not fully remediate the material weakness in a timely manner, and there is no assurance that we will not have material weaknesses or significant deficiencies in the future. 36 We will continue to incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.” Since the completion of our initial public offering, we have become a public company and have incurred significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs. We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses. We adopted an equity incentive plan in 2018, or the 2018 Plan, for the purpose of granting share-based compensation awards to employees, officers, directors and consultants to incentivize their performance and promote the success of our business. We account for compensation costs for all share-based awards using a fair-value-based method and recognize expenses in our consolidated statements of comprehensive income in accordance with U.S. GAAP. Under the 2018 Plan, we are authorized to grant options, restricted stock units and other types of awards the administrator of the 2018 Plan decides. Under the 2018 Plan, the maximum aggregate number of shares which may be issued pursuant to all awards is 307,608,500 shares. As of the date of this annual report, options to purchase a total of 307,608,500 ordinary shares were outstanding under the 2018 Plan. We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based awards 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. 37 Certain of our existing shareholders have substantial influence over our company, and their interests may not be aligned with the interests of our other stockholders. Kylin Investment Holdings Limited, a company incorporated in the British Virgin Islands, holds 17.8% of our ordinary shares. As a result, each shareholder has significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company, and might reduce the price of our ADSs. Failure to make adequate contributions to various employee benefits plans 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 social insurance plans, unemployment insurance, medical insurance, work-related injury insurance, maternity insurance, housing provident fund and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where our employees are based. 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. Our failure in making adequate contributions to various employee benefit plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties, and we could be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected. Our branches have not made full contributions to the social insurance plans and the housing provident fund for employees as required by the relevant PRC laws and regulations. As of the date of this annual report, we are not aware of any notice from regulatory authorities or any claim or request from these employees in this regard. However, we cannot assure you that the relevant regulatory authorities will not require us to pay outstanding amounts and impose late payment penalties or fines on us, which may materially and adversely affect our business, financial condition and results of operations. The inconsistency of domicile and place of business of our PRC subsidiaries may have a material adverse effect on our business and operations. Substantially all of our assets and operations are located in China. We have developed a network of 87 branches and sub-branches in over 50 cities in China. According to the PRC laws and regulations, the domicile and the place of business of our PRC subsidiaries should be the same. As our business grows rapidly, we may change the place of business according to market development strategy. We cannot assure you that the domicile of all the PRC subsidiaries, branches and sub-branches are consistent with the place of their business. In the event that our PRC subsidiaries, branches and sub-branches cannot be reached by relevant regulatory authorities at the domicile or place of business they provided, such subsidiaries, branches or sub-branches may be included in the unusual operation enterprise list, and may be required to rectify or may be imposed with penalties, which may adversely affect our business and results of operations. From time to time we may evaluate and enter into strategic alliances, which could divert significant management attention and resources, disrupt our business and adversely affect our financial results. We may from time to time evaluate and enter into strategic alliances with various third parties. Strategic alliances with third parties could subject us to a number of risks, including the potential failure to achieve the expected benefits of the alliance, risks associated with potential leakage of proprietary information, nonperformance by the counterparty and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. Strategic alliances will also divert the management’s time and resources from our normal operations and we may have to incur unexpected liabilities or expenses. 38 Risks Related to Our American Depositary Shares The trading price of our ADSs may be volatile, which could result in substantial losses to investors. The trading price of our ADSs have been, and is likely to continue 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 mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following: ● variations in our earnings and cash flows; ● announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; ● announcements of new offerings, solutions and expansions by us or our competitors; ● changes in financial estimates by securities analysts; ● detrimental adverse publicity about us, our services or our industry; ● announcements of new regulations, rules or policies relevant for our business; ● additions or departures of key personnel; ● our share repurchase program; ● release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and ● potential litigation or regulatory investigations. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade. In particular, since the COVID-19 outbreaks, concerns over the economic slowdown resulting from the COVID-19 have led to a significant decrease in the major indices of the U.S. capital markets and an increase in market volatility, which have adversely affected, and may continue to, adversely affect, the market price of our ADSs. For risks related to the COVID-19, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.” In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations. If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline. The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline. 39 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 our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline significantly. As of December 31, 2022, we had 1,371,643,240 ordinary shares outstanding. Among these shares, 288,485,480 ordinary shares are in the form of ADSs. All of our ADSs sold in our initial public offering will be freely transferable by persons other than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. All of the other ordinary shares outstanding will be available for sale, upon the expiration of the lock-up periods described elsewhere in this annual report beginning from May 5, 2019 (if applicable to such holder), subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the applicable lock-up period at the discretion of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of our ADSs could decline significantly. Certain major holders of our ordinary shares have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods in connection with our initial public offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline significantly. We adopted an equity incentive plan in 2018, or the 2018 Plan, under which we have the discretion to grant a broad range of equity-based awards to eligible participants. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.” We have registered certain ordinary shares that we may issue under our share incentive plans and intend to register all ordinary shares that we may issue under our share incentive plans. Once we register these ordinary shares, they can be freely sold in the public market in the form of ADSs upon issuance, subject to volume limitations applicable to affiliates and relevant lock-up agreements. If a large number of our ordinary shares or securities convertible into our ordinary shares are sold in the public market in the form of ADSs after they become eligible for sale, the sales could reduce the trading price of our ADSs and impede our ability to raise future capital. In addition, any ordinary shares that we issue under our share incentive plans would dilute the percentage ownership held by the investors who purchased ADSs. We cannot guarantee that any share repurchase program will be fully consummated or that any share repurchase program will enhance long-term shareholder value, and share repurchases could increase the volatility of the price of our ordinary shares and/or ADSs and could diminish our cash reserves. On March 16, 2022, our board of directors authorized a share repurchase program whereby our company was authorized a share repurchase program under which the Company may repurchase up to US$20.0 million of its ordinary shares in the form of ADSs during a period of up to 12 months commencing on March 16, 2022. As of the date of this annual report, our Company had repurchased a total of 5.6 million ADSs at an aggregate amount of US$14.0 million. Our board of directors also has the discretion to authorize additional share repurchase programs in the future. The share repurchase programs do not obligate us to repurchase any specific dollar amount or to acquire any specific number of ADSs and/or shares. We cannot guarantee that any share repurchase program will enhance long-term shareholder value. The share repurchase programs could affect the price of our listed securities and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our ordinary shares and/or ADSs. Furthermore, share repurchases could increase the volatility of the price of our ordinary and/or ADSs could diminish our cash reserves. Techniques employed by short sellers may drive down the market price of the ADSs. Short selling is the practice of selling securities that the 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. The short seller hopes 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 the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant 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. Public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto, and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions. It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could 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 relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless. 40 Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of the ADSs for a return on your investment. We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income. Our Board of Directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may, subject to the provisions of our amended and restated memorandum and articles of association, by ordinary resolution, declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in our being unable to pay its debts as they fall due in the ordinary course of business. Even if our Board of Directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in the ADSs. You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law. We are an exempted company with limited liability incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are governed by our amended and restated memorandum and articles of association, the Companies Act (as amended) of the Cayman Islands and 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 compared to U.S. law) as well as from the common law of England. The decisions of the English courts are of highly persuasive authority, but are not binding, on a court in the Cayman Islands (except for those decisions handed down from Judicial Committee of the Privy Council to the extent that these have been appealed from the Cayman Islands courts. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are broadly similar to those in other common law jurisdictions, but there may be differences in the 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, if shareholders want to proceed against the Company outside of the Cayman Islands, they will need to demonstrate that they have standing to initiate a shareholders derivative action in a federal court of the United States. Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies save for some exceptions. Our directors have discretion under our 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 motion or to solicit proxies from other shareholders in connection with a proxy contest. Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement. 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 in a state or federal court in New York, 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. Notwithstanding the foregoing, the depositary may, in its sole discretion, elect to institute any action, controversy, claim or dispute directly or indirectly based on, arising out of or relating to the deposit agreement or the ADRs or the transactions contemplated thereby in any competent court in the Cayman Islands, Hong Kong, the People’s Republic of China and/or the United States, or, by having such disputes referred to and finally resolved by an arbitration either in New York, New York or in Hong Kong, subject to certain exceptions solely related to the aspects of such claims that are related to U.S. federal securities law, in which case the resolution of such aspects may, at the option of such registered holder of the ADSs, remain in state or federal court in New York, New York. 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-American Depositary Shares” for more information. 41 ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action. The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by applicable law, ADSs holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. The waiver to right to a jury trial of the deposit agreement is not intended to be deemed a waiver by any holder or beneficial owner of ADSs of our or the depositary’s compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder. If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. The enforceability of a contractual predispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs. If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in a different outcome than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action. Certain judgments obtained against us by our shareholders may not be enforceable. We are a Cayman Islands exempted company with limited liability and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. Further, our directors and officers are located outside of the Cayman Islands. Service of court documents on a Cayman Islands company can be effected by serving the documents at the Company’s registered office and it may be possible to enforce foreign judgments in the Cayman Islands against a Cayman Islands company, subject to some exceptions. However, if investors wish to serve documents on and/or enforce foreign judgments against our directors and officers, they will need to ensure that they comply with the rules of the jurisdiction where the directors and officers are located. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers, depending on where the directors and officers are located. Walkers (Hong Kong), our counsel as to Cayman Islands law, has informed us that there is no guarantee that the courts of the Cayman Islands will automatically allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is no guarantee with regard to Cayman Islands law that a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce a judgment predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are taxes, fines or penal in nature, or otherwise contrary to public policy, including punitive damages. Walkers (Hong Kong) has further informed us that although 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 are 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 reexamination 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 (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. 42 Our PRC legal advisor, Merits & Tree Law Offices, advises us that there is uncertainty as to whether the courts of the PRC would enforce judgments of United States courts or Cayman courts obtained against us or these persons predicated upon the civil liability provisions of the United States federal and state securities laws. Our PRC legal advisor further advises us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provides 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 in the Cayman Islands. 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 your ordinary shares underling your ADSs. Holders of ADSs do not have the same rights as our registered shareholders. 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 ordinary shares underlying 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 holder of the ordinary shares underlying your ADSs. Upon receipt of your voting instructions, the depositary may try to vote the ordinary shares underlying your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying ordinary shares in accordance with those instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the shares underlying 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 and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering 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 ordinary shares underlying 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 notify you of the upcoming vote and to deliver our voting materials to you. We cannot assure you that you will receive the voting material in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested. You may experience dilution of your holdings due to the inability to participate in rights offerings. We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result. 43 You may be subject to limitations on the transfer of your ADSs. Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason. We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements. We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important. 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 ● the selective disclosure rules by issuers of material nonpublic information under Regulation FD. We will be 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 an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards. As a Cayman Islands exempted company listed on the New York Stock Exchange, we are subject to New York Stock Exchange corporate governance listing standards. However, New York Stock Exchange 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 New York Stock Exchange corporate governance listing standards. To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under New York Stock Exchange corporate governance listing standards applicable to U.S. domestic issuers. 44 Although the matter is not entirely clear, we were likely a passive foreign investment company (a “PFIC”) for our 2022 taxable year, and we will likely be a PFIC for 2023 and our future taxable years, which could result in adverse U.S. federal income tax consequences to U.S. taxpayers. In general, a non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the equity interests of another corporation or partnership is treated as if it held its proportionate share of the assets of the other corporation or partnership and received directly its proportionate share of the income of the other corporation of partnership. Passive income generally includes interest, income equivalent to interest, rents, dividends, royalties and gains from financial investments. It is not entirely clear how the PFIC rules should apply to a company with a business such as ours. For example, although the loans issued through our trust plans are shown in their entirety as our assets on our consolidated balance sheet, it is not clear whether for purposes of the PFIC rules we should be treated as owning only our subordinated interests in the trusts plans, and earning only the portion of the trust plans’ interest income attributable thereto. If we are treated as owning only the subordinated units and the portion of the trust plans’ loans attributable thereto, our PFIC status for any taxable year may depend on the relative values of the loans we are treated as owning and our other passive assets on the one hand, and the value of our goodwill (to the extent attributable to the services we provide) and fee receivables on the other hand. The extent to which our goodwill should be treated as an active asset is not entirely clear. Moreover, the value of our goodwill may be determined by reference to our market capitalization, which has been, and may continue to be, volatile. In addition, we provide loan facilitation, loan administration and other services in connection with the loans issued by our trust plans and we charge our trust plans service fees that are eliminated in, and therefore not shown on, our consolidated income statement. Therefore, our PFIC status for any taxable year may depend on the relative amounts of our fee and interest income (which may be less than the amount of interest income shown on our income statement, if we are treated as owning only a portion of the trusts’ loans). Furthermore, it is not entirely clear whether a portion of the interest income earned by the trust plans could be treated as payable in part for services to the borrowers. Although our PFIC status for any taxable year is not entirely clear, based on the composition of our income and assets and the manner in which we currently operate our business, we were likely a PFIC for our 2022 and prior taxable years, and will likely be a PFIC for our 2023 taxable year and future taxable years, subject to the discussion in the subsequent paragraph regarding the Active Financing Exception, as defined below. U.S. taxpayers should consult their tax advisors regarding the proper application of the PFIC rules to us and our PFIC status for any taxable year. For purposes of the PFIC rules “passive income” is defined by way of a cross-reference to Section 954(c) of the Internal Revenue Code of 1986, as amended (the “Code”), which applies for purposes of the Code’s “controlled foreign corporation”(“CFC”) rules. A different provision under the CFC rules (namely Section 954(h) of the Code) sets forth an exception for interest income derived by “eligible CFCs” that are “predominantly engaged” in the active conduct of a financing or similar business (the “Active Financing Exception”). Because the Active Financing Exception addresses eligible CFCs, there has been uncertainty as to whether it could apply to determine the PFIC status of companies that are not CFCs, such as our company. Proposed Treasury regulations promulgated in 2019 (the “2019 Proposed Regulations”) provided that the Active Financing Exception could apply to determine the PFIC status of such companies. However, in 2020 these regulations were finalized (the “2020 Final Regulations”) without addressing the Active Financing Exception. Although the 2020 Final Regulations are silent on the availability of the Active Financing Exception to companies like us, in the preamble to the 2020 Final Regulations Treasury expressed its position that under current law the Active Financing Exception does not apply in determining the PFIC status of a company that is neither a CFC nor a bank. The 2020 Final Regulations apply to taxable years of shareholders beginning on or after January 14, 2021. Treasury indicated in the preamble to the 2020 Final Regulations that taxpayers can rely on the 2019 Proposed Regulations to apply the Active Financing Exception for any open taxable year ending on or before December 31, 2020. Concurrently with the issuance of the 2020 Final Regulations, Treasury issued proposed regulations (the “2020 Proposed Regulations”) that would state explicitly that the Active Financing Exception is available only if the tested non-U.S. corporation is a bank. The 2020 Proposed Regulations have not been finalized yet. Based on the foregoing, our ADS holders and shareholders (i) generally are permitted to apply the Active Financing Exception for a taxable year ending on or before December 31, 2020 (provided that we in fact satisfied the exception’s conditions for the relevant year), (ii) should expect that the Internal Revenue Service will not agree with a return positon that applies the Active Financing Exception for any subsequent taxable year, and (iii) should be aware that if the 2020 Proposed Regulations are finalized in their current form they will not be able to take the position that the Active Financing Exception applies for any taxable year to which the regulations will apply. If we were “predominantly engaged” in the active conduct of a financing or similar business (as defined for purposes of the Active Financing Exception) and met all of the exception’s requirements then we would not be a PFIC for any taxable year with respect to which taxpayers validly applied the Active Financing Exception, if applicable. U.S. owners of our ADSs or ordinary shares should be aware that we have not determined whether these requirements were in fact satisfied. Moreover, if any of our trust plans is treated as a partnership for U.S. federal income tax purposes, and if such trust’s senior unit holders are treated as owning interests in such partnership other than as creditors, the characterization of our interest income as active under the Active Financing Exception may also depend, in part, on whether we owned 25% or more of the value of such trust for the relevant taxable years. U.S. owners of our ADSs or ordinary shares should consult their tax advisers as to whether the Active Financing Exception could apply to us with respect to any taxable year prior to the finalization of the 2020 Proposed Regulations, and whether it is advisable to take this position in light of Treasury’s views, as described above. 45 A U.S. taxpayer that owns our ADSs or ordinary shares during any year in which we are a PFIC will generally be subject to adverse U.S. federal income tax consequences. See “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company” in this annual report. U.S. taxpayers should consult their tax advisers regarding our PFIC status for any taxable year and the tax considerations relevant to owning shares or ADSs of a PFIC. ITEM 4. INFORMATION ON THE COMPANY 4.A. History and Development of the Company We started our operations in 1999 through Fanhua Chuang Li Information Technology (Shenzhen) Co., Ltd., which became our onshore holding company of the main operating subsidiaries in the PRC. In 2000, we formed our wholly owned Hong Kong subsidiary, China Financial Services Group Limited (“CFSGL”), as the offshore holding company of our PRC subsidiaries. In 2006, we were spun off from Fanhua Inc., a company listed on NASDAQ (symbol: FANH), and formed Sincere Fame International Limited (“SFIL”) under the laws of British Virgin Islands as the holding company of CFSGL. In January 2014, CNFinance Holdings Limited was incorporated under the laws of Cayman Islands. CNFinance Holdings Limited became our holding company through share exchanges with the shareholders of SFIL in March 2018. We conduct our business in the PRC primarily through Shenzhen Fanhua United Investment Group Co., Ltd., Guangzhou Heze Information Technology Co., Ltd., and their subsidiaries and consolidated affiliated entities. In November 2018, we completed an initial public offering of 7,060,460 ADSs (including the ADSs sold upon the exercise of the over-allotment option granted to the underwriters), representing 141,209,200 of our ordinary shares. On November 7, 2018, our ADSs were listed on the New York Stock Exchange under the symbol “CNF.” Our principal executive offices of our main operations are located 44/F, Tower G, No. 16 Zhujiang Dong Road, Tianhe District, Guangzhou City, Guangdong Province 510620, People’s Republic of China. Our telephone number at this address is +86 (020) 6231-6688. Our registered office in the Cayman Islands is located at the offices of Walkers Corporate Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9008, Cayman Islands. SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on www.sec.gov. You can also find information on our website, http://ir.cashchina.cn/. 4.B. Business Overview Overview We are a leading home equity loan service provider in China. We, through our operating subsidiaries in China, conduct business by connecting demands and supplies through collaborating with sales partners and trust companies under the trust lending model, and local channel partners and commercial banks under the commercial bank partnership model. Our sales partners and local channel partners are responsible for recommending micro- and small-enterprise (“MSE”) owners with financing needs to us and we introduce eligible borrowers to licensed financial institutions with sufficient funding sources including trust companies and commercial banks who will then conduct their own risk assessments and make credit decisions. We have established a national network of 87 branches and sub-branches in over 50 cities in China. In 2020 and 2021, we originated home equity loans with an aggregate principal amount of RMB8.8 billion and RMB12.8 billion, respectively, representing an increase of 45.2%. In 2022, we facilitated loans of RMB14.7 billion, representing an increase of 14.8% as compared to 2021. Our primary target borrower segment is MSE owners who own real properties in Tier 1 and Tier 2 and other major cities in China. We originated home equity loans for 17,703, 22,060 and 23,923 (including 3,891 under the commercial bank partnership model) borrowers in 2020, 2021 and 2022, respectively. These MSE owners typically have quick cash flow turnover from their business operations with high demand for working capital. Their financing needs are often unpredictable, time-sensitive and frequent. We believe our target borrowers are underserved by traditional financial institutions due to various reasons. Traditional financial institutions often impose stringent and inflexible loan application requirements designed for large corporations, making it difficult for MSE owners to meet such requirements. In addition, time-consuming and cumbersome requirements often limit MSE owners’ ability to meet their imminent financing needs. Moreover, unlike in the United States where home equity loans commonly serve as a financing alternative, traditional lenders in China, such as banks, typically do not grant loans secured by second lien interests and are generally less incentivized to introduce innovative home equity loan products. 46 We aim to serve our target borrowers by facilitating home equity loans and providing tailored services. Our standardized and integrated online and offline credit application and assessment process shorten the time of loan disbursement, providing expeditious financing solutions to MSE owners. We offer home equity loans to MSE owners that allow them to repay only the interests by installments and repay the full principal amount when due. In addition, we also facilitate home equity loans to MSE owners in the form of installment loans with a tenor typically ranging from one to three years, assisting borrowers’ short-term and long-term business planning. In 2020, 2021 and 2022, the average tenor of the home equity loans we originated was 24, 15 and 12 months with the weighted average effective interest rate (inclusive of interests and financing service fees, if applicable, payable by the borrowers) of 17.3% , 16.5% and 17.2% per annum, respectively. Such loan products are secured by first or second lien interests on real properties. 56.3%, 60.5% and 59.8%, of our total home equity loan origination volume in 2020, 2021 and 2022, respectively, was secured by second lien interests. Depending on the value of the collateral and the creditworthiness of the borrower, we offer flexible loan principal typically ranging from RMB100,000 to RMB5,000,000. Our risk mitigation mechanism is embedded in the design of our loan products, supported by an integrated online and offline process focusing on risks of both borrowers and collateral and further enhanced by effective post-loan management procedures. Our business infrastructure supports our operations by providing various offline services, such as on-site visits, interaction with local real property bureau and debt collection. Collateral for loans we facilitate is geographically dispersed in Tier 1 and Tier 2 and other major cities in China. We offer home equity loan products that allow borrowers to repay only the interests by installments and repay the full principal amount when due. In addition, we also provide home equity loan products that require monthly payments comprising principal and interests repayments, which permits us to assist our trust company partners to monitor borrowers’ credit status. Our practical risk assessment focuses on both credit risks of borrowers and quality of the collateral. We have also established strict guidelines on the characteristics and quality of collateral, including, among others, an LTV ratio capped at 70%. Through trust lending model we collaborate with our trust company partners, who are well-established trust funds in China with sufficient funding sources and have licenses to engage in lending business nationwide. This structure provides us with stable funding sources. Under the trust lending model, our trust company partners set up trust plans and acquire funding from their investors. Trust plans are typical investment vehicles in which investors participate by subscribing to trust units and receive a return as set out in subscription agreements. Each trust plan issues multiple trust products which are funded with senior and subordinated units at a pre-determined ratio with a term of one to three years. The loans funded by the trust products, however, have terms typically ranging from one to three years. For details of matching our funding sources and loans we facilitate, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Matching of Terms of Funding Sources and Loans.” The contractual ratio of the senior units and subordinated units of trust plans or products is determined pursuant to our collaboration agreements with our trust company partners, which set the upper limit to such ratio at a range of no higher than 3:1. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products —Terms of the Trust Plans” and “Item 4. Information on the Company—B. Business Overview—Our Products—Trust Lending—Funding Partners.” As part of the collaboration we have with our trust company partners, we are required to subscribe to all of the subordinated units under most trust plans. By subscribing to subordinated units, we are entitled to the residual value from trust plans after certain payments to senior unit holders, trust company partners and third-party service providers. Payments to senior unit holders consist of expected investment returns which are usually paid quarterly and principal amounts which are repaid upon borrowers’ payments of underlying loans. We as subordinated unit holders are paid each quarter after the quarterly payment of interest returns to senior unit holders and upon maturity after the payment of principal amounts to senior unit holders. Our financing costs for the senior units, excluding the trust administrative fees, ranged from 6.0% to 11.5% per annum of the issuance number of senior units in 2022, and our financing costs for subordinated units under repurchase arrangements with financial institutions was 10.5% to 13.8% per annum of the transfer prices for such subordinated units in 2022. Our cost of the subordinated units as measured by the investment amount was RMB3,045.2 million, RMB2,919.4 million and RMB2,627.4 million (US$380.9 million), as of December 31, 2020, 2021 and 2022, respectively. Our investment return from the subordinated units was RMB658.8 million, RMB578.7 million and RMB381.3 million (US$55.3 million) in 2020, 2021 and 2022, respectively. We are designated as the service provider and provide post-loan services such as payment monitoring, debt collection and release of collateral as the need arises. We receive a performance-based service fee up to 7% per annum of the size of the trust plan charged to the trust plans for the services we provide. 47 In December 2018, we introduced our collaboration model to optimize our collaboration with trust companies. Sales partners recommend borrowers to us by direct cooperation with us or joining limited partnerships. By contributing an amount equal to 10% to 25% of the loans issued to the borrowers introduced by them, sales partners receive incentive fees upon a pre-agreed schedule and other conditions. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Collaboration Model.” As of the date of this annual report, we have around 1,978 contracted sales partners in total, among which around 1,284 are effective sales partners. In order to diversify our financing channels to better serve the demands of MSE owners with credible funding sources, we started to collaborate with commercial banks in 2021. Under this commercial bank partnership model, we recommend borrowers to commercial banks who are responsible for reviewing and approving the loan.We provide loan facilitation services including introducing borrowers, initial credit assessment, facilitating loans from the banks to borrowers, and providing technical assistance, and assist commercial banks with post-loan managements. We charge a service fee equal to a pre-agreed percentage of each loan we introduce for our afore-mentioned loan facilitation services. We provide guarantees against the potential defaults and such contractual guarantee arrangement is underwritten by the guarantor company to which we provide back-to-back guarantee at request. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Commercial Bank Partnership.” We acquire our borrowers primarily through our sales partners under the trust lending model, and local channel partners including corporate and individual offline channels and telemarketing companies under the commercial bank partnership model. Through our sales partners, local channel partners and our established network and branch offices, we reach prospective MSE borrowers and assess their creditworthiness and value of collaterals, and if these borrowers meet our requirements, we refer them to our trust company and commercial bank partners who make their own independent credit assessment and decisions before directly lending to qualified borrowers. We help trust companies and commercial banks sign loan agreements with borrowers directly, and assist borrowers in pledging collateral for the benefit of trust companies and commercial banks. In 2020, 2021 and 2022, over 99.5% of our borrowers were introduced to us by our sales partners under the collaboration model. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Collaboration Model.” In 2022, 100.0% of borrowers introduced to commercial banks were acquired through local channel partners including corporate and individual offline channels and telemarketing companies. To a lesser extent, we also had a direct lending model through which we lend directly under our small loan licenses to borrowers with our own funding or funding we acquire from transfer of rights to earnings in loans principal, interest and financing service fee receivables to third parties with a repurchase arrangement. For details of our repurchase agreements with third parties under both the trust lending and direct lending models, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Funding Sources” and “Item 4. Information on the Company—B. Business Overview— OurProducts—Small Loan Direct Lending.” We generally rely on and will continue to rely primarily on our trust lending model and commercial bank partnership model, which are supplemented with our direct lending model. Our Borrowers Borrower Base We strategically target MSE owners who own properties in Tier 1 and Tier 2 and other major cities in China. These MSE owners typically have quick cash flow turnover from their business operations with high demand for working capital. MSE owners often also have financing needs that are unpredictable, time-sensitive and frequent. We believe target borrowers are underserved by traditional financial institutions, whose often stringent and inflexible loan application requirements that are designed for large corporations make it difficult for MSE owners to fulfill. In addition, time-consuming and cumbersome requirements often limit MSE owners’ ability to meet their imminent financing need. In addition, unlike in the United States where home equity loans serve as a common financing alternative, traditional lenders in China such as banks typically do not grant loans secured by second lien interests. Providing second lien home equity loans or title loans is limited for commercial banks in China, given the high level of regulatory supervision from relevant regulatory authorities. These products have instead been developed by non-traditional financial institutions like us to fulfill the unserved demand. We originated home equity loans for 17,703, 22,060 and 23,923(including 3,891 under the commercial bank partnership) borrowers in 2020, 2021 and 2022, respectively. Our borrowers have presence in over 70 Tier 1 and Tier 2 and other major cities in China and are geographically dispersed. 48 Borrower Acquisition Under the Collaboration Model, we acquire our borrowers primarily through our sales partners. In 2020, 2021 and 2022, over 99.5% of our borrowers were introduced to us by our sales partners under the collaboration model. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products——Collaboration Model.” Under our partnership with commercial banks, we have diversified our borrowers’ profiles with more competeitve pricing and efficiency. Borrowers are engaged through our local offices and word-of-mouth marketing. Our local staff works with various local channel partners including corporate and individual offline channels and telemarketing companies. We align the incentive of our local staff by offering a commission equal to a pre-determined fixed rate of the loan origination amount. Our Products The home equity loans we facilitate permit borrowers to borrow relatively large amounts up to 70% LTV ratio. Our weighted average LTV ratio was 54.6%, 58.5% and 60.0%, for home equity loans originated in 2020, 2021 and 2022, respectively. In 2020, 2021 and 2022, we originated home equity loans for trust companies of RMB8.8 billion, RMB12.8 billion and RMB12.2 billion (US$1.8 million), respectively. And we introduced loans of RMB2.5 billion to commercial banks in 2022. The home equity loans we facilitate are typically secured by apartments, houses or commercial properties owned by borrowers. Unlike most traditional financial institutions, the home equity loans we facilitate can be secured with second lien interests on top of the first lien interests with banks, offering additional financing to MSE owners not otherwise readily available to them. We facilitate home equity loans with flexible tenors typically ranging from one to three years enabling borrowers’ short-term and long-term business planning. In 2020, 2021 and 2022, the average tenor of the home equity loans we originated was 24, 15 and 12 months, respectively. The shorter average tenor of outstanding loans in 2021 than that of 2020 is mainly due to the fact that the majority of loans we facilitated in 2021 were short-term loans with a one-year maturity. The shorter average tenor of outstanding loans in 2022 than that of 2021 is mainly attributable to the fact that the majority of loans we facilitated in 2022 were short-term loans with a one-year maturity. The difference in tenor of home equity loans originated over the past three years was mainly driven by the reasons described above and not driven by type of collateral, type of borrower, credit quality or some other factors. The home equity loans we originate under trust lending model are also competitively priced, with a weighted average effective interest rate of 17.3% 16.5% and 17.2% per annum in 2020, 2021 and 2022, respectively. The interest rates of our loan product under commercial bank partnership model ranged from 9.0% to 15.5%, which had attracted more borrowers with higher credit record. We offer home equity loan products that allow borrowers to repay only the interests by installments and repay the full principal amount when due. In addition, we also provide home equity loan products that require monthly payments comprising principal and interests repayments, making it easier for borrowers to manage their cash flow and for us to timely monitor borrowers’ creditworthiness. Borrowers are obligated to pay directly to the trust plans in full the principal amount plus interest when due. We offer a flexible repayment schedule for installment loans, including but not limited to (i) an equal monthly installment comprising principal and interests evenly distributed throughout the life of the loan, (ii) a monthly installment comprising principal and interests in accordance with a pre-agreed step-down schedule, where a borrower starts with a higher equal monthly installment that decreases after a defined period and (iii) a monthly installment of interests only and full repayment of loan principal when due. To foster our home equity loan business, we also provide bridge loan products, which are generally unsecured short-term loans, to pay off borrowers’ existing loans secured by real property. As a result, such real property will be released from existing loans and can be used as collateral for the home equity loans we facilitate. Once borrowers obtain home equity loans facilitated by us, the bridge loans granted by us will be repaid in full. We granted bridge loans of RMB86.4 million, RMB71.4 million and RMB99.64million(US$14.5 million) in 2020, 2021 and 2022, respectively. We may continue to originate bridge loans going forward as the need arises. 49 Trust Lending In July 2014, we began cooperating with trust companies to fund loans to borrowers through trust plans established in collaboration with these trust companies. In December 2018, we have started to explore the collaboration model under which we collaborate with sales partners who introduce borrowers and receive incentives. Terms of the Trust Plans Pursuant to our collaboration agreements, our trust company partners establish long-term trust plans which issue multiple trust products, ranging from one to three years. Investors in these trust plans can subscribe to the trust units, which provides them with returns as provided in the subscription agreements. Once borrowers’ loan applications submitted through us are approved by trust company partners, they enter into loan agreements with borrowers and trust plans disburse loan proceeds to borrowers directly. Borrowers are required to repay the principal, interest and other fees, if applicable, directly to the account of the trust plan, and the trust company partner as trustee of the trust plan distributes the funds to unit holders according to the trust agreements. We are designated as the service provider for these trust plans, and in this role we assist our trust company partners acquire and screen borrowers and perform credit assessment pursuant to collaboration agreements with our trust company partners. We are also responsible for providing loan facilitation and post- loan management services for service fees charged directly to the trust plans. Each trust product issued under the long-term trust plan is funded with senior and subordinated units at a predetermined contractual structural leverage ratio with the upper limit of no higher than 3:1. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Trust Lending—Funding Partners.” As part of the collaboration we have with our trust company partners, we are required to subscribe to all of the subordinated units of each trust product issued under most long-term trust plans. Our cost of the subordinated units as measured by the investment amount was RMB3,045.2 million, RMB2,919.4 million and RMB2,627.4 million (US$380.9 million), as of December 31, 2020, 2021 and 2022, respectively. The trust plans typically pay senior unit holders an amount that equals (i) an expected rate of investment return, which is usually paid quarterly, plus (ii) the principal amount invested, which is the prompt repayment to trust companies after borrowers made payments for the underlying loans. The expected rate of investment return is provided in the subscription agreements of the senior units, to which we are not a party. Such rate of investment return is usually determined by our trust company partners based on market conditions and presented as an estimate. If the expected rate of investment return is not met, our trust company partners are not under any contractual obligation to top up for any shortfalls while we as the subordinated unit holders are required to manage the underlying NPLs to make up the shortfalls pursuant to our credit strengthening services. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Credit Strengthening Services.” We as subordinated unit holders are paid each quarter after the quarterly payment of investment returns to senior unit holders and upon maturity after the payment of principal amounts to senior unit holders. The trust company partner is responsible for administering the trust plan and is paid a trust administrative fee. We are responsible for maintaining the asset quality and receive a performance-based service fee of up to 7% per annum of the size of the trust plan for the services we provide, which decreases with the growth of percentage of NPLs in the amount of loans we facilitated. We as the subordinated unit holder also retain any residual value in trust plans after deducting (i) repayment of principal amount invested by senior unit holders, (ii) financing costs for the senior units, which primarily consist of the expected rate of return to the senior unit holders, (iii) administrative fee payments to trust companies and certain fee payments to third-party service providers (mainly depositary fees charged by the banks) and (iv) a performance-based service fee to us as service provider of up to 7% per annum of the size of the trust plan. Our financing costs for the senior units, excluding the trust administrative fees, ranged from 6.0% to 11.5% per annum of the issuance number of senior units in 2022. We received performance-based fee payments of RMB505.9 million, RMB440.1 million and RMB446.0 million (US$64.7 million), in 2020, 2021 and 2022, respectively. Our investment return from the subordinated units was RMB658.8 million, RMB578.7 million and RMB381.3 million (US$55.3 million) for the same periods. 50 Credit Strengthening Services We have been working with FOTIC to implement the 2018 FOTIC Funding Arrangements and implementing our credit strengthening services since 2018. Under the 2018 FOTIC Funding Arrangements, when there is an NPL under a trust product, we, as the subordinated unit holder, are required to adopt one of the following measures to ensure sufficient capital to repay the principal amount and the agreed financing costs for the senior units, which primarily consist of expected rate of investment return to the senior unit holders: ● purchase NPLs funded with senior units in an amount equal to the outstanding loan principal and interests; ● purchase additional subordinated units in an amount sufficient to cover the outstanding loan principal and interests of the NPLs; or ● replace such NPLs with non-delinquent loans or equal amount funded with our subordinated units. Under the 2018 FOTIC Service Fee Structure, our service fee charged to a trust plan is performance-based and up to 7% per annum of the size of the trust plan decreases with the growth of the NPLs in the loans we facilitated. Funding Partners As of the date of this annual report, we have formed partnerships with well-established trust companies under our trust lending model, including FOTIC, Zhonghai Trust, Zhongyuan Trust, Bairui Trust, Hunan Chasing Trust, Shaanxi International Trust, Bohai Trust, Everbright Trust, Shaanxi International Trust and National Trust. Through these collaborative partnerships, we have access to flexible funding of RMB7.7 billion sourced from the senior unit holders as of December 31, 2022. 69.3%, 62.1% and 62.3%, of the loans we originated in 2020, 2021 and 2022, respectively, were funded through FOTIC, mainly due to our familiarity and long-standing relationship with FOTIC. We also work with other leading trust partners to diversify our funding sources. Funding Sources Our trust company partners have developed various trust plans to provide home equity loans to borrowers we acquire and recommend. For the years ended December 31, 2020, 2021 and 2022, home equity loans we facilitated under the trust lending model amounted to RMB8.8 billion, RMB12.8 billion and RMB12.2 billion (US$1.8 billion), respectively. Each trust plan issues multiple trust products which are funded with senior and subordinated units at a predetermined ratio. The trust company partners may also transfer the underlying loans of trust products with repurchase arrangements to third parties at a specified annual rate of return when the original trust products become due. We subscribe to subordinated units in the trust plans through our wholly owned subsidiaries. Our financing costs for the senior units, excluding the trust administrative fees, ranged from 6.0% to 11.5% per annum of the issuance number of senior units in 2022. Each trust plan sets a predetermined contractual structural leverage ratio between senior units and subordinated units. We may be required to subscribe to additional subordinated units upon request of the trustee to maintain the contractual structural leverage ratio. To date, we have not been obligated to purchase additional subordinated units under this requirement. Other than our obligation to maintain the contractual structural leverage ratio or provide credit strengthening services, which is discussed in more details under “Item 4. Information on the Company—B. Business Overview—Our Products— Credit Strengthening Services,” we are not contractually obligated to provide additional funding. There are no exceptions or reliefs available to the aforementioned additional funding obligation. We fund our subscription of the subordinated units with (i) cash on hand and (ii) proceeds received through repurchase agreements with third parties with respect to subordinated units. Pursuant to such agreements, we transfer to third parties our rights to earnings in subordinated units up to an agreed investment return for a transfer price and are obligated to repurchase such right at a fixed repurchase price. Under such agreements, we continue to bear the risk of loss on the subordinated units and enjoy the upside on any return above the agreed investment return. The terms of our repurchase agreements may vary, such as obligating us to pay an expected investment return each quarter and the principal amount on or before the maturity date or requiring us to pay a lump sum amount within a specified period of time (generally within 360 days). In 2020, 2021 and 2022, we transferred our rights to earnings in subordinated units to a private equity fund and to certain third parties. We utilize multiple funding sources to support our business, some of which may be subject to challenges by regulatory authorities from time to time under the evolving legal environment. For details, please refer to “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Some of our funding sources are highly regulated and are subject to the changing regulatory environment. If any of the funding sources is deemed to violate the PRC laws and regulations, we may need to secure new funding, failure of which may result in a material and adverse impact on our business, financial condition, results of operations and prospects.” 51 Matching of Terms of Funding Sources and Loans We forecast our cash flows each month to determine our use and need of cash for the next month and take into account the amount of loans becoming due, amount of trust products becoming due and target size of loan products to be facilitated. When our monthly cash flow forecasts indicate a need for additional funding to ensure the matching of terms of funding sources and loans, we coordinate with our trust company partners to acquire additional funding through the transfer of loans with repurchase arrangements or through other permitted means, such as bridge loans. Under our trust lending model, once a trust product matures, the trustee strives to repay the expected rate of investment return and principal to the senior unit holders. Under our previous credit strengthening services, we were required to make up for any shortfalls if the proceeds from loans were less than the principal amount invested by the senior unit holders and the agreed financing costs for the senior units, which primarily consist of the expected rate of investment return to the senior unit holders. We ceased to provide such credit strengthening services since March 2018. The trust products set up under long-term trust plans usually have a term of one to three years. The loans we facilitate have tenors typically ranging from one to three years. Historically, majority of the loans we facilitated were repaid within the first two years. Our trust company partners have also implemented the pass-through repayment method in certain of the trust plans to help avoid the duration mismatch. Under the pass-through repayment method, loan repayment proceeds are usually distributed to the senior unit holders on a monthly basis to repay both the financing costs for the senior units and the principal amount invested by the senior unit holders after deducting relevant fees. Under the pass-through repayment method, the principal amount invested in the trust products is repaid as the underlying loans are repaid. As a result, terms of the underlying trust funding matched tenor of all loans we facilitated in 2020, 2021 and 2022. Collaboration Model We have switched to a collaboration business model to optimize the trust lending model since December 2018 to broaden our prospective borrower bases. Under the collaboration model, we generally require sales partners to contribute from a range of 10% to 25% of the loan principal they introduced (such contribution, the “CRMP”). The percentage of loan principal as the CRMP charged to sales partners is mainly determined based on the sales partner’s business scale, risk control capabilities and liquidity of funds investigated by us through market research and multiple negotiations with the local loan practitioners’ association in various cities in China, including four Tier 1 cities, key cities in the Pearl River Delta and the Yangtze River Delta. As of the date of this annual report, we have 1,978 contracted sales partners in total, among which around 1,284 are effective sales partners. Under such collaboration model, we will pay incentive fees, or collaboration cost, to each sales partner upon a pre-agreed schedule and conditions, which will be re-distributed to the sales partners. The collaboration cost we pay to sales partners is an agreed percentage of the loan principal amount, calculated by subtracting the project cost from interest and fees income received from borrowers. For each loan, the project cost is agreed between us and sales partners. The project cost is typically between 10.0%-15.8% of the loan principal, and the percentage varies based on different collaboration model types and the terms of the loan. The project cost in the loan agreement will not change once determined. The collaboration cost is settled monthly as agreed in the collaboration agreement. We only pay the incentive fee to the sales partner according to the pre-agreed schedule when the borrower repays the loan on time, in which case the sales partner is not obligated to return such incentive fee, and the collaboration costs are not subject to reimbursement. The following chart illustrates a typical arrangement among sales partners, borrowers, trust plans, trust plan investors and us. 52 We provide a convenient and user-friendly transaction process, which is implemented through our standardized home equity loan application procedures across our local offices. Our standardized transaction process under trust lending model is illustrated as below. Step 1: Sales partners recommend borrowers for loan application The transaction process begins with the submission of a loan application by a prospective borrower introduced by a sales partner either online or at one of our local offices. The application asks for information such as the borrower’s identity card information, contact, business and prospective collateral. The applicant typically also consents to access to his or her credit report generated by third parties while submitting the application. Step 2: Risk assessment After an application is submitted, our proprietary risk management system collects credit and valuation data from a number of internal and external sources. We and our sales partners then proceed with our risk assessment involving both online and offline processes focusing on both the creditworthiness of borrowers and quality of collateral. For details, please refer to “Item 4. Information of the Company—B. Business Overview—Risk Management—Dual— factor risk assessment with integrated online and offline processes.” Step 3: Credit decision Once we have performed rigorous risk assessments on both applicant and collateral, we recommend qualified applicants with suggested loan principal amount to our trust company partners who proactively conduct their own independent credit assessment and make credit decisions on the loan applications we recommend. Specifically, our trust company partners are independently responsible for, reviewing loan applications and verifying applicants’ personal, business and collateral information collected by us through various procedures. Our trust company partners are responsible for approving the loan application. 53 Step 4: Credit extension Our trust company partners will make the credit decision based on its own credit assessment. We will notify the applicants once we receive approvals from our trust company partners. We then assist the borrowers in signing loan agreements with the trust companies. Step 5: Collateral pledge and CRMP collection As part of our services, we help the trust companies set up security interests on the collateral by assisting with relevant documentation and registering security interests with local real property bureau. Once the process of collateral pledge is completed, sales partners will need to submit CRMP for underlying loans. Step 6: Loan disbursement Our trust company partners sign loan agreements and confirm receipt of relevant title documents and perfected security interests before disbursement of loan proceeds to the borrowers’ bank accounts. Funding occurs promptly after the documentary conditions precedent to the settlement are fulfilled. Step 7: Post-loan management process We are also designated as the service provider and provide post-loan management services to our trust company partners, including assisting them in monitoring repayment activities and collateral status and performing debt collection in an event of default on behalf of the trust companies. For details, please refer to “Item 4. Information of the Company—B. Business Overview—Risk Management—Effective post-loan management procedures.” Once the loans are fully paid off, we assist the trust company partners release the collateral. Sales Partners In the event of loans issued to the borrowers acquired under such collaboration model are in default, the respective sales partners who introduced such borrowers will share the credit risks with us by choosing from the following options, including (i)(1) full repayment to us for the total unpaid principal and accrued and overdue interests under the respective loan agreement and acquiring respective credit rights, (i)(2) repayment in installments to us for the total unpaid principal and accrued and overdue interests under the respective loan agreement, and a payment of fund possession fee to us following a pre- determined schedule and acquiring respective credit rights under each installments; (ii) repayment to us for the unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower, and if the borrower pays the payments under the loan agreement, the repayment by the sales partner on behalf of the borrower will be refunded to the sales partner; or (iii) relinquishing the respective CRMPs for such loan. Upon relinquishing its CRMPs, the sales partner is deemed to be released from its repayment obligations under the collaboration agreement. When a loan defaults, we will inform the sales partner the overdue status of the loan through the mobile app and require the sales partners to choose among the above-mentioned options to perform its repayment obligations within an agreed time table. When the sales partner selects option (i)(1), we receive the payment for purchasing the outstanding defaulted loan including all outstanding principal and the accrued and overdue interests, and we will refund the outstanding CRMPs to the sales partner. When the sales partner selects option (i)(2), it repurchases the delinquent loan by installments with the purpose to repurchase the entire outstanding principal and the accrued and overdue interests in the future. CRMPs will be refunded after entire amount of the overdue loan principal and interests are settled. When the sales partner selects option (ii), it repays the overdue loan principal and interests for the borrower according to the borrower’s repayment schedule. If borrower repays in the subsequent period, we need to return the payment from borrower to the sales partner according to the collaboration agreement. If the sales partner chooses to fulfill the repayment obligation according to option (i)(1), (i)(2) or (ii) above, it still maintains the rights to claim the collaboration cost (incentive fees) for the current period. 54 When the sales partner refuses to fulfill its repayment obligation according to option (i)(1), (i)(2) or (ii) above, and selects option (iii), CRMPs related to the defaulted loan (or all CRMPs related to the specific sales partner if the CRMPs it provides can be shared in all loans introduced under the collaboration agreement as described below) are surrendered to us. Upon the confiscation of CRMPs, the sales partner is deemed to be released from its repayment obligations under the collaboration agreement, and the sales partner can no longer claim the outstanding collaboration cost (incentive fees) of the referred loan. As described above, the percentage of loan principal as the CRMP charged to sales partners is mainly determined based on the sales partner’s business scale, risk control capabilities and liquidity of funds, as elaborated below. Sales partners who pay 10% of the loan principal as the CRMP are mainly loan service providers with strong risk control and management capabilities in Tier 1 and Tier 2 cities. The sales partners are required to pay a minimum CRMP upfront and the CRMP put up by these sales partners can be shared in all loans introduced, meaning that the CRMP can be used to offset all defaulting loans introduced by the sales partner. In third- and lower-tier cities, the percentage of loan principal as the CRMP charged to this type of sales partners will be raised to 15%. Sales partners who pay 20% of the loan principal as the CRMP are mainly individual and smaller-scale loan service providers in Tier 1 and Tier 2 cities. Each CRMP put up by these sales partners can only be used to offset a specific loan in default. In third- and lower-tier cities, the percentage of loan principal as the CRMP charged to this type of sales partners will be raised to 25%. Sales partners enter into strategic cooperation directly with us and contribute the CRMP directly to a designated account, which is fully refundable upon repayment of the loan that the CRMP is associated with. If at any time the balance of CRMP provided by sales partners is lower than the agreed percentage of the principal amount of the loans it introduced, the sales partner is required to make up the balance reach the agreed CRMP percentage. As of December 31, 2022, the percentage of options (i)(1), (i)(2), (ii) and (iii) selected by the sales partners on defaulting loans accounted for 8.3%, 73.9%, 3.7% and 14.1% respectively. As of December 31, 2021, the percentage of options (i)(1), (i)(2), (ii) and (iii) selected by the sales partners on defaulting loans accounted for 19.0%, 59.8%, 15.2% and 6.0% respectively. The percentage of the option selected is calculated based on the total loans principal amount (excluding any accrued interests) under each option selected by the sales partners divided by the total loans principal amount (excluding any accrued interests) under all options selected by the sales partners. The percentage of loans on which sales partner refused to fulfill its repayment obligation accounted for only 1.2% and 1.6% of the outstanding loan principal including loans held for sale as of December 31, 2021 and 2022 respectively. We believe such collaboration model will decrease our risk exposure. Since in the event that loans issued under the collaboration model are in default, the respective sales partners will share the credit risks with us by choosing from the above-mentioned options. Besides, the CRMPs from sales partners, by their nature, will also mitigate our exposure to credit losses. Commercial Bank Partnership In order to diversify our financing channels to better serve the demands of MSE owners with credible funding sources, we started to collaborate with commercial banks in 2021, under which our commercial bank partners are responsible for reviewing and approving the loan while we charge a service fee for loan facilitation services including introducing borrowers, initial credit assessment, facilitating loans from the banks to borrowers, and providing technical assistance, and assist commercial banks with post-loan managements. Under this commercial bank partnership model, we work with a guarantor company and provide matching services to our commercial bank partners for small and micro enterprises borrowers who seek business loans in exchange for real estate properties as collateral. The borrowers are obliged to mortgage their real estate properties to the commercial bank partner as collateral, while the guarantor is obliged to provide the guarantee deposit and assist us with preliminary review of the borrower, other pre-loan inspections and forward transfer services of past due loans as credit strengthing. Before making any decision, each of our commercial bank partner, the guarantor and ourselves will conduct a risk assessment of the borrower and the commercial bank partner holds the ultimate power to approve or reject a borrower. Once the loan is successfully granted by the commercial bank, we will receive a service fee and the guarantor company will receive a guarantee fee based on a pre- determined schedule. We provide guarantees against the potential defaults and such contractual guarantee arrangement is underwritten by the guarantor company to which we provide back-to-back guarantee at request. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If we are unable to achieve low delinquency ratio for loans originated by us, our business and results of operations may be materially and adversely affected.” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If our or our trust company partners’ or our commercial bank partners’ risk management system fails to perform effectively, such failure may materially and adversely impact our operating results.” 55 The loan origination volume in 2022 under the commercial bank partnership model was RMB2,533.3 million and the outstanding loan principal at the end of 2022 was RMB2,469.6 million. The Company offers loan facilitation services to the borrowers who have credit needs and the commercial banks who originate loans directly, with the Company continuing to provide post-origination services to the borrowers over the term of the loan agreement. As the Company is not the legal lender or borrower in the loan origination and repayment process, we do not record loans principal, interest and financing service fee receivables arising from these loans nor interest-bearing borrowings to the third-party commercial banks. Our standardized transaction process under the commercial bank partnership model is illustrated below. Step 1: Borrower assessment After obtaining the list of qualified borrowers, we first perform due diligence on such borrowers and then share those customers’ information with the guarantor company we work with for its own risk assessment. Step 2: Loan application referral After passing the guarantor’s risk assessment, the borrower will be introduced to our commercial bank partner. Such commercial bank partner will perform its own risk assessment and the borrower may be rejected even if the borrower passed the previous risk assessment by the guarantor. Step 3: Credit decision The commercial bank will inform the guarantor and us whether the loan recommended is approved or rejected for further actions and services. Step 4: Guarantee Agreement If the commercial bank partner decides to grant a loan, it will inform the guarantor to issue a guarantee agreement indicating that the guarantor is obliged to provide post-origination services and take legal responsibilities of any accidents that may happen relating to the borrower, including default risks. Additionally, for security purposes, the guarantor is obliged to provide a guarantee deposit as illustrated in Step 7 below. Step 5: Pledging collaterals Before releasing the loan to the borrower, the commercial bank partner entrusts the guarantor to assist the borrower completing the process of mortgaging their real estate properties, notarizing the loan contracts and obtaining encumbrance certificates. The guarantor is then obliged to send these documents directly back to the commercial bank partner. Step 6: Loan agreement After receiving the documents mentioned in Step 5, the commercial bank partner will proceed to the contract-signing process with the borrower. Step 7: Guarantee deposit After receiving all the required legal documents and signing the loan agreement, the commercial bank partner releases the loan to the borrower. For security purposes, the guarantor is obliged to pay a fixed percentage of total remaining loan balance as guarantee deposit to the commercial bank partner. We provide back-to-back guarantee to the guarantor at request. Step 8: Service fee We will receive facilitation service fee for our loan facilitation services. Under different collaboration arrangements, the borrower could pay such service fee directly to us on the due date of each installment or submit both the service fee and installment to the commercial bank and the commercial bank will disburse such service fee to us. Step 9: Repayment of loan principal and interest The borrower repays all principal and interest directly to the commercial bank partner. After the borrower settles the principal and interest of the loan in advance or at maturity, the commercial bank partner will issue a settlement report, and the borrower can apply for collateral release with the assistance from the guarantor. The guarantor can confirm this information with the commercial bank partner and the commercial bank partner will issue the required documents to release the collateral. These legal documents will be delivered to us within 3 business days from the date when the borrower applies to release the collateral, and the guarantor and we are responsible for the releasing process. 56 Small Loan Direct Lending Historically, we supplemented our trust lending model with direct lending by our small loan subsidiaries in Beijing, Shenzhen and Chongqing. Our subsidiaries typically entered into loan agreements that are secured by real property and had similar terms to home equity loans we facilitate under the trust lending model. We entered into loan agreements with borrowers directly. We financed our direct lending business with our own funds or funds we received from third parties by transferring our rights in the loans together with a repurchase arrangement. Small loan direct lending business in China requires a license granted by local regulatory authorities and is subject to leverage constraints. Our three small loan subsidiaries in Beijing, Shenzhen and Chongqing have relevant licenses to conduct direct lending business since 2012, 2012 and 2011, respectively. Subject to various regulations, some of our direct lending business is limited to certain regions for which we have a license to engage in such business. Due to regulatory financing/net capital ratio constraints and for liquidity reasons, we expect that direct lending will remain a fairly limited and immaterial part of our business in the near future. For the years ended December 31, 2020, 2021 and 2022, our loan origination volume through direct lending was RMB22 million, RMB17 million and RMB15 million, respectively. The balances of the borrowings that were funded by third parties for the small loan direct lending business were RMB9.3 million, nil and nil, as of December 31, 2020, 2021 and 2022, respectively. Our Funding Model We have explored various funding sources and have focused on collaboration with our trust company partners starting in 2014. To a lesser extent, we historically utilized a direct lending model through our small loan subsidiaries. In 2021, we launched a new funding model in cooperation with commercial banks to expand our financing channels. In 2020, 2021 and 2022, 100.0% 99.8% and 82.7% of the total home equity loan origination volume was originated under the trust lending model , respectively. In 2022, loan origination volume originated under the commercial bank partnership accounted for 17.2% of our total loan origination volume. The following table illustrates the breakdown of the home equity loan origination volume by funding sources in the periods indicated. Loan origination volume by funding model Trust lending Bank lending Direct lending Total 2020 Amount (RMB in millions) % of total For the Year Ended December 31, 2021 Amount (RMB in millions) % of total 2022 Amount (RMB in millions) % of total 8,846 — — 8,846 100.0% — 0.0% 100.0% 57 12,816 35 22 12,873 99.5% 0.3% 0.2% 100.0% 12,163 2,533 15 14,712 82.7% 17.2% 0.1% 100.0% The following table illustrates our funding capital from different sources as of December 31, 2020, 2021 and 2022, respectively. 2020 Amount (RMB in millions) % of total As of December 31, 2022 2021 Amount (RMB in millions) % of total 2022 Amount (RMB in millions) % of total 5,580 63.5% 7,985 73.0% 7,667 2,645 400 30.1% 4.5% 2,874 45 26.3% 0.4% 2,515 112 - - 35 0.3% 2,533 50 117 8,792 0.6% 1.3% 100.0% 0 0 10,939 0.0% 0.0% 100.0% 0 0 12,827 59.8% 19.5% 1.0% 19.7% 0.0% 0.0% 100.0% Funding capital by sources Trust lending Senior tranche Subordinated tranche Own funds Transferred to third parties Bank lending Commercial banks Direct lending Own funds Transferred to third parties Total Business Infrastructure Since our inception, we have strategically developed a network of branches and sub-branches in over 50 cities in China. Specifically, we have carefully selected the geographic location of our offices with 22 branches and sub-branches in the Pearl River Delta region, 18 branches and subbranches in the Yangtze River Delta region, and 47 branches and sub-branches in other areas. We prioritize expanding into cities that have stable housing market synergetic to our established network. In practice, regulatory regime on property-backed loans and mortgages may differ from region to region. Experiences of interacting with regulatory authorities in different regions need to be acquired through long-time business practice. Under the current regulatory framework, it is crucial for home equity loan service providers to have local knowledge and resources. Benefiting from our extensive network, we have developed deep local knowledge and resources throughout the loan service process from loan origination to security interest perfection, and to debt collection. Our local team works closely with local authorities and has gained recognition for our business operations and established good working relationships with them. We have also developed a cooperative relationship with our experienced sales partners who work with local real estate brokers and banks who cannot accommodate second lien collateral to acquire high-quality borrowers. Risk Management As a core component of our sustainable business model, we have developed a rigorous and robust risk management system. We focus on assessing both credit risks of borrowers and quality of collateral with our integrated online and offline processes. We refer borrowers who match the target profiles of trust companies and commercial banks, and share our risk assessment results before they perform their own independent credit assessment and make credit decisions. As of December 31, 2022, we had 532 employees in our risk management team. We impose strict guidelines on loan approvals and separation of loan approval and risk management. The loans we originated are divided into different categories by amount and are reviewed by various levels of seniority. Our risk management is based on our institutional knowledge and is well tested and evidenced by historical performance and based on our product design, dual-factor risk assessment and effective post-loan management procedures. Credit risk mitigation embedded in product design The home equity loans we facilitate primarily take real properties located in Tier 1 and Tier 2 and other major cities as collateral. Our loan portfolio spreads over 70 cities across China. We believe that such geographic diversification better protects us against deterioration of local housing and economic conditions. To further limit credit risk, we devoted to control home equity loans up to 70% LTV ratio with weighted average LTV ratio of 54.6%, 58.5% and 60.0%, for home equity loans originated in 2020, 2021 and 2022, respectively, to ensure recovery in the event of borrower default. The LTV ratio varies for different types of real properties and is also adjusted pursuant to a borrower’s credit history and quality of the collateral and may be lowered in the event of a past default. 58 We offer home equity loan products that allow borrowers to repay only the interests by installments and repay the full principal amount when due. In addition, we also provide home equity loan products that require monthly payments comprising principal and interests repayments. This strategic design allows us to timely monitor borrowers’ creditworthiness and initiate collection process at an early stage. We review a borrower’s monthly cash flow to determine the tenor of the loan. Borrowers with stronger cash flow will have the option of shorter tenors, which may require larger payment on each installment. Borrowers with weaker cash flow are usually encouraged to take loans of longer tenor, so as to lower the amount of each installment. We may also require deposit payment for borrowers with past default. In addition, the maximum tenor of the loan is determined by the term of the relevant trust plan. Dual-factor risk assessment with integrated online and offline process We perform rigorous risk assessment on prospective borrowers and collateral in the following order: Step 1: Collecting data on loan applicants The first step of our borrower risk assessment process is to collect data on applicants upon approval by the borrower. This is typically done through information directly provided by applicants in our standardized application package, and information we aggregate from a number of sources, including various databases and the Credit Reference Center of the People’s Bank of China. Step 2: Verification of information collected on loan applicants The second step of our borrower risk assessment process is to verify the information collected in Step 1. This is done through our offline identity authentication procedures conducted by local office staff together with corresponding sales partners, which typically consist of site visits to applicants’ residences and business premises. Step 3: Valuation of proposed collateral We also perform risk assessment on the proposed real property collateral. The proposed real property collateral is appraised by independent leading online property appraisers and refined by us on specifics such as liquidity value, location, neighborhood, type, facing direction, floor plan and size. Step 4: Verification of collateral condition We also take measures to verify the condition of proposed collateral. Local office staff together with sales partners visit the property that a loan applicant intends to pledge. As part of the collateral assessment, we cross-check the preliminary valuation provided by our appraisal company partners with local real estate agents and bank mortgage documents. After obtaining the authorization from the loan applicant, we check its credit report and determine its outstanding first lien loan amount and the identity of lender to the first lien loan. If our verification procedure on either a loan applicant or collateral reveals significant discrepancies from the information provided by such applicant, we will not recommend such applicant to our trust company partners. We determine the loan amount permitted to grant the loan applicant based on the applicant’s credit status and collateral value. If both our trust partner and the loan applicant agree to the loan amount we advised, we will facilitate the signing of loan agreements and pledge agreement between them. Step 5: Perfection of collateral The last step of our collateral risk assessment process is to register the pledge over real properties under the names of trust company partners with the local real property bureau. Immediately before the pledge of collateral is processed, we conduct a final lien search on the property to confirm if its lien status remains the same as previously reviewed. In the case that the lien status has not changed, we assist the borrower to pledge the collateral under the trust partner’s name. A representative from our company submits both the loan agreement and the pledge agreement to the local Housing Administration Bureau for the collateral pledge, specifying that such collateral is exclusively pledged for protection of such loan. The Housing Administration Bureau will issue a warrant that clearly states the lender and the amount of the mortgage. After successfully receiving the “deposit receipt” issued by the Housing Administration Bureau, we transfer the receipt to our trust partner and inform the trust partner to release the loan to the borrower. Borrowers are obligated to return loan proceeds if the pledge is not successfully registered under extreme circumstances. 59 Judicial foreclosure of the collateral We usually suggest our trust partners pursue foreclosure for loans more than 90 days past due. In 2020, 2021 and 2022, 7.4%, 3.3% and 0.4%, of the delinquent loans the Company facilitated entered into foreclosure process, respectively. The amount where the foreclosure was ultimately concluded was RMB114.5 million, RMB108.2 million and RMB12.1 million (US$1.8 million), in 2020, 2021 and 2022, respectively, among which RMB6.1 million, RMB4.1 million and nil, had additional losses beyond what was already recorded in the allowance for credit losses in 2020, 2021 and 2022, respectively. The amount of such additional losses was RMB1.9 million, RMB1.5 million and nil, in 2020, 2021 and 2022, respectively. In 2022, the total loan amount disposed through judicial foreclosures was RMB12.1 million, including RMB9.3million of first lien loans and RMB2.8 million of second lien loans. We recovered a total loan amount of RMB15.0 million through judicial foreclosures in 2022, including first lien amount of RMB11.9 million and second lien amount of RMB3.1 million. The corresponding allowances in 2022 by first lien and second lien were RMB3.1 million and RMB1.2 million, respectively. According to the loan agreement, when a loan defaults, our trust partner are entitled to the full recovery of the delinquent principal, delinquent interest and penalties if any. If the proceeds from judicial disposal of the collateral are sufficient to cover the aforementioned full recovery amounts, we will obtain the amount of which may exceed the principal of the delinquent loan. When calculating the impairment loss, we consider various expenses that may be incurred during the debt collection process, such as litigation fees, attorney fees, and other costs directly related to the collection process. The collection process to settle a past due loan generally takes one and a half to two years. In 2022, the amount of loans where the Company abandoned the foreclosure process was RMB12.2 million. We abandon foreclosure when the defaulting borrower has regenerated ability to repay its debt by financing efforts or selling the collateral on its own and seeks to settle with the Company. Effective post-loan management procedures Under the agreements with our trust company partners, we are responsible for assisting our trust company partners in monitoring collection of overdue principal and interest, and are authorized by our trust company partners to oversee the collection process. Monitoring repayments. We help our trust company partners closely monitor loan repayments, and help our sales partners closely monitor the realtime repayment status by posting them on the mobile app. Our system generates automatic payment reminders through SMSs one week before the due date. Collaborating with multiple sources of credit reference agencies, we help our trust company partners closely monitor if borrowers are involved in any new litigations. Monitoring collateral status. We help our trust company partners selectively conduct searches against real property collateral depending on principal amount outstanding and nature and location of collateral. Such searches are supplemented with online revaluation of collateral through our appraisal company partners and the search results will be shared real-time with sales partners through the mobile app. Debt collection. In an event of default, we help our trust company partners utilize different collection measures with our integrated online and offline process, and with the assistance of our sales partners. ● Within three to five business days past due, we and our sales partners will contact defaulting borrowers through SMSs or by phone to understand reasons for the nonpayment and inform them of past-due penalties. ● After a loan is past due for over six days, we and our sales partners will arrange a site visit to further assess the situation. If agreeable with the defaulting borrower, we will arrange for quick disposal plans, or disposal of collateral voluntarily by the borrower and repay the defaulted loans with the proceeds. Meanwhile, we will conduct an online judgment search against the defaulting borrowers and a lien search against the collateral. Once payment is 20 days past due, we will assist the trust partner to start preparing documents and materials for arbitration. Once payment is 30 days past due, we will assist the trust partner to initiate judicial proceedings against the defaulting borrower and inform the relevant sales partners of the situation. Once payment is 30 to 90 days past due, we and our sales partners will continue the collecting efforts, including initiating private negotiations with the borrower and requesting the borrower to repay the loan through self-raising of money or voluntary sale of the collateral, transferring the defaulted loans to the third parties, and move forward with the arbitration process. 60 ● Typically, when payment is over 60 days past due, we will keep the sales partners informed and the sales partners shall choose from the following options, including (i)(1) full repayment to us for the total unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower and acquiring respective credit rights, (i)(2) repayment in installments to us for the total unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower and acquiring respective credit rights under each installments (this option was introduced since the first quarter in 2020 recognizing the fact that the sales partners’ cash flow may be affected by the COVID-19 pandemic and may need to make repayment to us in installments); (ii) repayment to us for the unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower, and if the borrower pays the payments under the loan agreement, the repayment by the sales partner on behalf of the borrower will be refunded to the sales partner; or (iii) relinquishing the respective CRMPs for such loan. If the sales partners do not choose to fully repay us as mentioned in (i) and (ii) above, we will confiscate the CRMP corresponding to the loan in default. Meanwhile, we will continue the collecting efforts and move forward with the judicial process or quick disposal plans. As of December 31, 2022, for all of the loans with payment over 60 days past due, our sales partners have either fulfilled or are in the process of fulfilling their obligations under our agreements with them. We have implemented detailed debt collection guidance and code of conduct for our local staff to ensure our debt collection methods are ethical and in compliance with laws and regulations, and we share such materials with our sales partners for them to adjust their debt collection procedures accordingly. We recovered loan principal, interest and penalties which equal to 102.4%, 83.3% and 105.2%, of the actual outstanding loan principal of these delinquent loans in 2020, 2021 and 2022, respectively. Transferring default loans to third parties is one of our loan recovery methods. If sales partners choose to fulfill their obligations to provide guarantee for the loans they introduced by repurchasing the delinquent loans according to the collaboration agreements signed between us and the sales partners, we would assist the trust partner to fully transfer the outstanding loan and related rights to the collateral to the sales partners at current market fair value. Under the circumstances of selling delinquent loans to local investment asset management companies, experienced law firms or other entities, our post-loan department conducts a final check to determine the probability of recovering those loans by other collecting methods in shorter time before making the final decision on whether to sell those loans to a third party. Collateral The borrowers pledge their real properties to our trust company partners in the case of trust lending and to our small loan subsidiaries in case of direct lending. We have developed detailed guidelines for real property collateral. The LTV ratios are also adjusted based on the type of property (residential or commercial), floor plan, age and credit history of property owners. As of December 31, 2022, the updated LTV as of the most recent balance sheet date was 59.4%, with 49.4% for the first lien loans and 61.9% for the second lien loans, which is calculated by the percentage of outstanding loan principal of the re- appraised collateral value as of December 31, 2022. In the circumstances where we are facilitating the second lien loans, we have to obtain a prior authorization from the borrower before it checks the borrower’s credit status for the updated first lien balance, which is not practical in daily operation. Therefore, we use outstanding first lien balance at origination in the above calculation. The following table illustrates the weighted average LTV ratio of on-balance sheet home equity loans (excluding loans held for sale) under trust lending model we originated for the periods or as of the dates indicated, and a breakdown by collateral type For the Year Ended December 31, 2021 2022 2020 Weighted average LTV ratio by collateral type First lien Apartment House Commercial property Total Second lien Apartment House Commercial property Total Total 54.7% 44.4% 40.7% 53.8% 59.8% 45.9% 50.9% 58.8% 54.6% 55.6% 44.1% 36.6% 54.9% 61.4% 48.9% 49.4% 60.8% 58.5% 56.6% 41.0% 21.9% 55.5% 63.6% 48.3% 28.5% 62.9% 60.0% 61 On- and off-Balance Sheet Loans For loans disbursed indirectly through trusts plans per the request of our funding partners, we have determined that we are the primary beneficiary of the trusts plans. We therefore consolidate the trusts plans and record the loans funded through these trusts plans on our balance sheet. On-balance-sheet loans are recorded at amortized costs. Revenues from these loans are accounted as interest income, and we recorded allowance for loan loss. Off-balance sheet loans refer to loans funded and disbursed directly by commercial banks and not consolidated on our balance sheet. For the off-balance- sheet loans, we provide loan facilitation and post-facilitation services and also guarantee the repayment through third-party guarantee company. As a result, we incur guarantee liabilities and take credit risks. Services provided in connection with this portion of loans are categorized under commercial bank partnership model. 2020 Outstanding loan principal (RMB in millions) % of total As of December 31, 2021 Outstanding loan principal (RMB in millions) % of total 2022 Outstanding loan principal (RMB in millions) % of total On-balance sheet loan Trust lending model Direct lending Off-balance sheet loan Commercial bank partnership model Total 9,042 8,992 50 - - 9,042 100% 99.5% 0.5% - - 100.0% 9,408 9,392 16 - 31 9,439 99.7% 99.5% 0.2% - 0.3% 100.0% 8,991 8,976 15 2,470 2,470 11,461 78.4% 78.3 0.1% 21.6% 21.6% 100.0% The following table illustrates distribution of our outstanding on-balance sheet loan principal (excluding loans held for sale) by city tier as of December 31, 2020, 2021 and 2022, respectively. Outstanding loan principal (excluding loans held for sale) by collateral city tier Tier 1 Tier 2 Others Total 2020 Amount (RMB in millions) % of total As of December 31, 2021 Amount (RMB in millions) % of total 2022 Amount (RMB in millions) % of total 2,202 6,080 760 9,042 24.4% 67.2% 8.4% 100.0% 62 2,851 5,992 565 9,408 30.3% 63.7% 6.0% 100.0% 3,110 5,497 384 8,991 34.6% 61.1% 4.3% 100.0% The process for updating collateral values during the period the loan is held includes the following: (i) regular review and reappraisal of collateral value based on the data from multiple external online appraisal firms; (ii) if the difference between the reappraised value and the value at origination exceeds 20%, we will determine whether such difference is due to regional market fluctuations and accept such reappraised value if the difference is determined to result from regional market fluctuations, and (iii) if the value difference is determined to be isolated from regional market fluctuations, we will check with recognized housing agent companies for the latest market sales price for properties with similar conditions such as locations, floorplans and ages, and use the average value of such similar properties as the ultimate reappraised value of the collateral. The following table illustrates the breakdown of our home equity loan origination volume under trust lending model originated by first lien and second lien in the periods indicated. 2020 Amount % of total For the Year Ended December 31, 2021 Amount % of total (RMB in millions) 2022 Amount % of total Loan origination volume by first/second lien First lien Second lien Total 3,864 4,982 8,846 43.7% 56.3% 100.0% 5,065 7,773 12,838 39.5% 60.5% 100.0% 4,892 7,287 12,179 40.2% 59.8% 100.0% The following table illustrates distribution of our outstanding on-balance sheet loan principal (excluding loans held for sale) generated by first lien and second lien in the periods indicated. 2020 Amount % of total As of December 31, 2021 2022 Amount % of total Amount % of total (RMB in millions) Outstanding loan principal (excluding loans held for sale) by first/second lien First lien Second lien Total 3,874 5,168 9,042 42.8% 57.2% 100.0% 3,513 5,895 9,408 37.3% 62.7% 100.0% 3,360 5,631 8,991 37.4% 62.6% 100.0% Loans principal (excluding loans held for sale) First lien Apartment House Commercial property Total Second lien Apartment House Commercial property Total Total 63 As of December 31, 2022 (RMB in thousands) The traditional facilitation model The collaboration model 5,299 - - 5,299 47,334 - - 47,334 52,633 3,220,281 89,732 44,223 3,354,236 5,387,583 164,852 32,146 5,584,581 8,938,817 Total 3,225,580 89,732 44,223 3,359,535 5,434,918 164,852 32,146 5,631,916 8,991,451 Loans principal (excluding loans held for sale) First lien Apartment House Commercial property Total Second lien Apartment House Commercial property Total Total Loans principal (excluding loans held for sale) First lien Apartment House Commercial property Total Second lien Apartment House Commercial property Total Total Technology As of December 31, 2021 (RMB in thousands) The traditional facilitation model The collaboration model 35,250 1,552 4,550 41,352 34,236 4,038 1,084 39,358 80,710 3,264,112 126,960 80,301 3,471,373 5,569,525 239,387 47,348 5,856,260 9,327,633 As of December 31, 2020 (RMB in thousands) The traditional facilitation model The collaboration model 614,819 18,172 120,283 753,274 872,112 56,476 33,462 962,050 1,715,324 2,850,699 144,707 124,968 3,120,374 3,964,981 174,230 66,601 4,205,812 7,326,186 Total 3,299,362 128,512 84,851 3,512,725 5,603,761 243,425 48,432 5,895,618 9,408,343 Total 3,465,518 162,879 245,251 3,873,648 4,837,093 230,706 100,063 5,167,862 9,041,510 Our technology departments is composed of 39 employees as of December 31, 2022. We utilize our home equity loan information technology system to support our standardized credit application process. Through our information technology system, we are able to connect with third-party service providers’ systems, including credit risk evaluation systems and leading property appraisers, to automatically collect data generated from their systems. In addition, our local staff uploads information collected during the due diligence process on a timely basis to supplement external credit data and ensure efficient approval process. Furthermore, we exchange loan application and approval information through our information technology system with our trust company partners’ systems. Our sales partners could acquire borrowers, upload due diligence files, track risk assessment processes and check their incentives online using this system. We collect and store user personal information, including names, phone numbers, addresses, identification information and financial information for the sole purpose of individual credit assessment. We retrieve such information with consent and have safeguards designed to protect such information. We store our data in encrypted form, which offers an additional layer of protection. We also verify data interchange with our funding partners using digital signatures, which enhances the security of such interchange. We also limit employees’ access to such information and monitor authorized access. 64 Sales and Marketing We acquire borrowers primarily through our sales partners. In 2020, 2021 and 2022, over 99.5% of our borrowers were introduced to us by our sales partners under the collaboration model. In 2022, 100.0% of borrowers introduced to commercial banks were acquired through local channel partners including corporate and individual offline channels and telemarketing companies. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Borrower—Borrower Acquisition.” Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We have registered 17 software copyrights in China, including our proprietary loan management software and financial data analytics software. We have registered our domain name, cashchina.cn. As of December 31, 2022, we had 44 registered trademarks, including our “CNFH” and company logo. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to obtain and use our intellectual property. Monitoring unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources. In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop non- infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any failure to protect our own intellectual property rights could impair our brand, negatively impact our business or both” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business.” Data Policy We have adopted a strict internal data policy relating to confidential information of our borrowers and business partners, as well as our own confidential information. This policy establishes day-to-day data protection and use requirements, data and information classification, backup requirements, approval procedures and user control. This policy also specifies the manner in which data must be stored. We require each of our employees to agree in writing to abide by the data policy and protect the confidentiality of our data. Competition As a leader in China’s home equity loan service industry, we face competition from other national or regional home equity loan providers and home equity loan service providers, as well as from commercial banks and other traditional financial institutions. As our business continues to grow, we also face significant competition for highly skilled personnel, including management, marketing team and risk management personnel. The success of our growth strategy depends in part on our ability to retain existing personnel and recruit additional highly skilled employees. Insurance We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We also purchased employer’s liability insurance and additional commercial health insurance to increase insurance coverage of our employees. We do not maintain property insurance to protect our equipment and other properties essential to our business operation against risks and unexpected events. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key- man insurance. We consider our insurance coverage sufficient and in line with market practice for our business operations in China. 65 Regulation This section sets forth a summary of the most significant rules and regulations affecting our business that we operate in China. As a home equity loan service provider, we facilitate loans by connecting borrowers with our trust company partners, and, to a lesser extent, we also lend directly to borrowers through our small loan subsidiaries. We have established three small loan subsidiaries in Beijing, Chongqing and Shenzhen that are permitted to operate small loan businesses. Regulations Relating to Foreign Investment The establishment, operation and management of companies in China is governed by the PRC Company Law, as amended in 2005, 2013, and 2018. According to the PRC Company Law, companies established in the PRC are either limited liability companies or joint stock limited liability companies. The establishment procedures, organizational form, organizational structure and rules of conduct of a wholly foreign-owned enterprise are subject to PRC Foreign Investment Law and its Implementing Regulations, that came into effect on January 1, 2020, which provide that foreign investors shall not invest in the fields or industries prohibited for foreign investment access listed in the negative list, and shall comply with the conditions or requirements when investing in the restricted fields listed in the negative list, and foreign investors investing in the fields and industries not listed in the negative list are treated equally with the domestic investors. The organizational form, organizational structure, and rules of conduct of foreign-invested enterprises shall be governed by the PRC Company Law, the PRC Partnership Enterprise Law and other applicable laws. On December 24, 2021, the Standing Committee of the 13th National People’s Congress (the “Congress”) issued the draft Amendment to the PRC Company Law, and on December 30, 2022, the Congress issued the second draft Amendment to the PRC Company Law, which expands the scope of capital contributions to include equity and creditor’s rights. The draft improves the provisions of duties of loyalty and diligence for directors, supervisors, and senior managers, and tighten their responsibilities to maintain the Company’s capital. The draft increases the reporting obligations of related party transactions and expands the scope of related parties to include family relatives of directors, senior management and supervisors as well as units or individuals associated with them. On December 30, 2019, the MOFCOM and the State Administration for Market Regulation (“SAMR”) jointly issued the Measures for the Reporting of Foreign Investment Information (“Measures”), which came into effect on January 1, 2020, replacing the Interim Measures for the Administration of the Establishment and Change of Foreign-Invested Enterprises. The Measures provides that in terms of investing directly or indirectly in the PRC, foreign investors or foreign-invested enterprises shall submit investment information to the competent commercial authority in accordance with the Measures. The competent commercial authority shall supervise and inspect the fulfillment of information reporting obligations of foreign investors and foreign-invested enterprises. If investment information is not filed in accordance with the Measures, foreign-invested enterprises may be required to make corrections or be subject to fines. Special Administrative Measures for Access of Foreign Investment (Negative List) (2021 Version) The Negative List uniformly lists special administrative measures on foreign investment access such as requirements on equity interest and management. Foreign investors investing in the fields and industries not listed in the negative list are treated equally with the domestic investors. The Negative List lists the transitional period for removing or relaxing access restrictions in certain fields and industries. After the transitional period, the investment access restrictions will be cancelled or relaxed. Our business is currently not listed in the Negative List (2021 Version). According to Measures for Security Review of Foreign Investment, which was promulgated by the NDRC and the Ministry of Commerce in December 2020 and has been come into effect in January 2021, the Foreign Investment Security Review Mechanism, or the Security Review mechanism, in charge of organization, coordination and guidance of foreign investment security review is thereunder established. A working mechanism office shall be established under the NDRC and led by the NDRC and the Ministry of Commerce to undertake routine work on the security review of foreign investment. According to the Security Review Mechanism, foreign investment activities falling in the scope such as important cultural products and services, important information technologies and internet products and services, important financial services, key technologies and other important fields that concern state security while obtaining the actual control over the enterprises invested in, a foreign investor or a party concerned in the PRC shall take the initiative to make a declaration to the working mechanism office prior to making the investment. 66 Regulations Relating to Small Loan Under the Guiding Opinions of the CBRC and the PBOC on the Pilot Operation of Small Loan Companies which was promulgated by the CBRC and the PBOC on May 4, 2008, or the Guiding Opinions on Small Loan Companies, a small loan company is a company that specializes in operating a small loan business with investments from natural persons, legal entities or other social organizations, and which does not accept public deposits. The establishment of a small loan company is subject to the approval of the competent government authority at the provincial level. The major sources of funds for a small loan company are limited to capital paid by shareholders, donated capital and capital borrowed from up to two financial institutions. Furthermore, the balance of the capital borrowed by a small loan company from financial institutions must not exceed 50% of the net capital of such small loan company, and the interest rate and term of the borrowed capital are required to be determined by us with the banking financial institutions upon consultation, and the interest rate on the borrowed capital must be determined by using the Shanghai Interbank Offered Rate as the base rate. With respect to the grant of credit, small loan companies are required to adhere to the principle of “small sum and decentralization.” The outstanding balance of the loans granted by a small loan company to one borrower cannot exceed 5% of the net capital of such company. The interest ceiling used by a small loan company may be determined by such companies, but in no circumstance shall it exceed the restrictions prescribed by the judicatory authority, and the interest floor is 0.9 times the base interest rate published by the PBOC. Small loan companies have the flexibility to determine the specific interest rate within the range depending on market conditions. In addition, according to the Guiding Opinions on Small Loan Companies, small loan companies are required to establish and improve their corporate governance structures, the loan management systems, the financial accounting systems, the asset classification systems, the provision systems for accurate asset classification and their information disclosure systems, and such companies are required to make adequate provision for impairment losses and are required to accept public scrutiny supervision and are prohibited from carrying out illegal fund-raising in any form. On September 7, 2020, China Banking and Insurance Regulatory Commission issued the Circular of General Office of the China Banking and Insurance Regulatory Commission on Strengthening the Supervision and Administration of Micro-loan Companies, namely the Circular on Microloan Companies. Circular on Micro-loan Companies aims to promote the regulated and healthy development of micro-loan industry, and notifies the relevant matters as follows: (1) regulating business operations and improving service capabilities, (2) improving business management and promoting healthy development, (3) strengthening supervision and administration and rectifying the order of the industry, and (4) increasing support and creating a good environment. Accordingly, micro-loan companies are required to adhere to the principle of small amounts and dispersion, monitor the loan purposes, standardizing debt collection, etc. Furthermore, Circular on Micro-loan Companies endows the regulatory authorities the power to increase penalties upon violations of relevant laws and regulations. If the relevant laws and regulations do not contain penalty provisions or the micro-loan company in violation of laws and regulations does not reach the penalty standards, the regulatory authorities may take such regulatory measures as conducting a regulatory interview, issuing a warning letter, ordering the Company to make rectifications, circulating a notice of criticism, and recording the violations of laws and regulations into the information database of illegal business behavior. Circular 141 outlines general requirements on the “cash loan” business conducted by network small loan companies, banking financial institutions and online lending information intermediaries. Circular 141 requires network small loan companies to cautiously manage their funding sources and shall not (1) engage in any illegal fundraising or absorbing public deposits, (2) sell, transfer or substantively transfer its credit assets through internet platform or any kind of local financial exchange, and (3) raise any funds through the Peer-to-Peer Lending Information Intermediaries. Funds raised by the transferring of credit assets and asset securitization shall be calculated in a consolidation manner within the balance sheet, and the ratio of total amount of fundraising and net capital shall be executed temporarily according to the local ratio. The local authorities shall not further relax the ratio of fundraising by the small loan companies. Any violation of Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, revocation of license, order to cease business operation and criminal liabilities. Our small loan subsidiaries are not network small loan companies, and we are not subject to the restrictions under the aforesaid regulation. But whether the relevant regulatory authorities will have a more limited explanation or make further restrictions on small loan businesses remains uncertain at this stage. 67 Implementary Measures of Small Loan Companies in Beijing The Implementary Measures of the Pilot Small Loan Companies in Beijing was issued by the People’s Government of Beijing Municipality on January 4, 2009. The Interim Measures of Supervisal Regulations on Pilot Small Loan Companies of Beijing was issued by the Finance Bureau of Beijing Municipality on May 31, 2011. The key regulations of small loan companies in Beijing are as follows: ● no single largest shareholder (including its affiliates) may hold shares that exceed 30% of total registered capital of the small loan company; any other single shareholder and its affiliates may hold shares that exceed 1% but no more than 20% of total registered capital of the small loan company; and the shareholders of the small loan company shall be natural persons, legal entities and other social organizations in China, among others. The largest shareholder shall be a local natural person, legal entity or other social organization on a county basis; ● if a small loan company is a limited liability company, its registered capital must be at least RMB50 million; and if it is a company limited by shares, its registered capital must be at least RMB100 million. All registered capital shall be valid and legal, paid in cash and paid in full by the contributors or promoters at one time; and ● the funds of a small loan company mainly come from the capital contributed and funds donated by shareholders as well as funds raised from no more than two banking financial institutions and other fund resources approved by the relevant authorities, and the balance of funds obtained by a small loan company from banking financial institutions may not exceed 50% of its net capital. Interim Administrative Measures of Small Loan Companies in Shenzhen The Interim Administrative Measures of the Pilot Small Loan Companies of Shenzhen was issued by the People’s Government of Shenzhen Municipality on September 3, 2011. The Notice on Further Reinforcement and Regulation on Interim Guidance on Pilot Entry and Approval of the Small Loan Companies was issued by the Finance Development Service Office of Shenzhen Municipality on April 3, 2013. The Notice on the Pilot Business of Financing Innovation for Small Loan Companies in Shenzhen was issued by the People’s Government of Shenzhen Municipality Financing Development Service Office on February 20, 2014. The key regulations of small loan companies in Shenzhen are as follows: ● if a small loan company is a limited liability company, its registered capital must be at least RMB300 million; if it is a company limited by shares, its registered capital must be at least RMB400 million; ● the balance of funds obtained by a small loan company from external legitimate channels may not exceed 200% of its net capital the previous year; ● the main promoter of a small loan company shall (1) have net assets no less than RMB200 million and an asset-liability ratio of no more than 65%, and, in principle, the long-term investment amount after investing in this project shall be no more than 60% of net assets (on a consolidated financial statements basis); and (2) have continuous positive earnings for three years with a total net profit of no less than RMB60 million, and the total tax contribution shall be no less than RMB18 million (on a consolidated financial statements basis); ● enterprise, social organization or economic organization as other contributors shall be divided into two categories: (1) if the ratio of investments is 30% or more, it shall be subject to the approval process as the main promoter; and (2) if the ratio of investments is no more than 30%, it shall be subject to the following conditions: having been incorporated for more than three years with net assets no less than RMB100 million and an asset- liability ratio no more than 65%, and, in principle, the long-term investment amount after investing on this project shall be no more than 60% of net assets, having continuous positive earnings for two years with a total net profit of no less than RMB20 million, and the total tax contribution shall be no less than RMB6 million (on a consolidated financial statement basis); ● if a foreign financial institution or small loan credit company (or other similar entity) is the main promoter, it shall be subject to the following conditions: (1) having total assets no less than RMB2 billion (on a consolidated financial statement basis); (2) having been engaged in financial business and continuously operating for no less than 10 years with sufficient analysis and research on the small loan market in China; and (3) shall obtain the approval of the financial regulation authorities as a bank financing institution; 68 ● the key management personnel may hold no more than 5% of shares of the small loan company, and, as a temporary restriction, no other social natural person may contribute to the small loan company; ● the main promoter shall contribute no less than 30% of the total registered capital and shall control the Company relatively, other contribution by other entities shall be no less than 5% of the total registered capital; and ● the equity interests of a small loan company may be transferred, but no transfer or pledge is allowed in the first three years following the incorporation of the small loan company. Equity interests held by the directors or senior managers of the small loan company shall not be transferred during the term of office. As the time expires, the transferee shall have qualifications as the transferor, and the transferee shall not transfer its shares within three years following the date of change of registration of shares. Guidance on Small Loan Companies in Chongqing Guidance on Chongqing’s Promotion of Pilot Operation of Small Loan Companies was issued by the People’s Government of Chongqing Municipality on August 1, 2008. The Notice on Issues Concerning the Adjustment of Interim Measures of Chongqing Municipality for the Administration of Pilot Operation of Small Loan Companies was issued by the People’s Government of Chongqing Municipality on April 27, 2009. The Notice on Further Promoting the Development of Small Loan Companies was issued by the People’s Government of Chongqing Municipality on April 12, 2011. The Notice on Interim Supervision Regulations on Chongqing Small Loan Companies Financing Supervision was issued by Chongqing Financing Business Office on June 4, 2012. The Guidelines for the Supervision of the Establishment and Change of Chongqing Small Loan Company (Trial Implementation) was issued by the Chongqing Finance Office, and implemented on July 1st, 2013. The Notice on Adjusting Regulations of Chongqing Small Loan Company was issued by the Chongqing Finance Office on October 27, 2016. On November 15, 2019, Chongqing Local Financial Supervision Administration (CQLFSA) issued the Guideline for Disclosure of Service Information of Chongqing Small Loan Companies. On November 26, 2019, CQLFSA issued the Notice on Guiding Small Loan Companies to Reduce Loan Interest Rates. On February 17, 2020, CQLFSA issued the Notice on Guiding Small Loan Companies to Support Epidemic Prevention and Control to Provide Financial Services for the Real Economy, which was effective until June 30, 2020. The key regulations of small loan companies in Chongqing are as follows: ● if a small loan company is a foreign investment company, its registered capital must be at least US$30 million, and the shareholding of the foreign investor must be more than 50%; ● for small loan companies with sound corporate management and strong risk management ability, the balance of the capital borrowed from banking financial institutions can be 100% of its net capital; ● the balance of loans granted to a single borrower by a small loan company must not exceed 10% of the net capital of the Company and the balance of credit limit granted to a single client as a group enterprise must not exceed 15% of the net capital of the small loan company; ● support qualified small loan companies to increase their capital and shares, as well as mergers and acquisitions to enhance their capital strength; and ● support small loan companies to list on domestic and overseas capital markets, and make good use of cross-border financing channels such as cross-border loans and overseas bond issuance under the China-Singapore (Chongqing) Strategic Interconnection Demonstration Project to obtain low-cost and long-term overseas funds. Regulations Relating to Loan Facilitator Circular 141 imposes several requirements on financial institutions engaged in the “cash loan” business. With respect to the loan business conducted in cooperation with third-party entities, such financial institutions must not outsource their core business function (including credit assessment and risk control) and must not accept any credit enhancement services, whether or not in a disguised form (including the commitment to taking default risks) provided by any third-party entities that lack the qualification to provide guarantee services. Such financial institutions must require and ensure that such third-party entities do not charge any interest or fees from the borrowers. We historically provided credit enhancement to our trust company partners, but all the remaining loans under such arrangement had been transferred in 2021 and substantially all of such remaining loans had been paid off in 2022. We historically charged a financing service fee from the borrower under our trust lending model and small loan direct lending model, but we ceased charging such financing service fee starting from August 2017. 69 Regulations Relating to Loans and the Interest Rate Part III Contracts of Civil Code of People’s Republic of China, which became effective in January 2021, or the Contract Part, governs the formation, validity, performance, enforcement and assignment of contracts. The Contract Part requires that the interest rates charged under a loan agreement must not violate the applicable provisions of the PRC laws and regulations. In accordance with the Decision of the Supreme People’s Court on Revising the Provisions on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (2nd Revisions in the year of 2020) issued by the PRC Supreme People’s Court in December 2020 and effective since January 2021, or the Revised Private Lending Judicial Interpretations, private lending refers to the act of financing among natural persons, legal persons and unincorporated organizations. The revised Private Lending Judicial Interpretations required to reduce the maximum annual interest rate allowed on private lending to four times of the one-year loan prime rate (LPR). The one-year LPR refers to the one-year loan market quoted interest rate issued by the National Bank Interbank Funding Center, which was authorized by the PBOC, on the 20th of each month since August 20, 2019. According to the Official Reply of the Supreme People’s Court to the Issues concerning the Scope of Application of the New Judicial Interpretation on Private Lending, The Revised Private Lending Judicial Interpretations on private lending shall not apply to disputes arising from engagement in relevant financial business by small loan companies. Regulations Relating to Financing Guarantee In March 2010, CBRC, NDRC, MIIT, MOFCOM, PBOC, SAIC and the Ministry of Finance of PRC promulgated the Tentative Administrative Measures for Financing Guarantee Companies. The Tentative Administrative Measures for Financing Guarantee Companies requires an entity or individual to obtain a prior approval from the relevant regulatory body to engage in the financing guarantee business and defines “financing guarantee” as an activity whereby the guarantor and the creditor, such as a financial institution in the banking sector, agree that the guarantor shall bear the guarantee obligations in the event that the secured party fails to perform its financing debt owed to the creditor. In August 2017, the State Council promulgated the Regulations on the Supervision and Administration of Financing Guarantee Companies, or the Financing Guarantee Regulations, which became effective on October 1, 2017. The Financing Guarantee Regulations define “financing guarantee” as a guarantee provided for debt financing (including but not limited to the extension of loans or issuance of bonds) and set out that the establishment of a financing guarantee company or engagement in the financing guarantee business without approval may result in several penalties, including but not limited to banning, an order to cease business operation, confiscation of illegal gains, fines of up to RMB1,000,000 and criminal liabilities. The Financing Guarantee Regulations also set forth that the outstanding guarantee liabilities of a financing guarantee company shall not exceed 10 times its net assets and that the outstanding guarantee liabilities of a financing guarantee compacities of the same guaranteed party shall not exceed 10% of the net assets of the financing guarantee company, while the outstanding guarantee liabilities of a financing guarantee company in respect of the same guaranteed party and its affiliated parties shall not exceed 15% of its net assets. The Supplementary Provisions stipulate that any institution, which provides services such as customer recommendation and credit evaluation for different kinds of lending institutions, shall not provide any financing guarantee services directly or in a disguised way, without approval. As for an institution which has no business license for financing guarantee business but actually engages in the financing guarantee business, the competent supervision and administration department shall ban it in accordance with the Regulation on Financing Guarantee Companies and order it to properly settle the stock business. If the institution intends to continue to engage in the financing guarantee business, it shall establish a financing guarantee company pursuant to the Regulation on Financing Guarantee Companies. The Circular of the China Banking and Insurance Regulatory Commission on Issuing the Procedures for the Off-site Supervision of Financing Guarantee Companies (the Off-site Supervision Circular) was promulgated on July 14, 2020 and took effect on September 1, 2020. The Off-site Supervision Circular stipulates that financing guarantee companies should establish and implement an off-site supervision information filing system, and file the off-site supervision data and non-data information according to the requirement of regulatory authorities in time. If the financing guarantee companies do not comply with the requirement of regulatory authorities, regulatory authorities can exert penalties in compliance with relevant laws and regulations. 70 Regulations Relating to Illegal Fundraising Raising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid administrative and criminal liabilities. The Notice on Relevant Issues Concerning the Penalty on Illegal Fundraising issued by the General Office of the State Council in July 2007 explicitly prohibit illegal public fundraising. The main features of illegal public fundraising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising a return of interest or profits or investment returns in cash, properties or other forms within a specified period of time and (iii) using a legitimate form to disguise an unlawful purpose. To further clarify the criminal charges and punishments relating to illegal public fundraising, the Supreme People’s Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fundraising, or the Illegal Fundraising Judicial Interpretations, which came into force in January 2011. Decision of the Supreme People’s Court on Revising the Interpretations of the Supreme People’s Court on Certain Issues Concerning the Specific Application of Law in the Trial of Criminal Cases Involving Illegal Fund Raising came into force on March 1, 2022. The Illegal Fundraising Judicial Interpretations provides that a public fundraising will constitute a criminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law if it meets all the following four criteria: (i) taking in funds without license of the relevant authority or under the disguise of lawful business operations; (ii) publicizing by means of Internet, media, recommendation fairs, leaflets or mobile phone text messages, or other means; (iii) promising to repay the principal and interests or make payments in forms such as currency, real objects or equities, within a certain time limit; and (iv) absorbing funds from the general public, namely unspecified people. An illegal fundraising activity can incur a fine or prosecution in the event it constitutes a criminal offense. Pursuant to the Illegal Fundraising Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000, (ii) with over 150 fundraising targets involved, (iii) with direct economic loss caused to fundraising targets exceeding RMB500,000, or (iv) the illegal fundraising activities have caused baneful influences to the public or have led to other severe consequences. In addition, any entity that, while knowingly aware that another party deceptively issues securities, illegally accepts deposits from the general public, issues stocks and corporate bonds without permission, practice fund-raising fraud, or carry out fund-raising criminal activities such as organizing and leading pyramid sales activities, provides publicity such as advertising to such party, shall be convicted and punished as an accomplice for committing the relevant crime. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues concerning the Application of Law in the Illegal Fundraising Criminal Cases, the administrative proceeding for determining the nature of illegal fundraising activities is not a prerequisite procedure for the initiation of criminal proceedings concerning the crime of illegal fundraising, and the administrative departments’ failure in determining the nature of illegal fundraising activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fundraising. According to “the Notice of the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security on the Promulgation of Opinions on Several Issues in Handling Criminal Cases of Illegal Fundraising” issued in January 2019, the determination of the “illegality” of fundraising shall be based on the laws and regulations of the national financial management. If there are only general stipulations in the laws and regulations of the national financial management, the “illegality” could be determined in accordance with the spirit of laws and regulations and the provisions on regulatory documents such as regulations, measures, and implementation rules of the People’s Bank of China, the China Insurance Regulatory Commission, the China Securities Regulatory Commission. According to Regulations on Preventing and Dealing with Illegal Fundraising, which came into effect in May 2021, illegal fundraising involves collecting funds from non-specific targets with promised principal and interest or other investment returns, without lawful permission from the State Council’s financial management departments or in violation of China’s financial management rules. Provincial-level governments should have overall responsibility for anti-illegal fundraising efforts within their respective administrative regions, and local governments should build necessary work mechanisms. Financial and non-banking payment institutions should report large-value and suspicious transactions as required, and analyze and identify related accounts having suspected association with illegal fundraising. 71 Regulations Relating to Mortgage The principal regulations governing mortgage include the Part II Property Rights (including Security Rights) of Civil Code of the PRC and their respective Interpretations of the Supreme People’s Court. Under these laws and regulations, in order to create a legal and executable mortgage, the parties concerned shall conclude a written mortgage contract and complete the mortgage registration formalities with applicable real estate registration authorities. Mortgage interests shall be created at the time of registration. Under the Part II Property Rights of Civil Code of the PRC, a mortgage contract shall include, amongst others, the following terms: (1) type and amount of the secured debt; (2) term for performance of debt obligations by the debtor; (3) mortgaged property’s description, quality, quantity, condition, location, ownership or ownership of the right to use the mortgaged property; and (4) scope of the guarantee. In March 2019, the PRC Ministry of Land and Resources revised the Implementation Regulations for the Provisional Regulations on Real Estate Registration, according to which the mortgage contract is one of the required registration materials to be submitted to the real estate registration authorities. Anti-money Laundering Regulations The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as nonfinancial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and records and reports on large transactions and suspicious transactions. In June, 2021, the PBOC issued the draft revision of the PRC Anti-Money Laundering Law (draft) for public comments. According to the draft of Anti- money Laundering Law, predicate acts of money laundering include not only criminal activities, but also newly include illegal activities. The draft of Anti- money Laundering Law also includes in the scope of Anti-money Laundering monitoring activities that conceal the nature of the proceeds of illegal activities and the source of their proceeds. The Measures for Supervision and Administration of Anti-Money Laundering and Anti-Terrorism Financing of Financial Institutions, or the Anti-Money Laundering Measures for Financial Institutions, which became effective in April 2021, clarified that the following financial institutions duly established within the PRC territory are subjected to fulfill anti-money laundering related obligations: (a) developmental financial institution, policy banks, commercial banks, rural cooperative banks, rural credit cooperatives and village/township banks; (b) securities companies, futures companies and fund management companies; (c) insurance companies and insurance asset management companies; (d) trust companies, financial asset management companies, finance companies of enterprise groups, financial leasing companies, auto finance companies, consumer finance companies, currency brokerage companies and wealth management subsidiaries of commercial banks; and (e) other financial institutions. Besides, such obligations also apply to the non-bank payment institutions, banks card organization, fund clearing center, microcredit companies engaging in the internet microcredit lending business and the institutions engaging exchange business, funds sales business, insurance agency and brokers business. The PBOC and its branches shall carry out the supervision and administration of the financial institutions’ work with regard to the antimoney laundering and anti-terrorism financing pursuant to the relevant laws and regulations. The Anti-Money Laundering Measures for Financial Institutions require the financial institutions to draft and improve the anti-money laundering and anti-terrorism financing internal control policy, evaluate the anti-money laundering and anti-terrorism financing risks, establish the risks management mechanism according to its risks conditions and operation scale, construct anti-money laundering information system, and set up or appoint institutions equipped with qualified staff, to perform its anti-money laundering and anti-terrorism financing obligations. Regulations Relating to Internet Information Security and Privacy Protection Internet content in China is regulated and restricted from a state security standpoint. On December 28, 2000, the Standing Committee of the PRC National People’s Congress introduced and enacted the Decisions on Maintaining Internet Security, which was amended on August 27, 2009 and may subject violators to criminal punishment in China for any effort to: (i) use the internet to market fake and substandard products or carry out false publicity for any commodity or service; (ii) use the internet for the purpose of damaging the commercial goodwill and product reputation of any other person; (iii) use the internet for the purpose of infringing on the intellectual property of any person; (iv) use the internet for the purpose of fabricating and spreading false information that affects the trading of securities and futures or otherwise jeopardizes the financial order; or (v) create any pornographic website or webpage on the internet, providing links to pornographic websites, or disseminating pornographic books and magazines, movies, audiovisual products or images. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content and require internet service providers to take proper measures, including anti-virus, data backup and other related measures, and keep records of certain information about the users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days, and detect illegal information, stop transmission of such information and keep relevant records. If an internet information service provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites. 72 PRC government authorities have enacted laws and regulations on internet use to protect personal information from any unauthorized disclosure. In December 2012, the Standing Committee of the PRC National People’s Congress promulgated the Decision on Strengthening Network Information Protection to enhance the legal protection of information security and privacy on the internet. In July 2013, the MIIT promulgated the Provisions on Protection of Personal Information of Telecommunication and Internet Users to regulate the collection and use of users’ personal information in the provision of telecommunication services and internet information services in China. Telecommunication business operators and internet service providers are required to establish their own rules for collecting and use of users’ information and cannot collect or use users’ information without their consent. Telecommunication business operators and internet service providers are prohibited from disclosing, tampering with, damaging, selling or illegally providing others with, collected personal information. On November 7, 2016, the Standing Committee of the PRC National People’s Congress published Cyber Security Law of the PRC, which took effect on June 1, 2017 and requires network operators to perform certain functions related to cybersecurity protection and the strengthening of network information management. For instance, under the Cyber Security Law, network operators of key information infrastructures shall store within the territory of the PRC all the personal information and important data collected and produced within the territory of the PRC, and their purchase of network products and services that may affect national securities shall be subject to national cybersecurity review. On 14 September, 2022, the Cyberspace Administration of China released the Draft Amendment of the Cyber Security Law for public consultation. The Draft Amendments have significantly increased penalties for breaches, introducing a fine up to 5% of its annual turnover in the previous year. The draft also applies with the individuals directly liable subject to a fine up to RMB1 million and/or a ban on taking on managerial positions in China. On April 13, 2020, the Cyberspace Administration of China issued Measures for Cybersecurity Review, which took effect on June 1, 2020, to provide more detailed rules regarding cybersecurity review requirements. In addition, the Guidelines to Promote the Health Growth of the Internet Finance, or the Internet Finance Guidelines, requires internet finance service providers, including online finance platforms, among other things, to improve technology security standards and safeguard customer and transaction information. The State Council, the PBOC and other relevant regulatory authorities will jointly adopt the implementing rules and technology security standards. On November 28, 2019, the Secretary Bureau of the State Internet Information Office, the General Office of the MIIT, the General Office of the Ministry of Public Security, and the General Office of the SAMR issued the Identification Methods for Collection and Use of Personal Information in Violation of Laws by Applications, which enumerates the conducts to be including those with no published rules, no explicit purpose, method and scope when collecting and using personal information, collection and use of personal information without user consent, violation of “necessary principle”, collection of personal information unrelated to the services provided, and provision of personal information to others without consent, failure to provide the function of deleting or correcting personal information as required by law, or no published information for complaints and reporting methods. On May 28, 2020, the National People’s Congress adopted the Civil Code, which came into effect on January 1, 2021. According to the Civil Code, the personal information of a natural person shall be protected by the law. Any organization or individual shall legally obtain such personal information of others when necessary and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide, or disclose personal information of others. On June 10, 2021, the Standing Committee of the National People’s Congress adopted the Data Security Law, which took effect on September 1, 2021. The Data Security Law mainly sets forth specific provisions regarding establishing basic systems for data security management, including data classification management system, risk assessment system, monitoring and early warning system, and emergency disposal system. In addition, the Data Security Law clarifies the data security protection obligations of organizations and individuals carrying out data-related activities and implementing data security protection responsibility. In August 2021, The Personal Information Protection Law was passed by the Standing Committee of the National People’s Congress and was effective from 1 November 2021. 73 The Personal Information Protection Law is the first piece of legislation in China dedicated to the protection of personal information. It establishes individuals’ consents as the principal legal basis for processing personal information. It requires that the processing of personal information shall abide by the principles of legality, fairness, good faith, minimum necessity, openness, and transparency. There shall also be specific and reasonable purposes of processing. Individuals shall have the right to access and obtain a copy of their personal information from the processors of personal information. Individuals can also request the processors of personal information to rectify or delete their personal information, as well as to provide them with means to transfer their personal information to other processors. Processors of personal information which need to transfer personal information out of the Mainland China shall obtain separate consent from individuals, and meet certain requirements, such as passing the security assessment made by the state cyberspace authorities, obtaining the required certification, or entering into a standard contract as prescribed by the state cyberspace authorities. The Personal Information Protection Law contains provisions on extraterritorial application. Foreign organizations which process personal information of individuals in PRC for the purposes of offering products or services to them, or analyzing and assessing their behaviors, shall be subject to this law. These foreign organizations shall also establish designated agencies or appoint representatives in PRC. A processor of personal information which contravenes the requirements under the Personal Information Protection Law is liable to a maximum fine of RMB50,000,000 or 5% of its annual turnover of the preceding year. Other penalties may include suspension of operation for rectification, cancellation of business permits or licenses, etc. On November 14, 2021, the Cyberspace Administration of China (CAC) released the draft of Regulations on Network Data Security Management for public comments. It clarifies how network data should be categorized and provides illustrations of what would constitute important data. It requires that processors of important data (including those processing personal data of more than 1 million individuals) to comply with special obligations, which includes conducting an annual security assessment (either through a self-assessment, or by a qualified third party), and submitting the annual assessment report to the local CAC by January 31 of the following year. It requires obtaining consent from the local supervising authority for the industry concerned or the local CAC before engaging in the sharing, trading, or processing through third parties of important data. The Regulations on Network Data Security Management clarify the conditions that trigger a cybersecurity review required by the CSL, including data processing activities that affect or could affect national security. Regulations Relating to Credit Reporting Business The Measures for Credit Reporting Business (“Measures”) was issued by the PBOC in September 2021 and was promulgated in January 2022. The Measures define “credit information” as information that “serves the financial and other activities and is used to determine individuals and enterprises credit status, and information originated from analysis and evaluation of individuals and enterprises’ credit status based on the foregoing information”. It applies to entities that carry out credit reporting business and “activities relating to credit reporting business” in China as well as such activities carried out outside China but targeting Chinese residents. It provides rules on credit reporting business and credit reporting agencies, requiring that any institution shall obtain the permission for a personal credit reporting agency from the People’s Bank of China in accordance with the law to engage in personal credit reporting business; handle the record-filing of a corporate credit reporting agency in accordance with the law to engage in corporate credit reporting business; or handle the record-filing of a credit rating agency in accordance with the law to engage in credit rating business. The Measures require financial institutions to be prohibited from cooperating with unauthorized institutions. If relevant institutions have already cooperated with unauthorized institutions, they should complete compliance rectification within 18 months from January 1, 2022. Regulations on Intellectual Property Rights The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names. Copyright and Software Products The National People’s Congress adopted the Copyright Law in 1990 and amended it in 2001, 2010 and 2020 respectively. The amended Copyright Law extends copyright protection to internet activities, products disseminated over the internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001 and amended on January 30, 2013, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, which applies to software copyright registration, license contract registration and transfer contract registration. 74 Trademarks Trademarks are protected by the PRC Trademark Law adopted in 1982 and subsequently amended in 1993, 2001, 2013, and 2019 as well as the Implementation Regulation of the PRC Trademark Law adopted by the State Council in 2002 and amended on April 29, 2014. The Trademark Office under the SAIC handles trademark registrations and grants a term of 10 years to registered trademarks and another 10 years if requested upon expiry of the first or any renewed 10-year term. Trademark license agreements must be filed with the Trademark Office for record. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registrations. Any malicious application for trademark registration not for the purpose of use shall be rejected. Where a trademark for which a registration has been made is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such party’s use. Trademark license agreements should be filed with the Trademark Office or its regional offices. Domain Names Internet domain name registration and related matters are primarily regulated by the Measures on the Administration of Domain Names for the Chinese Internet, issued by the MIIT on November 5, 2004 and effective as of December 20, 2004, which was replaced by the Measures on Administration of Internet Domain Names issued by the MIIT as of November 1, 2017 and the Implementing Rules on Registration of National Toplevel Domain Names issued by China Internet Network Information Center in June, 2019. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and the applicants become domain name holders upon successful registration. As of December 31, 2021, we had eight registered trademarks with the Trademark Office under the State Administration for Industry and Commerce. We have 17 registered Copyright of Software Products and one registered Domain Name. Regulations Relating to Employment Pursuant to the Labor Law of PRC, promulgated by the NPC in July 1994, and most recently amended on December 29, 2018, or the Labor Law, and the Labor Contract Law of PRC, promulgated by the Standing Committee of the NPC in June 2007 and amended in December 2012, or the Labor Contract Law, employers must execute written employment contracts with full-time employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities. Enterprises in China are required by the Social Insurance Law of PRC promulgated by the Standing Committee of the NPC in October 2010, which became effective in July 2011, as most recently amended on December 29, 2018, or the Social Insurance Law, the Regulations on Management of Housing Provident Fund released by the State Council in March 2002, and most recently amended on March 24, 2019 and other related rules and regulations, to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. Failure to make adequate contributions to various employee benefit plans may be subject to fines and other administrative sanctions. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline and be subject to a late fee of 0.05% per day, as the case may be. If the employer still fails to rectify the failure to make social insurance contributions within the deadline, it may be subject to a fine ranging from one to three times the amount overdue. According to the Regulations on Management of Housing Fund, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement. We have not made adequate contributions to employee benefit plans as required by applicable PRC laws and regulations. See “Item 3. Key Information— D. Risk Factors—Risks Related to Doing Business in China—Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.” 75 Regulations Relating to Tax Enterprise Income Tax PRC enterprise income tax is calculated based on taxable income, which is determined under (i) the PRC Enterprise Income Tax Law, or the EIT Law, promulgated by the NPC and implemented in January 2008, and most recently amended on December 29, 2018, and (ii) the implementation rules to the EIT Law promulgated by the State Council and implemented in January 2008, and most recently amended on April 23, 2019. The EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises and domestic enterprises, unless they are qualified for certain exceptions. According to the EIT Law and its implementation rules, the income tax rate of an enterprise that has been determined to be a high and new technology enterprise may be reduced to 15% with the approval of relevant tax authorities. In addition, according to the EIT Law, enterprises registered in countries or regions outside the PRC but have their “de facto management bodies” located within China may be considered as PRC resident enterprises and are therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. Though the implementation rules of the EIT Law define “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., of an enterprise,” the only detailed guidance currently available for the definition of “de facto management body” as well as the determination and administration of tax residency status of offshore incorporated enterprises are set forth in the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or the Circular 82, promulgated by the State Administration of Taxation (the “SAT”) in April 2009, and the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Overseas Incorporated Resident Enterprises (Trial Version) issued by the SAT in July 2011, or Bulletin No. 45, which provides guidance on the administration as well as the determination of the tax residency status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the law of a foreign country or territory and that has a PRC company or PRC corporate group as its primary controlling shareholder. According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC resident enterprise 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: ● the primary location of the day-to-day operational management and the places where they perform their duties are in the PRC; ● decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval of organizations or personnel in the PRC; ● the enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions are located or maintained in the PRC; and ● 50% or more of voting board members or senior executives habitually reside in the PRC. Bulletin No. 45 further clarifies certain issues related to the determination of tax resident status and competent tax authorities. It also specifies that when provided with a copy of Recognition of Residential Status from a resident Chinese-controlled offshore incorporated enterprise, a payer does not need to withhold income tax when paying certain PRC-sourced income such as dividends, interest and royalties to such Chinese-controlled offshore-incorporated enterprise. Value-Added Tax and Business Tax According to the Provisional Regulations on Value-added Tax (“Provisional Regulations”), which was promulgated by the PRC State Council on December 13, 1993 and amended in November 2008, February 2016 and November 2017, and the Implementing Rules of the Provisional Regulations on Value-added Tax, which were promulgated by the MOF on December 18, 2008 and subsequently amended by the MOF and the SAT on October 28, 2011, all taxpayers selling goods, providing processing, repairing or replacement services or importing goods within the PRC must pay value-added tax. 76 Since January 1, 2012, the MOF and the SAT have implemented the VAT Pilot Plan, which imposes VAT in lieu of business tax for certain “modern service industries.” According to the implementation circulars released by the MOF and the SAT on the VAT Pilot Plan, the “modern service industries” include research, development and technology services, information technology services, cultural innovation services, logistics support, lease of corporeal properties, attestation and consulting services. According to the Notice of the Ministry of Finance and the SAT on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner which became effective on May 1, 2016, as subsequently amended on March 20 2019, entities and individuals engaged in the sale of services, intangible assets or fixed assets within the PRC territory are required to pay value-added tax instead of business tax. Following the implementation of the VAT Pilot Plan, most of our PRC subsidiaries and affiliates have been subject to VAT, instead of business tax. From April 1, 2019, according to “The Notice on Policies for Deepening the Value-Added Tax Reform” issued by the Ministry of Finance and the State Taxation Administration and the General Administration of Customs in March 2019 and “The Notice on Adjusting the Value-Added Tax Rate” issued by the Ministry of Finance and the State Taxation Administration in April 2018, most of our Chinese companies and subsidiaries used to pay a Value-Added Tax rate of 3% or 6%. Under the impact of COVID-19 pandemic, the Ministry of Finance and the State Taxation Administration issued “Announcement on the Value-added Tax Policy in Support of Resumption of Work and Business among Individual Businesses” in February 2020 and “Announcement on Extending the Applicable Period of the Value-added Tax Reduction and Exemption Policy for Small-scale Taxpayers” in April 2020 to reduce the Value-Added Tax rate from 3% to 1% and start to implement such policy from March 1, 2020. In March 2021, the Ministry of Finance and the State Taxation Administration further issued “Announcement on Continuously Implementing Some Tax Preferential Policies in Response to COVID-19 Epidemic” to extend the implementation of “1% Value-added Tax rate” policy to December 31, 2021. On 30, December, 2022, the Standing Committee of the 13th National People's Congress issued the draft of Value-Added Tax Law of the People's Republic of China (“Draft”) for public comment, which will elevate the Provisional Regulations on and related policy provisions into law. The Draft emphasizes the principle of correlation between sales and input tax in the VAT levy and deduction provisions. Stamp Tax As regulated in the Stamp Tax Law, which will come into effect on July 1, 2022, the taxable items include contracts, documents of transfer of property rights, and business account books, and the transfer of stocks and depositary receipts issued based on stocks that are traded on stock exchanges legally formed and other national securities trading venues approved by the State Council. The effect of this law will have an impact on our tax situation. Regulations Relating to Foreign Exchange Regulation on Foreign Currency Exchange The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments 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. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China. On February 13, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration. In August 2008, SAFE issued 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, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency-registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency-registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations may result in severe monetary or other penalties. 77 In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer requires the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular of the State Administration of Foreign Exchange on Printing and Distributing the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors and Relevant Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration, and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. On June 9, 2016, the SAFE promulgated Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, which expands the application scope from only the capital of the foreign-invested enterprises to the capital, the foreign debt fund and the fund from overseas public offerings. Circular 16 allows that the discretionary settlement of foreign exchange receipts under capital accounts refers to the case in which the foreign exchange receipts under capital accounts (including foreign exchange capital, foreign debts, and repatriated funds raised through overseas listing) subject to discretionary settlement as expressly prescribed in the relevant policies may be settled with banks according to the actual need of domestic institutions for business operations. Where the current regulations contain any restrictive provisions on the foreign exchange settlement of foreign exchange receipts under capital accounts of domestic institutions, such provisions shall prevail. Domestic institutions may, at their discretion, settle up to 100% of foreign exchange receipts under capital accounts for the time being. The SAFE may adjust the above proportion in due time according to balance of payments. In addition, Circular 16 specifies the use of foreign exchange receipts under capital accounts of a domestic institution and the RMB funds obtained thereby from foreign exchange settlement shall be subject to the following provisions: (i) they shall not, directly or indirectly, be used for expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations of the State; (ii) unless otherwise specified, they shall not, directly or indirectly, be used for investments in securities or other investment than banks’ principal-secured products; (iii) they shall not be used for the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) they shall not be used for the construction or purchase of real estate for purposes other than self-use (except for real estate enterprises). Where there is any contractual stipulation on the use scope of revenue under capital accounts between a domestic institution and other parties concerned, the relevant funds shall not be used beyond such scope. Unless otherwise specified, such stipulation shall not conflict with this Circular. Moreover, Circular 16 allows the enterprises to use their foreign exchange capitals under capital accounts allowed by the relevant laws and regulations. In January 2017, the SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting profits. Moreover, pursuant to Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment. On October 23, 2019, SAFE issued the Circular on Further Promoting Cross-border Trade and Investment Facilitation, or SAFE Circular 28. Among others, SAFE Circular 28 relaxes the prior restrictions and allows the foreign-invested enterprises without equity investment as in their approved business scope to use their capital obtained from foreign exchange settlement to make domestic equity investment as long as the investments are real and in compliance with the foreign investment-related laws and regulations. In addition, SAFE Circular 28 stipulates that qualified enterprises in certain pilot areas may use their capital income from registered capital, foreign debt and overseas listing, for the purpose of domestic payments without providing authenticity certifications to the relevant banks in advance for those domestic payments. According to the Circular on Optimizing the Administration of Foreign Exchange to Support the Development of Foreign-related Business issued by the SAFE on April 10, 2020, eligible enterprises are allowed to make domestic payments using the income under their capital accounts generated from their capital, foreign debt and overseas listing, without providing materials for each transaction evidencing the authenticity in advance, provided that the capital usage is authentic and compliant with the current capital account income usage management regulations. 78 Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents The SAFE issued the SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Round Trip Investment through Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign- invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contributions into an SPV, PRC residents or entities are required to complete the foreign exchange registration with the SAFE or its local branch. PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through roundtrip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. In February 2015, the SAFE released the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or Circular 13, which has amended Circular 37 by requiring PRC residents or entities to register with qualified banks rather than the SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. Share Option Rules Pursuant to Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly listed companies may submit applications to the SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notice of the State Administration of Foreign Exchange on Issues Related to Foreign Exchange Administration in Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Abroad issued by SAFE in February 2012, or the Share Option Rules, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with the SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. Regulations on Dividend Distribution Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries, which are wholly foreign-owned enterprises incorporated in China, to fund any cash and financing requirements we may have. The principal laws and regulations governing the distribution of dividends of foreign-invested enterprises include the PRC Foreign Investment Law and its Implementing Regulations, both of which came into effect on January 1, 2020, and other applicable laws, according to which a foreign investor may, in accordance with the law, freely transfer into or out of the PRC its contributions, profits, capital earnings, income from asset disposal, intellectual property rights royalties acquired, compensation or indemnity legally obtained, income from liquidation, etc., made or derived within the territory of the PRC in RMB or any foreign currency, subject to no illegal restriction by any entity or individual in terms of the currency, amount, frequency of such transfer into or out of the PRC, etc. 79 Regulations on Overseas Listing On August 8, 2006, six PRC regulatory agencies, including the CSRC, adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006 and were amended on June 22, 2009. Foreign investors shall comply with the M&A Rules when they purchase equity interests of a domestic company or subscribe to the increased capital of a domestic company and thus change the nature of the domestic company into a foreign-invested enterprise; or when the foreign investors establish a foreign-invested enterprise in the PRC, purchase the assets of a domestic company and operate the assets; or when the foreign investors purchase the assets of a domestic company, establish a foreign-invested enterprise by injecting such assets and operate the assets. The M&A Rules purport, among other things, to require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain approval from the CSRC prior to publicly listing their securities on an overseas stock exchange. On March 1, 2020, Securities Law of the People’s Republic of China (Revised in 2019) became effective. It stipulates that any securities issuance and trading activities outside the People’s Republic of China that disrupt the domestic market order in the PRC and damage the legitimate rights and interests of domestic investors shall be investigated for legal liability in accordance with the relevant laws. This gives the China Securities Regulatory Commission, public security organs and judicial organs “long-arm jurisdiction” over overseas securities market activities. On July 6, 2021, the General Office of the State Council and General Office of the Central Committee of the Communist Party of China issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. The opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. On December 24, 2021, the CSRC published the draft Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Administrative Provisions and the draft Measures for the Overseas Issuance and Listing of Securities Record- filings by Domestic companies (Draft for Comments), or the Draft Measures for public comments. Pursuant to these drafts, PRC domestic companies that directly or indirectly offer or list their securities in an overseas market, including a PRC company limited by shares and an offshore company whose main business operations are in China and intends to offer shares or be listed in an overseas market based on its onshore equities, assets or similar interests, are required to file with the CSRC within three business days after submitting their listing application documents to the regulator in the place of intended listing. Failure to complete the filing under the Administrative Provisions may subject the domestic enterprise to a warning or a fine of one to ten million RMB. If the circumstances are serious, the domestic enterprise may be ordered to suspend its business or suspend its business pending rectification, or its permits or businesses license may be revoked. The Draft Measures also provide that a PRC domestic company must file with the CSRC within three business days for its follow on offering of securities or issue of securities to purchase assets after it is listed in an overseas market. However, there is no timetable as to when these drafts will be enacted. On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China- based overseas-listed companies. On February 17, 2023, the China Securities Regulatory Commission promulgated the Overseas Listing Trial Measures, and five supporting guidelines, which became effective on March 31, 2023. According to the Overseas Listing Trial 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. If a company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, it may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. The Overseas Listing Trial Measures also provide that a company in mainland China must file with the CSRC within three business days for its follow-on offering of securities after it is listed in an overseas market. On February 17, 2023, the CSRC also issued the Notice on Administration of the Filing of Overseas Offering and Listing by Domestic Companies and held a press conference for the release of the Overseas Listing Trial Measures, which, among others, clarified that the companies in mainland China that have been listed overseas before March 31, 2023 are not required to file with the CSRC immediately, but these companies should complete filing with the CSRC for their financing activities in accordance with the Overseas Listing Trial Measures. Based on the foregoing, as an issuer that has been listed overseas before the effective date of the Overseas Listing Trial Measures, we are not required to complete filing with the CSRC for our offshore offerings prior to the effective date of the Overseas Listing Trial Measures, but we may be subject to the filing requirements for our financing activities under the Overseas Listing Trial Measures. Any securities offerings and listings outside of mainland China by our Company after the effective date of the Overseas Listing Trial Measures, including but not limited to follow on offerings, secondary listings, and going private transactions, will be subject to the filing requirements with the CSRC under the Overseas Listing Trial Measures, and we cannot assure you that we will be able to comply with such filing requirements in a timely manner, or at all. Since the Overseas Listing Trial Measures was newly promulgated, the interpretation, application and enforcement of the Overseas Listing Trial Measures remain unclear. We cannot assure you that we will be able to complete such filing in a timely manner and fully comply with such rules to maintain the listing status of our ADSs and/or other securities, or to conduct any securities offerings in the future. 80 As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection from the CSRC in connection with requirements of obtaining prior approval for the listing of our ADSs. However, since the Overseas Listing Trial Measures was newly promulgated, the interpretation, application and enforcement of the Overseas Listing Trial Measures remain unclear. We cannot assure you that we will be able to complete any required filing in a timely manner and fully comply with such rules to maintain the listing status of our ADSs and/or other securities, or to conduct any securities offerings in the future. On April 2, 2022, the CSRC released the revised Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) , or the Draft Archives Rules. On February 24, 2023, the CSRC, jointly with other relevant governmental authorities, issued the Provisions on Strengthening the Confidentiality and Archive Management Work Relating to the Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality Provisions”), which became effective on March 31, 2023. The Confidentiality Provisions requires, among others, that companies based in mainland China seeking to offer securities in overseas markets, either directly or indirectly, shall establish the confidentiality and archives system, and shall complete approval and filing procedures with competent authorities, if such companies or their overseas listing entities provide or publicly disclose documents or materials involving state secrets and work secrets of PRC government agencies to relevant securities companies, securities service institutions, overseas regulatory agencies and other entities and individuals. It further stipulates that providing or publicly disclosing documents and materials which may adversely affect national security or public interests, and accounting files or copies shall be subject to corresponding procedures in accordance with relevant laws and regulations. Given the Confidentiality Provisions were recently promulgated, there remain substantial uncertainties about how these provisions will be interpreted, or implemented and how it will affect our operations or future securities offerings. As of the date of this annual report, we have not provided files or copies of files outside China that involve national secrets, national security, vital interests, or have important preservation value to the nation and society. However, we cannot guarantee that relevant government agencies of China, including the CSRC, will share the same opinion as ours. Summaries of the National Conference for the Work of Courts in the Trial of Civil and Commercial Cases Summaries of the National Conference for the Work of Courts in the Trial of Civil and Commercial Cases circulated by the Supreme People’s Court On November 8, 2019 (“Summaries”), provides that, in the trust documents and relevant contracts, the beneficiaries are divided into different categories, such as preferential beneficiaries and inferior beneficiaries, and it is stipulated that the preferential beneficiaries will subscribe for trust plan shares with their asset, and after the trust expires, the inferior beneficiaries bear the obligation to make up the difference between the benefit obtained from the trust property by the preferential beneficiaries plus its investment principal and the agreed proceeds. The people’s court shall legally support preferential beneficiaries’ claims for the liability borne by inferior beneficiaries as agreed. The agreement on the rights and obligations of different types of beneficiaries in the trust documents will not affect the determination of the legal trust relationship between the beneficiary and the trustee. In addition, the Summaries provided for the nature of credit enhancement documents, i.e., where any party which are not parties to the trust contract provides similar commitment documents such as making up differences by this third party, fulfillment of the repurchase obligations at maturity instead, and liquidity support as credit enhancement measures, the contents of which comply with the provisions of the law on guarantees, the people’s court shall determine that a guarantee contractual relationship is established among the parties. If the contents do not comply with the provisions of the law on guarantees, the corresponding rights and obligations shall be determined according to the specific content of the commitment document, and the corresponding civil liability shall be determined according to the facts of the case. 81 Notice on Further Regulating Financial Marketing and Publicity Activities The People’s Bank of China, the China Banking Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange have issued notices on further regulating financial marketing and publicity activities on December 20, 2019, which took effect on January 25, 2020. It is stipulated it is illegal to engage in financial business without a business license or beyond the permitted business scope, and market entities that fail to obtain relevant financial business qualifications shall not conduct marketing and publicity activities relating to the financial business, except that information release platforms and media entrusted by relevant financial business qualifications carry out financial marketing and publicity activities for them. As this notice is relatively new, in the cooperation agreements we signed with the trust companies, there is no specific agreement on the marketing and publicity activities of financial products. At present, we have started to communicate with the trust partners on financial product marketing and publicity issues. We will improve the cooperation model to ensure that marketing activities and those of our sales partners are legal and in compliance. Administrative Measures for Online Marketing of Financial Products (Draft for Comment) The “Administrative Measures for Online Marketing of Financial Products (Draft for Comment)” was published on December 31, 2021, requiring financial institutions to conduct online marketing of financial products on their own or entrust Internet platform companies to conduct online marketing of financial products within the scope of business permitted by the financial regulatory authorities. Any institution or individual is prohibited from providing online marketing for illegal financial activities such as illegal fundraising. 4.C. Organizational Structure The following diagram illustrates our corporate structure with material subsidiaries as of the date of this annual report. For a complete list of our subsidiaries, please refer to note 1 to our consolidated financial statements as of and for the years ended December 31, 2020, 2021 and 2022 included elsewhere in this annual report. We subscribe to the subordinated units of the trust products issued under long-term trust plans through three of our wholly owned subsidiaries, Guangzhou Heze Information Technology Co., Ltd., Guangzhou Chengze Information Technology Co., Ltd., and Shenzhen Fanhua United Investment Group Co., Ltd. From an accounting perspective, we are exposed to the risk and variability of returns from activities of the trust plans and are therefore required to consolidate the financial results of the trust plans, including the results related to the senior units. Financial data of a trust plan is consolidated as if the trust plan is a subsidiary. Income and expenses of the trust plans are consolidated on our consolidated statements of comprehensive income while assets and liabilities of the trust plans are consolidated on our consolidated balance sheet. We do not, however, have ownership interest in the trust plans from a legal perspective other than in the subordinated units that account for only a portion of the total outstanding amount of the trust plans. For details of the contractual structural leverage ratio of each trust plan, please refer to “Item 4. Information of the Company—B. Business Overview—Our Funding Model.” Notes: (1) Guangzhou Chengze Information Technology Co., Ltd. is one of the entities through which we subscribe to subordinated units of trust products. (2) Shenzhen Fanhua United Investment Group Co., Ltd. operates our loan services business through various subsidiaries in the PRC and operates our small loan business through Beijing Fanhua Micro-credit Company Limited and Shenzhen Fanhua Micro-credit Co., Ltd. 82 4.D. Property, Plant and Equipment Our corporate headquarters are located in Guangzhou, China, where we lease 1,855 square meters of office space pursuant to a lease expiring in September 2022. We also maintain leased properties ranging from 5 square meters to 1,855 square meters in over 50 cities. The lease term varies from three months to five years. We believe that our existing facilities are generally adequate to meet our current needs, but we expect to seek additional funding as needed to accommodate future growth. ITEM 4A. UNRESOLVED STAFF COMMENTS None. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we describe under “Item 3.D. Risk Factors” and elsewhere in this annual report. 5.A. Operating Results Overview We are a leading home equity loan service provider in China. We facilitate loans by connecting MSE owners with our funding partners. Our primary target borrower segment is MSE owners who own real properties in Tier 1 and Tier 2 and other major cities in China. We have established a national network of 87 branches and sub-branches in over 50 cities in China. We acquire our borrowers primarily through our sales partners under trust lending model. In 2020, 2021 and 2022, over 99.5% of our borrowers who obtained loans from trust companies were introduced to us by our sales partners under the collaboration model. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Collaboration Model.” Under trust lending model, we originated home equity loans with an aggregate principal amount of RMB8.8 billion, RMB12.8 billion and RMB 12.2 billion in 2020, 2021 and 2022, respectively. The loan origination volume in 2022 under the commercial bank partnership was RMB2,533.3 million and the outstanding loan principal was RMB2,469.6 million as of December 31, 2022. We originated home equity loans for 17,703 and 22,060 borrowers in 2020 and 2021, respectively, representing an increase of 24.6%. In 2022, we originated home equity loans for 23,923 (including 3,891 under the commercial bank partnership) borrowers, representing an increase of 8.4% from 2021. In 2020, 2021 and 2022, the average tenor of the home equity loans we originated was 24, 15 and 12 months with the weighted average effective interest rate (inclusive of interests and financing service fees, if applicable, payable by the borrowers) of 17.3%, 16.5% and 17.2% per annum, respectively. The interest rates of our loan products under commercial bank partnership ranged from 9.0% to 15.5% Our practical risk assessment procedure focuses on both credit risks of borrowers and quality of the collateral. We have also established guidelines on characteristics and quality of collateral, including, among others, an LTV ratio capped at 70%. The weighted average LTV ratio of the home equity loan origination volume was 54.6%, 58.5% and 60.0% in 2020, 2021 and 2022, respectively. As of December 31, 2020, 2021 and 2022, our NPL ratio was 12.89%, 11.93% and 16.95%, respectively. Charge-off ratio in 2020, 2021 and 2022 was 4.06%, 0.85% and 0.43%, respectively. Our total operating income decreased from RMB687.7 million in 2020 to RMB176.2 million in 2021, representing a decrease of 74.4%, and increased to RMB749.2 million in 2022, representing an increase of 325.2%. Our net income decreased from RMB114.9 million in 2020, representing a decrease of 43.2% to RMB65.2 million in 2021, and increased to RMB135.3 million in 2022, representing an increase of 107.5%. 83 Under the contractual arrangements with our trust company partners, we subscribe to subordinated units of trust plans and provide services to trust plans. As a result, we are entitled to (i) the investment return payable to us as subordinated unit holder and (ii) a performance-based service fee up to 7% per annum of the size of trust plans payable to us for our services provided to trust plans. Our cost of the subordinated units as measured by the investment amount was RMB3,045.2 million, RMB2,919.4 million and RMB2,627.4 million (US$380.9 million) as of December 31, 2020, 2021 and 2022, respectively. Our investment return from the subordinated units was RMB658.8 million, RMB578.7 million and RMB381.3 million (US$55.3 million) in 2020, 2021 and 2022, respectively. As a subordinated unit holder, we are exposed to variability of returns from activities of trust plans and are therefore required to consolidate the financial results of trust plans on our consolidated financial statements, including those of the senior units. Therefore, the service fee charged to trust plans is considered inter-company transaction and is eliminated together with management service expenses of trust plans for accounting purposes. In 2020, 2021 and 2022, we generated service fees charged to trust plans of RMB505.9 million, RMB440.1 million and RMB446.0 million (US$ 64.7 million), respectively. Key Factors Affecting Our Results of Operations Ability to maintain and expand borrower base Due to the nature of our business, our ability to increase our loan origination volume largely depends on our ability to acquire new borrowers for the loans we facilitate. Since December 2018, we have been acquiring borrowers primarily through our sales partners under the collaboration model. For details, please refer to “Item 4. Information on the Company—B. Business Overview—Our Products—Collaboration Model.” Our sales partners are typically local loan facilitators who have their own sales and marketing teams, they use such teams to reach to qualified candidates and recommend them to our platform. In 2020, 2021 and 2022, over 99.5% of our borrowers were introduced to us by our sales partners under the collaboration model. We originated home equity loans for 17,703, 22,060 and 23,923 (including 3,891 under the commercial bank partnership) borrowers in 2020, 2021 and 2022, respectively. Our results of operations and ability to sustain and increase loan volumes will depend on our ability to maintain and expand borrower base. Effective risk management Our operating income and profitability are largely affected by our and our trust company partners’ risk management capabilities. We are exposed to credit risks under the trust lending model as a result of subscription of subordinated units and credit strengthening services and being a lender under the direct lending model. As such, the ability of us and our trust company partners to accurately assess default risks through our and our trust company partners’ credit analysis system directly affects our loan delinquency ratios and profitability. Any significant weakness in our or our trust company partners’ risk management system will directly or indirectly result in an increase in delinquency of loans originated by us or a failure of our loan servicing to recover losses. For a detailed discussion of our risk management, please refer to “Item 4. Information of the Company—B. Business Overview—Risk Management.” Relationship with our funding partners Our collaborative relationships with our funding partners are critical to our operations. We mainly collaborate with our trust company partners through trust lending model. In 2020, 2021 and 2022, 100%, 99.8% and 82.7%of our total home equity loan origination volume was originated under trust lending model, respectively. The availability of funds from our funding partners affects our liquidity and the amount of loan transactions that we can facilitate, which directly affects our profitability. Terms of our collaboration agreements with our funding partners generally set the financing costs of our home equity loan business. Our financing costs for senior units excluding the trust administrative fees, ranged from 6.0% to 11.5% per annum of the issuance number of senior units in 2022. The interest charged by trust company partners to our borrowers affects our profitability. If we fail to maintain or deepen our existing relationships with our trust company partners, our liquidity and profitability may be adversely affected. A general deterioration of our relationships with our funding partners will result in a significant decrease in liquidity or in our service fees charged to trust plans, and we may not be able to secure alternative financing on terms acceptable to us or our borrowers, or at all. This may result in a decrease in the volume of loans we facilitate, which has a material adverse impact on our business and results of operations. For detailed discussion relating to our relationship with our funding partners, please refer to “Item 4. Information on the Company—B. Business Overview—Our Funding Model.” 84 China’s macroeconomic environment Our business depends on the growth of MSE owners’ demand for home equity loan financing, which in turn depends on China’s macroeconomic environment. General economic factors, including the real estate prices, credit environment for MSEs, interest rate environment and unemployment rates, may affect borrowers’ willingness to seek home equity loans and/or repayment capability. For example, significant increase in interest rates could cause prospective borrowers to defer obtaining loans as they wait for interest rates to decrease. Additionally, a slowdown in the economy, resulting in a rise in the unemployment rate and/or a decrease in real income, may affect MSEs’ revenue. All these factors may affect borrowers’ repayment capability and their willingness to seek loans, which may potentially affect delinquency ratios. Further, the COVID-19 outbreak had and may continue to have a negative impact on China’s macroeconomic environment which may continue to result in a material negative impact on our business and results of operations. For details, please see “Item 3.D. Key Information—Risk Factors—Risks Related to Our Business—We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.” Government regulations and policies The regulatory environment for China’s financial market is developing and evolving, creating both challenges and opportunities that could affect our financial performance. We must adapt to developments in regulations and policies and may have to adjust our business practices, funding structures and product offerings from time to time. For an overview of applicable laws and regulations and risks relating to our business, see the sections headed “Item 4. Information of the Company—B. Business Overview—Regulation” and “Item 3. Key Information—D. Risk Factors.” Loan Performance Data and Trend Analysis Our operating results and financial condition are directly affected by the performance of the loans we originate. We focus mainly on the NPL ratio as home equity loans over 90 days past-due are more difficult and time-consuming to recover. Loan performance metrics (including loans held for sale)* Delinquency ratio (1) NPL ratio (2) Allowance ratio (3) NPL provision coverage ratio (4) Loan performance metrics (excluding loans held for sale) Delinquency ratio (1) NPL ratio (2) Allowance ratio (3) NPL provision coverage ratio (4) Notes: As of and for the Year Ended December 31, 2021 2022 2020 23.70% 12.89% 7.06% 54.76% 26.22% 11.93% 10.98% 92.03% 33.22% 16.95% 9.23% 52.27% As of and for the Year Ended December 31, 2021 2022 2020 17.22% 6.06% 6.71% 110.68% 16.17% 2.13% 10.36% 487.21% 18.26% 1.12% 8.22% 720.38% (1) Delinquency ratio represents total balance of outstanding loan principal for which any installment payment is one or more days past-due as a percentage of the outstanding loan principal as of the date. (2) NPL ratio represents total balance of outstanding loan principal for which any installment payment is over 90 calendar days past-due as a percentage of the outstanding loan principal as of the date. (3) Allowance ratio represents amount of allowance for loan principal, interest and financing service fee receivables as a percentage of the outstanding loan principal, interest and financing service fee receivables as of the date. (4) NPL provision coverage ratio represents amount of allowance for loan principal, interest and financing service fee receivables as a percentage of the outstanding balance of NPL principal as of the date. * Certain December 31, 2020 and 2021 amounts in loans held-for-sale have been corrected for an immaterial error identified. Please refer to Note 2(w) to Consolitated Financial Statement on page F-31. 85 Our delinquency ratio has increased from 23.70% as of December 31, 2020 to 26.22% as of December 31, 2021, and further increased to 33.22% as of December 31, 2022. The increase in the delinquency ratio from December 31, 2021 to December 31, 2022 was due to the fact that the borrowers’ ability to service their debts was negatively affected in 2022 due to strict prevention and control policies taken to contain the COVID-19 pandemic. Our NPL ratio had decreased from 12.89% as of December 31, 2020 to 11.93% as of December 31, 2021, and increased to 16.95% as of December 31, 2022. The increase of NPL ratio from December 31, 2021 to December 31, 2022 was primarily attributable to the fact that the pandemic prevention and control measures taken in 2022 has negatively impacted the efficiency of bad debt collection and legal proceedings against borrowers at default. Our allowance ratio has increased from 7.06% as of December 31, 2020 to 10.98% as of December 31, 2021, and decreased to 9.23% as of December 31, 2022, while our NPL provision coverage ratio has increased from 54.76% to 92.03% and decreased to 52.27% as of the same dates. Decreases in allowance ratio and NPL provision coverage ratio from December 31, 2021 to December 31, 2022 were primarily attributable to the decrease in the amount of loans charged off resulting form an increase in the amount of loans held-for-sale. In 2020, the Company revised its charge-off policy. Upon the revision, the Company considers loans principal, interest and financial service fee receivables of loans that are 180 days past due uncollectable and the balance shall be charged down to net realizable value (fair value of collaterals, less estimated cost to sell), unless such loans are well-secured and already in the process of re-collection. The tables below illustrate the delinquency and NPL ratios for loans introduced under the collaboration model and the loans under the traditional facilitation model by first lien and second lien as of December 2020, 2021 and 2022, respectively, presented based on the revised charge-off policy. (Including loans held for sale) First lien Delinquency Ratio NPL Ratio Second lien Delinquency Ratio NPL Ratio (Excluding loans held for sale) First lien Delinquency Ratio NPL Ratio Second lien Delinquency Ratio NPL Ratio (Including loans held for sale)* First lien Delinquency Ratio NPL Ratio Second lien Delinquency Ratio NPL Ratio As of December 31, 2022 The traditional facilitation model The collaboration model Total 94.87% 87.44% 36.43% 36.41% 39.77% 21.15% 30.92% 14.86% 40.08% 21.59% 30.98% 15.09% As of December 31, 2022 The traditional facilitation model The collaboration model Total 71.82% 30.99% 2.92% 2.89% 21.83% 1.06% 17.69% 1.14% 21.84% 1.11% 17.57% 1.16% As of December 31, 2021 The traditional facilitation model The collaboration model Total 76.88% 60.67% 77.87% 67.30% 31.65% 15.62% 21.23% 8.04% 32.62% 16.59% 22.07% 8.92% * Certain December 31, 2021 amounts in loans held-for-sale have been corrected for an immaterial error identified. Please refer to Note 2(w) to Consolitated Financial Statement on page F-31. 86 (Excluding loans held for sale) First lien Delinquency Ratio NPL Ratio Second lien Delinquency Ratio NPL Ratio (Including loans held for sale)* First lien Delinquency Ratio NPL Ratio Second lien Delinquency Ratio NPL Ratio As of December 31, 2021 The traditional facilitation model The collaboration model Total 49.66% 14.39% 46.04% 20.27% 18.93% 2.96% 14.09% 1.42% 19.29% 3.10% 14.31% 1.55% As of December 31, 2020 The traditional facilitation model The collaboration model Total 47.73% 39.01% 44.26% 32.92% 19.24% 8.12% 16.61% 5.71% 25.49% 14.90% 22.33% 11.34% * Certain December 31, 2020 amounts in loans held-for-sale have been corrected for an immaterial error identified. Please refer to Note 2(w) to Consolitated Financial Statement on page F-31. (Excluding loans held for sale) First lien Delinquency Ratio NPL Ratio Second lien Delinquency Ratio NPL Ratio As of December 31, 2020 The traditional facilitation model The collaboration model Total 35.21% 24.39% 33.34% 19.82% 14.07% 3.06% 12.66% 1.86% 18.18% 7.21% 16.51% 5.20% We have ceased facilitating loans under the traditional facilitation model starting from December of 2018 and started to transfer loans under the traditional facilitation model to third parties in bulk in 2021, which has caused the delinquency ratio and NPL ratio of loans under the traditional facilitation model to rise from 2020 to 2022. As of December 31, 2022, loans under the traditional facilitation model are all transfered by third parties in installment and classified as loans held for sale. The balance of outstanding loan principal under the traditional facilitation model was relatively small and constitue an immaterial proportion to the overall loan portfolio. We believe such ratios do not accurately reflect the loan performance and could no longer be used as a measure of our risk assessment and post-loan management abilities. 87 The following tables illustrate the amount of loans (excluding loans held for sale) we facilitate by collateral type for which we have an allowance determined based on the fair value of collateral, less cost to sell and the related allowance for credit losses for each applicable collateral category as of December 31, 2020, 2021 and 2022, respectively. Apartment House Commercial Property Total Apartment House Commercial Property Total Apartment House Commercial Property Total As of December 31, 2022 (RMB in thousands) Loan Allowance 86,717 - 15,847 102,564 12,248 - - 12,248 Allowance Ratio 14.1% - - 11.9% As of December 31, 2021 (RMB in thousands) Loan Allowance 193,021 3,824 3,159 200,004 60,308 729 443 61,480 Allowance Ratio 31.2% 19.1% 14.0% 30.7% As of December 31, 2020 (RMB in thousands) Loan Allowance 484,354 18,520 45,274 548,148 64,125 2,866 5,007 71,998 Allowance Ratio 13.2% 15.5% 11.1% 13.1% Increases in allowance ratio from December 31, 2020 to December 31, 2021 were primarily attributable to the current expected credit loss (CECL) model that took into account the COVID-19 pandemic’s continuous impact on the repayment abilities of borrowers. Decreases in allowance ratio from December 31, 2021 to December 31, 2022 were primarily attributable to the increase of delinquent loans that were repurchased by sales partners by installment. We incur losses and charge-off loans when we determine that the loan is uncollectable. We consider loans principal, interest and financing service fee receivables meeting any of the following conditions as uncollectible and the balance shall be written down to net realizable value (fair value of collaterals, less estimated cost sell): (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments; (iii) sales of loans to third parties; (iv) settlement with the borrower, where the Company releases irrecoverable loans through private negotiations with the borrower where the borrower cannot repay the loan in full through self-funding or voluntary sale of the collateral; (v) disposal through legal proceedings, including but not limited to online arbitrations, judicial auctions and court enforcements; or (vi) loans are 180 days past due unless both well-secured and in the process of collection. The following table sets forth our charge-off ratio for the periods indicated. For the Year Ended December 31, 2021 2020 2022 Charge-off ratio 4.06% 0.85% 0.43% Our charge-off ratio was 4.06%, 0.85% and 0.43% in 2020, 2021 and 2022. The increase of charge-off ratio in 2020 was mainly attributable to the revision of the Company’s charge-off policy in 2020 as mentioned above. We continue to dispose of collateral through judicial or arbitration proceedings and utilize other quick disposal plans available to manage NPLs. Meanwhile, we also transfer loans to third parties in exchange for proceeds upfront to quickly recover overdue loans, and the related gains or losses from such sale will be accounted for as other gains/(losses) in our consolidated statements of comprehensive income. 88 The tables below set forth the amortized cost of the loans (including loans held for sale) that were resolved by the different charge-off scenario above, the allowances recorded on those loans at the time of charge-off, additional provision for loan losses recorded at the time of the time of the scenario, in addition to the charge-off amounts as of December 31, 2020, 2021 and 2022: Sales of loans to third parties(2) Settlement with the borrower Disposal through legal proceedings Death of the borrower Identification of fraud Loans that are 180 days past due(3) Total Sales of loans to third parties(2) Settlement with the borrower Disposal through legal proceedings Death of the borrower Identification of fraud Loans that are 180 days past due(3) Total Sales of loans to third parties(2) Settlement with the borrower Disposal through legal proceedings Death of the borrower Identification of fraud Loans that are 180 days past due(3) Total Notes: Charge-off As of December 31, 2022 Amortized cost of the loans Allowance Additional provision(1) RMB in thousands 4,943 50 7 - - 41,599 46,600 12,518 83 679 - - 50,879 63,388 15,208 - - - - 195,582 211,552 (3,861) - - - - (10,106) (13,966) Charge-off As of December 31, 2021* Amortized cost of the loans Allowance RMB in thousands Additional provision(1) 10,610 2,827 5,633 - - 67,615 86,685 67,409 94,074 53,258 - - 1,041,370 1,256,111 26,858 16,385 1,732 - - - 44,975 (643) (3,196) (1,514) - - - (5,353) Charge-off As of December 31, 2020* Amortized cost of the loans Allowance RMB in thousands Additional provision(1) 32,654 12,017 8,610 - - 374,798 428,079 44,173 71,333 17,437 - - 1,128,557 1,261,500 21,081 24,699 16,170 - - - 61,950 (2,550) (4,232) (1,877) - - - (8,659) * Certain December 31, 2020 and 2021 amounts in loans held-for-sale have been corrected for an immaterial error identified. Please refer to Note 2(w) to Consolitated Financial Statement on page F-31. (1) Additional provisions refer to the total amount of additional losses of individual loans, which is beyond what was already recorded in the allowance for credit losses at the point of charge-off in different scenarios. (2) The loans sold to third parties are generally the ones that are over 90 days past due, which we have made a commercially reasonable effort to collect. In order to efficiently allocate resources and timely collect funds on impaired loans, we believe it is effective and efficient to sell certain loans that are over 90 days past due to third parties as we can save relevant costs that may occur during the time-consuming collection process. The delinquent loans are generally sold in bulk. The purchasers are all third parties and consist of (i) sales partners who choose to repurchase the delinquent loans they introduced according to their agreements signed with us, and (ii) local investment asset management companies, experienced law firms or other entities with legal, collection and disposal teams to handle delinquent loans and relevant collaterals. We have two approaches for the sale of loans to third parties, including (i) the sale that we do not retain any rights or obligations and such loans will be charged off from our balance sheet at the point of the sale and (ii) the sale that we retain certain rights or obligations such as an obligation to repurchase the loans after a certain period, and such loans sold are recorded as borrowings under agreements to repurchase in our balance sheet. (3) In 2020, the Company revised its charge-off policy. Upon the revision, the Company considers loans principal, interest and financial service fee receivables of loans that are 180 days past due uncollectable and the balance shall be charged down to net realizable value (fair value of collaterals, less estimated cost to sell), unless such loans are well-secured and already in the process of recollection. 89 Selected Income Statement Items Total operating income Our total operating income represents the sum of (i) net interest and fees income after collaboration cost and (ii) total non-interest income. Net interest and fees income after collaboration cost represents total interest and fees income netting of total interest and fees expenses and collaboration cost for sales partners. In 2020, 2021 and 2022, we generated net interest and fees income after collaboration cost of RMB708.4 million, RMB614.6 million and RMB683.3 million (US$99.1 million), respectively. Total non-interest income/(losses) comprises net gains/(losses) on sales of loans, net realized gains on sales of investments and other gains, net. In 2020, 2021 and 2022, we generated total non-interest income of RMB206.9 million, non-interest losses of RMB438.4 million and non-interest income of RMB65.9 million (US$9.6 million), respectively. Under the contractual arrangements with our trust company partners, we subscribe to subordinated units of the trust plans and also provide services to trust plans. As a result, we are entitled to (i) the investment return payable to us as subordinated holder and (ii) a performance-based service fee of up to 7% per annum of the size of trust plans payable to us for our services provided to trust plans. As subordinated unit holder, we are exposed to variability of returns from activities of trust plans and are therefore required to consolidate the financial results of trust plans. Therefore, the service fee charged to trust plans is considered inter-company transaction and is eliminated together with service expenses of trust plans for accounting purposes. As a result, the total payments to us under our trust lending model, together with the interest spread under our small loan direct lending model and certain non-interest income, is reflected on our consolidated financial statements as total operating income. The following table sets forth a breakdown of our total operating income for the periods indicated. For the Year Ended December 31, 2020* RMB 2021* RMB 2022 RMB US$ Interest and fees income(1) Interest and fees expenses(2) Net interest and fees income Net revenue under the commercial bank partnership model(3) Collaboration cost for sales partners Net interest and fees income after collaboration cost Non-interest income/(losses) Realized gains on sales of investments, net Net losses on sales of loans Other gains, net(1) (4) Total non-interest (losses)/income Total operating income Note: (731,315,365) 1,854,823,409 1,815,773,980 1,731,352,575 251,022,527 (784,776,537) (113,781,902) 946,576,038 137,240,625 8,344,111 (775,565,615) 1,123,508,044 1,040,208,365 107,072 - 57,551,005 (415,104,428) 708,403,616 (425,736,650) 614,578,787 (320,826,549) 683,300,494 (46,515,477) 99,069,259 20,153,659 (50,606,487) 9,760,472 (20,692,356) 687,711,260 19,170,436 (479,584,775) 22,061,842 (438,352,497) 176,226,290 20,566,672 2,981,887 (44,554,948) (6,459,860) 89,914,038 13,036,310 9,558,337 65,925,762 749,226,256 108,627,596 * We have identified an immaterial error and corrected the amounts of loans held-for-sale, guaranteed assets, provision for credit losses and net gains on sales of loans in the comparative period presentation. For details, see Note 2(w) to Consolitated Financial Statements on page F-31. (1) Interest and fees income include (i) interest and financing service fees on loans, (ii) interest income on debt securities, (iii) interest income charged to sales partners, and (iv) interest on deposits with banks. The interest income charged to sales partners in 2020 and 2021 was immaterial and was previously presented as “fund possession fee” under “other gains/(losses), net”. The interest income on debt securities was nil in 2020 and 2021. (2) Interest and fees expenses refer to interest expenses on interest-bearing borrowings. (3) The Company has started to collaborate with commercial banks since 2021 and such collaboration grew and scaled in the second half of 2022. (4) Certain provision for guarantee liabilities in 2021 was immaterial and presented under “other gains, net”. Provision for guarantee liabilities has been reclassified from “other gains, net” to “provision for credit losses” in 2022. 90 Interest and fees income Interest and financing service fees on loans Our interest and financing service fees on loans represents interest payment from borrowers under our trust lending model and direct lending model, and historical financing service fee charged on borrowers for the loan services we provide. Financing service fee is deferred and amortized over the average life of the related loans using the effective interest method. Due to recent regulatory changes, we ceased charging such financing service fee starting from August 2017. Interest income on debt securities Interest income on debt securities is calculated by applying the effective interest rate to the gross carrying amount of debt securities to unrelated companies plus any interest received from corporate debt securities. Interest income charged to sales partners In the event of a loan defaults and the sales partner chooses to repurchase such loan in installments, the Company charges certain percentage of the loan as the interest income charged to sales partners. Interest income charged to sales partners refers to the cost of and interest on the partner's 40% repayment and instalment repurchase options under collaboration model. Interest on deposits with banks Our interest on deposits with banks represents interest generated from our cash deposits with banks. Interest and fees expenses We recorded interest and fees expenses of RMB731.3 million, RMB775.6 million and RMB784.8 million (US$113.8 million) in 2020, 2021 and 2022, respectively. Our interest and fees expenses consists of interest expenses on interest-bearing borrowings and interest expenses paid to related parties. In 2020, 2021 and 2022, the interest expenses on interest-bearing borrowings was RMB731.3 million, RMB775.6 million and RMB784.8 million (US$113.8 million), accounting for 100%, 100% and 100%, respectively, of our total interest and fees expenses for the same periods. Interest expenses on interest-bearing borrowings Interest expenses on interest-bearing borrowings consists primarily of financing costs payable to (i) senior unit holders, (ii) third parties to whom we transferred rights to earnings in certain of our subordinated units in trust plans with a repurchase arrangement, and (iii) third parties to whom we transferred certain rights to earnings in loans principal, interest and financing service fee receivables with a repurchase arrangement. Net revenue under the commercial bank partnership model Net revenue under the commercial bank partnership model represents fees charged to commercial banks for services including introducing borrowers, initial credit assessment, facilitating loans from the banks to the borrower and providing technical assistance to the borrower and banks, net of fees paid to third-party insurance company. Revenues from loan facilitation services (covering matching of commercial banks to borrowers and facilitating the execution of loan agreement between commercial banks and borrowers) are recognized at the time a loan is originated, at which time the facilitation service is considered completed. Revenues from post-origination services (covering cash processing services and collection services) are recognized on a straight-line basis over the term of the underlying loans as the services are provided. The Group provided guarantee services for its off-balance sheet loans under the commercial bank partnership model. As a result, at inception of the guarantee, the Group recognized a stand-ready guarantee liability under ASC 460 at fair value with an associated guarantee receivable. Subsequently, the stand-ready guarantee is released into gains from guarantee liabilities on a straight-line basis over the term of the guarantee. See Note 20 in our Consolidated Financial Statements for more details. Collaboration cost for sales partners Collaboration cost for sales partners represents sales incentives paid to sales partners. It has decreased from RMB425.7 million in 2021 to RMB320.8 million (US$46.5 million) in 2022, primarily due to a lower average fee rate the Company paid to sales partners in the fiscal year of 2022 as compared to the same period of 2021. The fee rate under collaboration model varies based on different collaboration model types and the terms of the loan. 91 Non-interest income/(losses) Realized gains on sales of investments Realized gains on sales of investments consist of realized gains and losses from the disposal of investment securities, presented on a net basis. Net gains/(losses) on sales of loans Net gains/(losses) on sales of loans refer to any gains and losses from the disposal of loans. Other gains, net Other gains, net mainly consists of gains of confiscating CRMPs. Particularly, in the event of a loan defaults and the sales partner chooses to repurchase such loan in installments, the Company charges certain percentage of the loan as the interest income charged to sales partners. The interest income charged to sales partners was previously presented as “fund possession fee” under “other gains/(losses), net”, and is separately listed as “interest income charged to sales partners” since third quarter of 2022 due to an increase in its absolute amount. Operating expenses Our operating expenses consist of employee compensation and benefits, share-based compensation expenses, taxes and surcharges, operating lease cost, offering expenses and other expenses. The following table sets forth our operating expenses, in absolute amounts and as percentages of total operating income, for the periods indicated. 2020 2021 RMB % RMB % RMB 2022 US$ % For the Year Ended December 31, Operating expenses Employee compensation and benefits Share-based compensation expenses Taxes and surcharges Operating lease cost Other expenses Total operating expenses 190,374,014 27.7% 211,168,519 119.8% 197,035,872 28,567,516 26.3% 62,073,367 49,452,609 21,719,042 124,042,182 447,661,214 9.0% 18,766,367 7.2% 35,729,101 3.2% 14,764,364 18.0% 100,500,388 65.1% 380,928,739 837,190 10.6% 5,774,266 5,203,671 20.3% 35,890,761 8.4% 13,966,943 2,025,016 57.0% 85,889,497 12,452,807 216.2% 338,557,339 49,086,200 0.8% 4.8% 1.9% 11.5% 45.2% Other expenses primarily consist of (i) advertising and promotion expenses; (ii) litigation fees; (iii) consulting fees; (iv) research and development expenses; (v) office and commute expenses, which mainly include expenses relating to office renovation, office facility expansion and daily commute; (vi) attorney fees and (vii) entertainment and traveling expenses. The following table sets forth breakdown of other expenses in absolute amounts and as percentages of total operating income, for the periods indicated. 2020 2021 RMB % RMB % RMB 2022 US$ % For the Year Ended December 31, Other expenses Advertising and promotion expenses Litigation fees Entertainment and traveling expenses Office and commute expenses Consulting fees Attorney fees Communication expenses Depreciation and amortization Directors and officers liability insurance Research and development expenses Others Total other expenses 30,471,983 24,764,412 4.4% 29,171,942 3.6% 12,019,673 16.6% 32,412,727 6,291,273 6.8% 4,699,404 912,149 7,010,704 9,120,261 14,486,656 8,503,270 2,495,071 6,047,226 1.0% 10,793,089 1.3% 10,711,801 9,330,732 2.1% 6,678,111 1.2% 3,861,529 0.4% 3,821,788 0.9% 9,740,873 6.1% 6.1% 7,791,694 5.3% 12,016,260 1,389,360 3.8% 2,424,242 2.2% 2,244,279 2.2% 1,412,294 1,129,689 1,742,194 201,438 351,482 325,390 4,232,722 0.6% 3,545,117 2.0% 3,474,151 503,705 9,960,607 6,949,270 124,042,182 1,602,095 1.4% 1.0% 8,964,511 18.0% 100,500,388 110,257 0.9% 5.1% 1,064,805 57.0% 85,889,497 12,452,807 760,465 7,344,173 4.3% 0.8% 1.3% 1.0% 1.6% 0.2% 0.3% 0.3% 0.5% 0.1% 1.0% 11.5% 92 Taxation Cayman Islands We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands. British Virgin Islands Under the current laws of the British Virgin Islands, our company is not subject to tax on income or capital gains. In addition, upon payments of dividends by our British Virgin Islands subsidiaries to their shareholders, no British Virgin Islands withholding tax will be imposed. Hong Kong Our wholly owned subsidiary, China Financial Services Group Limited, is subject to Hong Kong profits tax on their activities conducted in Hong Kong at a uniform tax rate of 16.5%. Payments of dividends by our subsidiaries to us are not subject to withholding tax in Hong Kong. PRC Our subsidiaries and their subsidiaries in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the PRC Enterprise Income Tax Law (the “EIT Law”), which became effective on January 1, 2008, and most recently amended on December 29, 2018, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. For example, enterprises qualified as “High and New Technology Enterprises” are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. According to the Notice of the Ministry of Finance and the SAT on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner, which became effective on May 1, 2016, as amende on March 20, 2019, entities and individuals engaged in the sale of services, intangible assets or fixed assets within the PRC territory are required to pay value-added tax instead of business tax. Following the implementation of the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax, or the VAT Pilot Plan, most of our PRC subsidiaries and affiliates have been subject to VAT, at a rate of 1% (pursuant to the regulatory development in 2020 in response to the COVID-19 pandemic), 3% or 6%, instead of business tax. As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries through China Financial Services Group Limited. The PRC EIT Law and its implementing rules provide that dividends paid by a PRC entity to a nonresident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Hong Kong Tax Treaty, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. On January 1, 2020, the State Administration of Taxation issued the Announcement of the State Taxation Administration on Issuing the Administrative Measures for Entitlement to Treaty Benefits for Non-resident Taxpayers, which replaced the Administrative Measures for Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60. The Announcement changed the reporting requirement into collecting, gathering and retaining relevant materials for future reference in accordance with the provisions of these Measures in order to accept the follow-up administration of tax authorities. At the same time, the Announcement adjusts the definition of non-resident taxpayer to make it more accurate, which refers to taxpayers who shall be tax residents of the other contracting party in accordance with the provisions of the clauses on residents of the tax treaties. The SAT promulgated the Announcement on Certain Issues Concerning the Beneficial Owner in a Tax Agreement, or Circular 9, on February 3, 2018, effective as April 1, 2018, which provides guidance for determining whether a resident of a tax treaty country is the “beneficial owner” of income under China’s tax treaties and similar arrangements. 93 China Financial Services Group Limited may be able to benefit from the 5% withholding tax rate for the dividends it receives from our PRC subsidiaries if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. In addition, according to Circular 9, a beneficial owner shall generally engage in substantial business activities, and an agent shall not be considered a beneficial owner and, therefore, shall not qualify for those benefits. It is possible, however, under Circular 9, China Financial Services Group Limited would not be considered the “beneficial owner” of any such dividends, and that such dividends would as a result be subject to withholding tax at the rate of 10% rather than the favorable 5% rate applicable under the Hong Kong Tax Treaty. If our holding company in the Cayman Islands or any of our subsidiaries outside China were deemed to be a “resident enterprise” under the PRC EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.” Critical Accounting Policies, Judgments and Estimates We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report. Our consolidated financial statements include the results of the trust plans as the trust lending model creates exposure to variability of returns from the activities of the trust plans. All intercompany transactions and balances, including payment of service fees from trust plans to us, are eliminated in consolidation. Revenue recognition Interest and financing service fees on loans which are amortized over the contractual life of the related loans are recognized in consolidated statements of comprehensive income in accordance with Accounting Standard Codification (“ASC”) 310 using the effective interest method. In accordance with the relevant guidance in ASC Topic 606, the amounts associated with guarantee services under commercial bank partnership model is within the scope of ASC Topic 460 and should be accounted for in accordance with the provisions of that Topic. The services not within the scope of other Topics should be accounted for in accordance with the remaining provisions of ASC Topic 606 and the applicable revenue recognition guidance. Also, mortgage agency service revenue, asset management revenue and revenue from rendering of services are recognized in accordance with ASC 606 when following conditions are met: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The criteria of revenue recognition as they relate to each of the following major revenue generating activities are described below: Interest and financing service fees on loans Interest and financing service fees on loans, which include financing service fees on loans, are collected from borrowers for loans and related services. Interest and financing service fees on loans includes the amortization of any discount or premium or differences between the initial carrying amount of an interest-bearing asset and its amount at maturity calculated using the effective interest basis. The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating the interest and financing service fees on loans over the years. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. When calculating the effective interest rate, we estimate cash flows considering all contractual terms of the financial instrument but do not consider future credit losses. Interest on the impaired assets is recognized using the rate of interest used to discount future cash flows. 94 Interest income on debt investment Interest income on debt securities is calculated by applying the effective interest rate to the gross carrying amount of debt securities to unrelated companies plus any interest received from corporate debt securities. Revenue under commercial bank partnership model In accordance with the relevant guidance in ASC Topic 606, the amounts associated with guarantee services under commercial bank partnership model is within the scope of ASC Topic 460 and should be accounted for in accordance with the provisions of that Topic. The services not within the scope of other Topics should be accounted for in accordance with the remaining provisions of ASC Topic 606 and the applicable revenue recognition guidance. The Group considers loan facilitation services under commercial bank partnership model (covering matching of commercial banks to borrowers and facilitating the execution of loan agreement between commercial banks and borrowers) and post-facilitation services under commercial bank partnership model (covering cash processing services and collection services) as two distinctive performance obligations in accordance with ASC Topic 606. The transaction price is first allocated to guarantee services under commercial bank partnership model, if any, which is recorded at fair value and recognized amortized during the guarantee term in accordance with ASC Topic 460. Then the remaining considerations are allocated to the loan facilitation under commercial bank partnership model and post-facilitation services under commercial bank partnership model using their relative standalone selling prices. When estimating total consideration, the Group considers early termination scenarios based on historical early payment and other termination scenarios as the Group can not receive the full contractual service fee amount under early termination, given the service fee is collected on a pro-rata basis upon early loan termination. Such service fee is determined to be variable consideration that meets the “probable of not reversing” threshold. As such, the Group recognizes revenue related to early termination based on its best estimate and true up adjustments are made from time to time. The Group does not have observable standalone selling price for the loan facilitation services or post-facilitation services because it does not provide loan facilitation services or post-facilitation services on a standalone basis in similar circumstances to similar customers. There is no direct observable standalone selling price for similar services in the market that is reasonably available to the Group. As a result, the estimation of standalone selling price involves significant judgment. The Group uses an expected cost plus margin approach to estimate the standalone selling prices of loan facilitation services and post facilitation services as the basis of revenue allocation. When estimating the selling prices, the Group considers the cost related to such services, profit margin, customer demand, effect of competition on services, and other market factors, among which estimates of the cost of providing the services is the most significant. The transaction price allocated to loan facilitation services is recognized as revenue upon execution of loan agreements between commercial banks and borrowers; the consideration allocated to post-facilitation services is recognized over the period of the loan on a straight-line method, which approximates the pattern of when the underlying services are performed. Remaining performance obligations represents the amount of the transaction price for which services have not been performed under post-facilitation services. The Group collects service fees monthly. The aggregate amounts of the transaction price allocated to performance obligations that are unsatisfied pertaining to post-origination services were RMB67.08 million as of December 31, 2022, among which 64.6% of the remaining performance obligations will be recognized over the following 12 months, and with the remainder recognized thereafter. Mortgage agency service revenue We earn mortgage agency service revenue from providing mortgage agency services to borrowers applying for a bank loan. Mortgage agency service fee is often received immediately or shortly after establishing contracts with customers. This kind of revenue is recognized at the time when loan is granted as that is the point of time we fulfill the customer’s request, and is then recognized on an accrual basis in accordance with the terms of the relevant agreements. Realized gains/(losses) on sales of investments Realized gains/(losses) consist of realized gains and losses from the sale of investment securities, presented on a net basis. 95 Net gains/(losses) on sales of loans Net gains/(losses) on sales of loans refer to any gains and losses from the disposal of loans which is accounted for as a sale under ASC 860. Gains on confiscation of CRMPs Gains on confiscation of CRMPs are recognized to the extent confiscated CRMPs exceed previously recognized allowance for loan losses and guarantee asset when sales partners surrender the CRMPs and the obligation of refunding the CRMPs is released. Loans (i) On-balance sheet loans Loans are reported at their outstanding principal balances net of any unearned income and unamortized deferred fees and costs. Loan origination fees and certain direct origination costs are generally deferred and recognized as adjustments to income over the lives of the related loans. We facilitate credit to borrowers through structured funds which are considered as consolidated VIEs and we evaluated VIEs for consolidation in accordance with ASC 810. Although we have ceased providing credit enhancement and top-up arrangements since March 2018 and all the remaining loans under such arrangement had been transferred in 2021 and substantially all of such remaining loans had been paid off in 2022, we, as the subordinated unit holder, still provide credit strengthening services and are responsible to ensure sufficient capital to repay the principal amount and the agreed financing costs for the senior units, we also act as the manager of the structured funds, those are the two key factors to determine whether we should consolidate the structured funds. As a result, the loan principal remains on our consolidated balance sheets, whilst the funds received from senior tranches holders are recorded as Other Borrowings in our consolidated balance sheets. Non-accrual policies Loans principal, interest and financing service fee receivables are placed on non-accrual status when payments are 90 days contractually past due. When a loan principal, interest and financing service fee receivable is placed on non-accrual status, interest and financing service fees accrual ceases. If the loan is non-accrual, the cost recovery method is used and cash collected is applied to first reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Loans principal, interest and financing service fee receivables may be returned to accrual status when all of the borrower’s delinquent balances of loans principal, interest and financing service fees have been settled and the borrower continues to perform in accordance with the loan terms for a period of at least six months. Charge-off policies For the years ended December 31, 2018 and 2019, the Group considered loans principal, interest and financing service fee receivables meeting any of the following conditions as uncollectible charged off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments or (iii) the Group concludes that it has exhausted its collection efforts. In order to align the Group’s charge-off policies with ASC 326-20-35-8 (superseded ASC 310-10-35-41), the Group revised its charge-off policies to (1) provide additional information as to the collection efforts which must be exhausted before a charge-off is recorded and (2) charge down loans that are 180 days past due to net realizable value (fair value of collaterals, less estimated costs to sell) unless both well-secured and in the process of collection. The revised charge-off policies are presented as follows: Loans principal, interest and financing service fee receivables are charged down to net realizable value (fair value of collaterals, less estimated costs to sell) when the Group has determined the remaining balance is uncollectable after exhausting all collection efforts. In order to comply with ASC 310 and ASC 326, the Group considers loans principal, interest and financing service fee receivables meeting any of the following conditions as uncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments; (iii) sales of loans to third parties; (iv) settlement with the borrower, where the Group releases irrecoverable loans through private negotiations with the borrower where the borrower cannot repay the loan in full through self-funding or voluntary sale of the collateral; (v) disposal through legal proceedings, including but not limited to online arbitrations, judicial auctions and court enforcements; or (vi) loans are 180 days past due unless both well- secured and in the process of collection. 96 Allowance for credit losses Allowance for credit losses represents management’s best estimate of probable losses inherent in the portfolio. Commencing January 1, 2020, CNFinance adopted ASC 326, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology for determining the provision for credit losses and allowance for credit losses (“ACL”) with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model. ASC 326 defines the ACL as a valuation account that is deducted from the amortized cost of a financial asset to present the net amount that management expects to collect on the financial asset over its expected life. All financial assets carried at amortized cost are in the scope of ASC 326, while assets measured at fair value are excluded. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses. The allowance for credit losses includes an asset-specific component and a statistically based component. The Company aggregate loans sharing similar risk characteristics into pools for purposes of measuring expected credit losses. Pools are reassessed periodically to confirm that all loans within each pool continue to share similar risk characteristics. Expected credit losses for loans that do not share similar risk characteristics with other financial assets are measured individually. Estimation of CECLs requires CNFinance to make assumptions regarding the likelihood and severity of credit loss events and their impact on expected cash flows, which drive the probability of default (PD), loss given default (LGD) and exposure at default (EAD) models. In its loss forecasting framework, ECL is determined primarily by utilizing models for the borrowers’ PD, LGD and EAD and the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, gross-domestic product rates, interest rates and consumer price indexes. The ACL for financial assets held at amortized cost is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected. When credit expectations change, the valuation account is adjusted with changes reported in provision for credit losses. If amounts previously charged off are subsequently expected to be collected, we may recognize a negative allowance, which is limited to the amount that was previously charged off. The asset-specific component is calculated under ASC 310-10-35, on an individual basis for the loans whose payments are contractually past due more than 90 days or which are considered impaired. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When a collateral-dependent financial asset is probable of foreclosure, we will measure the ACL based on the fair value of the collateral and we will measure the ACL based on the collateral’s net realizable value (fair value of collateral, less estimated costs to sell). Under the collaboration model, when the Group grants loans through Trust Plan, the loan is with the borrower and guarantee is entered into with a separate counterparty (the sales partner). As such, under the definition of ASC 326-20-20, the guarantee arrangement and lending arrangement would be considered freestanding arrangements. As sale partners will provide guarantee of the entire loan to the Group, collection for loss is probable and estimable when a loss on an insured loan is incurred and recognized. In this case, the Group will recognize guarantee loss recoverable asset in the amount that the Group determines is probable to receive from the guarantor with an offsetting entry to “provision for credit losses” when the Group concludes that the loss recovery is collectible. However, potential recovery that exceeds the recognized loss, if any, (gain contingency) will not be recognized until cash is received. Therefore, the amounts estimated to be recoverable from the proceeds of guarantees will be reported as a separate asset (guarantee asset) in the balance sheet. The increase in guaranteed recoverable assets are included in the income statement as a reduction of the “provision for credit losses,” separate disclosure of the increase in guaranteed recoverable assets will be included in the rollforward of the “allowance for credit losses.” The income statement caption will be modified as “Provision for credit losses, net of increase in increase in guaranteed recoverable assets. 97 Loans held-for-sale Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. The valuation is performed on an individual loan basis. Loan origination fees or costs and purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred fees or costs and discounts or premiums are an adjustment to the basis of the loan and therefore are included in the periodic determination of the lower of cost or fair value adjustments. The loan is derecognized if the Group does not retain any risk and rewards after transferring the loan. Such transfer would be recorded as sales according to ASC 860-10-40-5. At the time of derecognition, any related loan loss allowance is released. Gains and losses on loans transfer as a sale are recognized in the non-interest income. (ii) Off-balance sheet loans For loans funded by the proceeds from third-party commercial banks, each underlying loan and borrower has to be approved by the third-party commercial banks individually. Once the loan is approved by and originated by the third-party commercial bank, the fund is provided by the third-party commercial bank to the borrower and a lending relationship between the borrower and the third-party commercial bank is established through a loan agreement. Effectively, the Group offers loan facilitation services to the borrowers who have credit needs and the commercial banks who originate loans directly to borrowers referred by the Group. The Group continues to provide post-origination services to the borrowers over the term of the loan agreement. Under this scenario, the Group determines that it is not the legal lender or borrower in the loan origination and repayment process. Accordingly, the Group does not record loans principal, interest and financing service fee receivables arising from these loans nor interest-bearing borrowings to the third-party commercial banks. Income tax Income tax is accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. Share-based compensation expenses We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. We recognize compensation cost using a front-loading approach for an award with only service conditions that has a graded vesting schedule over the requisite service period for the entire award, net of estimated forfeitures, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. Forfeiture rates are estimated based on historical and future expectations of employee turnover rates. In January 2017, SFIL adopted the 2017 SFIL Share Incentive Plan, or the 2017 Plan. Under the 2017 Plan, SFIL granted 187,933,720 options to its certain management members and employees to purchase up to 187,933,720 ordinary shares. The term of the options will not exceed ten years from the date of the grant. Accordingly, 60%, 20% and 20% of the award options shall vest on December 31 of each of the years 2017 to 2019, respectively. Unless terminated earlier, the 2017 Plan will terminate automatically in 2022. On August 27, 2018, we adopted our 2018 CNFinance Holdings Limit Share Incentive Plan, or the 2018 Plan to replace the 2017 Plan and granted 187,933,720 options to certain management members and employees to purchase up to 187,933,720 of our ordinary shares under this 2018 Plan to replace the granted and outstanding options under the 2017 Plan. 98 On December 31, 2019, we granted up to 119,674,780 options to certain management members and employees to purchase up to 119,674,780 of our ordinary shares under the 2018 Plan. Such options will be considered vested as to 50%, 30%, 20% on each of December 31, 2020, December 31, 2021 and December 31, 2022, respectively, but will only be distributed to the applicable grantees based on their performance scores on December 31, 2022, subject to continued employment through such date. As of the date hereof, the options may be allocated to up to 42 employees. Vested options will expire five years from the date of vesting. Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument. We recognize the compensation costs net of estimated forfeitures over the applicable vesting period. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catchup adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. There were no market conditions associated with the share option grants. The fair value of options granted to employees is determined based on a number of factors including valuations. In determining the fair value of our equity instruments, we referred to valuation reports prepared by an independent third-party appraisal firm, based on data we provided. The valuation reports provided us with guidelines in determining the fair value of the equity instruments, but we are ultimately responsible for the determination of all amounts related to share-based compensation recorded in the financial statements. Excluding the options containing service vesting conditions, we calculated the estimated fair value of the options on the respective grant dates using a binomial option pricing model with assistance from independent valuation firms, with the following assumptions: Expected volatility Expected dividends Risk-free interest rate Expected term (in years) Expected life (in years) Share awards granted on January 3, 2017 (“2018 Option”) Share awards granted on December 31, 2019 (“2019 Option”) 40.00% — 3.10% 5 6 41.52% — 3.12% 5 8 The contractual life of the share option is used as an input into the binomial option pricing model. Exercise multiple and post-vesting forfeit are incorporated into the model. When the options of the 2018 Option were issued, our shares had not been publicly traded at the time the options were issued and our shares were rarely traded privately, expected volatility for the shares underlying such options is estimated based on the average historical volatility of comparable entities with publicly traded shares for the period before the date of grant with length commensurate to contractual life of the options. The risk-free rate for the expected term of the option is based on the yield to maturity of China’s six-year government bond at the date of grant. When the options of the 2019 Option were issued, our shares were already publicly traded. Since the shares have only been publicly traded for just over a year, the expected volatility for the shares underlying such options is estimated based on the historical volatility of comparable entities with publicly traded shares for the period before the date of grant with length commensurate to contractual life of the options. The contractual life of the options is 6 years, 7 years and 8 years, respectively. Therefore, the risk-free rate for the expected term of the options is determined based on the yield to maturity of China 5-year, 7-year and 10-year government bond, using interpolation method, at the date of grant. We have not declared or paid any cash dividends on our capital stock, and do not anticipate any dividend payments on our ordinary shares in the foreseeable future. If any of the assumptions used in the binomial option pricing model changes significantly, share-based compensation expenses for future awards may differ materially compared with the awards granted previously. The following table sets forth the fair value of options and ordinary shares estimated at the dates of option grants indicated below with the assistance from an independent valuation firm. Date of options grant January 3, 2017 Date of options grant January 3, 2017 December 31, 2019 December 31, 2019 Options granted 75,173,492 Exercise price RMB0.50 Fair value of option RMB1.26 Fair value of ordinary shares RMB1.72 Options granted 112,760,238 83,772,346 35,902,434 Exercise price RMB0.50 RMB1.00 RMB1.00 Fair value of option RMB1.27 RMB0.71 RMB0.75 Fair value of ordinary shares RMB1.72 RMB1.40 RMB1.40 99 For the option granted on January 3, 2017, the Group recognized compensation expenses of RMB39,715,168 and RMB15,886,067 in year 2018 and 2019, respectively. There was no income tax benefit recognized associated with the share-based compensation expenses. As of December 31, 2019, the expenses in relation to the 2018 Option have been fully recognized. For the 2019 Option, the Group recognized compensation expenses of RMB62,073,367, RMB18,766,367 and RMB5,774,266 in year 2020, 2021 and 2022, respectively. There was no income tax benefit recognized associated with the share-based compensation expenses. As of December 31, 2022, the expenses in relation to the 2019 Option have been fully recognized. Non-GAAP Financial Measure Adjusted Net Income We use adjusted net income, a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. We believe that adjusted net income helps identify underlying trends in our business by excluding the impact of share-based compensation expense, which are non-cash charges. We believe that adjusted net income provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making. Adjusted net income 900,623,879 550,530,009 176,925,893 2018 RMB 2019 RMB 2020 RMB 2021 RMB 83,973,831 141,125,677 2022 RMB US$ 20,461,300 For the Year Ended December 31 Adjusted net income is not defined under U.S. GAAP and is not presented in accordance with U.S. GAAP. This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, its most directly comparable financial measure prepared in accordance with U.S. GAAP. A reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP measure has been provided in the tables included below. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP financial measure. As adjusted net income has material limitations as an analytical metric and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net income as a substitute for, or superior to, net revenues prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The following table reconciles our adjusted net income for the periods presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income. Net Income Add: share-based compensation expenses Adjusted net income 860,908,711 39,715,168 900,623,879 534,643,942 15,886,067 550,530,009 114,852,526 62,073,367 176,925,893 2018 RMB 2019 RMB 2020 RMB 2022 RMB 2021 RMB 65,207,464 135,351,411 5,774,266 18,766,367 83,973,831 141,125,677 US$ 19,624,110 837,190 20,461,300 For the Year Ended December 31 100 Results of Operations The following table sets forth a summary of our consolidated statements of comprehensive income for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results in any period are not necessarily indicative of our future trends. For the Year Ended December 31, 2020 RMB 2021 RMB 2022 RMB US$ Interest and fees income Interest and fees expenses Net interest and fees income Net revenue under the commercial bank partnership model Collaboration cost for sales partners Net interest and fees income after collaboration cost Provision for credit losses Net interest and fees income after collaboration cost and provision for credit losses Realized gains on sales of investments, net Net losses on sales of loans Other gains, net Total non-interest (losses)/income Operating expenses Employee compensation and benefits Share-based compensation expenses Taxes and surcharges Operating lease cost Other expenses Total operating expenses Income before income tax expense Income tax expense Net income Earnings per share Basic Diluted Other comprehensive (losses)/income Net unrealized losses on investment securities Foreign currency translation adjustment Comprehensive income Less: net income attributable to non-controlling interests Total comprehensive income attributable to ordinary shareholders (731,315,365) 1,854,823,409 1,815,773,980 1,731,352,575 251,022,527 (784,776,537) (113,781,902) 946,576,038 137,240,625 8,344,111 57,551,005 (46,515,477) (320,826,549) 99,069,259 683,300,494 (34,519,060) (238,084,863) (775,565,615) 1,123,508,044 1,040,208,365 107,072 - (425,736,650) (415,104,428) 614,578,787 708,403,616 298,467,893 (77,348,480) 631,055,136 20,153,659 (50,606,487) 9,760,472 (20,692,356) 913,046,680 19,170,436 (479,584,775) 22,061,842 (438,352,497) 445,215,631 20,566,672 (44,554,948) 89,914,038 65,925,762 64,550,199 2,981,887 (6,459,860) 13,036,310 9,558,337 (190,374,014) (62,073,367) (49,452,609) (21,719,042) (124,042,182) (447,661,214) 162,701,566 (47,849,040) 114,852,526 (211,168,519) (18,766,367) (35,729,101) (14,764,364) (100,500,388) (380,928,739) 93,765,444 (28,557,980) 65,207,464 (197,035,872) (5,774,266) (35,890,761) (13,966,943) (85,889,497) (338,557,339) 172,584,054 (37,232,643) 135,531,411 (28,567,516) (837,190) (5,203,671) (2,025,016) (12,452,807) (49,086,200) 25,022,336 (5,398,226) 19,624,110 0.08 0.08 0.05 0.05 0.10 0.09 0.01 0.01 (171,040) (16,166,094) 98,515,392 - 98,515,392 - (6,936,969) 58,270,495 - 58,270,495 - 15,181,518 150,532,929 970,379 149,562,550 - 2,201,113 21,825,223 140,692 21,684,531 *: We have identified an immaterial error and corrected the amounts of loans held-for-sale, guaranteed assets, provision for credit losses and net gains on sales of loans in the comparative period presentation. For details, see Note 2(w) to Consolitated Financial Statements on page F-31. Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Interest and fees income Total interest and fees income for fiscal year 2022 decreased by 4.6% to RMB1,731.4 million (US$251.0 million) as compared to RMB1,815.8 million for the same period of 2021. Interest and financing service fees on loans Interest and financing service fees on loans decreased by 11.1% to RMB1,574.7 million (US$228.3 million) for the fiscal year of 2022 as compared to RMB1,770.4 million for the same period of 2021, primarily attributable to a decrease in the balance of average daily outstanding loan principal. Such decrease was mainly as a result of the Company’s transferal of loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021 along with the impact of strict pandemic prevention and control measures taken from January to November 2022, which was partially offset by an increase in the total outstanding loan principal under the collaboration model. 101 Interest income charged to sales partners Interest income charged to sales partners, representing fee charged to sales partners who choose to repurchase default loans in installments, increased by 265.3% to RMB122.0 million (US$17.7 million) for the fiscal year of 2022 from RMB33.4 million in the same period of 2021, primarily attributable to an increase in the delinquent loans that were repurchased by the sales partners in installments. Interest income on debt securities Interest income on debt securities increased to RMB21.6 million (US$3.1 million) in 2022 from nil in 2021. Interest on deposit with banks Interest on deposits with banks increased by 9.2% to RMB13.1 million (US$1.9 million) for the fiscal year of 2022 as compared to RMB12.0 million for the same period of 2021, primarily due to the higher daily average amount of time deposits. Interest and fees expenses Total interest and fees expenses refer to interest expenses on interest-bearing borrowings and increased by 1.2% to RMB784.8 million (US$113.8 million) for the fiscal year of 2022 as compared to RMB775.6 million for the same period of 2021, primarily due to an increase in daily average outstanding principal of other borrowings. Net interest and fees income As a result of the foregoing, net interest and fees income decreased by 9.0% to RMB946.6 million (US$137.2 million) for the fiscal year of 2022 as compared to RMB1,040.2 million for the same period of 2021. Net revenue under the commercial bank partnership model Net revenue under the commercial bank partnership model, representing fees charged to commercial banks for introducing borrowers, initial credit assessment, facilitating loans from the banks to the borrower and providing technical assistance to the borrower and banks, net of fees paid to third-party insurance company, was RMB57.6 million (US$8.3 million) for the fiscal year of 2022 as compared to RMB0.1 million in 2021. The Company has started to collaborate with commercial banks since 2021 and such collaboration grew and scaled in the second half of 2022. Collaboration cost for sales partners Collaboration cost for sales partners representing sales incentives paid to sales partners decreased to RMB320.8 million (US$46.5 million) for the fiscal year of 2022 as compared to RMB425.7 million for the same period of 2021, primarily attributable to a lower average fee rate the Company paid to sales partners in the fiscal year of 2022 as compared to the same period of 2021. The fee rate under collaboration model varies based on different collaboration model types and the terms of the loan. Net interest and fees income after collaboration cost Net interest and fees income after collaboration cost was RMB683.4 million (US$99.1 million) for the fiscal year of 2022, representing an increase of 11.2% as compared to RMB614.6 million for the same period of 2021. 102 Provision for credit losses Provision for credit losses represents the provision for credit losses under the trust lending model and the expected credit losses of guarantee under the commercial bank partnership model in relation to certain financial guarantee arrangements the Company entered into with a third-party guarantor, who provides guarantee services to commercial bank partners. Our provision for credit losses was RMB238.1 million (US$34.5 million) for the fiscal year of 2022 as compared to a reversal of RMB298.5 million1 for the same period of 2021. The reversal in 2021 was primarily due to the fact that the Company transferred loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021 and the allowance of such loans was reversed. The increase in provision for credit losses in the fiscal year of 2022 was mainly due to economic uncertainty caused by COVID-19 pandemic and the relevant prevention measures, as well as the downward pressure faced by China’s real estate market during 2022. Net losses on sales of loans Net losses on sales of loans was RMB44.6 million (US$6.5 million) for the fiscal year of 2022 as compared to RMB479.6 million in the same period of 2021, primarily attributable to the fact that the Company transferred loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021. Such loans were all facilitated prior to 2019, and the majority of them were long past due. Other gains, net Other gains, net was RMB89.9 million (US$13.0 million) for the fiscal year of 2022, compared with RMB22.1 million1 in the same period of 2021, primarily attributable to the increase of Credit Risk Mitigation Position forfeited by the sales partners. Total operating expenses Our total operating expenses decreased by 11.1% to RMB338.6 million (US$49.1 million) for the fiscal year of 2022 as compared to RMB381.0 million for the same period of 2021. Employee compensation and benefits Employee compensation and benefits decreased by 6.7% to RMB197.0 million (US$28.6 million) for the fiscal year of 2022 as compared to RMB211.2 million for the same period of 2021, primarily due to a decrease in compensation associated with decreased operational headcounts. Share-based compensation expenses Share-based compensation expenses decreased by 69.1% to RMB5.8 million (US$0.8 million) for the fiscal year of 2022 as compared to RMB18.8 million for the same period of 2021. According to the Company’s share option plan adopted on December 31, 2019, 50%, 30% and 20% of the option granted will be vested on December 31, 2020, 2021 and 2022, respectively. Related compensation cost of the option grants will be recognized over the requisite period. Taxes and surcharges Taxes and surcharges increased by 0.6 % to RMB35.9 million (US$5.2 million) for the fiscal year of 2022 as compared to RMB35.7 million for the same period of 2021. Operating lease cost Operating lease cost decreased by 5.4% to RMB14.0 million (US$2.0 million) for the fiscal year of 2022 as compared to RMB14.8 million for the same period of 2021. Other expenses Other expenses decreased by 14.5% to RMB85.9 million (US$12.5 million) for the fiscal year of 2022 as compared to RMB100.5 million for the same period of 2021, primarily due to a decrease in attorney’s fees associated with legal proceedings mainly as a result of the Company’s business transition to collaboration model, under which relevant attorney fees are borne by sales partners. 1 Provision for guarantee liabilities was re-classified from “other gains, net” to “provision for credit losses” in 2022. 103 Income tax expenses Our Income tax expenses increased by 30.1% to RMB37.2 million (US$5.4 million) for the fiscal year of 2022 as compared to RMB28.6 million for the same period of 2021, primarily due to an increase in the amount of taxable income. Our Effective tax rate decreased to 21.57% for the fiscal year of 2022 from 30.46% in the same period of 2021, primarily due to the combined effect of (a) the non-deductible share-based compensation expenses which decreased to RMB5.8 million (US$0.8 million) for the fiscal year of 2022 from RMB18.8 million in the same period of 2021; and (b) one subsidiary turned losses into incomes during the fourth quarter in 2022, resulting in reversal of the full valuation allowance of the deferred tax asset. Net income Net income increased by 107.7% to RMB135.4 million (US$19.6 million) for the fiscal year of 2022 as compared to RMB65.2 million for the same period of 2021. Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Interest and fees income Interest and financing service fees on loans Our interest and financing service fees on loans decreased by 3.2% from RMB1,828.7 million in 2020 to RMB1,770.4 million in 2021, primarily due to the lowered interest rate on loans facilitated in an effort to comply with rules and regulations issued by relevant PRC regulatory authorities, including the Decisions of the Supreme People’s Court to Amend the Provisions on Several Issues concerning the Application of Law in the Trial of Private Lending Cases issued in August 2020. Interest income charged to sales partners Interest on deposits with banks increased by 234.0% from RMB10.0 million in 2020 to RMB33.4 million in 2021, primarily due to the increase in the delinquent loans that were repurchased by the sales partners in installments. Interest on deposits with banks Interest on deposits with banks decreased by 25.5% from RMB16.1 million in 2020 to RMB12.0 million in 2021, primarily due to the smaller daily average amount of time deposits in 2021 as compared to 2020. Interest and fees expenses Interest and fees expenses increased by 6.1% from RMB731.3 million in 2020 to RMB775.6 million in 2021, primarily due to the increase in the principals of other borrowings as well as the funding cost from trust companies. Net interest and fees income As a result of the foregoing, our net interest and fees income decreased by 7.4% from RMB1,123.5 million in 2020 to RMB1,040.2 million in 2021. Collaboration cost for sales partners Collaboration cost for sales partners represents sales incentives paid to sales partners, was RMB425.7 million for the fiscal year of 2021, and was RMB415.1 million in 2020, primarily due to the increase in average daily outstanding loan principal under the collaboration model as compared to the same period of 2020. Net interest and fees income after collaboration cost Net interest and fees income after collaboration cost was RMB614.6 million in 2021, representing a decrease of 13.2% as compared to RMB708.4 million in 2020. 104 Provision for credit losses Provision for credit losses recorded a reversal of RMB298.5 million in 2021 as compared to provision of RMB77.3 million in 2020. The reversal was mainly attributable to the fact that (a) the Company transferred loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021 and the allowance of such loans was reversed; partially offset by the fact that (b) the current expected credit loss (CECL) model took into account the deterioration in the economic outlook caused by the COVID-19 pandemic. Net losses on sales of loans Net losses on sales of loans was RMB479.6 million in 2021 as compared to RMB50.6 million in 2020, primarily attributable to the fact that the Company transferred loans under the traditional facilitation model to third parties in bulk at market price during the fourth quarter of 2021. Such loans were all facilitated prior to 2019, and the majority of them were long past due. Other gains, net Other gains, net was RMB22.1 million in 2021, compared with RMB9.8 million in 2020, mainly attributable to an increase in forfeited Credit Risk Mitigation Positions in 2021 as compared to 2020. Operating expenses Our total operating expenses decreased by 14.9% from RMB447.7 million in 2020 to RMB381.0 million in 2021. Employee compensation and benefits Employee compensation and benefits increased by 10.9% from RMB190.4 million in 2020 to RMB211.2 million in 2021. Share-based compensation expenses Expenses related to issuance of shares under our employee share incentive plan decreased by 69.7% from RMB62.1 million in 2020 to RMB18.8 million in 2021. According to the Company’s share option plan adopted on December 31, 2019, 50%, 30% and 20% of the option granted will be vested on December 31, 2020, 2021 and 2022, respectively. Related compensation cost of the option grants will be recognized over the requisite period. Taxes and surcharges Taxes and surcharges decreased by 27.9 % to RMB35.7 million in 2021 as compared to RMB49.5 million in 2020, primarily attributable to a decrease in the non-deductible value added tax (“VAT”). The decrease in VAT was attributable to the characterization of certain amounts as “service fees charged to trust plans” which are a non-deductible item. According to PRC tax regulations, “service fees charged to trust plans” incur a 6% VAT on the subsidiary level, but are not recorded as an input VAT on a consolidated trust plan level. “Service fees charged to trust plans” were significantly decreased in the fiscal year of 2021 compared to the same period of 2020 due to maturity of some trust plans. Operating lease cost Operating lease cost decreased by 31.8 % from RMB21.7 million in 2020 to RMB14.8 million in 2021, primarily due to the continued development of the collaboration model that allowed the Company to further reduce the office leasing costs which was used to rent offices to accommodate sales staff. Other expenses Other expenses decreased by 19.0% from RMB124.0 million in 2020 to RMB100.5 million in 2021, primarily due to (a) a decrease in the litigation and attorney’s fees during the ordinary course of business resulted from smaller amount of NPLs disposed through judicial procedure because the Company chose to transfer more NPLs to third party purchasers to accelerate recovery of cash; (b) a decrease in consulting fee; and (c) a decrease in the IT R&D and outsourcing service fees. 105 Income tax expense Our income tax expense decreased by 40.2% from RMB47.8 million in 2020 to RMB28.6 million in 2021, primarily due to the decrease in the amount of taxable income. Our effective tax rate increased to 30.5% in fiscal year 2021 from 29.4% in fiscal year 2020, primarily due to the combined effect of (a) the non-deductible share-based compensation expenses which decreased to RMB18.8 million for the fiscal year of 2021 from RMB62.1 million in the same period of 2020; and (b) the proceeds of RMB39.9 million tax-free dividends from equity investment funds in 2021. Net income As a result of the foregoing, our net income decreased by 43.2% from RMB114.9 million in 2020 to RMB65.2 million in 2021. 5.B. Liquidity and Capital Resources Cash Flows and Working Capital Our principal sources of liquidity have been cash generated from financing, operating and investing activities. As of December 31, 2022, we had cash and cash equivalents of RMB1.8 billion (US$256.9 million), as compared to cash and cash equivalents of RMB2.2 billion as of December 31, 2021, substantially all of which were held by our PRC subsidiaries. Our cash and cash equivalents consist primarily of bank deposits and are primarily denominated in Renminbi. We believe that our current cash and anticipated cash flow from financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for at least the next 12 months. We intend to finance our future working capital requirements and capital expenditures from funds provided by operating activities and raised from financing activities. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. Issuance of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer. As a holding company with no material operations of our own, we conduct our operations primarily through our PRC subsidiaries in China. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries in China through capital contributions or loans, subject to the approval of government authorities and limits on the amount of capital contributions and loans. The ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. For details, please refer to “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.” The following table sets forth a summary of our cash flows for the periods indicated. For the Year Ended December 31, Net cash provided by operating activities Net cash provided by/(used in) investing activities Net cash (used in)/provided by financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of exchange rate change on cash and cash equivalents Cash and cash equivalents at end of the year 2021 RMB 689,692,306 2020 RMB 1,119,576,982 2022 RMB 919,253,112 133,279,173 524,050,843 (2,350,564,315) (1,098,197,823) (159,223,717) (41,778,729) (67,723,273) 1,705,356,424 1,960,922,758 2,231,437,361 323,528,006 1,137,816 1,960,922,758 2,231,437,361 1,772,184,145 256,942,549 (1,367,138,705) 1,932,580,262 271,708,253 (288,156,250) (467,100,961) 276,489,120 (20,922,786) (1,193,650) 7,847,745 US$ 106 Operating Activities Net cash provided by operating activities in 2022 was RMB919.3 million (US$133.3 million) due to net income of RMB135.4 million (US$19.6 million), mainly adjusted for (i) provision for credit losses of RMB238.1 million, (ii) share-based compensation expenses of RMB5.8 million, (iii) depreciation and amortization of RMB2.2 million, (iv) losses on sale of loans of RMB44.6 million, (v) the utilized of loans held-for-sale for originations and purchase was RMB585.4 million and (vi) the increase of proceeds from sales and paydowns of loans originally classified as held for sale was RMB1,550.0 million. Adjustment for changes in operating assets and liabilities consisted of (i) a decrease in other operating liabilities of RMB12.5 million, (ii) an increase in other operating assets of RMB167.2 million, (iii) an decrease in deposits of RMB11.9 million, (iv) an increase of CRMP of RMB6.2 million and (v) an increase in deposits of RMB168.8 million. Net cash provided by operating activities in 2021 was RMB689.7 million (US$108.2 million) due to net income of RMB65.2 million (US$10.2 million), mainly adjusted for (i) reversal of provision for credit losses of RMB298.5 million, (ii) share-based compensation expenses of RMB18.8 million, (iii) depreciation and amortization of RMB3.8 million, (iv) losses on sale of loans of RMB479.6 million, (v) the utilized of loans held-for-sale for originations and purchase was RMB453.9 million and (vi) the increase of proceeds from sales and paydowns of loans originally classified as held for sale was RMB1,006.9 million. Adjustment for changes in operating assets and liabilities consisted of (i) a increase in other operating liabilities of RMB69.1million, (ii) an increase in other operating assets of RMB30.9 million, (iii) an increase in deposits of RMB42.9 million, (iv) an increase of CRMP of RMB138.7 million. Net cash used in operating activities in 2020 was RMB1,119.6 million due to net income of RMB114.9 million, mainly adjusted for (i) provision for credit losses of RMB77.3 million, (ii) share-based compensation expenses of RMB62.1 million, (iii) depreciation and amortization of RMB6.0 million, (iv) losses on sale of loans of RMB50.6 million, (v) the utilized of loans held-for-sale for originations and purchase was RMB152.1 million and (vi) the increase of proceeds from sales and paydowns of loans originally classified as held for sale was RMB637.7 million. Adjustment for changes in operating assets and liabilities consisted of (i) an increase in other operating liabilities of RMB140.1million, (ii) an increase in other operating assets of RMB28.4 million, (iii) a decrease in deposits of RMB19.5 million, (iv) an increase of CRMP of RMB281.0 million. Investing Activities Net cash used in investing activities was RMB1,098.2 million (US$159.2 million) in 2022, which was attributable to (i) purchase of investment securities of RMB8,567.3 million, (ii) purchases of property, equipment and intangible assets of RMB89.9 million, (iii) loans originated, net of principal collected of RMB2,556.9 million, and (iv) purchases of non-marketable equity securities of RMB25.0 million offset by (i) proceeds from sales of investment securities of RMB9,002.2 million, (ii) proceeds from disposal of property, equipment and intangible assets of RMB0.3 million, and (iii) proceeds from sales of loans of RMB1,088.4 million. and. Net cash used in investing activities was RMB2,350.6 million (US$368.9 million) in 2021, which was attributable to (i) purchase of investment securities of RMB9,496.3 million, (ii) purchases of property, equipment and intangible assets of RMB3.8 million, (iii) loans originated, net of principal collected of RMB2,839.5 million, offset by (i) proceeds from sales of investment securities of RMB8,956.5 million, (i) proceeds from disposal of property, equipment and intangible assets of RMB0.6 million, (iii) proceeds from sales of loans of RMB1,022.0 million, and (iv) proceeds from disposal of non-marketable equity securities of RMB10.0 million. Net cash provided by investing activities was RMB524.1 million in 2020, which was attributable to i) proceeds from sales of investment securities of RMB7,187.5 million, (i) proceeds from disposal of property, equipment and intangible assets of RMB2.2 million, and (iii) proceeds from sales of loans of RMB378.3 million, offset by (i) purchase of investment securities of RMB6,951.5 million, (ii) purchases of property, equipment and intangible assets of RMB3.2 million, and (iii) loans originated, net of principal collected of RMB89.2 million. Financing Activities Net cash used in financing activities was RMB288.2 million (US$41.8 million) in 2022, which was attributable to (i) repayment of interest-bearing borrowings of RMB6,333.6 million, and (ii) repurchase of ordinary shares of RMB87.6 million, partially offset by (i) proceeds from interest-bearing borrowings of RMB6,082.3 million and (ii) proceeds from contributions from non-controlling shareholders of RMB50.8 million. Net cash used in financing activities in 2021 was RMB1,932.6 million, which was attributable to repayment of interest-bearing borrowings of RMB7,068.0 million, offset by proceeds from interest-bearing borrowings of RMB5,135.4 million. Net cash used in financing activities in 2020 was RMB1,367.1 million, which was attributable to repayment of interest-bearing borrowings of RMB7,382.1 million, offset by proceeds from interest-bearing borrowings of RMB6,015.0 million. 107 Capital Expenditures Our capital expenditures represent purchases of property, equipment and intangible assets necessary to support our operations. Our capital expenditures were RMB3.2 million, RMB3.8 million and RMB89,9 million (US$13.0 million) in 2020, 2021 and 2022, respectively. The increase in capital expenditures in 2022 was primarily due to our purchase of new office building in Guangzhou, China. Off-Balance Sheet Commitments and Arrangements We launched in 2021 a new funding model in cooperation with commercial banks, under which our commercial bank partners are responsible for reviewing and approving the loan while we charge a service fee for our loan facilitation services. For loans funded by the proceeds from third-party commercial banks as our commercial bank partners, each underlying loan and borrower has to be approved by the third-party commercial banks individually. Once the loan is approved by and originated by the third-party commercial bank, the fund is provided by the third-party commercial bank to the borrower and a lending relationship between the borrower and the third-party commercial bank is established through a loan agreement. Effectively, we offer loan facilitation services to the borrowers who have credit needs and the commercial banks who originate loans directly to borrowers referred by us. We continue to provide post-origination services to the borrowers over the term of the loan agreement. As we are not the legal lender or borrower in the loan origination and repayment process, we do not record loans principal, interest and financing service fee receivables arising from these loans nor interest-bearing borrowings to the third-party commercial banks. Apart from the above, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us. Contractual Obligations We lease multiple office spaces which are contracted under various non-cancelable operating leases, most of which provide extension or early termination options and are generally expired in one to four years. We do not enter into any finance leases or leases where the Group is a lessor. Moreover, the existing operating lease agreements do not contain any residual value guarantees or material restrictive covenants. Management determines if an arrangement is a lease at inception and records the leases in the financial statements upon lease commencement, which is the date when the underlying office space is made available for use by the lessor. The incremental borrowing rates determined forcomputing the lease liabilities are based on the People’s Bank of China (PBOC) Benchmark Rates for terms of loans ranging from zero (exclusive) to five years and above. The following tables present the operating lease cost and other supplemental information. Operating lease cost(1) (1) Amounts include short-term leases that are immaterial. Weighted-average remaining lease term Weighted-average discount rate Cash paid for amounts included in the measurement of lease liabilities under operating cash flows ROU assets obtained in exchange for new operating lease liabilities 108 Year ended December 31, 2021 RMB 14,764,364 2020 RMB 21,719,042 2022 RMB 13,966,943 December 31, 2022 RMB 3.59 Year 4.75% 15,101,145 29,777,357 The following represents the Group’s future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities (excluding short-term operating leases) as of December 31, 2022: Year Ended December 31, 2023 2024 2025 2026 2027 Thereafter Total future operating lease payments Less: imputed interest Total present value of operating lease liabilities Holding Company Structure RMB 12,085,870 6,285,367 4,745,037 4,636,293 3,427,888 - 31,180,455 (2,596,980) 28,583,475 CNFinance Holdings Limited is a holding company with no operations of its own. It conducts substantially all of its operations in China primarily through its subsidiaries in China, in particular Shenzhen Fanhua United Investment Group Co., Ltd., Guangzhou Heze Information Technology Co., Ltd., and their subsidiaries and consolidated affiliated entities, and substantially all of its assets and operations are located in China. With a holding company structure, we principally rely on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. If these subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In 2020, 2021 and 2022, CNFinance has not transferred any cash proceeds to any of its PRC subsidiaries. For instance, cash proceeds raised from overseas financing activities, may be transferred by CNFinance through China Financial Services Group Limited, our Hong Kong subsidiary, to Fanhua Chuangli Information Technology (Shenzhen) Company Limited (“Fanhua Chuangli”), a PRC subsidiary, via capital contribution and shareholder loans, as the case may be. Fanhua Chuangli then will transfer funds to its subsidiaries to meet the capital needs of business operations. None of our PRC subsidiaries have issued any dividends or distributions to respective holding companies, including CNFinance, or any investors as of the date of this annual report. Our subsidiaries in the PRC generate and retain cash generated from operating activities and re-invest it in business operations. In addition, our subsidiaries in the PRC are only permitted to pay dividends only out of their retained earnings, if any, as determined in accordance with the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance of the PRC, or PRC GAAP. The aggregate retained earnings for our PRC subsidiaries as determined under the PRC GAAP were RMB2,742.2 million, RMB2,853.7 million and RMB2,990.3 million (US$433.6 million), as of December 31, 2020, 2021 and 2022, respectively. Pursuant to the law applicable to foreign investment enterprises, our subsidiaries that are foreign investment enterprises in the PRC are required to draw 10% of their profits as the companies’ statutory common reserve, provided that companies with aggregate common reserve of more than 50% of the companies registered capital may elect not to draw any statutory common reserve any more. The appropriation to the general reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the reserve fund has reached 50% of the registered capital of our subsidiary. Appropriation to the other two reserve funds are at our subsidiary’s discretion. 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 “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—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.” 109 As of the date of this annual report, the majority of our PRC subsidiaries are still required to contribute to general reserve fund and these contributions are not expected to cease in the near term. Appropriation to the other two reserve funds are at our subsidiaries’ discretion. Our PRC subsidiaries did not make any contributions to the enterprise expansion fund or the staff and bonus welfare fund during each period presented. The restricted amounts of our PRC subsidiaries totaled RMB420.5 million, RMB423.3 million and RMB428.4 million (US$62.1 million) as of December 31, 2020, 2021 and 2022, respectively. In addition, ADS holders may potentially be subject to PRC taxes on dividends paid by CNFinance in the event it is deemed as a PRC resident enterprise for PRC tax purposes. An offshore holding company is permitted under PRC laws and regulations to provide funding from the proceeds of offshore fund raising activities to its PRC subsidiaries through loans or capital contributions, and to its consolidated affiliated entities only through loans, in each case subject to the satisfaction of the applicable government registration and approval requirements. As a result, there is uncertainty with respect to our ability to provide prompt financial support to our PRC subsidiaries when needed. For details about the applicable PRC rules that limit transfer of funds from overseas to our PRC subsidiaries, see “Risk Factors—Risks Related to Doing Business in China—PRC regulations of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of our public offerings to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” Notwithstanding the foregoing, our PRC subsidiaries may use their own retained earnings (rather than Renminbi converted from foreign currency denominated capital) to provide financial support to our consolidated affiliated entities either through entrustment loans from our PRC subsidiaries or direct loans to such consolidated affiliated entities’ nominee shareholders, which would be contributed to the consolidated affiliated entities as capital injections. Such direct loans to the nominee shareholders would be eliminated in our consolidated financial statements against the consolidated affiliated entities’ share capital. Furthermore, if certain procedural requirements are satisfied, the payment of current account items, including profit distributions and trade and service related foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange (“SAFE”) or its local branches. However, where RMB 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, approval from or registration with competent government authorities or its authorized banks is required. The PRC government may take measures at its discretion from time to time to restrict access to foreign currencies for current account or capital account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, our PRC subsidiaries may not be able to pay dividends in foreign currencies to our offshore intermediary holding companies or ultimate parent company, and therefore, our shareholders or investors in the ADSs. In addition, we cannot assure you that new regulations or policies will not be promulgated in the future, which may further restrict the remittance of RMB into or out of the PRC. We cannot assure you, in light of the restrictions in place, or any amendment to be made from time to time, that our current or future PRC subsidiaries will be able to satisfy their respective payment obligations that are denominated in foreign currencies, including the remittance of dividends out of the PRC. Recent Accounting Pronouncements On January 1, 2020, we adopted the new accounting standard. Our lifetime expected credit losses are determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios, and are net of expected recoveries on loans that were previously charged off. The standard also expands credit quality disclosures beginning in the first quarter of 2020. While the standard changes the measurement of the allowance for credit losses, it does not change our credit risk of its lending portfolios or the ultimate losses in those portfolios. Prior to the adoption, we used the roll rate-based model for the measurement of credit losses and the management had been working through the implementation of the new standard. In that regard, we (1) formed a cross-functional working group under the direction of the risk management department, (2) evaluated data sources and made process updates to capture additional relevant data, and (3) identified a service provider to perform the calculation. The working group was comprised of individuals from various functional areas including credit, risk management, finance and information technology. The implementation plan included, but was not limited to, an assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs. 110 In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework (Topic 842) – Changes to the Disclosure Requirements for Fair Value Measurement, which modify the disclosure requirements on fair value measurement by removing, modifying, or adding certain disclosures. The amendments improve the effectiveness of disclosures in the notes to financial statements modify the disclosure requirements on fair value measurements in Topic 820. This ASU requires disclosure of the changes in unrealized gains or losses included in OCI for Level 3 assets or liabilities held at the end of the period and the range and weighted-average of the significant unobservable inputs used in determining the fair value of Level 3 assets and liabilities. The amendments also remove the requirement to disclose the transfers between Level 1 and Level 2 of the fair value hierarchy, timing of transfers between levels, and the valuation process for determining Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted the standard on January 1, 2020. We have not historically recorded material amounts of Level 3 assets and liabilities or material transfers of assets or liabilities between levels within the fair value hierarchy and therefore do not anticipate the adoption to have any material impact on our financial statement disclosures. In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The ASU is currently not expected to have a material impact on the Group’s consolidated financial statements. In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments, which revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020- 3 was effective immediately upon its release in March 2020 and did not have a material impact on the Group’s consolidated financial statements. In August 2021, the FASB issued ASU No. 2021-06, Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946), which amended certain paragraphs for better presentation of codifications. This Update was effective immediately upon its release in August 2021 and did not have a material impact on the Group’s consolidated financial statements. The ASU 2022-02 is to be adopted on a prospective basis and will be effective for the Group on January 1, 2023, although early adoption is permitted. The Amendment eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors and introduces new required disclosures for loan modifications made to borrowers experiencing financial difficulty. The Amendment also sets the guidance for vintage disclosures to require disclosure of current period gross charge-offs by year of origination. Adoption of the accounting standard is not expected to have an impact on the Group’s operating results or financial position, as the Group does not involve in the activity of debt restructurings. The ASU 2022-03 is to be adopted on a prospective basis and will be effective for the Group on January 1, 2024, although early adoption is permitted. The Amendment clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and also states that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The Update also requires a few more disclosures on equity securities subject to contractual sale restrictions. Adoption of the accounting standard is not expected to have an impact on the Group’s operating results or financial position, as the Group excludes such restrictions when valuing equity securities. 5.C. Research and Development We have focused on and will continue to invest in our technology system, which supports all key aspects of our platform and is designed to optimize for scalability and flexibility. Our research and development expenses which was reported in other expenses of the consolidated statements of comprehensive income were RMB10.0 million, RMB1.6 million and RMB0.8 million (US$0.1 million) in 2020, 2021 and 2022, respectively. 111 5.D. Trend Information Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2022 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition. 5.E. Critical Accounting Estimates We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect out reporting of, among other things, assets and liabilities, contingent assets and liabilities and total revenues and expenses. On an on-going basis, we evaluate out estimates based on historical experience and on various other assumptions that from other sources. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from what we expect.We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used n the current period, would have a material impact on our financial condition or results of operations. Such critical estimates are discussed below. For further information on our other significant accounting estimates, see Note 2 to our consolidated financial statements included elsewhere in this annual report. Allowance for credit loss and guaranteed liabilities Commencing January 1, 2020, we adopted ASC 326, which replaced the incurred loss methodology for determining the provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. Allowance for credit losses represents our estimate of probable losses inherent in the portfolio, and the guaranteed liabilities represents our estimate of probable losses of providing financial guarantee services for the off-sheet loans under the commercial bank partnership model. Estimation of CECLs requires us to make assumptions regarding the likelihood and severity of credit loss events and their impact on expected cash flows, which drive the probability of default (PD), loss given default (LGD) and exposure at default (EAD) models. we incorporate forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These variables include, but are not limited to, gross-domestic product rates and consumer price indexes. Standalone selling prices We use an expected costs plus margin approach to estimate the standalone selling prices of loan facilitation services and post facilitation services under commercial bank partnership model as the basis of revenue allocation under ASC 606 in 2022. when estimating the selling prices, we consider the cost related to such services, profit margin, customer demand, effect of competition on services, and other market factors, among which estimates of the cost of providing the services is the most significant. Also, We consider early termination scenarios based on historical early payment and other termination scenarios as we cannot receive the full contractual service fee amount under early termination, given the service fee is collected on a pro-rata basis upon early loan termination. Valuation allowance of deferred tax assets We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Significant judgement is required in determining the valuation allowance. In assessing the need for a valuation allowance, we consider all sources of taxable income, including projected future taxable income, reversing taxable temporary differences and ongoing tax planning strategies. If it is determined that we are able to realize deferred tax assets in excess of the net carrying value or to the extent we are unable to realize a deferred tax asset, we would adjust the valuation allowance in the period in which such a determination is made, with a corresponding increase or decrease to earnings. 112 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.A. Directors and Senior Management The following table sets forth information regarding our executive officers and directors as of the date of this annual report. The business address of our directors and executive officers except for Mr. Fengyong Gao, Mr. Lin Xu, Mr. Xi Wang and Mr. Ge Yang is 44/F Tower G, No. 16 Zhujiang Dong Road, Tianhe District, Guangzhou City, Guangdong, People’s Republic of China. The business address for Mr. Fengyong Gao is Room 702A, No.1518 Minsheng Road, Pudong New District, Shanghai. The business address for Mr. Lin Xu is No.1405, Building 4, No.3 Courtyard, Sanlihe Yiqu, Xicheng District, Beijing. The business address for Mr. Xi Wang is No.66 Xingang Xi Road, Guangzhou, Guangdong Province. The business address for Mr. Ge Yang is 32 Crabtree Ln Tenafly, NJ 07670, the U.S.A. Directors and Executive Officers Bin Zhai Jun Qian Fengyong Gao Lin Xu Xi Wang Ge Yang Zehui Zhang Huiling Jiang Jing Li Age 53 50 53 61 54 52 50 43 42 Chairman, Director, Chief Executive Officer Director and Vice President Position/Title Independent Director Independent Director Independent Director Independent Director Vice President Vice President Acting Chief Financial Officer Bin Zhai has served as our Chairman of the Board of Directors since 2017 and our Chief Executive Officer since 2010. He joined our company in 2006 as executive director of Shenzhen Nanfeng Mortgage Advisory Co., Ltd., a subsidiary of Fanhua Inc. Prior to joining us, Mr. Zhai served as account manager of Bank of Communications Tianjin Branch from 1991 to 1993, investment manager at China Ministry of Agriculture Shenzhen Office from 1993 to 1998 and general manager at Shenzhen Modern Warehouse Building Material Co., Ltd. from 1998 to 2006. Mr. Zhai received his bachelor’s degree in insurance from Nankai University in China. Jun Qian joined the Company in 2001 and has served as our Vice President since 2010. Mr. Qian has over 20 years of experience in China’s loan industry and has served in the Company’s senior management team for more than 15 years. Mr. Qian received his bachelor’s degree in international trade from Hohai University and his second bachelor’s degree in accounting from Guilin University of Electronic Technology. Fengyong Gao has served as our Independent Director since our initial public offering. Mr. Gao is the founder, partner and chief executive director of Leading Capital Co., Ltd. and the founder, partner and chairman of the board of Shanghai Blue Ocean Capital. Mr. Gao previously served as the general manager of the trust department and subsequently as the vice president of Bridge Trust Co., Ltd. from 2003 to 2007. Mr. Gao currently also serves as the independent director of China Haisum Engineering Co., Ltd. and Great Wall Movie and Television Co. Ltd. Mr. Gao received both his bachelor’s degree and master’s degree in finance from Nankai University in China. Lin Xu has served as our Independent Director since our initial public offering. Mr. Xu currently serves as the director general of China Center for Urban Development of NDRC and the chairman of the board of U.S.-China Green Fund. Prior to that, Mr. Xu served as the director general of Development Planning Department of NDRC from 2012 to 2017. Mr. Xu also served as the director general of Fiscal and Financial Affairs Department of NDRC from 2006 to 2012 and as the deputy director general of Development Planning Department of NDRC from 2002 to 2006. Mr. Xu received his bachelor’s degree in mathematics from Hunan Shaoyang Normal College, his first master’s degree in economics from Nankai University and his second master’s degree of public administration from the Lee Kuan Yew School of Public Policy at National University of Singapore. 113 Xi Wang has served as our Independent Director since March 2019. Dr. Wang is currently a professor at Lingnan (University) College, as well as the director of China Institute for Economic Transformation and Opening of Sun Yat-sen University (“SYSU”). He specializes in economics and his research area includes banking and monetary policy, international finance (exchange rates and balance of payments), and China’s economy among other subjects. Dr. Wang received his master’s degree and Ph.D in economics from SYSU and has been a professor at SYSU since 2004. He is a contributor of multiple business journals, such as the Economic Research Journal, China Economic Quarterly, Finance Research, and Journal of World Economy. Dr. Wang also serves as an independent director at various companies including Palm Eco-Town Development Co., Ltd., a company listed on the Shenzhen Stock Exchange since May 2014, Zhuhai Rural Commercial Bank Co., Ltd. since July 2014, Guangdong Electric Power Development Co., Ltd., a company listed on the Shenzhen Stock Exchange since June 2016, Guangzhou Public Transport Group Co., Ltd. since August 2018, and Guangzhou Yuexiu Financial Holdings Group Co., Ltd., a company listed on the Shenzhen Stock Exchange since January 2019. Ge Yang has served as our Independent Director since November 2022. Mr. Yang has over 30 years of experiences in corporate finance, non-bank financial institution, and wealth and asset management, having worked with public companies both in China and in the U.S. He currently serves as financial controller in Noah Gopher Capital Advisors LLC in charge of asser management. Prior to that, he held the positions of vice president and chief financial officer in Minmetals Inc. from 2003 to 2019. Mr. Yang received his bachelor’s degree in international finance from Nankai University, his MBA degree from Tsinghua University, and a second master’s degree in Accounting from Seton Hall University. Zehui Zhang has served as our Vice President since 2010. He joined Fanhua Inc. in 2001 and served as general manager of Guangdong Nanfeng Insurance Agency Co., Ltd., a subsidiary of Fanhua Inc. from 2002 to 2009. Mr. Zhang has over 15 years of experience in finance business. He received his diploma in accounting at Guangdong Polytechnic Normal University, formerly known as Guangdong Commercial Management College, in China. Huiling Jiang has served as our Vice President since 2021. She joined the Company in 2008, and served successively as the Manager of Operation Management Department, the Manager of Risk Management Department, the General Manager of Guangzhou Branch, the Manager of Retail Financing Department, the President of Structural Funding Department and the Assistant President of the Company. Jing Li has served as our Acting Chief Financial Officer, Assistant President of the Company and the Head of Department of Finance and Internal Control since the fourth quarter of 2021. Ms. Li has 20 years of experience in the financial industry and holds the certificate of ACCA and IPA. Prior to joining CNFinance Holdings Limited in 2008, she worked for Deloitte Touche Tohmatsu Certified Public Accountants LLP and Fanhua Inc. Ms. Li received her bachelor’s degree in financial management from Guangdong University of Foreign Studies and her MPAcc degree from Sun Yat-Sen University. 6.B. Compensation Compensation For the fiscal year ended December 31, 2022, we paid an aggregate of RMB 4.4 million (US$0.6 million) in cash to our executive officers (including our executive directors), and we did not pay any cash compensation to our non-executive directors. For the fiscal year ended December 31, 2022, we paid for our executive officers (including our executive directors) an aggregate of RMB442,334 (US$64,132) of social insurance plans and housing provident funds required by PRC law. We did not pay such insurance or housing fund for our non-executive directors. For share incentive grants to our directors and executive officers, please refer to “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.” Employment Agreements and Indemnification Agreements We have entered into employment agreements with each of our executive officers. Each of our executive officers is employed for a specified time period, which can be renewed upon both parties’ agreement before the end of the current employment term. We may terminate an executive officer’s employment for cause at any time without advance notice in the event of, among other things, (i) commitments by such executive officer of any serious breach of the terms and conditions of his or her employment and our internal rules and procedures, (ii) conviction of a criminal offense, or (iii) severe neglect of his or her duties or embezzlement to our detriment. We may also terminate an executive officer’s employment by giving a 30 days’ prior written notice or by paying a compensation of an amount equal to one month’s wages of such executive officer. An executive officer may terminate his or her employment at any time by giving a 30 days’ prior written notice. 114 Each executive officer has agreed to hold, unless expressly consented to by us, at all times during and after the termination of his or her employment agreement, in strict confidence and not to use, any of our confidential information or the confidential information of our customers and suppliers. In addition, each executive officer has agreed to be bound by certain non-competition and non-solicitation restrictions during the term of his or her employment and for two years following the last date of employment. Specifically, each executive officer has agreed not to (i) carry out or otherwise be concerned or interested, directly or indirectly, in certain businesses in direct or indirect competition with us; (ii) assume employment with or provide services to certain of our competitors or engage, whether as principal, partner, licensor or otherwise, with such competitors; or (iii) seek directly or indirectly, by the offer of alternative employment or other inducement whatsoever, to solicit the services of any of our employees, agents or consultants who are employed or engaged by us at any time in the one year preceding the last date of his or her employment. We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company. Share Incentive Plan 2017 SFIL Share Incentive Plan In January 2017, SFIL adopted the 2017 SFIL Share Incentive Plan, or the 2017 Plan. Under the 2017 Plan, SFIL granted 187,933,720 options to its certain management members and employees to purchase up to 187,933,720 ordinary shares. The term of the options will not exceed ten years from the date of the grant. 2018 CNFinance Holdings Limited Share Incentive Plan On August 27, 2018, we adopted the 2018 CNFinance Holdings Limited Share Incentive Plan, or the 2018 Plan, to replace the 2017 Plan and granted 187,933,720 options to certain management members and employees to purchase up to 187,933,720 of our ordinary shares under this 2018 Plan to replace the granted and outstanding options under the 2017 Plan. Pursuant to the terms of the 2018 Plan, 60%, 20% and 20% of the award options shall vest on December 31 of each of the years 2017, 2018 and 2019, respectively. On December 31, 2019, we granted 119,674,780 options to certain management members and employees to purchase up to 119,674,780 of our ordinary shares under the 2018 Plan. Pursuant to the terms of 2018 Plan, 50%, 30% and 20% of the award options shall vest on December 31 of each of the years of 2021, 2022 and 2023, respectively. The purpose of the 2018 Plan is to promote the success and enhance the value of the Company by linking the personal interests of the members of the board of directors, employees and consultants to those of the Company shareholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to the Company shareholders. The 2018 Plan is further intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of member of the board of director, employees and consultants upon whose judgment, interest and special effort the successful conduct of the Company’s operation is largely dependent. The 2018 Plan provides for the issuance of up to an aggregate of 307,608,500 of our ordinary shares. The following paragraphs summarize the terms of the 2018 Plan. Types of Awards. The 2018 Plan permits the awards of options, restricted shares and restricted share units and other rights or benefits under the 2018 Plan. Plan Administration. The 2018 Plan shall be administered by the board of directors; provided, however, that the board of directors may delegate to a committee of one or more members of the board of the directors the authority to grant or amend Awards to grantee other than Independent Directors and executive officers of the Company. The committee shall consist of at least two individuals, each of whom qualifies as a non-employee director. Eligibility. Employees, consultants of the Company or its affiliate and member of the board of directors are eligible to participate in the 2018 Plan. An employee or consultant who has been granted an award may, if he or she is otherwise eligible, be granted additional awards. 115 Designation of Award. Each award under the 2018 Plan is designated in an award agreement, which is a written agreement evidencing the grant of an award executed by the company and the grantee, including any amendments thereto. Conditions of Award. The board of directors or any entity appointed by the board of directors to administer the 2018 Plan shall determine the provisions, terms, and conditions of each award including, but not limited to, the award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, and form of payment upon settlement of the award. Terms of Award. The term of each award is stated in the award agreement between the Company and the grantee of such award. Amendment, Modification, Suspension or Termination of the 2018 Plan. The administrator of the 2018 Plan may amend, alter, suspend, discontinue or terminate this 2018 Plan, or any Award Agreement hereunder or any portion hereof or thereof at any time; provided, however, that (a) to the extent necessary and desirable to comply with applicable laws defined therein, or stock exchange rules, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required, and (b) shareholder approval is required for any amendment to the 2018 Plan that (i) increases the number of shares available under the 2018 Plan (other than any adjustment as provided by Article 8 of the 2018 Plan), (ii) permits the Committee to extend the term of the 2018 Plan or the exercise period for an option beyond ten years from the date of grant, or (iii) results in a material increase in benefits or a change in eligibility requirements. The following table summarizes, as of the date of this annual report, the outstanding equity awards granted to our directors and executive officers under the 2018 Plan, which replaced the 2017 Plan. Ordinary Shares Underlying Equity Awards Number of Options Outstanding (1) Name Bin Zhai Ning Li Jun Qian Zehui Zhang All directors and executive officers as a group Granted (1) 40,000,000 40,000,000 30,000,000 30,000,000 20,000,000 20,000,000 20,000,000 20,000,000 110,000,000 110,000,000 Exercise Price (Per share) (1) RMB0.5 RMB0.5 RMB0.5 RMB0.5 RMB0.5 Date of Grant (1) January 3, 2017 January 3, 2017 January 3, 2017 January 3, 2017 January 3, 2017 Date of Expiration December 31,2022 December 31,2022 December 31,2022 December 31,2022 December 31,2022 Notes: (1) Does not include 35,902,434 options to purchase up to 35,902,434 of our ordinary shares granted under the 2018 Plan on December 31, 2019, with an exercise price of RMB1.0 per share. Such options will be considered vested as to 50%, 30%, 20% on each of December 31, 2020, December 31, 2021 and December 31, 2022, respectively, but will only be distributed to the applicable grantees based on their performance scores on December 31, 2022, subject to continued employment through such date. As of the date of this annual report, our other employees as a group held options to purchase up to 161,706,076 of our ordinary shares. For the options granted on January 3, 2017, our other employees as a group held options to purchase up to 77,933,730 of our ordinary shares, with an exercise price of RMB0.5 per share. For the option granted on December 31, 2019, our other employees as a group held options to purchase up to 83,772,346 of our ordinary shares, with an exercise price of RMB1.0 per share. For discussions of our accounting policies and estimates for awards granted pursuant to the 2018 Plan, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies, Judgments and Estimates—Share-based compensation expenses.” 116 6.C. Board Practices Board of Directors Our Board of Directors consists of six directors, including three independent directors. A director is not required to hold any shares in our company to qualify to serve as a director. The Corporate Governance Rules of the NYSE generally require that a majority of an issuer’s board of directors must consist of independent directors. However, the Corporate Governance Rules of the NYSE permit foreign private issuers like us to follow “home country practice” in certain corporate governance matters. We rely on this “home country practice” exception and do not have a majority of independent directors serving on our Board of Directors. A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare the nature of his or her interest at a meeting of our directors. A general notice given to the directors by any director to the effect that he or she is a member, shareholder, director, partner, officer or employee of any specified company or firm and is to be regarded as interested in any contract or transaction with that company or firm shall be deemed a sufficient declaration of interest for the purposes of voting on a resolution in respect to a contract or transaction in which he/she has an interest, and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may vote in respect of any contract or proposed contract or arrangement notwithstanding that he/she may be interested therein and if he/she does so, his/her vote shall be counted and he/she may be counted in the quorum at any meeting of the directors at which any such contract or proposed contract or arrangement is considered. Our board of directors may exercise all of the powers of our company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt, liability or obligation of our company or of any third party. None of our directors has a service contract with us that provides for benefits upon termination of service as a director. Committees of the Board of Directors Our Board of Directors has established an audit committee, a compensation committee and a nominating and corporate governance committee under our Board of Directors. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below. Audit Committee Our audit committee consists of Mr. Fengyong Gao, Mr. Lin Xu and Mr. Xi Wang, and is chaired by Mr. Fengyong Gao. We have determined that Mr. Fengyong Gao, Mr. Lin Xu and Mr. Xi Wang satisfy the requirements of Section 303A of the Corporate Governance Rules of the NYSE and meet the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. We have determined that Mr. Fengyong Gao qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things: ● reviewing and recommending to our board for approval, the appointment, re-appointment or removal of the independent auditor, after considering its annual performance evaluation of the independent auditor; ● approving the remuneration and terms of engagement of the independent auditor and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors at least annually; ● obtaining a written report from our independent auditor describing matters relating to its independence and quality control procedures; ● reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response; ● discussing with our independent auditor, among other things, the audits of the financial statements, including whether any material information should be disclosed, issues regarding accounting and auditing principles and practices; ● reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; ● reviewing and recommending the financial statements for inclusion within our quarterly earnings releases and to our board for inclusion in our annual reports; 117 ● discussing the annual audited financial statements with management and the independent registered public accounting firm; ● reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any special steps taken to monitor and control major financial risk exposures; ● at least annually, reviewing and reassessing the adequacy of the committee charter; ● approving annual audit plans, and undertaking an annual performance evaluation of the internal audit function; ● establishing and overseeing procedures for the handling of complaints and whistleblowing; ● meeting separately and periodically with management and the independent registered public accounting firm; ● monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance; and ● reporting regularly to the board. Compensation Committee Our compensation committee consists of Mr. Bin Zhai, Mr. Jun Qian and Mr. Fengyong Gao and is chaired by Mr. Bin Zhai. We have determined that Mr. Fengyong Gao satisfies the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his or her compensation is deliberated upon. The compensation committee is responsible for, among other things: ● overseeing the development and implementation of compensation programs in consultation with our management; ● at least annually, reviewing and approving, or recommending to the board for its approval, the compensation for our executive officers; ● at least annually, reviewing and recommending to the board for determination with respect to the compensation of our non-executive directors; ● at least annually, reviewing periodically and approving any incentive compensation or equity plans, programs or other similar arrangements; ● reviewing executive officer and director indemnification and insurance matters; ● overseeing our regulatory compliance with respect to compensation matters, including our policies on restrictions on compensation plans and loans to directors and executive officers; ● at least annually, reviewing and reassessing the adequacy of the committee charter; ● selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management; and ● reporting regularly to the board. 118 Nominating and Corporate Governance Committee Our nominating and corporate governance committee consists of Mr. Bin Zhai, Mr. Jun Qian and Mr. Xi Wang, and is chaired by Mr. Bin Zhai. We have determined that Mr. Xi Wang satisfies the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. The nominating and corporate governance committee assists the board in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things: ● recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board; ● reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience, expertise, diversity and availability of service to us; ● developing and recommending to our board such policies and procedures with respect to nomination or appointment of members of our board and chairs and members of its committees or other corporate governance matters as may be required pursuant to any SEC or NYSE rules, or otherwise considered desirable and appropriate; ● selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the nominating and corporate governance committee itself; ● at least annually, reviewing and reassessing the adequacy of the committee charter; ● developing and reviewing at least annually the corporate governance principles adopted by the board and advising the board with respect to significant developments in the law and practice of corporate governance and our compliance with such laws and practices; and ● evaluating the performance and effectiveness of the board as a whole. Duties and Functions of Directors Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our company a duty to exercise the skill they actually possess and such care and diligence that a reasonable prudent person would exercise in comparable circumstances. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association, as amended and restated from time to time. Our company has the right to seek damages if a duty owed by our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached. The functions and powers of our Board of Directors include, among others, (i) convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings, (ii) declaring dividends, (iii) appointing officers and determining their terms of offices and responsibilities, and (iv) approving the transfer of shares of our company, including the registering of such shares in our share register. Terms of Directors and Officers Our officers are elected by and serve at the discretion of the board. Each director is not subject to a term of office and holds office until such time as his successor takes office or until the earlier of his death, resignation or removal from office by special resolution or the unanimous written resolution of all shareholders. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be of unsound mind; (iii) resigns by notice in writing to our company; (iv) without special leave of absence from our Board of Directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated; (v) is prohibited by law from being a director; or (vi) is removed from office pursuant to any other provisions of our post-offering amended and restated memorandum and articles of association. 119 Interested Transactions A director may, subject to approval of the chairman of the relevant board meeting and under applicable law or applicable NYSE rules, vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that matter. 6.D. Employees We had 930 employees as of December 31, 2022. Our employees are based in our headquarters in Guangzhou, Guangdong province and various local offices over 50 cities across China. The following table sets forth the breakdown of our employees by function as of December 31, 2022. Functions Risk Management Sales and Marketing General and Administration Finance Others Total As of December 31, 2022 Number % of Total Employees 532 174 99 65 60 930 57.2% 18.7% 10.6% 7.0% 6.5% 100.0% As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including, among other things, housing, pension, medical insurance and unemployment insurance. We typically enter into standard employment, confidentiality and non-compete agreements with our senior management. These contracts include a standard non-compete covenant that prohibits any employee from competing with us, directly or indirectly, during his or her employment and for two years after the termination of employment, provided that we pay monthly compensation equal to 30% of his or her previous average monthly salary during the restriction period. We believe that we maintain a good working relationship with our employees, and we have not experienced any labor disputes. None of our employees are represented by labor unions. 6.E. Share Ownership The following table sets forth information concerning the beneficial ownership of our ordinary shares, as of March 31, 2023, by: ● each of our directors and executive officers; and ● each person known to us to beneficially own more than 5% of our ordinary shares. The calculations in the table below are based on 1,371,643,240 ordinary shares issued and outstanding as of the date of March 31, 2023. 120 Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. Functions Directors and Executive Officers:† Bin Zhai(1) Jun Qian(2) Zehui Zhang(3) Huiling Jiang Jing Li Fengyong Gao Lin Xu Xi Wang Ge Yang Principal Shareholders: Kylin Investment Holdings Limited(4) Notes: Ordinary Shares Beneficially Owned as of March 31, 2023 Number %* 283,949,380 20,000,000 20,000,000 — — — — — — 20.1% 1.4% 1.4% — — — — — — 243,949,380 17.8% * † For each person and group included in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of (i) 1,371,643,240, being the number of ordinary shares as of March 31, 2023 and (ii) the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after March 31, 2023. The business address of our directors and executive officers except for Mr. Fengyong Gao, Mr. Lin Xu, Mr. Xi Wang and Mr. Ge Yang is 44/F Tower G, No. 16 Zhujiang Dong Road, Tianhe District, Guangzhou City, Guangdong, People’s Republic of China. The business address for Mr. Fengyong Gao is Room 702A, No.1518 Minsheng Road, Pudong New District, Shanghai. The business address for Mr. Lin Xu is No.1405, Building 4, No.3 Courtyard, Sanlihe Yiqu, Xicheng District, Beijing. The business address for Mr. Xi Wang is No.66 Xingang Xi Road, Guangzhou, Guangdong Province. The business address for Mr. Ge Yang is 32 Crabtree Ln Tenafly, NJ 07670, the U.S.A. (1) Includes (i) options we granted to Mr. Bin Zhai under the 2018 Plan to purchase up to 40,000,000 of our ordinary shares that are immediately exercisable; and (ii) the equity interest held by Mr. Bin Zhai through Kylin Investment Holdings Limited, or Kylin Investment, as set forth in note (4) below. (2) Includes options we granted to Mr. Jun Qian under the 2018 Plan to purchase up to 20,000,000 of our ordinary shares that are immediately exercisable. This does not include the equity interest held by Mr. Jun Qian through Kylin Investment, as set forth in note (4) below. (3) Includes options we granted to Mr. Zehui Zhang under the 2018 Plan to purchase up to 20,000,000 of our ordinary shares that are immediately exercisable. This does not include the equity interest held by Mr. Zehui Zhang through Kylin Investment, as set forth in note (4) below. (4) Represents 243,949,380 ordinary shares of our company held by Kylin Investment Holdings Limited, or Kylin Investment, a company incorporated in the British Virgin Islands. 50% of the total outstanding shares of Kylin Investment are held by Mr. Bin Zhai, our chairman and chief executive officer. 30% of the total outstanding shares of Kylin Investment are held by Mr. Ning Li, our former executive director and former chief financial officer. 10% of the total outstanding shares of Kylin Investment are held by Mr. Jun Qian, one of our officers and 10% of the total outstanding shares of Kylin Investment are held by Mr. Zehui Zhang, one of our officers. Mr. Bin Zhai may be deemed to have the power to direct voting and disposition of the 243,949,380 of our ordinary shares held by Kylin Investment. The business address of Kylin Investment Holdings Limited is Floor 44, Building G, Winter Square, Gaode Land, Guangzhou, Guangdong Province, People’s Republic of China. 6.F. Disclosure of a Registrant's Action to Recover Erroneously Awarded Compensation Not applicable 121 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7.A. Major Shareholders Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.” 7.B. Related Party Transactions Employment Agreements See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Employment Agreements and Indemnification Agreements” for a description of the employment agreements we have entered into with our senior executive officers. Share Incentives See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Share Incentive Plan” for a description of share options we have granted to our directors, officers and other individuals as a group. Other Related Party Transactions The Group did not have any other related party transactions in the year ended December 31, 2022. 7.C. Interests of Experts and Counsel Not applicable. ITEM 8. FINANCIAL INFORMATION 8.A. Consolidated Statements and Other Financial Information We have appended consolidated financial statements filed as part of this annual report. Legal and Administrative Proceedings We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in a substantial cost and diversion to our resources, including our management’s time and attention. For risks relating to legal and administrative proceedings against us, please see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We are involved in legal proceedings in the ordinary course of our business from time to time. If the outcomes of these proceedings are adverse to us, it could have a material adverse effect on our business, results of operations and financial condition.” Dividend Policy We have not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our shares or the ADSs representing our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. 122 We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. 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 “Item 4. Information of the Company—B. Business Overview— Regulation—Regulations on Dividend Distribution.” Our Board of Directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, subject to the provisions in our amended and restated memorandum and articles of association, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our Board of Directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the ordinary shares underlying the ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Item 12. Description of Securities Other Than Equity Securities—American Depositary Shares.” 8.B. Significant Changes Except as otherwise disclosed in this report, we have not experienced any significant changes since the date of the annual financial statements included herein. ITEM 9. THE OFFER AND LISTING 9.A. Offering and Listing Details Our ADSs have been listed on the New York Stock Exchange since November 7, 2018 under the symbol “CNF.” Each ADS represents 20 ordinary shares, par value US$0.0001 per share. 9.B. Plan of Distribution Not applicable. 9.C. Markets Our ADSs have been listed on the New York Stock Exchange since November 7, 2018 under the symbol “CNF.” 9.D. Selling Shareholders Not applicable. 9.E. Dilution Not applicable. 9.F. Expenses of the Issue Not applicable. 123 ITEM 10. ADDITIONAL INFORMATION 10.A. Share Capital Not applicable. 10.B. Memorandum and Articles of Association We incorporate by reference into this annual report our amended and restated memorandum and articles of association, the form of which was filed as Exhibit 3.2 to our registration statement on Form F-1 (File Number 333-226126), as amended, filed with the Securities and Exchange Commission on July 31,2018. Our members adopted our amended and restated memorandum and articles of association by a special resolution on July 11, 2018, which became effective immediately prior to completion of our initial public offering of ADSs representing our ordinary shares. 10.C. Material Contracts We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report. 10.D. Exchange Controls The Cayman Islands currently has no exchange control regulations or currency restrictions. For exchange control regulations or currency restrictions in China, see “Item 4. Information of the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange.” 10.E. Taxation Cayman Islands Taxation According to Walkers (Hong Kong), our Cayman counsel, the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us or holders of our ADSs or ordinary shares levied by the government of the Cayman Islands, except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands. Payments of dividends and capital in respect of the ADSs or ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the ADSs or ordinary shares, nor will gains derived from the disposal of the ADSs or ordinary shares be subject to Cayman Islands income or corporation tax. Our Company has been incorporated under the laws of the Cayman Islands as an exempted company with limited liability and, as such, has obtained an undertaking from the Government of the Cayman Islands as to tax concessions under the Tax Concessions Act (as amended). In accordance with the provision of Section 6 of the Tax Concession Act (as amended), the Governor in Cabinet undertakes with our company: ● that no law which is hereafter enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciation shall apply to our company or its operations; and ● in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable: (i) on or in respect of the shares or other obligations of our company; or (ii) by way of the withholding, in whole or part, of any relevant payment as defined in Section 6(3) of the Tax Concessions Law (as amended). 124 These concessions shall be for a period of 20 years from January 28, 2014. PRC Taxation Under the PRC EIT Law, which became effective on January 1, 2008 and was lastly amended on December 29, 2018, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the PRC EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the SAT Circular 82 issued by the SAT in April 2009 and as amended on December 29, 2017, specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: (a) senior management personnel and departments that are responsible for daily production, operation and management; (b) financial and personnel decision-making bodies; (c) key properties, accounting books, company seal, minutes of board meetings and shareholders’ meetings; and (d) half or more of the senior management or directors having voting rights. Further to SAT Circular 82, the SAT issued the SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration details of determination on resident status and administration on post-determination matters. Our company is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. As such, we do not believe that our company meets all of the conditions above or is a PRC resident enterprise for PRC tax purposes. For the same reasons, we believe our other entities outside China are not PRC resident enterprises either. 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.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us. If the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. For example, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders (including our ADS holders). In addition, nonresident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be able to obtain 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. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.” Material U.S. Federal Income Tax Considerations The following are material U.S. federal income tax consequences to the U.S. Holders described below of the ownership and disposition of the ADSs or ordinary shares, but this discussion does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold such ADSs or ordinary shares. This discussion applies only to a U.S. Holder that holds the ADSs or ordinary shares as capital assets for U. S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the alternative minimum tax, the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special rules, such as: ● certain financial institutions; ● dealers or traders in securities that use a mark-to-market method of tax accounting; ● persons holding ADSs or ordinary shares as part of a straddle, conversion transaction or similar transaction; ● persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; 125 ● entities classified as partnerships for U.S. federal income tax purposes; ● tax-exempt entities, “individual retirement accounts” or “Roth IRAs”; ● persons who acquired our ADSs or ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation; ● persons that own or are deemed to own 10% or more of the Company’s stock by vote or value; or ● persons holding ADSs or ordinary shares in connection with a trade or business conducted outside the United States. If an entity that is classified as a partnership for U.S. federal income tax purposes owns ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning ADSs or ordinary shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of ADSs and ordinary shares. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”) administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, and the income tax treaty between the United States and the PRC (the “Treaty”), all as of the date hereof, any of which is subject to change, possibly with retroactive effect. This discussion assumes that each obligation under the deposit agreement will be performed in accordance with its terms. As used herein, a “U.S. Holder” is a person eligible for Treaty benefits that is, for U.S. federal income tax purposes is a beneficial owner of the Company’s ADSs or ordinary shares and is: ● a citizen or individual resident of the United States; ● a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or ● an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. In general, a U.S. Holder that owns ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs. This discussion does not address the effects of any state, local or non-U.S. tax laws, or any U.S. federal taxes other than income taxes (such as U.S. federal estate or gift tax consequences). U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ADSs or ordinary shares in their particular circumstances. Passive Foreign Investment Company In general, a non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the equity interests of another corporation or partnership is treated as if it held its proportionate share of the assets of the other corporation or partnership and received directly its proportionate share of the income of the other corporation of partnership. Passive income generally includes interest, income equivalent to interest, rents, dividends, royalties and gains from financial investments. 126 It is not entirely clear how the PFIC rules should apply to a company with a business such as ours. For example, although the loans issued through our trust plans are shown in their entirety as our assets on our consolidated balance sheet, it is not clear whether for purposes of the PFIC rules we should be treated as owning only our subordinated interests in the trust plans, and earning only the portion of the trust plans’ interest income attributable thereto. If we are treated as owning only the subordinated units and the portion of the trust plans’ loans attributable thereto, our PFIC status for any taxable year may depend on the relative values of the loans we are treated as owning and our other passive assets on the one hand, and the value of our goodwill (to the extent attributable to the services we provide) and fee receivables on the other hand. The extent to which our goodwill should be treated as an active asset is not entirely clear. Moreover, the value of our goodwill may be determined by reference to our market capitalization, which has been, and may continue to be, volatile. In addition, we provide loan facilitation, loan administration and other services in connection with the loans issued by our trust plans and we charge our trust plans service fees that are eliminated in, and therefore not shown on, our consolidated income statement. Therefore, our PFIC status for any taxable year may depend on the relative amounts of our fee and interest income (which may be less than the amount of interest income shown on our income statement, if we are treated as owning only a portion of the trusts’ loans). Furthermore, it is not entirely clear whether a portion of the interest income earned by the trust plans could be treated as payable in part for services to the borrowers. Although our PFIC status for any taxable year is not entirely clear, based on the composition of our income and assets and the manner in which we currently operate our business, we were likely a PFIC for our 2022 and prior taxable years, and will likely be a PFIC for our 2023 taxable year and future taxable years, subject to the discussion in the subsequent paragraph regarding the Active Financing Exception, as defined below. U.S. Holders should consult their tax advisors regarding the proper application of the PFIC rules to us and our PFIC status for any taxable year. For purposes of the PFIC rules “passive income” is defined by way of a cross-reference to Section 954(c) of the Code, which applies for purposes of the Code’s “controlled foreign corporation”(“CFC”) rules. A different provision under the CFC rules (namely Section 954(h) of the Code) sets forth an exception for interest income derived by “eligible CFCs” that are “predominantly engaged” in the active conduct of a financing or similar business (the “Active Financing Exception”). Because the Active Financing Exception addresses eligible CFCs, there has been uncertainty as to whether it could apply to determine the PFIC status of companies that are not CFCs, such as our company. Proposed Treasury regulations promulgated in 2019 (the “2019 Proposed Regulations”) provided that the Active Financing Exception could apply to determine the PFIC status of such companies. However, in 2020 these regulations were finalized (the “2020 Final Regulations”) without addressing the Active Financing Exception. Although the 2020 Final Regulations are silent on the availability of the Active Financing Exception to companies like us, in the preamble to the 2020 Final Regulations Treasury expressed its position that under current law the Active Financing Exception does not apply in determining the PFIC status of a company that is neither a CFC nor a bank. The 2020 Final Regulations apply to taxable years of shareholders beginning on or after January 14, 2021. Treasury indicated in the preamble to the 2020 Final Regulations that taxpayers can rely on the 2019 Proposed Regulations to apply the Active Financing Exception for any open taxable year ending on or before December 31, 2020. Concurrently with the issuance of the 2020 Final Regulations, Treasury issued proposed regulations (the “2020 Proposed Regulations”) that would state explicitly that the Active Financing Exception is available only if the tested non-U.S. corporation is a bank. The 2020 Proposed Regulations have not been finalized yet. Based on the foregoing, U.S. Holders (i) generally are permitted to apply the Active Financing Exception for a taxable year ending on or before December 31, 2020 (provided that we in fact satisfied the exception’s conditions for the relevant year), (ii) should expect that the Internal Revenue Service (the “IRS”) will not agree with a return position that applies the Active Financing Exception for any subsequent taxable year, and (iii) should be aware that if the 2020 Proposed Regulations are finalized in their current form they will not be able to take the position that the Active Financing Exception applies for any taxable year to which the regulations apply. If we were “predominantly engaged” in the active conduct of a financing or similar business (as defined for purposes of the Active Financing Exception) and met all of the exception’s requirements then we would not be a PFIC for any taxable year with respect to which taxpayers validly applied the Active Financing Exception, if applicable. U.S. Holders should be aware that we have not determined whether these requirements were in fact satisfied. Moreover, if any of our trust plans is treated as a partnership for U.S. federal income tax purposes, and if such trust’s senior unit holders are treated as owning interests in such partnership other than as creditors, the characterization of our interest income as active under the Active Financing Exception may also depend, in part, on whether we owned 25% or more of the value of such trust for the relevant taxable years. U.S. Holders should consult their tax advisers as to whether the Active Financing Exception could apply to us with respect to any taxable year prior to the finalization of the 2020 Proposed Regulations, and whether it is advisable to take this position in light of Treasury’s views, as described above. Our company may also hold, directly or indirectly, equity interests in subsidiaries and other entities which are PFICs (collectively “Lower-tier PFICs”). Under attribution rules, if we are a PFIC, U.S. Holders will be deemed to own their proportionate share of the equity interests in each Lower-tier PFICs and will be subject to U.S. federal income tax according to the PFIC rules described below on (i) certain distributions by a Lower-tier PFIC and (ii) a disposition of equity interests of a Lower-tier PFIC, in each case as if the U.S. Holder held such interests directly, even though the U.S. Holders will not receive the proceeds of those distributions or dispositions directly. 127 A U.S. Holder that owns our company’s ADSs or ordinary shares (or as discussed above is deemed to own equity interests of any Lower-tier PFIC) during any taxable year in which we are a PFIC will generally be subject to adverse tax treatment. In general, gain recognized on a disposition (including, under certain circumstances, a pledge) of ADSs or ordinary shares by the U.S. Holder (or on an indirect disposition of equity interests of any Lower-tier PFIC) will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares. The amounts allocated to the taxable year of disposition and to any year before we (or, a Lower-tier PFIC, as the case may be) became a PFIC, will be taxed as ordinary income. The amounts allocated to each other taxable year will be subject to tax at the highest rate in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge will be imposed on the resulting tax liability for each taxable year. Any loss recognized upon disposition of ADSs or ordinary shares will be capital loss and will be long-term capital loss if the U.S. Holder held the ADSs or ordinary shares for more than one year. The deductibility of capital losses is subject to limitations. The total amount of gain (before the imposition of interest charges described above) or loss will equal the difference between the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of and the amount realized on disposition, in each case as determined in U.S dollars. Furthermore, to the extent that distributions received in a taxable year by a U.S. Holder on its ADSs or ordinary shares (or a distribution by any Lower-tier PFIC that is deemed to be received by a U.S. Holder) exceed 125% of the average of the annual distributions received (or deemed received) during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter, the distributions will be subject to taxation in the same manner. If we are a PFIC for any year during which a U.S. Holder holds ADSs or ordinary shares, we will generally continue to be treated as a PFIC with respect to such ADSs or ordinary shares held by the U.S. Holder for all succeeding years during which the U.S. Holder holds such ADSs or ordinary shares, even if we cease to be a PFIC, unless the U.S. Holder makes a “deemed sale” election, which would allow the U.S. Holder to eliminate the continuing PFIC status under certain circumstances but would require the U.S. Holder to recognize gain taxed under the general PFIC rules described above. If the ADSs are “regularly traded” on a “qualified exchange,” a U.S. Holder of ADSs may make a mark-to-market election that would result in tax treatment different from the general tax treatment for PFICs described above. The ADSs will be treated as “regularly traded” in any calendar year in which more than a de minimis quantity of the ADSs are traded on a qualified exchange on at least 15 days during each calendar quarter. The New York Stock Exchange on which the ADSs are listed is a qualified exchange for this purpose. If a U.S. Holder makes the mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ADSs at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs in a year when the Company is a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election, with any excess loss treated as a capital loss). Distributions paid on ADSs will be treated as discussed below under “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations— Taxation of Distributions.” U.S. Holders should consult their tax advisers regarding the availability and advisability of making a mark-to-market election in their particular circumstances. In particular, U.S. Holders should consider carefully the impact of a mark-to-market election with respect to their ADSs given that we may have Lower-tier PFICs and that there is no provision in the Code, Treasury regulations or any administrative guidance that would permit making a mark-to-market election with respect to any Lower-tier PFIC the shares of which are not “regularly traded” as described above. If we are a PFIC (or with respect to a particular U.S. Holder are treated as a PFIC) for a taxable year in which we pay a dividend or for the prior taxable year, the favorable tax rate applicable to “qualified dividend income” paid to certain non-corporate U.S. Holders will not apply. We do not intend to provide U.S. Holders with the information necessary to make a qualified electing fund election, which if available would result in an alternative treatment of the ADSs and ordinary shares. If a U.S. Holder owns ADSs or ordinary shares during any year in which we are PFIC, the U.S. Holder generally must file annual reports on an IRS form 8621 with respect to us and any Lower-tier PFIC, generally with the U.S. Holder’s federal income tax return for that year. The application of the PFIC rules to an investment in our ADSs or ordinary shares is complex. U.S. Holders should consult their tax advisers concerning our PFIC status for any taxable year and the application of the PFIC rules in their particular circumstances. 128 Taxation of Distributions The following discussion is subject to the discussion under “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company” above. Distributions paid on the Company’s ADSs or ordinary shares (other than certain pro rata distributions of ordinary shares) will be treated as dividends to the extent paid out of our company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not calculate our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. In light of the discussion in “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company” above, non-corporate U.S. Holders should expect that dividends, if any, will likely not be eligible for preferential tax rates. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, receipt. The amount of any dividend income paid in foreign currency will be the U.S. dollar amount calculated by reference to the spot rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars on such date. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the amount received. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Dividends will be treated as foreign-source income for foreign tax credit purposes. As described in “Item 10. Additional Information—E. Taxation—PRC Taxation,” dividends paid by the Company may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of the dividend income will include any amounts withheld in respect of PRC withholding tax. Subject to applicable limitations, which vary depending upon the U.S. Holder’s circumstances and the discussion below regarding certain Treasury regulations, PRC taxes withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty if a U.S. Holder is eligible for Treaty Benefits) generally will be creditable against a U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex and U.S. Holders generally should consult their tax advisers regarding the creditability of PRC taxes in their particular circumstances. For example, Treasury regulations provide that, in the absence of an election to apply the benefits of an applicable income tax treaty, in order for non-U.S. income taxes to be creditable, the relevant non-U.S. income tax rules must be consistent with certain U.S. federal income tax principles, and we have not determined whether the PRC income tax system meets this requirement. In lieu of claiming a credit, a U.S. Holder may elect to deduct any creditable PRC taxes in computing its taxable income, subject to applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all creditable foreign taxes paid or accrued in the taxable year. Sale or Other Taxable Disposition of ADSs or Ordinary Shares The following discussion is subject to the discussion under “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company” above. A U.S. Holder will generally recognize gain or loss on a sale or other taxable disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized on the sale or disposition and the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of, in each case as determined in U.S. dollars. Such gain or loss will be long-term capital gain or loss if, at the time of the sale or disposition, the U.S. Holder has owned the ADSs or ordinary shares for more than one year, and we are not a PFIC (or treated as a PFIC with respect to the U.S. Holder). Long-term capital gains recognized by noncorporate U.S. Holders are subject to tax rates that are lower than those applicable to ordinary income. In light of the discussion under “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations— Passive Foreign Investment Company” above, U.S. Holders should expect that any gain recognized on a sale or other taxable disposition of the ADSs or ordinary shares after the end of 2022 will likely not be treated as long-term capital gain. The deductibility of capital losses is subject to limitations. Foreign tax credit for PRC taxes imposed on disposition of ADSs or ordinary shares As described in “Item 10. Additional Information—E. Taxation—PRC Taxation,” gain on the sale of ADSs or ordinary shares may be subject to PRC taxes if the Company is considered a PRC resident enterprise for PRC enterprise income tax purposes. Under the Code, capital gains of U.S. persons are generally treated as U.S. source income. However, a U.S. Holder may be able to elect to treat the gain as foreign-source income under the Treaty and claim foreign tax credit in respect of any PRC tax on dispositions. The foreign tax credit rules generally preclude a U.S. Holder from claiming a foreign tax credit with respect to PRC income taxes on gains from dispositions of ADSs or Class A ordinary shares if the U.S. Holder does not elect to apply the benefits of the Treaty. However, in that case it is possible that any PRC taxes on disposition gains may either be deductible or reduce the amount realized on the disposition. The rules governing foreign tax credits and deductibility of foreign taxes are complex. U.S. Holders should consult their tax advisers regarding the consequences of the imposition of any PRC tax on disposition gains, including the Treaty’s resourcing rule, any reporting requirements with respect to a Treaty-based return position and the creditability or deductibility of the PRC tax on disposition gains in their particular circumstances (including any applicable limitations). 129 Information Reporting and Backup Withholding Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other exempt recipient (and if required, establishes its status as such) or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS. Certain U.S. Holders who are individuals (or certain specified entities) may be required to report information relating to their ownership of ADSs or ordinary shares or non-U.S. financial accounts through which they are held. U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to the ADSs or ordinary shares. 10.F. Dividends and Paying Agents Not applicable. 10.G. Statement by Experts Not applicable. 10.H. Documents on Display We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report. We have also filed a registration statement on Form F-6 (Registration No. 333-228089), a registration statement on Form S-8 (Registration No. 333230955), and a registration statement on Form 8-A (Registration No. 001-38726), including relevant exhibits and schedules under the Securities Act, covering the ordinary shares represented by the ADSs, as well as the ADSs. You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York and Chicago, Illinois. You also can request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the SEC’s Public Reference Room. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this website. We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers, and are required to file reports and other information with the SEC. Specifically, we are required to file annually an annual report on Form 20-F within four months after the end of each fiscal year, which is December 31. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We will furnish JPMorgan Chase Bank, N.A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us. 10.I. Subsidiary information Not applicable. 10.J. Annual Report to Security Holders Not applicable. 130 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk Our exposure to interest rate risk relates to the interest income and financing service fee on loans and interest on deposits with banks. Borrowers’ cost of borrowing mainly consist of interest rates charged under trust plans. An increase in prevailing interest rates could result in an increase in the interest rates of loans we facilitate, and borrowers may be less likely to accept such adjusted terms. If borrowers decide not to use the products or services we offer because of such an increase in market interest rates, our ability to retain existing borrowers and engage prospective borrowers as well as our competitive position may be severely impaired. Foreign exchange risk Substantially all of our revenues are denominated in Renminbi. The functional currency of our company is the Hong Kong dollar. The functional currency of SFIL, which is incorporated in British Virgin Islands, is the U.S. dollar. The functional currency of our subsidiary in the PRC is the Renminbi. We use Renminbi as our reporting currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Due to foreign currency translation adjustments, we recognized a foreign exchange loss of RMB16,166,094 in 2020, a foreign exchange loss of RMB6,936,969 in 2021, and a foreign exchange gain of RMB15,181,518 (US$2,201,113) in 2022, respectively. The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21,2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U. S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us. Inflation risk Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2020, 2021 and 2022 were increases of 0.2%, 1.5% and 1.8% respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 12.A. Debt Securities Not applicable. 12.B. Warrants and Rights Not applicable. 12.C. Other Securities Not applicable. 131 12.D. American Depositary Shares Fees and Expenses Pursuant to the terms of the deposit agreement, the depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, $5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge. The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs and/or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADSs or the deposited securities or a distribution of ADSs), whichever is applicable: ● a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs; ● a fee of up to US$0.05 per ADS for any cash distribution made pursuant to the deposit agreement; ● an aggregate fee of up to US$0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision); ● a fee for the reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of its agents (including, without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the sale of securities (including, without limitation, deposited securities), the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions); ● a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the $0.05 per ADS issuance fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto; ● stock transfer or other taxes and other governmental charges; ● cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares, ADRs or deposited securities; ● transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; ● in connection with the conversion of foreign currency into U.S. dollars, JPMorgan shall deduct out of such foreign currency the fees, expenses and other charges charged by it and/or its agent (which may be a division, branch or affiliate) so appointed in connection with such conversion; and ● fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage and/or execute any public and/or private sale of securities under the deposit agreement. 132 The fees and charges described above may be amended from time to time by agreement between us and the depositary. The depositary may make available to us a set amount or a portion of the depositary fees charged in respect of the ADR program or otherwise upon such terms and conditions as we and the depositary may agree from time to time. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide any further services to holders that have not paid those fees and expenses owing until such fees and expenses have been paid. At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary. The fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of the increase in any such fees and charges. Payments by Depositary In March 2019, excluding withholding tax, we received a US$0.4 million cash payment from JPMorgan Chase Bank, N.A., the depositary bank for our ADR program. 133 ITEM 13. ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES PART II None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 14.A.-14.D. Material Modifications to the Rights of Security Holders See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged. 14.E. Use of Proceeds The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-226126) in relation to our initial public offering, which was declared effective by the SEC on November 6, 2018. In November 2018, we completed our initial public offering in which we issued and sold an aggregate of 7,060,460 ADSs, representing 141,209,200 ordinary shares, resulting in net proceeds to us ofUS$45.7 million, net of the underwriting discounts and commissions and other fees paid or payable by us in connection with the offering. As of December 31, 2022, we had used a portion of the net proceeds received from our initial public offering for share repurchase and other general corporate purposes. ITEM 15. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Group Chief Executive Officer and Group Acting 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) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our management has concluded that, as of December 31, 2022, our existing disclosure controls and procedures were ineffective, solely due to the material weakness in internal control over financial reporting identified below. Internal Control Over Financial Reporting In the course of preparing our consolidated financial statements in the prior years, we identified one material weakness which has not been remedied in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that was identified related to our lack of sufficient financial reporting and accounting personnel with appropriate experience of U.S. GAAP and SEC reporting requirements and our failure to establish and clearly communicate acceptable policies regarding U.S. GAAP financial reporting. 134 To remediate our identified material weakness, we have implemented and will continuously use the following measures to improve our financial reporting process. For the specific material weakness, we are in the process of (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function; (ii) holding regular U.S.GAAP trainings for employees in the Finance and Capital Market Departments (on a quarterly or monthly basis) and record the results of these trainings. For internal controls over financial reporting, we involve external consultants (Deloitte Touche Tohmatsu Certified Public Accountants LLP) to assist the Group improving their internal controls under the Sarbanes-Oxley (SOX) Audit Requirements, particularly for the Group’s two main business processes: trust lending process and commercial bank partnership process. This internal control optimization process is yet to be completed, but the efforts attempted by the Group can be summarized as (i) refining and setting more control points for the above main business processes; (ii) establishing effective oversight and clear reporting requirements for complex transactions, specifically for the personnel in the Finance and Capital Market Departments; and (iii) updating the Accounting Policy Manual (APM) of CNFinance timely. However, we cannot assure you that these measures will be sufficient to remediate our material weakness in time, or at all. See “Item 3. Key Information—D. Risk factors—Risks Related to Our Business—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.” Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15 (f) and 15d- 15(f) under the Exchange Act. Our management evaluated the effectiveness of our internal control over financial reporting, as required by Rule 13a-15(c) of the Exchange Act, based on criteria established in the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was ineffective as of December 31, 2022. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Attestation Report of the Registered Public Accounting Firm This annual report on Form 20-F does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Changes in Internal Control Over Financial Reporting There were two changes in our internal control over financial reporting during the period covered by this annual report on Form 20-F that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. Such changes include (i) refining and setting more control points for our main business processes, namely the trust lending process and commercial bank partnership process; (b) establishing effective oversight and clear reporting requirements for complex transactions, specifically for the personnel in the Finance and Capital Market Departments. ITEM 16. [Reserved] 16.A. Audit Committee Financial Expert Our Board of Directors has determined that Mr. Fengyong Gao, an independent director and the chairperson of our audit committee, qualifies as an “audit committee financial expert” within the meaning of the SEC rules and possesses financial sophistication within the meaning of Listing Rules of the New York Stock Exchange. Mr. Fengyong Gao satisfies the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Section 303A of the Corporate Governance Rules of the NYSE. 135 16.B. Code of Ethics Our Board of Directors has adopted a code of business conduct and ethics that applies to all of our directors, officers, employees, including certain provisions that specifically apply to our principal executive officer, principal financial officer, principal accounting officer or controller and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-226126), as amended, filed with the SEC on July 31, 2018 and posted a copy of our code of business conduct and ethics on our website at ir.cashchina.cn. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request. 16.C. Principal Accountant Fees and Services Auditor Fees The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by KPMG Huazhen LLP, our independent registered public accounting firm, for the periods indicated. Services Audit Fees (1) Audit-Related Fees (2) Tax Fees (3) Other Fees (4) Total 2020 RMB Year Ended December 31, 2021 RMB (in thousands) 2022 RMB 6,585 — — — 6,585 7,353 — — — 7,353 6,620 — — 100 6,720 (1) Audit Fees. Audit fees mean the aggregate fees billed in each of the fiscal periods listed for professional services rendered by our principal auditors for the audit of our annual consolidated financial statements and assistance with and review of documents filed with the SEC. (2) Audit-related Fees. Audit-related fees mean the aggregate fees billed for professional services rendered by our principal auditors for the assurance and related services, which were not included under Audit Fees above. (3) Tax Fees. Tax fees mean fees incurred from professional services related to tax compliance. (4) Other Fees. Other fees mean fees incurred from professional services related to training, advisory and assurance for corporate and social responsibility reporting and professional services related to tax advice. The policy of our audit committee is to pre-approve all audit and non-audit services provided by KPMG Huazhen LLP, our independent registered public accounting firm, including audit services and audit-related services as described above, other than those for de minimis services which are approved by the audit committee prior to the completion of the audit. 16.D. Exemptions from the Listing Standards for Audit Committees Not applicable. 136 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers On March 16, 2022, our board of directors authorized a share repurchase program whereby our company was authorized a share repurchase program under which the Company may repurchase up to US$20.0 million of its ordinary shares in the form of American depositary shares during a period of up to 12 months commencing on March 16, 2022 (the “Share Repurchase Program”). The Company’s share repurchases may be made from time to time on the open market at prevailing market prices, in open-market transactions, privately negotiated transactions or block trades, and/or through other legally permissible means, depending on market conditions and in accordance with the applicable rules and regulations. The timing and conditions of the share repurchases will be subject to various factors including the requirements under Rule 10b-18 and Rule 10b5-1 of the Exchange Act. Our board of directors will review the share repurchase program periodically and may authorize adjustments to its terms and size or suspend or discontinue the program. Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report. 16.F. Change in Registrant’s Certifying Accountant Not applicable. 16.G. Corporate Governance We are a “foreign private issuer” (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs, each representing twenty ordinary shares, are listed on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York Stock Exchange listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the New York Stock Exchange with limited exceptions. The following summarizes some significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of the New York Stock Exchange. Director independence The NYSE Standards require a majority of the membership of NYSE-listed company boards to be composed of independent directors, which is not required under Cayman Islands law, the law of our country of incorporation. Our Board of Directors currently consists of six members, three of whom are independent directors. Non-management directors’ executive sessions The NYSE Standards require non-management directors of NYSE-listed companies to meet at regularly scheduled executive sessions without management. We are not subject to this requirement under the Cayman Islands law. Committee member composition The NYSE Standards require NYSE-listed companies to have a nominating/corporate governance committee and a compensation committee that are composed entirely of independent directors. Cayman Islands law does not impose similar requirements. We do not have a nominating/corporate governance committee. Currently, our compensation committee is composed of three members, only one of whom is an independent director. Our corporate governance and nominating committee is composed of three members, only one of whom is an independent director. Shareholder Approval The NYSE Standards require shareholder approval in connection with (i) equity-compensation plans and material revisions thereto; and (ii) issuance of shares under certain circumstances, including in connection with a transaction involving the issuance or potential issuance by the Company of common stock (or their equivalent) equal to 20% or more of the common stock or 20% voting power outstanding before the issuance. We are not subject to such shareholder approval requirements under the Cayman Islands law nor in our amendment and restated memorandum and articles of association. 137 16.H. Mine Safety Disclosure Not applicable. 16.I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections For the immediately preceding annual financial statement period, our auditor, which is a registered public accounting firm that the PCAOB was unable to inspect or investigate completely because of a position taken by the PRC government, issued our audit report that was included in our Form 20-F for the fiscal year of 2021. As of the date of this annual report and to our best knowledge: i) none of our shares are owned by governmental entities in the jurisdiction in which we are in corporated or otherwise organized; ii) none of the governmental entities in the applicable foreign jurisdiction with respect to our registered public accounting firm have a controlling financial interest in us; iii) none of the members of our board of directors or the board of directors of our operating entity is an official of the Chinese Communist Party; and iv) our amended and restated memorandum and articles of association does not contain any charter of the Chinese Communist Party. ITEM 16.J. INSIDER TRADING POLICIES Not applicable. 138 PART III ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements pursuant to Item 18. ITEM 18. FINANCIAL STATEMENTS Our consolidated financial statements are included at the end of this annual report. ITEM 19. EXHIBITS Exhibit Number 1.1 2.1 2.2 2.3 2.4* 4.1 4.2 4.3 4.4 4.5 4.6 Description of Document Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 3.2 from our registration statement on Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) Form of Registrant’s Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.1 from our registration statement on Form F-1 (File No. 333-226126). as amended, initially filed publicly with the SEC on July 11, 2018) Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 from our registration statement on Form F- 1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) Form of Deposit Agreement (incorporated by reference to Exhibit 4.3 from our registration statement on Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) Description of Securities registered under Section 12 of the Exchange Act Form of Indemnification Agreement with the Registrant’s directors (incorporated by reference to Exhibit 10.1 from our registration statement on Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) Form of Employment Agreement between the Registrant and the executive officers of the Registrant (incorporated by reference to Exhibit 10.2 from our registration statement Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) 2018 CNFinance Holdings Limited Share Incentive Plan (incorporated by reference to Exhibit 10.3 from our registration statement Form F- 1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) English translation of Cooperative Service and Management Agreement between Shenzhen Fanhua United Investment Group Co., Ltd, and FOTIC, dated March 15, 2018 (incorporated by reference to Exhibit 10.4 from our registration statement Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) English translation of FOTIC Jinghua No. 5 Project Service Agreement between the Company and China Foreign Economy and Trade Trust Co., Ltd. (“FOTIC”), dated December 19, 2014 (incorporated by reference to Exhibit 10.5 from our registration statement Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) English translation of FOTIC Jinghua Structure Fund 5 Trust Plan-Structure Funds Trust Contract (Subordinated Level) between the Company and FOTIC, dated December 19, 2014 (incorporated by reference to Exhibit 10.6 from our registration statement Form F-1 (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) 8.1* 11.1 List of subsidiaries of the Registrant Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our registration statement Form F-1 12.1* 12.2* 13.1** 13.2** 15.1* 15.2* 15.3* 15.4** 101.INS* 101.SCH* 101.CAL* 101.DEF* 101.LAB* 101.PRE* (File No. 333-226126), as amended, initially filed publicly with the SEC on July 11, 2018) Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Consent of Merits & Tree Law Offices Consent of Walkers (Hong Kong) Consent of KPMG Huazhen LLP, Independent Registered Public Accounting Firm Submisssion under Item16I(a) of Form 20-f in relation to the Holding Foreign Companies Accountable Act Inline XBRL Instance Document Inline XBRL Taxonomy Extension Schema Document Inline XBRL Taxonomy Extension Calculation Linkbase Document Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Label Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith ** Furnished herewith 139 The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Date: April 25, 2023 CNFinance Holdings Limited SIGNATURES By: /s/ Bin Zhai Name: Bin Zhai Title: Chief Executive Officer and Chairman 140 CNFINANCE HOLDINGS LIMITED Consolidated Financial Statements December 31, 2020, 2021 and 2022 (With Independent Registered Public Accounting Firm’s Report Thereon) F-1 CNFINANCE HOLDINGS LIMITED INDEX TO CONSOLIDATED FINANCIAL STATEMENT CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 1186) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2021 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PAGE(S) F-3 F-4 – F-5 F-6 F-7 F-8 – F-9 F-10 – F-68 F-2 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors CNFinance Holdings Limited: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of CNFinance Holdings Limited (CNFinance) , its subsidiaries and variable interest entities (the Company) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL). Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG Huazhen LLP We have served as the Company’s auditor since 2013. Guangzhou, China April 25, 2023 F-3 CNFINANCE HOLDINGS LIMITED Consolidated balance sheets Assets Cash, cash equivalents and restricted cash (including amounts of the consolidated VIEs of RMB1,516,044,449 and 1,265,876,948 as of December 31, 2021 and 2022, respectively) Loans principal, interest and financing service fee receivables (including amounts of the consolidated VIEs of RMB9,352,354,803 and 8,911,163,298 as of December 31, 2021 and 2022, respectively) Allowance for credit losses (including amounts of the consolidated VIEs of RMB962,821,917 and 729,743,207 as of December 31, 2021 and 2022, respectively) Net loans principal, interest and financing service fee receivables (including amounts of the consolidated VIEs of RMB8,389,532,886 and 8,181,420,091 as of December 31, 2021 and 2022, respectively) Loans held-for-sale (including amounts of the consolidated VIEs of RMB699,730,547 and Note 4 5 December 31, 2021 RMB December 31, 2022 RMB 2,231,437,361 1,772,184,145 9,412,717,366 9,456,802,188 975,850,851 763,996,187 8,436,866,515 8,692,806,001 1,122,309,299 as of December 31, 2021 and 2022, respectively) 5(d) 1,095,412,086 1,844,438,134 Investment securities (including amounts of the consolidated VIEs of RMB709,255,924 and 205,711,749 as of December 31, 2021 and 2022, respectively) Property and equipment Intangible assets and goodwill Deferred tax assets (including amounts of the consolidated VIEs of RMB6,903 and nil as of December 31, 2021 and 2022, respectively) Deposits (including amounts of the consolidated VIEs of RMB152,998,895 and 137,661,130 as of December 31, 2021 and 2022, respectively) Right-of-use assets (including amounts of the consolidated VIEs of RMB98,238 and 309,531 as of December 31, 2021 and 2022, respectively) Guaranteed assets (including amounts of the consolidated VIEs of RMB917,426,116 and 716,129,457 as of December 31, 2021 and 2022, respectively) Other assets (including amounts of the consolidated VIEs of RMB550,145 and 19,878,136 as of December 31, 2021 and 2022, respectively) Total assets Liabilities and shareholders’ equity Interest-bearing borrowings Borrowings under agreements to repurchase Other borrowings (including amounts of the consolidated VIEs of RMB8,041,816,663 and 7,727,559,337 as of December 31, 2021 and 2022, respectively) Accrued employee benefits (including amounts of the consolidated VIEs of RMB111,980 and 61,602 as of December 31, 2021 and 2022, respectively) Income taxes payable (including amounts of the consolidated VIEs of RMB733,159 and 902,734 as of December 31, 2021 and 2022, respectively) Deferred tax liabilities (including amounts of the consolidated VIEs of nil and RMB15,863 as of December 31, 2021 and 2022, respectively) Lease liabilities (including amounts of the consolidated VIEs of RMB98,238 and 246,081 as of December 31, 2021 and 2022, respectively) Credit risk mitigation position Other liabilities (including amounts of the consolidated VIEs of RMB125,172,432 and 144,061,166 as of December 31, 2021 and 2022, respectively) Total liabilities 6 7 8 27 9 31 10 11 12 27 31 13 14 1,088,044,211 3,041,946 4,009,372 518,644,561 2,284,262 3,487,733 21,068,094 76,904,707 156,954,100 145,093,301 16,196,806 29,777,357 928,314,725 726,410,799 404,826,131 669,888,900 14,386,171,347 14,481,919,900 45,250,000 112,642,010 8,041,892,080 7,727,559,337 24,223,752 31,644,590 154,957,182 186,901,268 151,828,860 73,752,022 15,521,022 28,583,475 1,348,449,426 1,354,653,070 785,761,285 1,028,470,668 10,567,883,607 10,544,206,440 The accompanying notes are an integral part of these consolidated financial statements. F-4 CNFINANCE HOLDINGS LIMITED Consolidated balance sheets (continued) Ordinary shares (USD0.0001 par value; 3,800,000,000 shares authorized; 1,559,576,960 shares issued and 1,371,643,240 shares outstanding as of December 31, 2021 and December 31, 2022, respectively) Treasury stock Additional paid-in capital Retained earnings Accumulated other comprehensive losses Total equity attributable to owners of the Company Non-controlling interests Total shareholders’ equity Total liabilities and shareholders’ equity Note 15 16 17 18 December 31, 2021 RMB December 31, 2022 RMB 916,743 916,743 (87,631,475) - 1,018,429,249 1,024,203,515 2,824,335,263 2,958,716,295 (10,211,997) (25,393,515) 3,818,287,740 3,885,993,081 - 51,720,379 3,818,287,740 3,937,713,460 14,386,171,347 14,481,919,900 The accompanying notes are an integral part of these consolidated financial statements. F-5 CNFINANCE HOLDINGS LIMITED Consolidated statements of comprehensive income Note Year ended December 31 2021 RMB 2020 RMB 2022 RMB Interest and fees income 19 1,854,823,409 1,815,773,980 1,731,352,575 Interest expenses on interest-bearing borrowings (731,315,365) (775,565,615) (784,776,537) Net interest and fees income 1,123,508,044 1,040,208,365 946,576,038 Net revenue under the commercial bank partnership model Collaboration cost for sales partners Net interest and fees income after collaboration cost Provision for credit losses Net interest and fees income after collaboration cost and provision for credit losses Realized gains on sales of investments, net Net losses on sales of loans Other gains, net Total non-interest (losses)/income Operating expenses Employee compensation and benefits Share-based compensation expenses Taxes and surcharges Operating lease cost Other expenses Total operating expenses Income before income tax expense Income tax expense Net income Earnings per share Basic Diluted Other comprehensive (losses)/income Net unrealized losses on investment securities Foreign currency translation adjustment Comprehensive income 20 21 22 23 24 25 29 30 26 27 28 - 107,072 57,551,005 (415,104,428) (425,736,650) (320,826,549) 708,403,616 614,578,787 683,300,494 (77,348,480) 298,467,893 (238,084,863) 631,055,136 913,046,680 445,215,631 20,153,659 (50,606,487) 9,760,472 19,170,436 (479,584,775) 22,061,842 20,566,672 (44,554,948) 89,914,038 (20,692,356) (438,352,497) 65,925,762 (190,374,014) (62,073,367) (49,452,609) (21,719,042) (124,042,182) (211,168,519) (18,766,367) (35,729,101) (14,764,364) (100,500,388) (197,035,872) (5,774,266) (35,890,761) (13,966,943) (85,889,497) (447,661,214) (380,928,739) (338,557,339) 162,701,566 (47,849,040) 93,765,444 (28,557,980) 172,584,054 (37,232,643) 114,852,526 65,207,464 135,351,411 0.08 0.08 0.05 0.05 0.10 0.09 (171,040) (16,166,094) - (6,936,969) - 15,181,518 98,515,392 58,270,495 150,532,929 Less: net income attributable to non-controlling interests - - 970,379 Total comprehensive income attributable to ordinary shareholders 98,515,392 58,270,495 149,562,550 The accompanying notes are an integral part of these consolidated financial statements. F-6 CNFINANCE HOLDINGS LIMITED Consolidated statements of changes in shareholders’ equity Note Ordinary shares RMB Treasury Stock RMB Additional paid-in capital RMB Accumulated other comprehensive (losses)/ income RMB Retained earnings RMB Non- controlling interest RMB Total equity RMB Balance as of January 1, 2020 Cumulative effect from change in accounting policies (1) Net income Foreign currency translation adjustment Unrealized losses on investment securities Share-based compensation Balance as of December 31, 2020 Balance as of January 1, 2021 Net income Foreign currency translation adjustment Share-based compensation 18 18 29 18 29 916,743 - 937,589,515 (2,119,412) 2,662,145,649 - 3,598,532,495 - - - - - - - - - - - - - (17,870,376) - 114,852,526 - (17,870,376) - 114,852,526 - (16,166,094) - 62,073,367 (171,040) - - - - - (16,166,094) - - (171,040) 62,073,367 916,743 - 999,662,882 (18,456,546) 2,759,127,799 - 3,741,250,878 916,743 - - 999,662,882 - - (18,456,546) 2,759,127,799 65,207,464 - - 3,741,250,878 65,207,464 - - - - - - 18,766,367 (6,936,969) - - - - - (6,936,969) 18,766,367 Balance as of December 31, 2021 916,743 - 1,018,429,249 (25,393,515) 2,824,335,263 - 3,818,287,740 Balance as of January 1, 2022 Repurchase of treasury stock Net income Foreign currency translation adjustment Share-based compensation Contributions from non-controlling interests 916,743 - (87,631,475) - - - 1,018,429,249 - - (25,393,515) 2,824,335,263 - - - 134,381,032 - 3,818,287,740 (87,631,475) - 970,379 135,351,411 18 29 2(a) - - - - - - - 5,774,266 15,181,518 - - - - - 15,181,518 5,774,266 - - - 50,750,000 50,750,000 Balance as of December 31, 2022 916,743 (87,631,475) 1,024,203,515 (10,211,997) 2,958,716,295 51,720,379 3,937,713,460 (1) We adopted CECL effective January 1, 2020. For additional information, see Note 2 (Summary of Significant Accounting Policies) for more information. The accompanying notes are an integral part of these consolidated financial statements. F-7 CNFINANCE HOLDINGS LIMITED Consolidated statements of cash flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses Depreciation and amortization Share-based compensation expenses Net losses on disposal of property and equipment Foreign exchange losses/(gains) Deferred tax benefit Net losses on sale of loans Profit and loss arising from fair value changes Year ended December 31 2021 RMB 2020 RMB 2022 RMB 114,852,526 65,207,464 135,351,411 77,348,480 6,047,226 62,073,367 2,868 5,345,004 (94,389,779) 50,606,487 (56,773) (298,467,893) 3,821,788 18,766,367 328,262 (786,080) (190,009,905) 479,584,775 (1,101,669) 238,084,863 2,244,279 5,774,266 30,742 (7,355,135) (133,913,450) 44,554,948 362,855 Loans held-for-sale: Originations and purchases Proceeds from sales and paydowns of loans originally classified as held-for-sale (152,062,194) (585,434,771) (453,880,066) 637,716,580 1,006,876,340 1,549,993,492 Changes in operating assets and liabilities: Deposits Guarantee deposits Credit risk mitigation position Other operating assets Other operating liabilities 19,461,259 - 281,027,037 (28,446,434) 140,051,328 (42,902,327) (74,680,000) 138,720,288 (30,875,632) 69,090,594 11,860,799 (168,790,845) 6,203,644 (167,193,614) (12,520,372) Net cash provided by operating activities 1,119,576,982 689,692,306 919,253,112 Cash flows from investing activities: Loans originated, net of principal collected Proceeds from sales of investment securities Proceeds from disposal of non-marketable equity securities Proceeds from disposal of subsidiaries Proceeds from disposal of property and equipment and intangible assets Proceeds from sales of loans Purchases of investment securities Purchases of non-marketable equity securities Purchases of property, equipment and intangible assets - - 2,159,345 (89,215,328) (2,839,526,077) (2,556,903,189) 7,187,477,436 8,956,466,358 9,002,171,357 - 50,000,000 319,539 378,308,227 1,022,025,709 1,088,433,960 (6,951,457,436) (9,496,275,212) (8,567,330,149) (25,000,000) (89,889,341) 10,000,000 - 550,673 - (3,805,766) - (3,221,401) Net cash provided by/(used in) investing activities 524,050,843 (2,350,564,315) (1,098,197,823) The accompanying notes are an integral part of these consolidated financial statements. F-8 CNFINANCE HOLDINGS LIMITED Consolidated statements of cash flows (continued) Year ended December 31 2021 RMB 2020 RMB 2022 RMB Cash flows from financing activities: Proceeds from interest-bearing borrowings Proceeds from contributions from non-controlling shareholders Repurchase of ordinary shares Repayment of interest-bearing borrowings 6,014,983,918 7,068,023,900 6,082,283,165 50,750,000 (87,631,475) (7,382,122,623) (5,135,443,638) (6,333,557,940) - - - - Net cash (used in)/provided by financing activities (1,367,138,705) 1,932,580,262 (288,156,250) Net increase/(decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at the beginning of year Effect of exchange rate change on cash, cash equivalents and restricted cash 276,489,120 (467,100,961) 1,705,356,424 1,960,922,758 2,231,437,361 7,847,745 (20,922,786) 271,708,253 (1,193,650) Cash, cash equivalents and restricted cash at the end of year 1,960,922,758 2,231,437,361 1,772,184,145 Supplemental disclosures of cash flow information: Income taxes paid Interest expense paid 46,378,568 728,846,965 153,494,369 832,735,000 139,205,940 792,794,985 The accompanying notes are an integral part of these consolidated financial statements. F-9 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION CNFinance Holdings Limited (“CNFinance”), through its controlled subsidiaries and consolidated variable interest entities (collectively, referred to hereinafter as the “Group”) in the People’s Republic of China (“PRC”), primarily provides micro credit loan services for micro and small- enterprise (“MSE”) owners, loan facilitation and post-facilitation and guarantee services for the commercial bank, and loan lending agency service for financial institutions. The Group’s main funding resources are equity and borrowings from third parties. The loans are granted through its licensed micro credit subsidiaries in Beijing, Shenzhen and Chongqing directly, or the structured funds funded with the Group as general partners. Through the Group’s network of sales team and branch offices, prospective MSE borrowers are referred to the licensed micro credit subsidiaries or the structured funds (“the traditional facilitation model”). Home equity loans were secured by residential or commercial real estate as of December 31, 2022. In December 2018, the Group began to explore a new collaboration model to mitigate credit risks (“collaboration model”) and started to record the business under this model. The collaboration model is different from the traditional facilitation model by adding a collaboration relationship, which involves sales partners for introducing borrowers and providing a certain level of guarantee of repayment for loans recommended. Under such model, the Group is able to develop a financial services platform that matches various parties to lend resources at competitive rates. Those parties include sales partners who introduce borrowers from particular jurisdictions, trust companies that administer funds, and the loan borrowers who has financial needs for their business operations. The sales partners are nationwide mid-or-small companies that have local risk assessment capabilities. The collaboration model requires the sales partners to place a security deposit called credit risk mitigation positions which could be confiscated by the Group when loans are defaulted. The loan borrowers who are introduced by the sales partners are MSE owners who have properties that can be used as collateral. Under the collaboration model, in the event of loans issued to the borrowers acquired under such collaboration model are in default, the respective sales partners who introduced such borrowers will share the credit risks with the Group by choosing from the following options, including (i)(1) full repayment to the Group for the total unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower and acquiring respective credit rights, (i)(2) repayment in instalments to the Group for the total unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower and acquiring respective credit rights under each instalments; (ii) repayment to the Group for the unpaid principal and accrued and overdue interests under the respective loan agreement on behalf of the borrower, and if the borrower pays the payments under the loan agreement, the repayment by the sales partner on behalf of the borrower will be refunded to the sales partner; or (iii) relinquishing the respective credit risk mitigation positions (“CRMPs”) for such loan. The Group has started to collaborate with commercial banks since 2021 and such collaboration grew and scaled in the second half of 2022. Under the commercial bank partnership model, the Group provides loan facilitation services (covering matching of commercial banks to borrowers and facilitating the execution of loan agreement between commercial banks and borrowers) and post-facilitation services (covering cash processing services and collection services), and guarantee services for the off–balance sheet loans. Basis of preparation The consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). F-10 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Investment in significant subsidiaries for the year ended December 31, 2022 Name of company Sincere Fame International Limited 诚名国际有限公司 China Financial Services Group Limited 泛华金融服务集团 有限公司 Fanhua Chuang Li Information Technology (Shenzhen) Co., Ltd. 泛华创利信息技术 (深圳) 有限公司 Shenzhen Fanhua United Investment Group Co., Ltd. 深圳泛华联合投资集团 有限公司 Guangzhou Anyu Mortgage Consulting Co., Ltd. 广州安宇按揭咨询 有限公司 Chongqing Fengjie Financial Advisory Co., Ltd. 重庆丰捷财务咨询 有限公司 Guangzhou Chengze Information Technology Co., Ltd. 广州诚泽信息科技 有限公司 Chongqing Liangjiang New Area Fanhua Micro-credit Co., Ltd. 重庆市两江新区泛华 小额贷款有限公司 Shenzhen Fanhua Micro-credit Co., Ltd. 深圳泛华小额贷款 有限公司 Place and date of incorporation/ establishment Registered capital Issued and fully paid up capital Percentage of equity attributable to the Group Direct Indirect British Virgin Islands October 6, 2006 USD Hong Kong August 28, 2000 1,230,434 USD 1,230,434 100% - Principal activities Investment Holding HKD 100,000,000 HKD 100,000,000 the PRC December 21, 1999 HKD 400,000,000 HKD 400,000,000 the PRC August 9, 2006 RMB 250,000,000 RMB 250,000,000 the PRC January 23,2003 RMB 2,220,000 RMB 2,220,000 the PRC June 13, 2010 RMB 500,000 RMB 500,000 the PRC December 11, 2006 RMB the PRC December 26, 2011 3,000,000 RMB 3,000,000 USD 30,000,000 USD 30,000,000 the PRC March 15, 2012 RMB 300,000,000 RMB 300,000,000 F-11 - - - - - - - - 100% Investment Holding 100% Investment Holding 100% 100% Investment Holding Micro credit and mortgage agency services 100% Financial consultancy Software development and maintenance 100% Micro credit and mortgage agency services 100% Micro credit and mortgage agency services 100% CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Place and date of incorporation/ establishment the PRC June 8, 2012 Registered capital Issued and fully paid up capital Percentage of equity attributable to the Group Direct Indirect Principal activities Name of company Shenzhen Fanhua Fund Management Services Co., Ltd. 深圳泛华基金 管理服务有限公司 Guangzhou Heze Information Technology Co., Ltd. 广州和泽信息科技 有限公司 Beijing Lianxin Chuanghui Information Technology Co., Ltd. 北京联鑫创辉 信息技术有限公司 Shenzhen Fanlian Investment Co., Ltd. 深圳泛联投资有限公司 Fanhua Financial Leasing (Shenzhen) Co., Ltd. 泛华融资租赁 (深圳) 有限公司 Shenzhen Fanhua Chengyu Finance Service Co., Ltd. 深圳泛华诚誉金融配套 服务有限公司 RMB 5,000,000 RMB 5,000,000 the PRC September 16, 2010 RMB the PRC February 2, 2012 20,000,000 RMB 20,000,000 HKD 10,000,000 HKD 10,000,000 the PRC November 26, 2012 RMB 30,000,000 RMB 30,000,000 the PRC September 4, 2012 USD the PRC March 15, 2013 10,000,000 USD 10,000,000 RMB 10,000,000 RMB 10,000,000 Beijing Fanhua Qilin Capital Management Co., Ltd. 北京泛华麒麟资本管理 有限公司 the PRC December 26, 2016 RMB 100,000,000 RMB 10,000,000 Shijiazhuang Fanhua Financial Advisory Co., Ltd. 石家庄泛华财务咨询 有限公司 Taizhou Fanhua Financial Advisory Co., Ltd. 泰州泛华财务咨询服务 有限公司 Xuzhou Shenfanlian Enterprise Management Co., Ltd. 徐州深泛联企业管理 有限公司 the PRC July 27, 2017 RMB 2,000,000 the PRC September 28, 2017 RMB 500,000 the PRC December 7, 2017 RMB 10,000,000 - - - F-12 - - - - - - - - - - 100% Company register service Software development and maintenance 100% Software development and maintenance 100% 100% Investment Holding 100% 100% Business Advisory Labor outsourcing services 96% Asset Management 100% Financial Consultancy 100% Financial Consultancy 100% Enterprise Management CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Registered capital Issued and fully paid up capital Percentage of equity attributable to the Group Direct Indirect Principal activities Name of company Nantong Shenfanlian Enterprise Management Co., Ltd. 南通深泛联企业管理 有限公司 Baoding Fanjie Financial Advisory Co., Ltd. 保定泛杰财务咨询 有限公司 Shenzhen Fancheng Business Operation Management Partnership (Limited Partnership) 深圳泛诚商业运营管理合伙企业 (有限合伙) Fanxiaoxuan Cultural Media (Guangzhou) Co., Ltd. 泛小宣文化传媒 (广州) 有限公司 Guangzhou Fanze Information Technology Co., Ltd. 广州泛泽信息科技 有限公司 Langfang Fanhua Technology Co., Ltd. 廊坊市泛华科技 有限公司 Shenyang Fanhua Financial Advisory Co., Ltd. 沈阳市泛华财务咨询 有限公司 Luoyang Fanzhan Information technology Co., Ltd. 洛阳泛展信息科技有限公司 Lanzhou Fanhua Enterprise Information Advisory Co., Ltd. 兰州泛华企业信息咨询有限公司 Place and date of incorporation/ establishment the PRC September 8, 2017 RMB 5,000,000 the PRC February 9, 2018 RMB 500,000 the PRC June 22, 2018 - - RMB 500,000,000 RMB34,550,000 the PRC July 16, 2018 RMB 1,000,000 the PRC February 27, 2019 RMB 10,000,000 the PRC September 9, 2019 RMB 200,000 the PRC November 18, 2019 RMB 1,000,000 the PRC May 13, 2020 RMB 500,000 the PRC May 19, 2020 RMB 200,000 - - - - - - - Yantai Shenzhen Fanlian Financial Advisory Co., Ltd. 烟台深泛联财务咨询有限公司 the PRC June 22, 2020 RMB 1,000,000 F-13 - - - - - - - - - - 100% Enterprise Management 100% Financial Consultancy 100% Enterprise Management 100% Enterprise Management Software development and maintenance 100% Software development and maintenance 100% 100% Financial consultancy Software development and maintenance 100% 100% 100% Enterprise Management Financial consultancy CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Name of company Place and date of incorporation/ establishment Registered capital Issued and fully paid up capital Percentage of equity attributable to the Group Direct Indirect Principal activities Haikou Fanhua Financial Advisory Co., Ltd. 海口市泛华财务咨询有限公司 the PRC June 12, 2020 RMB 1,000,000 Ganzhou Shenzhen Fanlian Financial Advisory Co., Ltd. 赣州深泛联财务咨询有限公司 the PRC August 8, 2020 RMB 1,000,000 Fanhua Jinfu (Foshan) Co., Ltd. 泛华金服（佛山）有限公司 the PRC May 22, 2020 RMB 200,000,000 Huaian Fanhualian Economic Information Advisory Co., Ltd淮安泛华联经济信息咨询有限公司 the PRC February 2, 2021 RMB 1,000,000 Guangzhou Nansha Weisen Technology Co., Ltd 广州南沙区玮森科技有限公司 the PRC March 30, 2020 RMB 500,000 Wuxi Shenzhen Fanlian Enterprise Management Co., Ltd. 无锡深泛联企业管理有限公司 the PRC April 27, 2022 RMB 500,000 Shenzhen Fanlian (Hangzhou) Financial Advisory Co., Ltd. 深泛联（杭州）财务咨询有限公司 the PRC May 5, 2022 RMB 1,000,000 Ningbo Lianyi Technological Advisory Co., Ltd. the PRC 宁波联亿科技咨询有限公司 November 24, 2022 RMB 50,000,000 F-14 - - - - - - - - - - - - - - - - 100% 100% 100% 100% 100% 100% 100% 100% Financial consultancy Financial consultancy Financial consultancy Financial consultancy Software development and maintenance Enterprise Management Financial consultancy Financial consultancy CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Variable interest entities (“VIEs”) An entity is a variable interest entity (VIE) if it meets the criteria outlined in Accounting Standards Codification (ASC) Topic 810, Consolidation, which are (i) the entity has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the entity’s expected losses or expected returns. The Group consolidates a VIE when it has both the power to direct the activities that most significantly impact the VIE’s economic performance and a right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE (that is, the Group is the primary beneficiary). In addition to variable interests held in consolidated VIEs, the Group has variable interests in other VIEs that are not consolidated because the Group is not the primary beneficiary. However, these VIEs and all other unconsolidated VIEs are monitored by the Group to assess whether any events have occurred to cause its primary beneficiary status to change. All other entities not deemed to be VIEs with which the Group has involvement are evaluated for consolidation under other subtopics of ASC 810. In the normal course of business, the Group engages in a variety of activities with VIEs. The Group determines whether it is the primary beneficiary of a VIE at the time it becomes involved with the variable interest entity and reconsiders that conclusion continually. In evaluating whether the Group is the primary beneficiary, the Group evaluates its economic interests in the entity. If the Group is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Group is determined not to be the primary beneficiary of a VIE, such VIE is not consolidated. The Group has segregated its involvement with VIEs between those VIEs which are consolidated and those VIEs which are not consolidated. Consolidated VIEs Structured funds The Group grants loans to customers through structured funds set up by trust companies. The assets of the structured funds can only be used to settle obligations of consolidated VIEs. The cash of structured funds represents that funds established by the institutional trust companies through segregated bank accounts, including structured funds that are partially funded by the Group’s own capital. The cash and cash equivalents of structured funds amounted to RMB1,515,820,737 and RMB1,157,244,687 as of December 31, 2021 and 2022 respectively can only be used to grant loans. The Group is general partner of the funds, promising the expected returns for limited partners, and providing credit strengthening on the loans to customers under the funds. The Group is also the manager of the funds, having the approval role for the loan origination and modification within the structured funds. The Group is the primary beneficiary of the funds as it has the power to direct the activities that most significantly impact the economic performance of the funds and it has obligation to absorb losses of the funds that could potentially be significant to the funds or the right to receive benefits from the funds that could potentially be significant to the funds. The structured funds are not taxpayers according to PRC tax law. The Group consolidates the structured funds as it is the primary beneficiary of the funds as of December 31, 2021 and 2022. F-15 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) The table sets forth the investments in the consolidated VIEs by the Group as of December 31, 2022. Name of structured funds Jinghua Structured Fund 6 菁华6号信托计划 Bohai Trust Shenfanlian Micro Finance Structured Fund 渤海信托深泛联小微金融集合资金信托计划 Bohai Huihe SME Structured Fund 渤海汇和中小微企业经营贷集合资金信托计划 Zhongyuan Wealth Anhui Structured Fund 1 中原财富-安惠1期 Zhongyuan Wealth Anhui Structured Fund 2 中原财富-安惠2期 Beijing Fanhua Micro-credit Company Limited 北京泛华小额贷款有限公司 Zhonghai Lanhai Structured Fund 1 中海信托蓝海1号集合资金信托计划 Bairui Hengyi No.613 Structured Fund 百瑞恒益613号集合资金信托计划 Bohai Trust No.1 Huiying Structured Fund 渤海惠盈1号集合资金信托计划 Bohai Trust No.2 Shenzhen Fanhua United Structured Fund 渤海信托-深泛联2号集合资金信托计划 Jinghua Structured Fund 1 外贸信托菁华1号集合资金信托计划 Zhonghai Lanhai Structured Fund 1-2 中海信托-蓝海1-2号集合资金信托计划 Zhonghai Lanhai Structured Fund 1-3 中海信托-蓝海1-3号集合资金信托计划 Hunan Structured Fund 2019-1 湖南信托2019-1集合资金信托计划 Hunan Structured Fund 2019-2 湖南信托2019-2集合资金信托计划 Shaanxi International Xinglong Structured Fund 1-1 陕国投·兴隆1-1号集合资金信托计划 Shaanxi International Xinglong Structured Fund 2-1 陕国投·兴隆2-1号集合资金信托计划 Bairui Hengyi No.711 Structured Fund 百瑞恒益711号集合资金信托计划 Place and date of incorporation/ establishment Principal activities the PRC September 9, 2014 Micro credit the PRC September 14, 2016 Micro credit the PRC September 29, 2017 Micro credit the PRC January 20, 2017 Micro credit the PRC August 18, 2017 the PRC August 10, 2012 the PRC July 18, 2018 the PRC July 25, 2018 Micro credit Micro credit Micro credit Micro credit the PRC September 10, 2018 Micro credit the PRC November 28, 2018 Micro credit the PRC May 8, 2019 the PRC June 28, 2019 Micro credit Micro credit the PRC September 11, 2019 Micro credit the PRC September 23, 2019 Micro credit the PRC September 23, 2019 Micro credit the PRC November 6, 2019 Micro credit the PRC September 24, 2019 Micro credit the PRC September 20, 2019 Micro credit F-16 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Name of structured funds Zhonghai Lanhai Structured Fund 1-4 中海信托-蓝海1-4号集合资金信托计划 Zhongyuan Wealth Anhui Structured Fund 49 中原信托-安惠49期 Bairui Hengyi No.724 Structured Fund 百瑞恒益724号集合资金信托计划 Zhonghai Lanhai Structured Fund 1-5 中海信托-蓝海1-5号集合资金信托计划 Zhonghai Lanhai Structured Fund 1-6 中海信托-蓝海1-6号集合资金信托计划 No. 50 Jinghua Structured Fund 外贸信托菁华50号资管计划 Zhonghai Lanhai Structured Fund 1-1 中海信托-蓝海1-1号集合资金信托计划 Shaanxi International Xinglong Structured Fund 22-1 陕国投·兴隆22-1号集合资金信托计划 Zhonghai Lanhai Structured Fund 1-7 中海信托-蓝海1-7号集合资金信托计划 No. 74 Jinghua Structured Fund 外贸信托菁华74号资管计划 Hunan Structured Fund 2020-1 湖南信托2020-1集合资金信托计划 Shaanxi International Xinglong Structured Fund 2-2 陕国投·兴隆2-2号集合资金信托计划 No.103 Jinghua Structured Fund 外贸信托菁华103号资管计划 Zhonghai Lanhai Structured Fund 30-X 中海信托-蓝海30-X号集合资金信托计划 Bohai Trust 2020 Pucheng No. 75 渤海信托·2020普诚75号集合资金信托计划 Guomin Tianshu Structured Fund 2-1 国民信托·天枢2-1号单一资金信托 Shenzhen Fanshu Information Technology Advisory Partnership (Limited Partnership). 深圳泛枢信息技术咨询合伙企业（有限合伙） Shenzhen Lianshu Economic Information Technology Advisory Partnership (Limited Partnership) 深圳联枢经济信息技术咨询合伙企业（有限合伙） Place and date of incorporation/ establishment Principal activities the PRC October 10, 2019 Micro credit the PRC October 24, 2019 Micro credit the PRC November 11, 2019 Micro credit the PRC November 19, 2019 Micro credit the PRC December 20, 2019 Micro credit the PRC April 26, 2019 Micro credit the PRC May 19, 2020 the PRC June 22, 2020 Micro credit Micro credit the PRC August 14, 2020 Micro credit the PRC November 26, 2020 Micro credit the PRC December 8, 2020 Micro credit the PRC January 26, 2021 Micro credit the PRC March 23, 2021 the PRC March 17, 2021 Micro credit Micro credit the PRC July 15, 2021 Micro credit the PRC August 31, 2021 the PRC August 27, 2021 the PRC August 27, 2021 Micro credit Micro credit Micro credit Shenzhen Ruishu Economic Information Technology Advisory Partnership (Limited Partnership) 深圳瑞枢经济信息技术咨询合伙企业（有限合伙） the PRC September 30, 2021 Micro credit F-17 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) Name of structured funds Tianjin Ninghua Economic Information Advisory Partnership (Limited Partnership) 天津宁华经济信息咨询合伙企业（有限合伙） Shenzhen Shengshu Information Technology Advisory Partnership (Limited Partnership) 深圳盛枢信息技术咨询合伙企业（有限合伙） Shenzhen Chengshu Information Technology Advisory Partnership (Limited Partnership) 深圳诚枢信息技术咨询合伙企业（有限合伙） Shenzhen Xuanshu Information Technology Advisory Partnership (Limited Partnership) 深圳宣枢信息技术咨询合伙企业（有限合伙） Tianjin Juehua Economic Information Advisory Partnership (Limited Partnership) 天津珏华经济信息咨询合伙企业（有限合伙） Zhongrong Yuanshuo No.1 Structured Fund 中融-元烁1号集合资金信托计划 Guangzhou Mingsheng Capital Management Partnership (Limited Partnership) 广州明晟资本管理合伙企业 （有限合伙） Tianjin Baihua Economic Information Advisory Partnership (Limited Partnership) 天津柏华经济信息咨询合伙企业（有限合伙） Bohai Trust 2021 Pucheng No. 83 渤海信托·2021普诚83号集合资金信托计划 Zhongrong Yuanshuo No.2 Structured Fund 中融-元烁2号集合资金信托计划 Shenzhen Huashu Information Technology Advisory Partnership (Limited Partnership) 深圳华枢信息技术咨询合伙企业（有限合伙） Shenzhen Leshu Information Technology Advisory Partnership (Limited Partnership) 深圳乐枢信息技术咨询合伙企业（有限合伙） Zijin No.3 Business Acceleration Structured Fund 紫金信托·助业3号集合资金信托计划 Zhongliang Hongrui No.1 Structured Fund 中粮信托-弘瑞普惠1号集合资金信托计划 Zhongrong Yuanshuo No.3 Structured Fund 中融-元烁3号集合资金信托计划 Tianjin Pinhua Economic Information Advisory Partnership (Limited Partnership) 天津品华经济信息咨询合伙企业（有限合伙） F-18 Place and date of incorporation/ establishment Principal activities the PRC November 1, 2021 Micro credit the PRC November 2, 2021 Micro credit the PRC November 29, 2021 Micro credit the PRC November 29, 2021 Micro credit the PRC December 20, 2021 Micro credit the PRC September 29, 2021 Micro credit The PRC January 11, 2022 Micro credit the PRC January 19, 2022 Micro credit the PRC January 25, 2022 Micro credit the PRC February 18, 2022 Micro credit the PRC February 22, 2022 Micro credit the PRC April 7, 2022 the PRC April 25, 2022 the PRC May 19, 2022 the PRC July 26, 2022 Micro credit Micro credit Micro credit Micro credit the PRC October 10, 2022 Micro credit CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 1. DESCRIPTION OF BUSINESS, ORGANIZATION, AND BASIS OF PRESENTATION (CONTINUED) The table sets forth the assets and liabilities of the consolidated VIEs included in the Group’s consolidated balance sheets after elimination of intercompany transactions and balances: Cash, cash equivalents and restricted cash Loans principal, interest and financing service fees receivables Investment securities Deferred tax assets Other assets Total assets Interest-bearing borrowings Income taxes payable Deferred tax liabilities Other liabilities Total liabilities December 31, 2021 RMB December 31, 2022 RMB 1,516,044,449 1,265,876,948 9,089,263,433 9,303,729,390 205,711,749 709,255,924 - 6,903 1,071,073,393 873,978,254 12,385,644,102 11,649,296,341 8,041,816,663 7,727,559,338 902,734 15,863 144,368,848 8,167,932,472 7,872,846,783 733,159 - 125,382,650 The table sets forth the results of operations of the VIEs included in the Group’s consolidated statements of comprehensive income: Revenue Net income 2020 RMB Year ended December 31 2021 RMB 1,731,934,459 1,298,055,332 1,437,398,097 381,273,670 658,400,554 579,742,472 2022 RMB The table sets forth the cash flows of the VIEs included in the Group’s consolidated statements of cash flows: Net cash used in operating activities Net cash provided by/(used in) investing activities Net cash (used in)/provided by financing activities F-19 2020 RMB Year ended December 31 2021 RMB (303,745,231) (1,571,552,463) 939,802,714 (633,511,824) (812,396,284) 692,705,844 (429,173,286) 2,682,931,827 (377,573,931) 2022 RMB CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The accompanying consolidated financial statements include the financial statements of the Group. All intercompany transactions and balances have been eliminated in consolidation. The Group accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting. Non-controlling interests Non-controlling interests are recognized to reflect the portion of the equity of majority-owned subsidiaries and VIEs which is not attributable, directly or indirectly, to the controlling shareholder. (b) Currency translation for financial statements presentation The Group uses Renminbi (“RMB”) as its reporting currency. The United States Dollar (“USD”) is the functional currency of the Company incorporated in Cayman and the Group’s subsidiary Sincere Fame incorporated in British Virgin Islands, and the Hong Kong Dollar (“HKD”) is the functional currency of the Group’s subsidiary China Financial Services Group Limited incorporated in Hong Kong and the RMB is the functional currency of the Group’s PRC subsidiaries. The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the subsidiaries are translated into RMB using the exchange rate in effect at each balance sheet date. Income and expenses items are generally translated at the average exchange rates prevailing during the fiscal year. Foreign currency translation adjustments arising from these are accumulated as a separate component of shareholders’ deficit on the consolidated financial statements. The resulting exchange differences are recorded in the consolidated statements of comprehensive income/(losses). (c) Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include, allowance for loans principal, interest and financing service fee receivables, debt securities, guarantee assets, the valuation allowance for deferred tax assets, unrecognized tax benefits, the indefinite reinvestment assertion and the fair value of equity securities and share-based compensation. (d) Revenue recognition Interest and financing service fees on loans which are amortized over the contractual life of the related loans are recognized in consolidated statements of comprehensive income in accordance with ASC 310 using the effective interest method. F-20 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Group considered relevant accounting guidance and concluded that arrangements for its guarantee services provided for its off-balance sheet loans under commercial bank partnership model are out of scope of ASC 606, Revenue from Contracts with Customers. Therefore, “Gains/losses from guarantee liabilities” included in “Net revenue under commercial bank partnership model” on the Consolidated Statements of Comprehensive income should be accounted for in accordance with ASC 460, Guarantees. The other revenue streams under commercial bank partnership model are accounted for in accordance with ASC 606. The criteria of revenue recognition as they relate to each of the following major revenue generating activities are described below: (i) Interest and financing service fees on loans Interest and financing service fees on loans, which include financing service fees on loans, are collected from borrowers for loans and related services. Interest and financing service fees on loans include the amortization of any discount or premium or differences between the initial carrying amount of an interest-bearing asset and its amount at maturity calculated using the effective interest basis. The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating the interest and financing service fees on loans over the years. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. Interest on the impaired assets is recognized using the rate of interest used to discount future cash flows. (ii) Interest income on debt securities Interest income on debt securities is calculated by applying the effective interest rate to the gross carrying amount of debt securities to unrelated companies plus any interest received from corporate debt securities. (iii) Revenue under commercial bank partnership model In accordance with the relevant guidance in ASC Topic 606, the amounts associated with guarantee services under commercial bank partnership model is within the scope of ASC Topic 460 and should be accounted for in accordance with the provisions of that Topic. The services not within the scope of other Topics should be accounted for in accordance with the remaining provisions of ASC Topic 606 and the applicable revenue recognition guidance. The Group considers loan facilitation services under commercial bank partnership model (covering matching of commercial banks to borrowers and facilitating the execution of loan agreement between commercial banks and borrowers) and post-facilitation services under commercial bank partnership model (covering cash processing services and collection services) as two distinctive performance obligations in accordance with ASC Topic 606. The transaction price is first allocated to guarantee services under commercial bank partnership model, if any, which is recorded at fair value and recognized amortized during the guarantee term in accordance with ASC Topic 460. F-21 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Then the remaining considerations are allocated to the loan facilitation under commercial bank partnership model and post-facilitation services under commercial bank partnership model using their relative standalone selling prices. When estimating total consideration, the Group considers early termination scenarios based on historical early payment and other termination scenarios as the Group can not receive the full contractual service fee amount under early termination, given the service fee is collected on a pro-rata basis upon early loan termination. Such service fee is determined to be variable consideration that meets the “probable of not reversing” threshold. As such, the Group recognizes revenue related to early termination based on its best estimate and true up adjustments are made from time to time. The Group does not have observable standalone selling price for the loan facilitation services or post-facilitation services because it does not provide loan facilitation services or post-facilitation services on a standalone basis in similar circumstances to similar customers. There is no direct observable standalone selling price for similar services in the market that is reasonably available to the Group. As a result, the estimation of standalone selling price involves significant judgment. The Group uses an expected cost plus margin approach to estimate the standalone selling prices of loan facilitation services and post facilitation services as the basis of revenue allocation. When estimating the selling prices, the Group considers the cost related to such services, profit margin, customer demand, effect of competition on services, and other market factors, among which estimates of the cost of providing the services is the most significant. The transaction price allocated to loan facilitation services is recognized as revenue upon execution of loan agreements between commercial banks and borrowers; the consideration allocated to post-facilitation services is recognized over the period of the loan on a straight-line method, which approximates the pattern of when the underlying services are performed. Remaining performance obligations represents the amount of the transaction price for which services have not been performed under post- facilitation services. The Group collects service fees monthly. The aggregate amounts of the transaction price allocated to performance obligations that are unsatisfied pertaining to post-origination services were RMB67.08million as of December 31, 2022, among which approximately 64.6% of the remaining performance obligations will be recognized over the following 12 months, and with the remainder recognized thereafter. (iv) Mortgage agency service revenue The Group earns mortgage agency service revenue from providing mortgage agency services to borrowers applying for a bank loan. Mortgage agency service fee is often received immediately or shortly after establishing contracts with customers. This kind of revenue is recognized at the time when loan is granted as that is the point of time the Group fulfils the customer’s request, and is then recognized on an accrual basis in accordance with the terms of the relevant agreements. (v) Realized gains/(losses) on sales of investments Realized gains/(losses) consist of realized gains and losses from the sale of investment securities, presented on a net basis. (vi) Net gains/(losses) on sales of loans Net gains/(losses) on sales of loans refer to any gains and losses from the disposal of loans which is accounted for as a sale under ASC 860. F-22 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (vii) Gains on confiscation of CRMPs Gains on confiscation of credit risk mitigation positions are recognized to the extent confiscated CRMPs exceed previously recognized allowance for loan losses and guarantee asset when sales partners surrender the CRMPs and the obligation of refunding the CRMPs is released. (e) (i) Loans On-balance sheet loans Loans are reported at their outstanding principal balances net of any unearned income and unamortized deferred fees and costs. Loan origination fees and certain direct origination costs are generally deferred and recognized as adjustments to income over the lives of the related loans. The Group facilitates credit to borrowers through structured funds which are considered as consolidated VIEs and the Group evaluated VIEs for consolidation in accordance with ASC 810 in the Consolidated VIEs Section of Note 1. Providing credit strengthening arrangement since March 2018 for the loans to customers under the funds is one of the key factors to determine that the Group should consolidate the structured funds as it is the primary beneficiary of the funds. As a result, the loan principal remains on the Group’s consolidated balance sheets, whilst the funds received from senior tranches holders are recorded as Other Borrowings in the Group’s consolidated balance sheets as disclosed in Note 12(b)(i). Non-accrual policies Loans principal, interest and financing service fee receivables are placed on non-accrual status when payments are 90 days contractually past due. When a loan principal, interest and financing service fee receivable is placed on non-accrual status, interest and financing service fees accrual cease. If the loan is non-accrual, the cost recovery method is used and cash collected is applied to first reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Loans principal, interest and financing service fee receivables may be returned to accrual status when all of the borrower’s delinquent balances of loans principal, interest and financing service fee have been settled and the borrower continue to perform in accordance with the loan terms for a period of at least six months. Charge-off policies For the years ended December 31, 2021 and 2022, the Group considered loans principal, interest and financing service fee receivables meeting any of the following conditions as uncollectible charged off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments or (iii) the Group concludes that it has exhausted its collection efforts. F-23 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In order to align the Group’s charge-off policies with ASC 326-20-35-8 (superseded ASC 310-10-35-41), the Group revised its charge-off policies to (1) provide additional information as to the collection efforts which must be exhausted before a charge-off is recorded and (2) charge down loans that are 180 days past due to net realizable value (fair value of collaterals, less estimated costs to sell) unless both well-secured and in the process of collection. The revised charge-off policies are presented as follows: principal, interest and financing service fee receivables are charged down to net realizable value (fair value of collaterals, less estimated costs to sell) when the Group has determined the remaining balance is uncollectable after exhausting all collection efforts. In order to comply with ASC 310 and ASC 326, the Group considers loans principal, interest and financing service fee receivables meeting any of the following conditions as uncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments; (iii) sales of loans to third parties; (iv) settlement with the borrower, where the Group releases irrecoverable loans through private negotiations with the borrower where the borrower cannot repay the loan in full through self-funding or voluntary sale of the collateral; (v) disposal through legal proceedings, including but not limited to online arbitrations, judicial auctions and court enforcements; or (vi) loans are 180 days past due unless both well-secured and in the process of collection. Allowance for credit losses Allowance for credit losses represents management’s best estimate of probable losses inherent in the portfolio. Commencing January 1, 2020, CNFinance adopted ASC 326, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology for determining the provision for credit losses and allowance for credit losses (“ACL”) with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model. ASC 326 defines the ACL as a valuation account that is deducted from the amortized cost of a financial asset to present the net amount that management expects to collect on the financial asset over its expected life. All financial assets carried at amortized cost are in the scope of ASC 326, while assets measured at fair value are excluded. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses. The allowance for credit losses includes an asset-specific component and a statistically based component. The Group aggregates loans sharing similar risk characteristics into pools for purposes of measuring expected credit losses. Pools are reassessed periodically to confirm that all loans within each pool continue to share similar risk characteristics. Expected credit losses for loans that do not share similar risk characteristics with other financial assets are measured individually. Estimation of CECLs requires CNFinance to make assumptions regarding the likelihood and severity of credit loss events and their impact on expected cash flows, which drive the probability of default (PD), loss given default (LGD) and exposure at default (EAD) models. In its loss forecasting framework, ECL is determined primarily by utilizing models for the borrowers’ PD, LGD and EAD and the Group incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, gross-domestic product rates, interest rates and consumer price indexes. The ACL for financial assets held at amortized cost is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected. When credit expectations change, the valuation account is adjusted with changes reported in provision for credit losses. If amounts previously charged off are subsequently expected to be collected, the Group may recognize a negative allowance, which is limited to the amount that was previously charged off. The asset-specific component is calculated under ASC 310-10-35, on an individual basis for the loans whose payments are contractually past due more than 90 days or which are considered impaired. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When a collateral-dependent financial asset is probable of foreclosure, the Group will measure the ACL based on the fair value of the collateral and we will measure the ACL based on the collateral’s net realizable value (fair value of collateral, less estimated costs to sell). F-24 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Under the collaboration model, when the Group grants a loan through a trust plan, the loan is with the borrower and guarantee is entered into with a separate counterparty (the sales partner). As such, under the definition of ASC 326-20-20, the guarantee arrangement and lending arrangement would be considered freestanding arrangements. As sale partners will provide guarantee of the entire loan to the Group, collection for loss is probable and estimable when a loss on an insured loan is incurred and recognized. In this case, the Group will recognize guarantee loss recoverable asset in the amount that the Group determines is probable to receive from the guarantor with an offsetting entry to “provision for credit losses” when the Group concludes that the loss recovery is collectible. However, potential recovery that exceeds the recognized loss, if any, (gain contingency) will not be recognized until cash is received. Therefore, the amounts estimated to be recoverable from the proceeds of guarantees will be reported as a separate asset (guarantee asset) in the balance sheet. The increase in guaranteed recoverable assets are included in the income statement as a reduction of the “provision for credit losses”, separate disclosure of the increase in guaranteed recoverable assets will be included in the rollforward of the “allowance for credit losses”. The income statement caption will be modified as “Provision for credit losses, net of increase in increase in guaranteed recoverable assets”. Loans held-for-sale Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. The valuation is performed on an individual loan basis. Loan origination fees or costs and purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred fees or costs and discounts or premiums are adjustments to the basis of the loan and therefore are included in the periodic determination of the lower of cost or fair value adjustments. The loan is derecognized if the Group does not retain any risk and rewards after transferring the loan. Such transfer would be recorded as sales according to ASC 860-10-40-5. At the time of derecognition, any related loan loss allowance is released. Gains and losses on loans transfer as a sale are recognized in the non-interest income. (ii) Off-balance sheet loans For loans funded by the proceeds from third-party commercial banks, each underlying loan and borrower has to be approved by the third-party commercial banks individually. Once the loan is approved by and originated by the third-party commercial bank, the fund is provided by the third- party commercial bank to the borrower and a lending relationship between the borrower and the third-party commercial bank is established through a loan agreement. Effectively, the Group offers loan facilitation and matching services to the borrowers who have credit needs and the commercial banks who originate loans directly to borrowers referred by the Group. The Group continues to provide post-origination services to the borrowers over the term of the loan agreement. Under this scenario, the Group determines that it is not the legal lender or borrower in the loan origination and repayment process. Accordingly, the Group does not record loans principal, interest and financing service fee receivables arising from these loans nor interest-bearing borrowings to the third-party commercial banks. (f) Cash, cash equivalents and restricted cash Cash and cash equivalents primarily consist of cash, deposits which are highly liquid and all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Group considers highly liquid investments that are readily convertible to known amounts of cash. Restricted cash are cash and cash equivalents that are not readily available for normal disbursement and mainly represents cash and cash equivalents from structured funds. Such restricted cash is not available to fund the general liquidity needs of the Group and could only be used to grant new loans and activities as mentioned in Note 1. F-25 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (g) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment securities Equity securities Equity securities consist of wealth management products. Equity securities are recorded at fair value and included in the profit and loss of changes in fair value. Realized gains and losses from the sale of investment securities are determined on a specific identification basis and are recorded as realized gains/(losses) on sales of investments. Interest and investment income are recognized when earned. Debt securities Debt securities consist of held-to-maturity debt securities that the Group has the positive intent and ability to hold the security to maturity, and are recorded at amortized cost. The Group reviews its investments in held-to-maturity debt securities for impairment periodically, recognizing an allowance, if any, by applying an estimated loss rate. The Group considers available quantitative and qualitative evidence in evaluating the potential impairment of its investments in held-to-maturity debt securities. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the held-to-maturity debt securities. (h) Property and equipment Property and equipment are stated at cost. Depreciation on equipment is calculated on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the economic useful life of the improvement or the term of the lease. The estimated useful life of office and other equipment range from 1 to 5 years, the estimated useful life of leasehold improvements or the term of the lease range from 1 to 6 years, while the estimated useful lives of motor vehicles range from 3 to 8 years. F-26 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (i) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Goodwill Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Impairment tests for cash-generating units containing goodwill The Group assesses goodwill for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events. The Group has the option to assess qualitative factors first to determine whether it is necessary to perform the two-step test. If the Group believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required. In the qualitative assessment, the Group considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and the Group is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Group must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss. Goodwill is related to the acquisition of Guangzhou Anyu Mortgage Consulting Co., Limited (“Guangzhou Anyu”). In 2016, the key management of Guangzhou Anyu has left the company. Guangzhou Anyu’s business model has changed from providing loans to referring micro credit business to other entities of the Group, resulting in an expected reduction in the operating profits and cash flows in the future. Therefore, the Group recognized a goodwill impairment loss of RMB20,279,026. The goodwill was fully impaired in 2016. (j) Intangible assets Indefinite-lived intangible assets are assets that are not amortized because there is no foreseeable limit to cash flows generated from them. Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. The Group categorizes trademarks as indefinite-lived intangible assets, whose carrying value is RMB2.97 million. If it is more likely than not that the asset is impaired, the Group records the amount that the carrying value exceeds the fair value as an impairment expense. The Group performed its annual impairment review of indefinite-lived intangible assets on December 31, 2021 and 2022 and determined that it is more likely than not that the carrying value was less than the fair value. Intangible assets with finite useful lives represent software and cooperation agreements, the estimated useful lives of which are 1 to 5 years and 5 years, respectively. F-27 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (k) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the deferred tax assets or liabilities are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Group recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured as the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group classifies interest and penalties related to the liability for unrecognized tax benefits as income tax expense. (l) Employee benefit plans Pursuant to relevant PRC regulations, the Group is required to make contributions to various employee benefit plans organized by municipal and provincial PRC governments. The contributions are made for each PRC employee at statutory rates as determined by local social security bureau. Contributions to the employee benefit plans are charged to the consolidated statements of income. The Group has no obligations for payment of pension benefits associated with the plans beyond the amount it is required to contribute. (m) Long-lived assets Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market value and third-party independent appraisals, as considered necessary. (n) Share-based compensation The Group measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. The Group recognizes compensation cost using a front-loading approach for an award with only service conditions that have a graded vesting schedule over the requisite service period for the entire award, net of estimated forfeitures, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. Forfeiture rates are estimated based on historical and future expectations of employee turnover rates. F-28 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (o) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. The Group’s lease liability is measured at the present value of future operating lease payments, discounted using the incremental borrowing rate. Right of use asset is measured at the amount of lease liabilities plus prepaid rent and direct costs, less any lease incentives. The operating lease expense is recognized on a straight-line basis over the lease term. Certain of the operating lease agreements contain rent holidays, which are considered in determining the straight-line operating lease expense to be recorded over the lease term. (p) Guarantee liabilities Starting from 2021, the Group started to cooperate with third-party guarantee companies that directly provides guarantee services to commercial banks. According to relevant financial guarantee arrangements, third-party guarantee companies will fulfil its obligations to purchase defaulted loans. However, the Group is required to provide deposits and replenish such deposits from time to time to third-party guarantee companies for its obligations of purchasing defaulted loans. Effectively, the Group provides back-to-back guarantee to third-party guarantee companies and takes on all of the credit risk of the borrowers. These financial guarantee contracts are accounted for as guarantee liabilities under ASC 460, Guarantees. The Group adopted ASC 326, Financial Instruments—Credit Losses, which requires gross accounting for guarantee liability. As a result, at inception of the guarantee under commercial bank partnership model, the Group will recognize both a stand-ready guarantee liability under ASC 460 with an associated guarantee receivable, and a contingent guarantee liability with an allowance for credit losses of the underlying loans under Current expected credit loss (“CECL”) model. Subsequent to the initial recognition, the ASC 460 stand-ready guarantee is released into gains from guarantee liabilities on a straight-line basis over the term of the guarantee, while the contingent guarantee is reduced by the pay-outs made by the Group to compensate the investors upon borrowers’ default. (q) Repurchase agreements Financial assets sold under agreements to repurchase do not constitute a sale of the underlying financial assets for accounting purposes and are treated as collateralized financing transactions. Financial assets sold under agreements to repurchase are recorded at the amount of cash received plus accrued interest. Interest paid on agreements to repurchase is recorded in interest expense at the contractually specified rate. (r) Commitments and contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. F-29 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (s) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair value measurements The Group uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Group determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with ASU 2011-04 (see Note 3 to the consolidated financial statements): ● Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. ● Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. ● Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. In situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects management’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by management based on the best information available in the circumstances. (t) Earnings per share Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive. (u) Segment reporting The Group uses the management approach in determining its operating segments. The management approach considers the internal reporting used by the Group’s chief operating decision maker for making decisions about the allocation of resources to and the assessment of the performance of the segments of the Group, therefore the management has determined that the Group has one operating segment. All of the Group’s operations and customers are located in the PRC. Consequently, no geographic information is presented. F-30 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 2. (v) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently adopted accounting standards In 2022, the Group adopted the following new accounting guidance: ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures The ASU 2022-02 is to be adopted on a prospective basis and will be effective for the Group on January 1, 2023, although early adoption is permitted. The Amendment eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors and introduces new required disclosures for loan modifications made to borrowers experiencing financial difficulty. The Amendment also sets the guidance for vintage disclosures to require disclosure of current period gross charge-offs by year of origination. Adoption of the accounting standard is not expected to have an impact on the Group’s operating results or financial position, as the Group does not involve in the activity of debt restructurings. ASU 2022-03 -Accounting Standards Update No. 2022-03—Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions The ASU 2022-03 is to be adopted on a prospective basis and will be effective for the Group on January 1, 2024, although early adoption is permitted. The Amendment clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and also states that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The Update also requires few more disclosures on equity securities subject to contractual sale restrictions. Adoption of the accounting standard is not expected to have an impact on the Group’s operating results or financial position, as the Group excludes such restrictions when valuing equity securities. (w) Revision of immaterial error In 2022, the Group identified inappropriate initial measurement of held-for-sale loans and derecognition of loans in previous years, leading to overstatement in guaranteed assets and net gains/(losses) on sales of loans as well as understatement in held-for-sale loans and provision for credit losses, which did not affect total asset, net income, cash and cash equivalent, or other subtotal on the accompanying consolidated financial statements. The Group evaluated the materiality of the previously described error from a qualitative and quantitative perspective. Based on such evaluation, the Group concluded that the error was not material to any individual current or prior periods, nor did it have an effect on the Group’s trend of financial result. Although the effect of the error was not material to the current or previously issued financial statements, guaranteed assets and held-for-sale loans in the consolidated balance sheets as well as net gains/(losses) on sales of loans and provision for credit losses in the consolidated statements of comprehensive income for year 2020 and 2021 have been revised accordingly to reflect the immaterial error. Consequently, this had the following impact on certain 2020 and 2021 financial statements’ captions: increases in held-for-sale loans of RMB101.9 million and RMB361.4 million respectively, decreases in guaranteed assets of RMB101.9 million and RMB361.4 million respectively, increases in provision for credit losses of RMB200.2 million and RMB28.9 million respectively and decreases in net gains/(losses) on sales of loans of RMB200.2 million and RMB28.9 million respectively. F-31 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 3 Fair value measurements Fair Value Hierarchy FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach, as specified by FASB ASC 820, are used to measure fair value. Assets recorded at fair value on a recurring basis mainly include marketable securities. Additionally, from time to time, the Group records fair value adjustments on a nonrecurring basis. These nonrecurring adjustments typically involve application of LOCOM accounting, write-downs of individual assets or application of the measurement alternative for nonmarketable equity securities. Fair Value Measurements A description of the valuation techniques applied to the Group’s major categories of assets and liabilities measured at fair value is as follows. The Group determines fair value primarily based on pricing sources with reasonable levels of price transparency. Where quoted prices are available in an active market, the Group classifies the assets and liabilities within Level 1 of the valuation hierarchy. If quoted market prices are not available, fair value is primarily determined using pricing models using observable trade data, market data, quoted prices of securities with similar characteristics or discounted cash flows. Such instruments would generally be classified within Level 2 of the valuation hierarchy. The following table presents the Group’s fair value hierarchy for those assets measured at fair value on a recurring basis as of December 31, 2021 and 2022. Wealth management products Total December 31, 2022 Fair value RMB Level 1 RMB 244,337,727 244,337,727 206,304,763 206,304,763 Level 2 RMB 38,032,964 38,032,964 Level 3 RMB - - F-32 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 3 Fair value measurements (continued) Wealth management products Total December 31, 2021 Fair value RMB Level 1 RMB Level 2 RMB Level 3 RMB 847,047,295 847,047,295 729,255,924 117,791,371 729,255,924 117,791,371 - - The following table presents the Group’s fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2021 and 2022. Assets Loans(1) Loans held-for-sale(2) Equity securities(3) Total Assets Liabilities Guarantee liabilities(4) Total Liabilities Assets Loans(1) Loans held-for-sale(2) Equity securities(3) Total Assets December 31, 2022 Fair value RMB Level 1 RMB Level 2 RMB Level 3 RMB 61,835,456 1,844,438,134 49,010,000 1,955,283,590 - 61,835,456 - 1,844,438,134 - 49,010,000 - 1,955,283,590 - - - - 82,385,089 82,385,089 - - - - 82,385,089 82,385,089 December 31, 2021 Fair value RMB Level 1 RMB Level 2 RMB Level 3 RMB 64,650,818 1,095,412,086 24,010,000 1,184,072,904 - 64,650,818 - 1,095,412,086 24,010,000 - - 1,184,072,904 - - - - (1) Loans are recorded at amortized cost, while the Group records nonrecurring fair value adjustments to reflect partial write-downs that are based on the observable market price of the loan or current appraised value of the collateral. (2) Loans held-for-sale are held at LOCOM (the lower of cost or fair value) which may be written down to fair value on a nonrecurring basis. (3) Nonmarketable equity securities are accounted for using the measurement alternative and can be subject to nonrecurring fair value adjustments to record impairment. (4) Guarantee liabilities are accounted for stand-ready guarantee liabilities of the Group’s guarantee services for its off-balance sheet loans under the commercial bank partnership model at fair value. During the years ended December 31, 2021 and 2022, there were no transfers between instruments in Level 1 and Level 2. F-33 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 4 Cash, cash equivalents and restricted cash Cash and cash equivalents represent cash on hand and bank deposits. To limit exposure to credit risk relating to bank deposits, the Group primarily places bank deposits with large financial institutions in the PRC with acceptable credit rating. As of December 31, 2021 and 2022, the Group had three PRC individual financial institutions with cash balances in 2021 and one in 2022 respectively, and these institutions held cash balances in excess of 10% of the Group’s total cash balances. These bank deposits collectively accounted for 76.5% and 56.4% of the Group’s total cash balances as of December 31, 2021 and 2022, respectively. The nominal holders of certain bank accounts of the Group are employees of the Group. The Group has entered into agreements with these employees which stipulate that the funds held in these bank accounts are owned and managed by the Group. Cash balances of such accounts collectively accounted for 1.34% and 0.31% of the Group’s total cash balances as of December 31, 2021 and 2022, respectively. Restricted cash represents cash and cash equivalents from structured funds, which are established by the institutional trust companies through segregated bank accounts, including structured funds that are partially funded by the Group’s own capital. Restricted cash amounted to RMB1,515,820,737 and RMB1,157,244,687 as of December 31, 2021 and 2022 respectively, which can only be used to grant loans and is not available to fund the general liquidity needs of the Group. 5 Loans principal, interest and financing service fee receivables Home equity loans: Loans principal, interest and financing service fee receivables Less: allowance for credit losses - Individually assessed - Collectively assessed Subtotal Net loans principal, interest and financing service fee receivables of home equity loan Corporate loans: Loans principal, interest and financing service fee receivables Less: allowance for credit losses Net loans principal, interest and financing service fee receivables of corporate loan Net loans principal, interest and financing service fee receivables F-34 Note December 31, 2021 RMB December 31, 2022 RMB (a) 9,412,717,366 8,993,547,621 (i) (e) (61,479,897) (914,370,954) (975,850,851) (12,247,836) (727,055,237) (739,303,073) 8,436,866,515 8,254,244,548 463,254,567 - (24,693,114) - 438,561,453 - 8,436,866,515 8,692,806,001 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 5 (a) Loans principal, interest and financing service fee receivables (continued) Home equity loans Note First lien RMB December 31, 2021 Second lien RMB Subtotal RMB First lien RMB December 31, 2022 Second lien RMB Subtotal RMB Loans principal, interest and financing service fee receivables Less: allowance for credit losses - Individually assessed - Collectively assessed (a) 3,514,373,477 5,898,343,889 9,412,717,366 3,360,094,375 5,633,453,246 8,993,547,621 (32,968,721) (357,239,453) (28,511,176) (557,131,501) (61,479,897) (914,370,954) (3,836,350) (286,300,001) (8,411,486) (440,755,236) (12,247,836) (727,055,237) Subtotal (390,208,174) (585,642,677) (975,850,851) (290,136,351) (449,166,722) (739,303,073) Net loans principal, interest and financing service fee receivables (i) Allowance for credit losses 3,124,165,303 5,312,701,212 8,436,866,515 3,069,958,024 5,184,286,524 8,254,244,548 The table below presents the components of allowances for loans principal, interest and financing service fee receivables by impairment methodology with the recorded investment as of December 31, 2021 and 2022. Allowance for loans which are collectively assessed Second lien RMB Subtotal RMB First lien RMB 357,239,453 (8,058,972) (1,318,568) 557,131,501 (19,852,708) - 914,370,954 (27,911,680) (1,318,568) December 31, 2022 Allowance for loans which are individually assessed First lien Second lien Subtotal RMB RMB 61,479,897 32,968,721 28,511,176 72,834,526 98,794,363 171,628,889 (52,677,056) (7,843,977) (44,833,079) RMB (61,561,912) - (96,523,557) - (158,085,469) (102,009,203) (87,525,498) (189,534,701) 21,350,807 7,886,283 13,464,524 - Total RMB 975,850,851 143,717,209 (53,995,624) (347,620,170) 21,350,807 As of January 1 Provision for credit losses Charge-offs Increase in guaranteed recoverable assets Recoveries As of December 31 286,300,001 440,755,236 727,055,237 3,836,350 8,411,486 12,247,836 739,303,073 Net loans principal, interest and financing service fee receivables 3,036,599,198 5,127,455,016 8,164,054,214 33,358,825 56,831,509 90,190,334 8,254,244,548 Recorded investment 3,322,899,199 5,568,210,252 8,891,109,451 37,195,175 65,242,995 102,438,170 8,993,547,621 F-35 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 5 Loans principal, interest and financing service fee receivables (continued) Allowance for loans which are collectively assessed Second lien RMB First lien RMB As of January 1 Provision for credit losses Charge-offs Increase in guaranteed recoverable assets Recoveries 222,034,414 1,184,418 (53,919,303) 313,932,763 (6,117,066) (69,524,088) 187,939,924 - 318,839,892 - December 31, 2021 Allowance for loans which are individually assessed Subtotal RMB First lien Second lien Subtotal RMB 71,998,321 (4,932,648) (65,333,841) (137,477,353) (202,811,194) (21,581,044) RMB 44,821,768 535,967,177 27,176,553 (11,630,112) (9,950,932) (123,443,391) RMB 506,779,816 18,633,218 35,137,890 - 62,443,724 116,292,200 178,735,924 16,504,672 Total RMB 607,965,498 (207,743,842) (145,024,435) 541,917,706 178,735,924 As of December 31 357,239,453 557,131,501 914,370,954 32,968,721 28,511,176 61,479,897 975,850,851 Net loans principal, interest and financing service fee receivables 3,048,382,936 5,249,959,347 8,298,342,283 75,782,367 62,741,865 138,524,232 8,436,866,515 Recorded investment 3,405,622,388 5,807,090,849 9,212,713,237 108,751,089 91,253,040 200,004,129 9,412,717,366 (1) Effective January 1, 2020, the Group adopted accounting guidance which changed impairment recognition of financial instruments to a model that is based on expected losses rather than incurred losses. The Group charges off loans principal, interest and financing service fee receivables if the remaining balance is considered uncollectable. Recovery of loans principal, interest and financing service fee receivables previously charged off would be recorded when received. For the description of the Group’s related accounting policies of allowance for credit losses, see Note 2(e) Loans. The following tables present the aging of allowance for credit losses as of December 31, 2022. The collaboration model First lien Second lien Subtotal The traditional facilitation model First lien Second lien Subtotal Allowance for credit losses Total current RMB 1 - 30 days past due RMB 31 - 90 days past due RMB 91 - 180 days past due Total loans RMB RMB 116,930,653 82,019,376 86,848,853 3,836,350 289,635,232 214,691,499 118,189,879 105,038,216 8,411,486 446,331,080 331,622,152 200,209,255 191,887,069 12,247,836 735,966,312 656 2,832,406 2,833,062 501,119 2,835,642 3,336,761 334,455,214 200,712,954 191,887,069 12,247,836 739,303,073 500,463 3,236 503,699 - - - - - - F-36 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 5 Loans principal, interest and financing service fee receivables (continued) The following tables present the aging of allowance for credit losses as of December 31, 2021. The collaboration model First lien Second lien Subtotal The traditional facilitation model First lien Second lien Subtotal Allowance for credit losses (b) Loan delinquency and non-accrual details Total current RMB 1 - 30 days past due RMB 31 - 90 days past due RMB 91 - 180 days past due RMB Total loans RMB 189,814,922 86,537,327 66,784,464 31,394,514 374,531,227 340,800,002 124,542,266 80,395,050 26,996,820 572,734,138 530,614,924 211,079,593 147,179,514 58,391,334 947,265,365 4,980,213 1,574,208 15,676,947 5,618,913 3,617,330 1,514,355 12,908,539 5,491,292 11,110,205 8,597,543 3,088,563 28,585,486 541,725,129 216,868,768 155,777,057 61,479,897 975,850,851 3,503,613 2,285,562 5,789,175 The following tables present the aging of past-due loan principal and financing service fee receivables as of December 31, 2022. Total current RMB 1 - 30 days past due RMB 31 - 90 days past due RMB 91 - 180 days 181 - 270 days 271 - 360 days past due RMB past due RMB past due RMB 361 days past due Total loans RMB RMB Total non-accrual RMB The collaboration model First lien Second lien Subtotal The traditional facilitation model First lien Second lien Subtotal Loans principal, interest and financing service fee receivables 2,621,922,407 357,338,815 339,856,221 10,753,640 4,686,900 2,446,894 17,790,991 3,354,795,868 35,678,425 4,596,435,737 515,052,451 410,753,899 16,756,323 22,661,421 9,951,192 14,507,390 5,586,118,413 63,876,326 7,218,358,144 872,391,266 750,610,120 27,509,963 27,348,321 12,398,086 32,298,381 8,940,914,281 99,554,751 1,493,232 45,954,310 47,447,542 2,163,296 13,855 2,177,151 - - - 544,591 - 544,591 - - - - 1,097,387 - 1,366,669 - 2,464,056 5,298,506 47,334,834 52,633,340 1,641,978 1,366,669 3,008,647 7,265,805,686 874,568,417 750,610,120 28,054,554 27,348,321 12,398,086 34,762,437 8,993,547,621 102,563,398 F-37 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 5 Loans principal, interest and financing service fee receivables (continued) The following tables present the aging of past-due loan principal and financing service fee receivables as of December 31, 2021. Total current RMB 1 - 30 days past due RMB 31 - 90 days past due RMB 91 - 180 days past due RMB 181 - 269 days 270 - 360 days past due RMB past due RMB 361 days past due Total loans RMB RMB Total non-accrual RMB The collaboration model First lien Second lien Subtotal The traditional facilitation model First lien Second lien Subtotal Loans principal, interest and financing service fee receivables 2,814,226,880 325,090,831 230,622,938 65,080,342 6,979,995 5,972,352 24,768,894 3,472,742,232 102,801,583 5,030,913,080 467,836,400 276,784,712 52,043,750 7,455,656 6,468,134 17,308,803 5,858,810,535 83,276,343 7,845,139,960 792,927,231 507,407,650 117,124,092 14,435,651 12,440,486 42,077,697 9,331,552,767 186,077,926 8,334,398 6,532,393 20,814,948 6,081,004 4,238,098 21,237,555 42,052,503 10,770,491 14,415,402 4,887,949 5,027,879 9,915,828 285,023 360,727 645,750 122,845 653,689 673,625 1,914,466 796,470 2,568,155 5,949,506 41,631,245 7,976,697 39,533,354 81,164,599 13,926,203 7,887,192,463 803,697,722 521,823,052 127,039,920 15,081,401 13,236,956 44,645,852 9,412,717,366 200,004,129 Loans principal, interest and financing service fee receivables are placed on non-accrual status when payments are 90 days contractually past. Any interest accrued on non-accrual loans is reversed at 90 days and charged against current earnings, and interest is thereafter included in earnings only to the extent actually received in cash. When there is doubt regarding the ultimate collectability of principal, all cash receipts are thereafter applied to reduce the recorded investment in the loan. F-38 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 5 (c) (1) Loans principal, interest and financing service fee receivables (continued) Impaired loans Impaired loans summary Recorded investment Impaired loans with related allowance for credit losses RMB Impaired loans without related allowance for credit losses RMB Related allowance for credit losses RMB Unpaid principal balance RMB Impaired loans RMB First lien Second lien 32,981,329 37,320,404 8,776,965 28,543,440 3,836,350 62,134,501 65,242,994 15,257,298 49,985,695 8,411,486 As of December 31, 2022 95,115,830 102,563,398 24,034,263 78,529,135 12,247,836 First lien Second lien 102,914,225 108,751,090 64,871,825 43,879,265 32,968,721 88,073,367 91,253,039 50,995,087 40,257,952 28,511,176 As of December 31, 2021 190,987,592 200,004,129 115,866,912 84,137,217 61,479,897 In accordance with ASC 310-10-35-16 and 17, impaired loans are those loans where the Group, based on current information and events, believes it is probable all amounts due according to the contractual terms of the loan will not be collected. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans without an allowance generally represent loans that the fair value of the underlying collateral meets or exceeds the loan’s amortized cost. (2) Average recorded investment in impaired loans First lien Second lien Impaired loans Year ended December 31,2021 Year ended December 31,2022 Average recorded investment RMB Interest and fees income recognized RMB Average recorded investment RMB Interest and fees income recognized RMB 184,523,313 61,453,546 73,035,747 82,191,331 176,098,252 61,775,021 78,248,017 83,791,498 360,621,565 123,228,567 151,283,764 165,982,829 (i) (ii) Average recorded investment represents ending balance for the last four quarters and does not include the related allowance for credit losses. The interest and fees income recognized are those interest and financing service fees recognized related to impaired loans. All the amounts are recognized on cash basis. F-39 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 5 Loans principal, interest and financing service fee receivables (continued) No debt restructuring in which contractual terms of loans are modified, has occurred during 2021 and 2022. The Group transferred loans with carrying amounts of RMB2,466,160,820and RMB2,375,645,263 to third party investors and recorded the transfers as sales for the years ended December 31, 2021 and 2022, respectively. The Group recognized net losses of RMB479,584,775 and RMB44,554,948 from transfers accounted for as sales of loans for the years ended December 31, 2021 and 2022, respectively. The Group carries out pre-approval, review and credit approval of loans by professionals for credit risk arising from micro credit business. During the post-transaction monitoring process, the Group conducts a visit of customers regularly after disbursement of loans and conducts on-site inspection when the Group considers it is necessary. The review focuses on the status of the collateral. The Group adopts a loan risk classification approach to manage the loan portfolio risk. Loans are classified as non-impaired and impaired based on the different risk level. When one or more events demonstrates there is objective evidence of impairment and causes losses, corresponding loans are considered to be classified as impaired. The asset-specific component is calculated under ASC 310-10-35, on an individual basis for the loans whose payments are contractually past due more than 90 days or which are considered impaired. The Group applies a series of criteria in determining the classification of loans. The loan classification criteria focus on a number of factors, including (i) the borrower’s ability to repay the loan; (ii) the borrower’s repayment history; (iii) the borrower’s willingness to repay; (iv) the net realizable value of any collateral; and (v) the prospect for the support from any financially responsible guarantor. The Group also takes into account the length of time for which payments of principal and interest on a loan are overdue. (d) Loans held-for-sale Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. The valuation is performed on an individual loan basis. Loans transferred to held-for-sale category were RMB1,095,412,086 and RMB 1,844,438,134 as of December 31, 2021 and 2022 respectively. (e) Corporate loans Corporate loans are unsecured loans granted to unrelated entities in order to fulfil their normal operating and capital requirement. Loans principal, interest and financing service fee receivables of corporate loan were nil and RMB463,254,567 as of December 31, 2021 and December 31, 2022 and the Allowance for credit losses were RMB24,693,114 assessed on a collective basis as of December 31, 2022. F-40 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 6 Investment securities Investment securities consist of equity securities and debt securities. (a) Equity securities The carrying amount and fair value of the investment securities by major security type and class of security as of December 31, 2021 and 2022 was as follows: As of December 31, 2022: Wealth management products Total As of December 31, 2021: Wealth management products Total Profits and losses from fair value changes Aggregate fair value RMB RMB Aggregate cost basis RMB 243,542,140 795,587 244,337,727 243,542,140 795,587 244,337,727 Profits and losses from fair value changes Aggregate fair value RMB RMB Aggregate cost basis RMB 845,888,854 1,158,441 847,047,295 845,888,854 1,158,441 847,047,295 Wealth management products are investment products issued by commercial banks and other financial institutions in China. The wealth management products invest in a pool of liquid financial assets in the interbank market or exchange, including debt securities, asset backed securities, interbank lending, reverse repurchase agreements and bank deposits. The products can be redeemed on weekdays on demand. F-41 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 6 Investment securities(continued) (b) Debt securities The debt securities are in the form of an investment in partnership, made in December 2021 and 2022 and held- to-maturity corporate debt securities purchased in 2022. The partnership will return RMB10,000,000 to the Group quarterly, along with an 8% interest. The principle and interests are required to be fully repaid within 3 years. As of December 31, 2022, the investment has an amortized cost of RMB286,077,339 with an allowance for credit loss of RMB15,248,938, and the held-to-maturity debt securities have an amortized cost of RMB4,198,055 with an allowance for credit loss of RMB719,622. The Group has the intent and ability to hold the investments to maturity or payoff. 7 Property and equipment Office and other equipment Leasehold improvements Motor vehicles Less: accumulated depreciation Total December 31, 2021 RMB December 31, 2022 RMB 18,059,177 18,167,730 17,179,429 16,904,137 2,372,413 (34,248,905) (35,160,018) 2,052,245 3,041,946 2,284,262 Total depreciation expense for the years ended December 31, 2021 and 2022 was RMB3,077,154 and 1,722,640, respectively, which were recorded in other expenses in each year. 8 Intangible assets and goodwill Intangible assets (a) Intangible assets Amortized intangible assets: Software Cooperation agreement Note (a) December 31, 2021 RMB 4,009,372 December 31, 2022 RMB 3,487,733 December 31, 2021 December 31, 2022 Gross carrying value RMB Accumulated amortisation RMB Net carrying value RMB Gross carrying value RMB Accumulated amortisation RMB Net carrying value RMB 10,793,974 5,030,000 (9,754,602) 1,039,372 10,793,974 (10,276,241) (5,030,000) (5,030,000) - 5,030,000 517,733 - Total amortized intangible assets 15,823,974 (14,784,602) 1,039,372 15,823,974 (15,306,241) 517,733 Unamortized intangible assets: Trademarks 2,970,000 2,970,000 F-42 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 8 Intangible assets and goodwill (continued) As of December 31, 2021 and 2022, accumulated amortization was RMB14,784,602 and 15,306,241 respectively. Below table provides the current year and estimated future amortization expense for amortized intangible assets. The Group based its projections of amortization expense shown below on existing asset balances as of December 31, 2022. Future amortization expense may vary from these projections. Year ended December 31, 2022 (actual) Estimate for year ended December 31, 2023 2024 2025 2026 2027 9 Deposits Software RMB 521,639 517,143 590 - - - Deposits include security deposits to landlords of rental premises and deposits to the China Trust Protection Fund. In accordance with relevant rules of the China Trust Protection Fund, 1% of the size of trust plans subscribed is deposited in the Fund. 10 Guaranteed assets As described in Note 13, sales partners submit CRMPs to the Group as a guarantee for the loans under the collaboration model. When allowance for credit losses is recognized and accrued, the Group will evaluate if the loan increase in guaranteed recoverable assets guaranteed by the CRMPs is probable and estimable. If the increase in guaranteed recoverable assets is probable and estimable, the amount guaranteed by the CRMPs is recognized as guaranteed assets. 11 Other assets Receivable from sale of loans Guarantee deposits Receivables from disposal of subsidiary Prepayments Non-marketable equity securities Amounts due from employees Receivables for realization of collaterals Receivables from loan facilitation service Receivables of guarantee service Other receivables Total Note (i) (ii) (iii) (iv) (v) (vi) December 31, 2021 RMB December 31, 2022 RMB 197,226,882 32,469,152 74,680,000 243,470,845 50,000,000 - 34,068,479 94,853,194 24,010,000 49,010,000 4,606,389 34,269,800 722,603 31,022,975 - 49,963,322 - 97,552,160 19,511,778 37,277,452 404,826,131 669,888,900 (i) As mentioned in Note 5, the Group transferred the delinquent loans to third parties so that the Group could collect the payment more quickly than to simply dispose the collaterals through litigation. The transferred loans have been isolated from the Group. There is no constrain on the transferee’s rights to pledge or exchange. The Group does not maintain effective control of transferred loans and loan transfers accounted for as sales are the transfer transactions without repurchase agreements. In 2021, the Group transferred loans under traditional facilitation model with balances amounting to RMB990,485,783 to Guangzhou Minghui Capital Management Co., Ltd. (“Guangzhou Minghui”) for transfer price of RMB350,783,000. As of December 31, 2022, the amount due from Guangzhou Minghui for such transfer is RMB27,769,074. F-43 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 11 Other Assets (continued) (ii) Guarantee deposits are deposits that the Group provided, through Guangdong Nanfeng Financial Guarantee Group Co., Ltd (“Guangzhou Nanfeng”), which holds a financial guarantee license, for loans granted (a) under its consolidated VIE Zhonghai Lanhai Structured Fund 30-X, which is not structured in a stratified way and requires guarantee from a third party, and (b) under the cooperation with commercial banks for introduction of borrowers and provision of post-origination services, refer to Note 2(e)(ii) Off-balance sheet loans. (iii) The Group disposed of one of its wholly-owned subsidiaries Ningbo Lianjia Enterprise Management Advisory Co., Ltd. to an unrelated third party in 2021 and relevant consideration was received in January 2022. (iv) In June 2016, the Group invested 10,003,334 shares at RMB3.00 per share, which represents 2.14% of the paid-in capital in Guangdong Qingyuan Rural Commercial Bank (“Qingyuan Rural”). The Group transferred 2 million shares to an unrelated third party at RMB3.00 per share that is same as the investment cost on September 18, 2019. As of December 31, 2021 and 2022, the Group invested 1.72% of the paid-in capital in Qingyuan Rural. Qingyuan Rural has paid-in capital of RMB1,400,000,000, and the Group has invested RMB24,010,000 in Qingyuan Rural. In January 2022, the Group and Guangzhou Minghui set up Guangzhou Mingfeng Partnership (“Guangzhou Mingfeng”). The total paid-in capital was RMB40,000,000 and the Group has invested RMB25,000,000 in Guangzhou Mingfeng. The measurement alternative is selected for the above non-marketable equity securities. Under the measurement alternative, the equity securities without readily determinable fair value are measured at cost minus impairment and adjusted for changes in observable prices. No change in observable price has been identified and no impairment has been recorded for the two years of 2021 and 2022. (v) Amounts due from employees mainly include temporary advances to employees for payments of collateral evaluation fee, mortgage handling fee, payments for office supplies, etc. on behalf of the Group. (vi) the receivables for realization of collaterals under traditional model is RMB238,616 and the receivables for realization of collaterals under commercial bank partnership model is RMB30,784,359. F-44 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 12 (a) Interest-bearing borrowings Borrowings under agreements to repurchase Financial assets sold under agreements to repurchase are effectively short-term collateralized borrowings. In these transactions, the Group receives cash in exchange for transferring financial assets as collateral and recognizes an obligation to reacquire the financial assets for cash at the transaction’s maturity. These types of transactions create risks, including (1) fair value of the financial assets transferred may decline below the amount of obligation to reacquire the financial assets, and therefore create an obligation to pledge additional amounts, or to replace collaterals pledged, and (2) the Group does not have sufficient liquidity to repurchase the financial assets at the transaction’s maturity. Repurchase agreements Funds obtained from Financial institutions Interest payable Financial institutions Total repurchase agreements Note Fixed interest rate per annum Term December 31, 2021 RMB December 31, 2022 RMB (i) (i) 10.5% to 13.8% Within 2 years 45,250,000 111,593,865 1,048,145 - 45,250,000 112,642,010 Funds obtained from financial institutions On December 2, 2022, the Group transferred loan principals, interests and financing service fee receivables with carrying amount of RMB26,420,000 to a third-party transferee, Guangdong Yuehai Asset Management Co., Ltd. (“Yuehai Asset”), an unrelated third party. However, in accordance with ASC 860, Transfers and Servicing, the right to earnings is not derecognized upon transfer as the Group is required to repurchase the right to earnings one year after the date of transfer. As of December 31, 2022, the amount of funds obtained from Yuehai Asset and the interest payable are RMB18,494,000 and RMB122,365. On August 29, 2022, the Group transferred loan principals, interests and financing service fee receivables swith carrying amount of RMB5,965,976 to a third-party transferee, Pingan Puhui Lixin Asset Management Co., Ltd (“Pingan Puhui”), an unrelated third party. However, in accordance with ASC 860, Transfers and Servicing, the right to earnings is not derecognized upon transfer as the Group is required to repurchase the right to earnings one year after the date of transfer. As of December 31, 2022, the amount of funds obtained from Pingan Puhui and the interest payable are RMB5,376,724 and RMB252,149. F-45 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 12 Interest-bearing borrowings (continued) On November 16, 2022 and December 26, 2022, the Group transferred loan principals, interests and financing service fee receivables with carrying amount of RMB86,803,141 to a third-party transferee, China Foreign Economy and Trade Trust Co.,Ltd (“FOTIC”), an unrelated third party. However, in accordance with ASC 860, Transfers and Servicing, the right to earnings is not derecognized upon transfer as the Group is required to repurchase the right to earnings one year after the date of transfer. As of December 31, 2022, the amount of funds obtained from FOTIC and the interest payable are RMB87,723,141 and RMB673,631. Underlying collateral types of gross obligations Repurchase agreements: Loans principal, interest and financing service fee receivables Total repurchase agreements The below table provides the contractual maturities of the gross obligations under repurchase agreements. December 31, 2021 RMB December 31, 2022 RMB 45,250,000 111,593,865 45,250,000 111,593,865 Repurchase agreements As of December 31, 2022 As of December 31, 2021 Overnight RMB Up to 30 days RMB 30 to 90 days RMB Greater than 90 days RMB Total gross obligations RMB - - - - - 111,593,865 111,593,865 - 45,250,000 45,250,000 F-46 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 12 (b) Interest-bearing borrowings (continued) Other borrowings Other borrowings Short-term: Investors of consolidated VIEs Long-term: Investors of consolidated VIEs Interest payable to Investors of consolidated VIEs Total Note Fixed interest rate per annum Term December 31, 2021 RMB December 31, 2022 RMB (i) (i) (i) 6.3% to 10.5% Less than 1 year 4,654,388,213 5,675,480,078 7.0% to 11.5% 1 - 5 years 3,330,334,482 1,991,623,976 57,169,385 60,455,283 8,041,892,080 7,727,559,337 (i) The financial liabilities arising from the VIEs with underlying investments in loans to customers are classified as payable in these consolidated financial statements. It is because the Group has an obligation to pay senior tranches holders upon maturity dates based on the related terms of those consolidated structured funds. As of December 31, 2022, the borrowings from VIEs have principal RMB7,667,104,054, bearing interests from 6.3% to 11.5% per year. Aggregate annual maturities of long-term borrowing obligations (based on final maturity dates) are as follows: 2023 RMB 2024 RMB December 31, 2022 2026 RMB 2025 RMB 2027 RMB Thereafter RMB Total RMB Investors of consolidated VIEs - 1,084,492,735 237,055,841 13,075,400 - 657,000,000 1,991,623,976 F-47 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 12 (c) Interest-bearing borrowings (continued) Pledged assets The Group pledges certain assets to secure borrowings under agreements to repurchase and other borrowings. The table provides the total carrying amounts of pledged assets by asset types. Loans principal, interest and financing service fee receivables Total 13 Credit risk mitigation position Balance at the beginning of the year Increase during the year Decrease during the year Confiscation during the year Balance at the end of the year December 31, 2021 RMB 64,640,192 December 31, 2022 RMB 147,257,249 64,640,192 147,257,249 December 31, 2021 RMB December 31, 2022 RMB 1,209,729,138 1,348,449,426 960,663,187 1,203,458,816 (883,079,007) (1,052,004,847) (71,380,536) (12,733,681) 1,348,449,426 1,354,653,070 Under the collaboration model, the Group collaborates with sales partners who are dedicated to introduce the Group’s loan services to prospective borrowers. The sales partners need to place security deposits ranging from 10%-25% of the loans issued to the borrowers introduced by them (such contribution, the “credit risk mitigation position”) to the Group. The credit risk mitigation position will be transferred into an account designated by the Group and is fully refundable upon repayment of the loan the credit risk mitigation position is associated with. F-48 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 14 Other liabilities Guarantee repayments from sales partner Guarantee liabilities Settlement and clearing accounts Other tax payables Collaboration cost payable Customer pledged deposits Receipt in advance Amounts due to third parties Accrued expenses Others Total Note (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) December 31, 2021 RMB December 31, 2022 RMB 259,439,715 3,182,958 74,255,253 70,756,236 59,554,661 40,363,129 53,125,074 216,526,655 5,773,392 2,784,212 416,698,397 230,867,505 135,652,186 74,985,486 50,393,275 39,296,162 35,645,384 18,591,226 16,486,002 9,855,045 785,761,285 1,028,470,668 (i) Under the collaboration model, sales partners are required to provide a certain level of guarantee of repayment for loans recommended. Guarantee repayments from sales partner mainly consist of repayments collected from sales partners who exercise the guarantee, and those repayments will be returned to trust company. In accordance with the Company’s PRC subsidiaries’ articles of associate, the subsidiaries are required to appropriate 10% of their net incomes, upon approval by board of directors. (ii) In 2021, the Group started to cooperate with a third-party guarantee company, Guangzhou Nanfeng, that directly provides guarantee services to commercial banks. According to relevant financial guarantee arrangements, Guangzhou Nanfeng will fulfil its obligations to purchase defaulted loans. However, the Group is required to provide deposits and replenish such deposits from time to time to Guangzhou Nanfeng for its obligations of purchasing defaulted loans. Effectively, the Group provides back-to-back guarantee to Guangzhou Nanfeng and takes on all of the credit risk of the borrowers. These financial guarantee contracts are accounted for as guarantee liabilities under ASC 460, Guarantees. As of December 31, 2022, maximum potential undiscounted future payment that the Group would be required to make was RMB2,450.37 million. The initial term of the guarantee liabilities is the same as the term of loans facilitated under the arrangements with commercial banks, which ranges from 1 year to 10 years, as of December 31, 2022. The remaining term of the guarantee liabilities range from 1 year to 10 years as of December 31, 2022. (iii) The Group transferred loans to third party investors and recorded these transactions as sales in Note 5(c). After the transfer, the contract terms related to payment proceeds from the loans remain the same: The Group collects payments of loans and then disburses the proceeds from the relevant loans to third-party transferees. (iv) Other tax payables mainly represent value-added tax and surcharges payables. (v) As mentioned in Note 21, the Group will pay collaboration cost to the sales partners who introduce prospective borrowers to the Group. The collaboration cost for sales partners is a fixed percentage of the loan principal amount and is calculated by subtracting the project cost from interest and fees income received from borrowers. (vi) Customer pledged deposits mainly consist of the deposits collected from certain customers to reduce the risk of failure to make payments on schedule. (vii)Receipt in advance consists of advance for interest and financing service fees on loans and down payments of loans held-for-sale by loan transferees. (viii)Accrued expenses mainly consist of promotional costs relating to building the collaboration model and expenses payable to consultants such as the auditor and lawyer. (ix) Other liabilities are expected to be settled or recognized as income within one year or are repayable on demand. F-49 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 15 Ordinary shares On January 8, 2014, the Company was incorporated in the Cayman Islands with authorized share capital of HKD380,000 divided into 3,800,000,000 shares of a nominal or par value of HKD0.0001 each. Upon the incorporation of the Company, one subscriber’s share was allotted and issued to Kevin Butler at a consideration of HKD0.0001, representing 100% of the entire ordinary share of the Company. On the same date, such share was transferred to Complete Joy Investments Limited (“Complete Joy”) at nil consideration. As a result, Complete Joy was the sole owner of the Company. On July 11, 2018, the Company repurchased of a total of 1,230,434,041 shares of HKD0.0001 each share, following by issuing a total of 1,230,434,040 shares of USD0.0001 each share. As the result of the above redenomination, the par value of the Company’s shares has been changed from HKD0.0001 to USD0.0001, and its authorized share capital has been increased to USD380,000 divided into 3,800,000,000 shares of USD0.0001 each. Upon the IPO on November 7, 2018 and exercise of the green shoes options, the Company issued 130,000,000 and 8,500,000 ordinary shares, equal to 6,500,000 ADSs and 425,000 ADSs, respectively, priced at USD7.5 per ADS. The Company issued 2,709,200 ordinary shares, equal to 135,460 ADSs, upon a follow-on exercise of the green shoes options on November 21, 2018, priced at USD7.5 per ADS. As disclosed in Note 27, on July 19, 2021, 187,933,720 ordinary shares were issued to JPMorgan Chase Bank N.A. (the “Depositary”) as a reserve pool for future issuances upon the exercise of share options granted under the 2018 Option to the Group’s management members and employees. All shareholder rights of these 187,933,720 ordinary shares including but not limited to voting rights and dividend rights are unconditionally waived until the corresponding shares are exercised. While the ordinary shares were legally issued to the Depositary, the Depositary does not have any of the rights associated with the ordinary shares, as such the Group accounted for these shares as issued but not outstanding until the waiver is released by the Group, which occur when the share options are exercised and ordinary shares are transferred to the management members and employees. F-50 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 16 Additional paid-in capital Additional paid-in capital represents (1) the difference between the nominal value of share capital and the paid-up capital of the Group; (2) the difference between the purchase price and the proportionate share of the identifiable net assets of Guangzhou Anyu when the Group acquired its remaining shares to take full ownership; (3) the portion of the grant date fair value of unexercised share options granted to employees of the Group that has been recognized. 17 Retained earnings PRC statutory reserves PRC surplus reserves Unreserved retained earnings Total Note (i) (ii) December 31, 2021 RMB December 31, 2022 RMB 258,654,052 164,653,757 258,654,052 169,552,789 2,401,027,454 2,530,509,454 2,824,335,263 2,958,716,295 (i) With effect from July 1, 2012, pursuant to the “Administrative Measures on Accrual of Provisions by Financial Institutions” issued by the MOF in March 2012, the Group is required, in principle, to set aside a general reserve not lower than 1.5% of the ending balance of its gross risk-bearing assets. (ii) In accordance with the Company’s PRC subsidiaries’ articles of associate, the subsidiaries are required to appropriate 10% of their net incomes, upon approval by board of directors. 18 Accumulated other comprehensive losses Foreign currency translation adjustment Total Foreign currency translation adjustment Total Balance as of January 1, 2021 RMB Other comprehensive loss, net RMB Balance as of December 31, 2021 RMB (18,456,546) (18,456,546) (6,936,969) (6,936,969) (25,393,515) (25,393,515) Balance as of January 1, 2022 RMB Other comprehensive income, net RMB Balance as of December 31, 2022 RMB (25,393,515) (25,393,515) 15,181,518 15,181,518 (10,211,997) (10,211,997) F-51 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 19 Interest and fees income Interest and financing service fees on loans - Interest income - Financing service fees Interest income charged to sales partners Interest income on debt securities Interest on deposits with banks Total Note (i) (ii) (iii) Year ended December 31, 2021 RMB 2022 RMB 2020 RMB 1,828,687,910 1,770,351,645 1,574,074,534 1,828,687,910 1,759,906,523 1,573,405,364 669,170 122,019,472 22,195,046 13,063,523 1,854,823,409 1,815,773,980 1,731,352,575 - 10,001,581 - 16,133,918 10,445,122 33,448,660 - 11,973,675 (i) Interest and financing service fees on loans, which include financing service fees on loans, are recognized in the consolidated statements of comprehensive income using the effective interest method. Financing service fees on loans, are deferred and amortized over the contractual life of the related loans utilizing the effective interest method. (ii) Interest income charged to sales partners refers to the cost of and interest on the partner’s instalment repurchase options under collaboration model. (iii) Interest income on debt securities in forms of partnership investment and corporate debt securities. Please refer to note 6(b). 20 Net revenue under the commercial bank partnership model The Group has started to collaborate with commercial banks since 2021 and such collaboration grew and scaled in the second half of 2022. Net revenue under the commercial bank partnership model representing fees charged to commercial banks for services including introducing borrowers, initial credit assessment, facilitating loans from the banks to the borrower and providing technical assistance to the borrower and banks, net of fees paid to third-party insurance company. Revenues from loan facilitation services are recognized at the time a loan is originated, at which time the facilitation service is considered completed. Revenues from loan facilitation services, covering matching of commercial banks to borrowers and facilitating the execution of loan agreement between commercial banks and borrowers was RMB48,352,866 in 2022. Revenues from post-origination services are recognized on a straight-line basis over the term of the underlying loans as the services are provided. Revenues from post-facilitation services, covering cash processing services and collection services was RMB6,226,524 in 2022. F-52 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 20 Net revenue under the commercial bank partnership model (continued) Refer to Note 19, the Group provided guarantee services for its off-balance sheet loans under the commercial bank partnership model. As a result, at inception of the guarantee, the Group recognized a stand-ready guarantee liability under ASC 460 at fair value with an associated guarantee receivable of RMB97,552,160. Subsequently, the stand-ready guarantee is released into gains from guarantee liabilities on a straight-line basis over the term of the guarantee. Gains from guarantee liabilities was RMB15,167,071 in 2022. The total amount of net fees paid to third-party insurance company for providing guarantee services to commercial banks and commission fee to local sales channels was RMB 12,195,456 in 2022. 21 Collaboration cost for sales partners The Group started to develop a new collaboration model in December 2018. Under such model, the Group collaborates with sales partners who are dedicated to introduce the Group and its loan services to prospective borrowers. The unique feature of this collaboration model is that the sales partners will be required to deposit an amount equal to 10% - 25% of the loans issued to the borrowers introduced by them. In return, the Group will pay collaboration cost as sales incentives to the sales partners. 22 Provision for credit losses Home equity loans Corporate loans Debt securities Guarantee liabilities Trade and other receivables Total 23 Realized gains on sales of investments, net Year ended December 31, 2021 RMB 2020 RMB 2022 RMB (55,755,647) (58,216,554) 257,624,013 (24,693,114) - - (5,403,084) (10,565,475) - (3,182,958) (155,017,657) - (19,131,926) 7,947,030 49,429,922 (77,348,480) 298,467,893 (238,084,863) The gross realized gains on sales of investments are RMB70,611,492, RMB57,368,616 and RMB28,330,375 for the years ended December 31, 2020, 2021 and 2022, respectively. The gross realized losses on sales of investments are RMB50,457,833, RMB38,198,180 and RMB7,763,703 for the years ended December 31, 2020, 2021 and 2022, respectively. F-53 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 24 Net losses on sales of loans As mentioned in Note 5(c), the Group transferred the delinquent loans to third parties. Net losses on sale of loans which summarizes the received from sales of loans are net losses of RMB50,606,487, RMB479,584,775 and RMB44,554,948 for the years ended December 31, 2020, 2021 and 2022, respectively. 25 Other gains, net Net gains on confiscated credit risk mitigation positions Profits/(losses) from fair value changes Foreign exchange (losses)/gains Net loss on disposal of property and equipment Mortgage agency service revenue Others Total Note (i) (ii) (iii) Year ended December 31, 2021 RMB 2020 RMB 2022 RMB 13,446,619 56,773 (5,345,004) (2,868) 511,500 1,093,452 9,760,472 12,733,681 1,101,669 786,080 (328,262) - 7,768,674 22,061,842 71,380,536 (362,855) 7,355,135 (30,742) - 11,571,964 89,914,038 (i) Sales partners provide CRMPs as security deposits. Pursuant to the collaboration agreements if the debtor’s loan principal repayments or accrued interests are past due or the loan is in default, sales partners are obliged to fulfill their guaranteed responsibility by selecting among different approaches, otherwise the CRMPs deposited by sales partners are confiscated by the Group, refer to Note 1 (ii) Profits/(losses) from fair value changes refers to gains or losses resulting from changes in the fair value of investment securities. (iii) The changes of foreign exchange gain/(loss) are mainly due to exchange rate changes in cash and cash equivalents held by the Group, including US dollar account and Hong Kong dollar account. The Group recorded a foreign exchange gain as RMB7,355,135 in 2022, an increase of RMB6,569,055 compared with that in 2021. The gain is mainly due to the increase of the exchange rate between Hong Kong dollar and RMB and the US dollar against RMB. F-54 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) Year ended December 31 2021 RMB 29,171,942 18,697,784 10,793,089 10,711,801 9,330,732 3,861,529 3,821,788 3,545,117 1,602,095 8,964,511 124,042,182 100,500,388 2020 RMB 30,471,983 33,267,682 7,010,704 9,120,261 14,486,656 2,495,071 6,047,226 4,232,722 9,960,607 6,949,270 2022 RMB 32,412,727 7,680,633 9,740,873 7,791,694 12,016,260 2,424,242 2,244,279 3,474,151 760,465 7,344,173 85,889,497 26 Other expenses Advertising and promotion expenses Litigation and attorney fees Entertainment and travelling expenses Office and commute expenses Consulting fees Communication expenses Depreciation and amortization Directors and officers liability insurance Research and development expenses Others Total 27 Income tax expense Cayman Islands Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. British Virgin Islands (BVI) Pursuant to the rules and regulations of the British Virgin Islands, the Group is not subject to any income tax in the British Virgin Islands. Hong Kong No provision for Hong Kong Profits Tax has been made for the subsidiary located in Hong Kong as the subsidiary has not derived any income subject to Hong Kong Profits Tax during the years. Peoples Republic of China (PRC) According to the PRC Corporate Income Tax (“CIT”) Law, the Group’s PRC subsidiaries are subject to PRC income tax at the statutory tax rate of 25%, unless otherwise specified. F-55 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 27 Income tax expense (continued) Income tax expense, all of which relates to the PRC, consists of the following for the years ended December 31, 2020, 2021 and 2022: Current tax expense Deferred tax benefit Total income tax expense The principal components of the deferred tax assets and liabilities are as follows: Deferred tax assets: Net loans principal, interest and financing service fee receivables Debt securities Guarantee liabilities Net operating loss carry-forwards Lease liabilities Other deferred tax assets Total deferred tax assets Valuation allowance Deferred tax assets, net of valuation allowance Net deferred tax assets Deferred tax liabilities: Intangible assets Equity securities Right-of-use assets Intercompany receivables Guarantee assets Undistributed earnings from structured funds Total deferred tax liabilities Net deferred tax liabilities F-56 Year ended December 31 2021 RMB 2020 RMB 2022 RMB 142,238,819 218,567,885 171,146,093 (94,389,779) (190,009,905) (133,913,450) 37,232,643 47,849,040 28,557,980 Year ended December 31 2022 2021 RMB RMB 444,036,207 316,744,794 3,992,140 37,120,604 9,116,290 7,145,869 669,876 465,422,787 374,789,573 1,350,771 - 15,226,575 3,880,255 928,979 (15,226,575) (9,116,290) 450,196,212 365,673,283 76,904,707 21,068,094 (742,500) (289,610) (4,049,202) (45,849,201) (742,500) (171,864) (7,444,339) (41,988,923) (322,437,865) (181,602,700) (207,588,600) (130,570,272) (580,956,978) (362,520,598) (73,752,022) (151,828,860) CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 27 Income tax expense (continued) Movement of valuation allowance: At the beginning of year Current year additions Current year reversals Current year expiration of carryforwards Net change in the valuation allowance At the end of year Year ended December 31 2022 2021 RMB RMB 10,443,239 7,238,296 (2,427,869) (27,091) 4,783,336 15,226,575 15,226,575 613,314 (6,722,726) (873) (6,110,285) 9,116,290 In assessing the recoverability of its deferred tax assets, management considers whether some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers reversing taxable temporary differences, carryback availability, projected future income and tax-planning strategies in making this assessment. Recovery of a substantial majority of the Group’s deferred tax assets is supported by reversing taxable temporary differences. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are recoverable, management believes that it is more likely than not that the Group will realize the benefits of its deferred tax assets, net of valuation allowance, as of December 31, 2021 and 2022. Valuation allowances have been provided for certain deferred tax assets due to the uncertainty surrounding their realization. As of December 31,2021 and 2022, the valuation allowance on deferred tax assets, mainly arising from operating loss carryforwards, were provided because it was more likely than not that the Group will not be able to utilize the operating loss carryforwards generated by certain unprofitable subsidiaries. The Group operates through its subsidiaries and VIEs. Since each entity files a separate tax return, the valuation allowance is considered on an individual entity basis. As of December 31, 2022, the Group had net operating loss carryforwards of 36,465,159 from its subsidiaries registered in the PRC, which can be carried forward to offset future taxable income. The Group had deferred tax assets related to net operating loss carryforwards of 9,116,290. Net operating losses of RMB 34,020,989 will expire in year in 2026, and in 2027, about RMB 2,444,170 will expire, if not utilized. F-57 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 27 Income tax expense (continued) Management intends to indefinitely reinvest the undistributed earnings of the subsidiaries located in the PRC. The amount of the temporary difference in respect of investments in PRC subsidiaries is RMB2,560,782,025 as of December 31, 2022. Upon repatriation of the subsidiaries’ and the VIE’s earnings, in the form of dividends or otherwise, the Group would be subject to 10% PRC withholding income tax when making distribution to foreign parent companies. However, the Group was not subject to withholding income tax in 2022 because the Group did not make any distribution to foreign parent companies. The related unrecognized deferred tax liabilities were RMB256,078,202. Income before income tax expense is as follows: Year ended December 31 2021 RMB 2020 RMB 2022 RMB Cayman Islands BVI Hong Kong PRC Total (2,847,746) (22,126) 3,424,910 (189,507) (247) (11,202,740) (477,322) (20,803) 2,773,547 162,146,528 105,157,938 170,308,632 93,765,444 172,584,054 162,701,566 The reconciliation of the PRC statutory income tax rate of 25%, the income tax rate of the jurisdiction where the Group has substantially all of its operations, to the effective income tax rate is as follows: PRC statutory income tax rate (Decrease)/increase in effective income tax rate resulting from: Tax-free income Non-deductible share option expense Other non-deductible expenses Zero tax rate in foreign countries Differential and preferential tax rates Changes in valuation allowance Others Effective income tax rate Year ended December 31 2021 RMB 2020 RMB 2022 RMB 25.00% 25.00% 25.00% (8.02)% 9.54% 0.29% 0.44% (0.49)% 2.49% 0.16% 29.41% (10.63)% 5.00% 2.56% 0.05% 3.05% 5.14% 0.29% 30.46% (1.36)% 0.84% 0.67% 0.07% (1.82)% (3.54)% 1.71% 21.57% The Group’s only major jurisdiction is China where tax returns generally remain open and subject to examination by tax authorities for tax years 1999 onwards. The Group did not have any significant unrecognized tax benefits, and no interest and penalty expenses related to income taxes were recorded for the years ended December 31, 2020, 2021 and 2022. F-58 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 28 Earnings per share The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2020, 2021 and 2022: Year ended December 31 2021 RMB 2020 RMB 2022 RMB Net income Basic weighted average number of common shares outstanding Effect of dilutive share options Dilutive weighted average number of ordinary shares Basic earnings per share Diluted earnings per share 65,207,464 114,852,526 153,589,125 135,351,411 1,371,643,240 1,371,643,240 1,371,643,240 155,453,871 1,525,232,365 1,525,890,071 1,527,097,111 0.10 0.09 0.08 0.08 0.05 0.05 154,246,831 In 2020, the Group issued 187,933,720 ordinary shares to the Depositary. No consideration was received by the Group for the issuance. As of December 31, 2022, no share out of the total 187,933,720 ordinary shares were used to settle share-based compensation. The 187,933,720 ordinary shares are legally issued and not outstanding, and do not affect the computation of earnings per share. 29 (a) Share-based compensation expenses Description of share-based compensation arrangements On January 3, 2017, the Group adopted a new share incentive plan, or the 2017 Share Incentive Plan. Options to purchase 187,933,720 ordinary shares pursuant to the 2017 Share Incentive Plan were issued to certain management and employees. Accordingly, 60%, 20% and 20% of the award options shall vest on December 31, each of the years 2017 to 2019, respectively. Unless terminated earlier, the 2017 Share Incentive Plan will terminate automatically in 2022. On August 27, 2018, 2018 Share Incentive Plan (the “2018 Option”) for granting shares award of CNFinance to certain management members and employees of the Group was issued to concurrently replace the 2017 Share Incentive Plan which granted Sincere Fame’s share. Except for the aforementioned change of grantor and the extension of the termination year by one to December 31st, 2023, all terms of the 2017 Share Incentive Plan and the 2018 Share Incentive Plan were the same. No change in the fair value, vesting conditions or the classification of the 2017 Share Incentive Plan and the 2018 Share Incentive Plan. In connection with the 2018 Option, 187,933,720 ordinary shares were issued to the Depositary as a reserve pool for future issuances upon the exercise of share options granted under the 2018 Option to the Group’s management members and employees. All shareholder rights of these 187,933,720 ordinary shares including but not limited to voting rights and dividend rights are unconditionally waived until the corresponding shares are exercised. On December 31, 2019, the Group granted options to certain management and employees to purchase 119,674,780 ordinary shares pursuant to the 2018 Share Incentive Plan (the “2019 Option”). Accordingly, 50%, 30% and 20% of the award options shall vest on December 31, each of the years 2020 to 2022, respectively, with expiration dates on December 31, each of the years 2025 to 2027. F-59 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 29 Share-based compensation expenses (continued) Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument. The Group recognizes the compensation costs net of estimated forfeitures over the applicable vesting period. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expenses to be recognized in future periods. There were no market conditions associated with the share option grants. (b) Fair value of share options and assumptions The fair value of options granted to employees is determined based on a number of factors including valuations. In determining the fair value of equity instruments, the Group referred to valuation reports prepared by an independent third-party appraisal firm, based on data the Group provided. The valuation reports provided the Group with guidelines in determining the fair value of the equity instruments, but the Group is ultimately responsible for the determination of all amounts related to share-based compensation recorded in the financial statements. Excluding the options containing service vesting conditions, the Group calculated the estimated fair value of the options on the respective grant dates using a binomial option pricing model with assistance from independent valuation firms, with the following assumptions: Expected volatility Expected dividends Risk-free interest rate Expected term (in years) Expected life (in years) Share awards granted on January 3, 2017 (2018 Option) Share awards granted on December 31, 2019 (2019 Option) 40.00% - 3.10% 5 6 41.52% - 3.12% 5 8 The contractual life of the share option is used as an input into the binomial option pricing model. Exercise multiple and post-vesting forfeit are incorporated into the model as well. 2018 Option When the options of the 2018 Option were issued, the Group’s shares had not been publicly traded and its shares were rarely traded privately. Therefore, the expected volatility is estimated based on the historical volatility of comparable entities with publicly traded shares for the period before the date of grant with length commensurate to contractual life of the options. Since the contractual life of the options is 6 years, the risk- free rate for the expected term of the options is determined based on the yield to maturity of China 6-year government bond at the date of grant. F-60 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 29 Share-based compensation expenses (continued) 2019 Option When the options of the 2019 Option were issued, the Group’s shares were already publicly traded. Since the shares have only been publicly traded for just over a year, the expected volatility is estimated based on the historical volatility of comparable entities with publicly traded shares for the period before the date of grant with length commensurate to contractual life of the options. The contractual life of the options is 6 years, 7 years and 8 years, respectively. Therefore, the risk-free rate for the expected term of the options is determined based on the yield to maturity of China 5-year, 7-year and 10-year government bond, using interpolation method, at the date of grant. The Group has not declared or paid any cash dividends on its capital stock and does not anticipate any dividend payments on its ordinary shares in the foreseeable future. If any of the assumptions used in the binomial option pricing model changes significantly, share-based compensation expenses for future awards may differ materially compared with the awards granted previously. A summary of share option activity under the 2018 Option is as follows: Balance, December 31, 2016 Granted Exercised Surrendered Balance, December 31, 2017 Exercisable, December 31, 2017 Expected to vest, December 31, 2017 Balance, December 31, 2017 Granted Exercised Surrendered Balance, December 31, 2018 Exercisable, December 31, 2018 Expected to vest, December 31, 2018 Balance, December 31, 2018 Granted Exercised Surrendered Balance, December 31, 2019 Exercisable, December 31, 2019 Expected to vest, December 31, 2019 Number of shares Weighted average exercise price RMB Weighted average grant date fair value RMB - 187,933,720 - - 187,933,720 112,760,232 75,173,488 187,933,720 - - - 187,933,720 150,346,976 37,586,744 187,933,720 - - - 187,933,720 187,933,720 - - - - - - - - - - - - - - - - - - - - - - - 1.27 - - 1.27 1.27 1.27 1.27 - - - 1.27 1.27 1.27 1.27 - - - 1.27 1.27 - F-61 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 29 Share-based compensation expenses (continued) A summary of share option activity under the 2019 Option is as follows: Balance, December 31, 2018 Granted Exercised Surrendered Balance, December 31, 2019 Exercisable, December 31, 2019 Expected to vest, December 31, 2019 Balance, December 31, 2019 Granted Exercised Surrendered Balance, December 31, 2020 Exercisable, December 31, 2020 Expected to vest, December 31, 2020 Balance, December 31, 2020 Granted Exercised Surrendered Balance, December 31, 2021 Exercisable, December 31, 2021 Expected to vest, December 31, 2021 Balance, December 31, 2021 Granted Exercised Surrendered Balance, December 31, 2022 Exercisable, December 31, 2022 Expected to vest, December 31, 2022 Number of shares Weighted average exercise price RMB Weighted average grant date fair value RMB - 119,674,780 - - 119,674,780 - 119,674,780 119,674,780 - - - 119,674,780 59,837,390 59,837,390 119,674,780 - - - 119,674,780 95,739,824 23,934,956 119,674,780 - - - 119,674,780 119,674,780 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0.72 - - 0.72 - 0.72 0.72 - - - 0.72 0.72 0.72 0.72 - - - 0.72 0.72 0.72 0.72 - - - 0.72 0.72 - F-62 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 29 Share-based compensation expenses (continued) The following table sets forth the fair value of options and ordinary shares estimated at the dates of option grants indicated below with the assistance from an independent valuation firm. Date of options grant January 3, 2017 January 3, 2017 December 31, 2019 December 31, 2019 Options granted Exercise price Fair value of option Fair value of ordinary shares 75,173,492 112,760,238 83,772,346 35,902,434 RMB0.50 RMB0.50 RMB1.00 RMB1.00 RMB1.26 RMB1.27 RMB0.71 RMB0.75 RMB1.72 RMB1.72 RMB1.40 RMB1.40 For the option granted on January 3, 2017, there was no income tax benefit recognized associated with the share-based compensation expenses. As of December 31, 2019, the expenses in relation to the 2018 Option have been fully recognized. For the 2019 Option, the Group recognized compensation expenses of RMB62,073,367 RMB18,766,367 and RMB5,774,266 in year 2020, 2021 and 2022, respectively. There was no income tax benefit recognized associated with the share-based compensation expenses. As of December 31, 2022, the expenses in relation to the 2019 Option have been fully recognized. 30 Material related party transactions The Group did not have any related party transactions in the year ended December 31, 2022. 31 Operating leases The Group leases multiple office spaces which are contracted under various non-cancelable operating leases, most of which provide extension or early termination options and are generally expired in 1 to 4 years. The Group does not enter into any finance leases or leases where the Group is a lessor. Moreover, the existing operating lease agreements do not contain any residual value guarantees or material restrictive covenants. Management determines if an arrangement is a lease at inception and record the leases in the financial statements upon lease commencement, which is the date when the underlying office space is made available for use by the lessor. The incremental borrowing rates determined for computing the lease liabilities are based on the People’s Bank of China (PBOC) Benchmark Rates for terms of loans ranging from zero (exclusive) to 5 years and above. F-63 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 31 Operating leases (continued) The following tables present the operating lease cost and other supplemental information: Operating lease cost (1) (1) Amounts include short-term leases that are immaterial. Weighted-average remaining lease term Weighted-average discount rate Year ended December 31 2021 RMB 2020 RMB 2022 RMB 21,719,042 14,764,364 13,966,943 December 31, 2021 RMB December 31, 2022 RMB 1 Year 3.59 Years 4.73% 4.75% Cash paid for amounts included in the measurement of lease liabilities under operating cash flows 15,478,630 15,101,145 ROU assets obtained in exchange for new operating lease liabilities 16,196,806 29,777,357 The following represents the Group’s future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities (excluding short-term operating leases) as of December 31, 2022: Year ended December 31 2023 2024 2025 2026 2027 Thereafter Total future operating lease payments Less: imputed interest Total present value of operating lease liabilities F-64 RMB 12,085,870 6,285,367 4,745,037 4,636,293 3,427,888 - 31,180,455 (2,596,980) 28,583,475 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 32 Condensed financial information of the parent company The Group’s PRC VIEs and PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Group. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The Group’s subsidiaries are also required to set aside at least 10% of its net income based on PRC accounting standards each year to its statutory reserves account until the accumulative amount of such reserves reaches 50% of its respective registered capital. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. In addition, the Group’s operations and revenues are conducted and generated in China, all of the Group’s revenues being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Group may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the Group’s ability to convert RMB into US Dollars. Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Group’s PRC subsidiary and VIE exceed 25% of the consolidated net assets of the Group. The condensed financial information of the parent company has been prepared in accordance with SEC Regulation S-X Rule 5-04 and Rule 12-04, using the same accounting policies as set out in the Group’s consolidated financial statements, except that the Group uses the equity method to account for investments in its subsidiaries. The footnote disclosures generally included in financial statements prepared in accordance with U.S. GAAP have been condensed and omitted. The footnote disclosures contain supplemental information relating to the operations of the Group, as such, these statements are not the general-purpose financial statements of the reporting entity and should be read in conjunction with the notes to the consolidated financial statements of the Group. On January 8, 2014, the Group was incorporated in the Cayman Islands with one subscriber’s share allotted and issued at par value of HKD0.0001, representing 100% of the entire ordinary share of the Group. The shareholder as well as shareholder’s equity remained the same until the reorganization with Sincere Fame. F-65 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 32 Condensed financial information of the parent company (continued) Condensed balance sheets Assets Cash and cash equivalents investment securities Investments in subsidiaries Other assets Total assets Liabilities and shareholders’ equity Accrued employee benefits Other operating liabilities Total liabilities Ordinary shares (USD0.0001 par value; 3,800,000,000 shares authorized; 1,559,576,960 shares issued and 1,371,643,240 shares outstanding as of December 31, 2021 and December 31, 2022, respectively) Treasury stock Additional paid-in capital Retained earnings Accumulated other comprehensive losses Total shareholders’ equity Total liabilities and shareholders’ equity F-66 December 31, 2021 RMB December 31, 2022 RMB - - 5,080,204 11,320,828 392,559,403 392,559,403 291,457,560 212,636,091 684,016,963 621,596,526 - 9,697,485 9,697,485 620,748 10,827,876 11,448,624 916,743 - 916,743 (87,631,475) 705,422,445 705,422,445 (7,944,752) (7,467,430) (24,552,280) (615,059) 674,319,478 610,147,902 684,016,963 621,596,526 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 32 Condensed financial information of the parent company (continued) Condensed statements of comprehensive income Interest and fees income Interest income on debt securities Interest on deposits with banks Total interest and fees income Realized gains on sales of investments, net Other gains, net Total non-interest income Operating expenses Employee compensation and benefits Other expenses Total operating expenses Income before income tax expense Net losses Other comprehensive (losses)/income Foreign currency translation adjustment Comprehensive (losses)/income F-67 Year ended December 31 2022 2021 RMB RMB - 171 171 621,472 20,593 642,065 - 481,007 481,007 2,889,427 (22) 2,889,405 (580,464) (90,221) (670,685) (620,748) (3,388,044) (4,008,792) (189,507) (189,507) (477,322) (477,322) (6,970,285) (7,159,792) 23,937,221 23,459,899 CNFINANCE HOLDINGS LIMITED Notes to the consolidated financial statements (Expressed in Renminbi unless otherwise stated) 32 Condensed financial information of the parent company (continued) Condensed statements of cash flows Cash flows from operating activities: Net losses Other operating assets Other operating liabilities Net cash (used in)/provided by operating activities Cash flows from financing activities: Repurchase of ordinary shares Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of year Effect of exchange rate change on cash and cash equivalents Cash and cash equivalents at the end of year 33 Commitments and contingencies Year ended December 31 2022 2021 RMB RMB (189,507) 483,825 (3,609,478) (3,315,160) (477,322) 67,500,641 1,751,140 68,774,459 - - (3,315,160) 3,315,160 - - (87,631,475) (87,631,475) (18,857,016) - 23,937,220 5,080,204 In 2022, CNFinance entered into a contract with a third-party company for the purchase of commercial properties as office buildings for its own use. As of December 31, 2022, the Group has paid RMB 88,574,103 as agreed in the contract and this amount is being recognized in the account prepaid. The remaining amount of RMB 88,450,000 will be paid by December 30, 2023, and the delivery of the building will be made by February 28, 2024, as the Group completing the payment in full. In addition, the Group has not entered into any derivative contracts that are indexed to the Group’s shares and classified as shareholders’ equity, or that are not reflected in the Group’s consolidated financial statements. Furthermore, the Group does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, the Group does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to the Group or engages in leasing, hedging or product development services with the Group. 34 Subsequent events The Group has considered subsequent events through April 27, 2022, which was the date of these consolidated financial statements were issued, and has determined none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes. F-68 Exhibit 2.4 Description of Rights of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) American Depositary Shares (“ADSs”), each representing twenty ordinary shares of CNFinance Holdings Limited (“our company” or “us)) are listed on the New York Stock Exchange and the shares are registered under Section 12(b) of the Exchange Act. This exhibit contains a description of the rights of (i) the holders of ordinary shares and (ii) ADS holders. Shares underlying the ADSs are held by JPMorgan Chase Bank, N.A., as depositary, and holders of ADSs will not be treated as holders of the ordinary shares. Description of Ordinary Shares The following is a summary of material provisions of our currently effective amended and restated memorandum and articles of association (the “amended and restated memorandum and articles of association”), as well as the Companies Law (as amended) of the Cayman Islands (the “Companies Law”) insofar as they relate to the material terms of our ordinary shares. Notwithstanding this, because it is a summary, it may not contain all the information that you may otherwise deem important. For more complete information, you should read the entire Memorandum and Articles of Association, which has been filed with the Securities And Exchange Commission (the “SEC”) as an exhibit to our Registration Statement on Form F-1 (File No. 333- 226126), as amended, initially filed with the SEC on July 11, 2018. Type and Class of Securities (Item 9.A.5 of Form 20-F) Each ordinary share has US$0.0001 par value. The number of ordinary shares that have been issued as of the last day of the financial year ended December 31, 2022 is provided on the cover of the annual report on Form 20-F filed on April 25, 2023 (the “Form 20-F”). Our ordinary shares may be held in either certificated or uncertificated form. Certificates representing the ordinary shares are issued in registered form. We may not issue share to bearer. Our shareholders who are non-residents of the Cayman Islands may freely hold and transfer their ordinary shares. Preemptive Rights (Item 9.A.3 of Form 20-F) Our shareholders do not have preemptive rights. Limitations or Qualifications (Item 9.A.6 of Form 20-F) Not applicable. Rights of Other Types of Securities (Item 9.A.7 of Form 20-F) Not applicable. Rights of Ordinary Shares (Item 10.B.3 of Form 20-F) General. Our authorized share capital consists of US$380,000 divided into 3,800,000,000 ordinary shares with a par value of US$0.0001 each. Holders of ordinary shares will have the same rights except for voting and conversion rights. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our Board of Directors subject to our amended and restated memorandum and articles of association and the Companies Law (as amended) of the Cayman Islands, which is referred to as Companies Law below. In addition, our shareholders may, subject to the provisions of our amended and restated memorandum and articles of association, by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Our amended and restated memorandum and articles of association provide that dividends may be declared and paid out of our profits, realized or unrealized, or out of share premium account or as otherwise permitted by the Companies Law. No dividend may be declared and paid unless our directors determine that, immediately after the payment, we will be able to pay our debts as they become due in the ordinary course of business and we have funds lawfully available for such purpose. Voting Rights. In respect of all matters subject to a shareholders’ vote, each ordinary share is entitled to one vote for each ordinary share registered in his or her name on our register of members. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder. A quorum required for a meeting of shareholders consists of two or more shareholders holding not less than one-third of the votes attaching to the issued and outstanding shares entitled to vote at general meetings present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative. As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our amended and restated memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting, in which case we will specify the meeting as such in the notices calling it, and the annual general meeting will be held at such time and place as may be determined by our directors. We, however, will hold an annual shareholders’ meeting during each fiscal year, as required by the Listing Rules at the New York Stock Exchange (NYSE). Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting. Shareholders’ annual general meetings and any other general meetings of our shareholders may be called by a majority of our Board of Directors or our chairman or upon a requisition of shareholders holding at the date of deposit of the requisition not less than one-third of the votes attaching to the issued and outstanding shares entitled to vote at general meetings, in which case the directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our amended and restated memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders. Advance notice of at least ten (10) days is required for the convening of our annual general meeting and other general meetings unless such notice is waived in accordance with our amended and restated memorandum and articles of association. An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting, while a special resolution also requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting. A special resolution will be required for important matters such as a change of name or making changes to our amended and restated memorandum and articles of association. Transfer of Ordinary Shares. Subject to the restrictions in our amended and restated memorandum and articles of association as set out below, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our Board of Directors. Our Board of Directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our Board of Directors may also decline to register any transfer of any ordinary share unless: ● the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our Board of Directors may reasonably require to show the right of the transferor to make the transfer; ● the instrument of transfer is in respect of only one class of shares; ● the instrument of transfer is properly stamped, if required; 2 ● in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and ● a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof. If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register closed at such times and for such periods as our Board of Directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our Board of Directors may determine. Liquidation. On a return of capital on winding-up or otherwise (other than on conversion, redemption or purchase of ordinary shares), if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them. Any distribution of assets or capital to a holder of ordinary share will be the same in any liquidation event. Redemption, Repurchase and Surrender of Ordinary Shares. We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our Board of Directors or by an ordinary resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner and terms of such purchase have been approved by our Board of Directors or by ordinary resolution of our shareholders, or are otherwise authorized by our amended and restated memorandum and articles of association. Under the Companies Law, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if the company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding other than shares held as treasury shares, or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration. Requirements to Change the Rights of Holders of Ordinary Shares (Item 10.B.4 of Form 20-F) Variations of Rights of Shares. If at any time our share capital is divided into different classes or series of shares, the rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not our company is being wound up, may be varied with the consent in writing of the holders of not less than two-thirds of the issued shares of that class or series or with the sanction of a resolution passed by a majority of two-thirds of the votes cast at a separate meeting of the holders of the shares of the class or series. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares. 3 Limitations on the Rights to Own Ordinary Shares (Item 10.B.6 of Form 20-F) There are no limitations under the laws of the Cayman Islands or under the amended and restated memorandum and articles of association that limit the right of non-resident or foreign owners to hold or vote ordinary shares, other than anti-takeover provisions contained in the amended and restated memorandum and articles of association to limit the ability of others to acquire control of our company or cause our company to engage in change-of- control transactions. Provisions Affecting Any Change of Control (Item 10.B.7 of Form 20-F) Anti-Takeover Provisions. Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders. Under Cayman Islands law, our directors may only exercise the rights and powers granted to them under the amended and restated memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company. Ownership Threshold (Item 10.B.8 of Form 20-F) There are no provisions under the laws of the Cayman Islands or under the amended and restated memorandum and articles of association that govern the ownership threshold above which shareholder ownership must be disclosed. Differences Between the Law of Different Jurisdictions (Item 10.B.9 of Form 20-F) We are incorporated under, and are governed by, the laws of the Cayman Islands. The Companies Law is derived, to a large extent, from the older Companies Acts of England, but does not follow many recent English law statutory enactments. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the State of Delaware. Mergers and Similar Arrangements. The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company, and (b) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The written plan of merger or consolidation must be filed with the Registrar of Companies of the Cayman Islands together with a declaration as to the solvency of the consolidated or surviving company, a declaration as to the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures. A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman subsidiary to be merged unless that member agrees otherwise. For this purpose a company is a “parent” of a subsidiary if it holds issued shares that together represent at least ninety percent (90%) of the votes at a general meeting of the subsidiary. The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands. 4 Save in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation is entitled to payment of the fair value of his shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provide the dissenting shareholder complies strictly with the procedures set out in the Companies Law. The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of any other rights to which he or she might otherwise be entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful. Separate from the statutory provisions relating to mergers and consolidations, the Companies Law also contains statutory provisions that facilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that: ● the statutory provisions as to the required majority vote have been met; ● the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; ● the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and ● the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. The Companies Law also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of a dissenting minority shareholder upon a tender offer. When a tender offer is made and accepted by holders of 90.0% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares to the offeror on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion. If an arrangement and reconstruction is thus approved, or if a tender offer is made and accepted, a dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands court can be expected to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit a minority shareholder to commence a class action against or derivative actions in the name of the company to challenge actions where: ● a company acts or proposes to act illegally or ultra vires; ● the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and ● those who control the company are perpetrating a “fraud on the minority.” 5 Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association provide that we shall indemnify our officers and directors against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such directors or officers, other than by reason of such person’s dishonesty, willful default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings concerning our company or its affairs in any court whether in the Cayman Islands or elsewhere. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in our amended and restated memorandum and articles of association. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation. As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his position as director (unless the company permits him to do so), a duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third party, and a duty to exercise powers for the purpose for which such powers were intended. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. 6 Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. The Companies Law and our amended and restated articles of association provide that our shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held. Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. The Companies Law provide shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our amended and restated articles of association allow our shareholders holding in aggregate not less than one-third of all votes attaching to the issued and outstanding shares of our company entitled to vote at general meetings to requisition an extraordinary general meeting of our shareholders, in which case our board is obliged to convene an extraordinary general meeting and to put the resolutions so requisitioned to a vote at such meeting. Other than this right to requisition a shareholders’ meeting, our amended and restated articles of association does not provide our shareholders with any other right to put proposals before annual general meetings or extraordinary general meetings not called by such shareholders. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings. Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands but our amended and restated articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation. Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our amended and restated articles of association, directors may be removed with or without cause, by an ordinary resolution of our shareholders. A director shall hold office until the expiration of his or her term or his or her successor shall have been elected and qualified, or until his or her office is otherwise vacated. In addition, a director’s office shall be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found to be or becomes of unsound mind or dies; (iii) resigns his office by notice in writing to the company; (iv) without special leave of absence from our Board of Directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated; (v) is prohibited by law from being a director; or (vi) is removed from office pursuant to any other provisions of our amended and restated memorandum and articles of association. Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors. 7 Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, the directors of the Company are required to comply with fiduciary duties which they owe to the Company under Cayman Islands laws, including the duty to ensure that, in their opinion, any such transactions must be entered into bona fide in the best interests of the company, and are entered into for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders. Dissolution; Winding-Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the Companies Law and our amended and restated articles of association, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders. Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our amended and restated articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the written consent of the holders of not less than two-thirds of the issued shares of that class or with the sanction of a resolution passed by a majority of two-thirds of the votes cast at a separate general meeting of the holders of the shares of that class. Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under the Companies Law and our amended and restated memorandum and articles of association, our memorandum and articles of association may only be amended by a special resolution of our shareholders. Exempted Company. We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company: ● does not have to file an annual return of its shareholders with the Registrar of Companies; ● is not required to open its register of members for inspection; ● does not have to hold an annual general meeting; ● may issue shares or shares with no par value; 8 ● may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); ● may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; ● may register as a limited duration company; and ● may register as a segregated portfolio company. “Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the company. Changes in capital (Item 10.B.10) The requirements of the amended and restated memorandum and articles of association regarding changes in capital are not more stringent than the requirements of Cayman Islands law. Debt Securities (Item 12.A of Form 20-F) Not applicable. Warrants and Rights (Item 12.B of Form 20-F) Not applicable. Other Securities (Item 12.C of Form 20-F) Not applicable. Description of American Depositary Shares (Items 12.D.1 and 12.D.2 of Form 20-F) JPMorgan Chase Bank, N.A. (“JPMorgan”), as depositary registers and delivers the ADSs. Each ADS represents twenty ordinary shares, deposited with the custodian, as agent of the depositary, under the deposit agreement among ourselves, the depositary and yourself as an ADR holder. Each ADS also represents any securities, cash or other property deposited with the depositary but which they have not distributed directly to you. The depositary’s office is located at 383 Madison Avenue, Floor 11, New York, NY 10179. As an ADR holder, we do not treat you as a shareholder of ours and you do not have any shareholder rights. Cayman Islands law governs shareholder rights. Because the depositary or its nominee is the shareholder of record for the shares represented by all outstanding ADSs, shareholder rights rest with such record holder. Your rights are those of an ADR holder. Such rights derive from the terms of the deposit agreement to be entered into among us, the depositary and all registered holders from time to time of ADSs issued under the deposit agreement. The obligations of the depositary and its agents are also set out in the deposit agreement. Because the depositary or its nominee is actually the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your behalf. The following is a summary of what we believe to be the material terms of the deposit agreement. Notwithstanding this, because it is a summary, it may not contain all the information that you may otherwise deem important. For more complete information, you should read the entire deposit agreement and the form of ADR which contains the terms of your ADSs. You can read a copy of the deposit agreement which has been filed as an exhibit to a Registration Statement on Form F-6 (File No. 333- 228089). The form of ADR has been filed with the SEC as an exhibit to our Registration Statement on Form F-1 (File No. 333- 226126), as amended, initially filed with the SEC on July 11, 2018. 9 Share Dividends and Other Distributions How will I receive dividends and other distributions on the shares underlying my ADSs? We may make various types of distributions with respect to our securities. The depositary has agreed that, to the extent practicable, it will pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after converting any cash received into U.S. dollars (if it determines such conversion may be made on a reasonable basis) and, in all cases, making any necessary deductions provided for in the deposit agreement. The depositary may utilize a division, branch or affiliate of JPMorgan to direct, manage and/or execute any public and/or private sale of securities under the deposit agreement. Such division, branch and/or affiliate may charge the depositary a fee in connection with such sales, which fee is considered an expense of the depositary. You will receive these distributions in proportion to the number of underlying securities that your ADSs represent. Except as stated below, the depositary will deliver such distributions to ADR holders in proportion to their interests in the following manner: ● Cash. The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution or the net proceeds of sales of any other distribution or portion thereof (to the extent applicable), on an averaged or other practicable basis, subject to (i) appropriate adjustments for taxes withheld, (ii) such distribution being impermissible or impracticable with respect to certain registered ADR holders, and (iii) deduction of the depositary’s and/or its agents’ expenses in (1) converting any foreign currency to U.S. dollars to the extent that it determines that such conversion may be made on a reasonable basis, (2) transferring foreign currency or U.S. dollars to the United States by such means as the depositary may determine to the extent that it determines that such transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for such conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time and (4) making any sale by public or private means in any commercially reasonable manner. If exchange rates fluctuate during a time when the depositary cannot convert a foreign currency, you may lose some or all of the value of the distribution. ● Shares. In the case of a distribution in shares, the depositary will issue additional ADRs to evidence the number of ADSs representing such shares. Only whole ADSs will be issued. Any shares which would result in fractional ADSs will be sold and the net proceeds will be distributed in the same manner as cash to the ADR holders entitled thereto. ● Rights to receive additional shares. In the case of a distribution of rights to subscribe for additional shares or other rights, if we timely provide evidence satisfactory to the depositary that it may lawfully distribute such rights, the depositary will distribute warrants or other instruments in the discretion of the depositary representing such rights. However, if we do not timely furnish such evidence, the depositary may: (i) sell such rights if practicable and distribute the net proceeds in the same manner as cash to the ADR holders entitled thereto; or (ii) if it is not practicable to sell such rights by reason of the non-transferability of the rights, limited markets therefor, their short duration or otherwise, do nothing and allow such rights to lapse, in which case ADR holders will receive nothing and the rights may lapse. We have no obligation to file a registration statement under the Securities Act in order to make any rights available to ADR holders. 10 ● Other Distributions. In the case of a distribution of securities or property other than those described above, the depositary may either (i) distribute such securities or property in any manner it deems equitable and practicable or (ii) to the extent the depositary deems distribution of such securities or property not to be equitable and practicable, sell such securities or property and distribute any net proceeds in the same way it distributes cash. If the depositary determines in its discretion that any distribution described above is not practicable with respect to any specific registered ADR holder, the depositary may choose any method of distribution that it deems practicable for such ADR holder, including the distribution of foreign currency, securities or property, or it may retain such items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities, in which case the ADSs will also represent the retained items. Any U.S. dollars will be distributed by checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability and dealt with by the depositary in accordance with its then current practices. The depositary is not responsible if it fails to determine that any distribution or action is lawful or reasonably practicable. There can be no assurance that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, nor that any of such transactions can be completed within a specified time period. All purchases and sales of securities will be handled by the Depositary in accordance with its then current policies, which are currently set forth in the “Depositary Receipt Sale and Purchase of Security” section of https://www.adr.com/Investors/FindOutAboutDRs, the location and contents of which the Depositary shall be solely responsible for. Deposit, Withdrawal and Cancellation How does the depositary issue ADSs? The depositary will issue ADSs if you or your broker deposit shares or evidence of rights to receive shares with the custodian and pay the fees and expenses owing to the depositary in connection with such issuance. Shares deposited in the future with the custodian must be accompanied by certain delivery documentation and shall, at the time of such deposit, be registered in the name of JPMorgan Chase Bank, N.A., as depositary for the benefit of holders of ADRs or in such other name as the depositary shall direct. The custodian will hold all deposited shares for the account and to the order of the depositary. ADR holders thus have no direct ownership interest in the shares and only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property and cash received on or in substitution for the deposited shares. The deposited shares and any such additional items are referred to as “deposited securities”. Upon each deposit of shares, receipt of related delivery documentation and compliance with the other provisions of the deposit agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an ADR or ADRs in the name or upon the order of the person entitled thereto evidencing the number of ADSs to which such person is entitled. All of the ADSs issued will, unless specifically requested to the contrary, be part of the depositary’s direct registration system, and a registered holder will receive periodic statements from the depositary which will show the number of ADSs registered in such holder’s name. An ADR holder can request that the ADSs not be held through the depositary’s direct registration system and that a certificated ADR be issued. 11 How do ADR holders cancel an ADS and obtain deposited securities? When you turn in your ADR certificate at the depositary’s office, or when you provide proper instructions and documentation in the case of direct registration ADSs, the depositary will, upon payment of certain applicable fees, charges and taxes, deliver the underlying shares to you or upon your written order. Delivery of deposited securities in certificated form will be made at the custodian’s office. At your risk, expense and request, the depositary may deliver deposited securities at such other place as you may request. The depositary may only restrict the withdrawal of deposited securities in connection with: ● temporary delays caused by closing our transfer books or those of the depositary or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends; ● the payment of fees, taxes and similar charges; or ● compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited securities. This right of withdrawal may not be limited by any other provision of the deposit agreement. Record Dates The depositary may, after consultation with us if practicable, fix record dates (which, to the extent applicable, shall be as near as practicable to any corresponding record dates set by us) for the determination of the registered ADR holders who will be entitled (or obligated, as the case may be): ● to receive any distribution on or in respect of deposited securities, ● to give instructions for the exercise of voting rights at a meeting of holders of shares, ● to pay the fee assessed by the depositary for administration of the ADR program and for any expenses as provided for in the ADR, or ● to receive any notice or to act in respect of other matters, all subject to the provisions of the deposit agreement. 12 Voting Rights How do I vote? If you are an ADR holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the voting rights for the shares which underlie your ADSs. Subject to the next sentence, as soon as practicable after receiving notice from us of any meeting at which the holders of shares are entitled to vote, or of our solicitation of consents or proxies from holders of shares, the depositary shall fix the ADS record date in accordance with the provisions of the deposit agreement in respect of such meeting or solicitation of consent or proxy. The depositary shall, if we request in writing in a timely manner (the depositary having no obligation to take any further action if our request shall not have been received by the depositary at least 30 days prior to the date of such vote or meeting) and at our expense and provided that no legal prohibitions exist, distribute to the registered ADR holders a notice stating such information as is contained in the voting materials received by the depositary and describing how you may instruct or, subject to the next sentence, will be deemed to instruct, the depositary to exercise the voting rights for the shares which underlie your ADSs, including instructions for giving a discretionary proxy to a person designated by us. To the extent we have provided the depositary with at least 35 days’ notice of a proposed meeting and the notice will be received by all holders and beneficial owners of interests in ADSs no less than 10 days prior to the date of the meeting and/or the cut-off date for the solicitation of consents, if voting instructions are not timely received by the depositary from any holder, such holder shall be deemed, and in the deposit agreement the depositary is instructed to deem such holder, to have instructed the depositary to give a discretionary proxy to a person designated by us to vote the shares represented by their ADSs as desired, provided that no such instruction shall be deemed given and no discretionary proxy shall be given (a) if we inform the depositary in writing (and we agree to provide the depositary with such information promptly in writing) that (i) we do not wish such proxy to be given, (ii) substantial opposition exists with respect to any agenda item for which the proxy would be given or (iii) the agenda item(s), if approved, would materially or adversely affect the rights of holders of shares and (b) unless, with respect to such meeting, the depositary obtained an opinion of counsel, in form and substance satisfactory to the depositary, confirming that (a) the granting of such discretionary proxy does not subject the depositary to any reporting obligations in the Cayman Islands, (b) the granting of such proxy will not result in a violation of Cayman Islands laws, rules, regulations or permits and (c) the voting arrangement and deemed instruction as contemplated under the deposit agreement will be given effect under Cayman Islands laws, rules and regulations and (d) the granting of such discretionary proxy will not under any circumstances result in the shares represented by the ADSs being treated as assets of the depositary under Cayman Islands laws, rules or regulations. Holders are strongly encouraged to forward their voting instructions to the depositary as soon as possible. For instructions to be valid, the ADR department of the depositary that is responsible for proxies and voting must receive them in the manner and on or before the time specified, notwithstanding that such instructions may have been physically received by the depositary prior to such time. The depositary will not itself exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote. Notwithstanding anything contained in the deposit agreement or any ADR, the depositary may, to the extent not prohibited by law or regulations, or by the requirements of the stock exchange on which the ADSs are listed, in lieu of distribution of the materials provided to the depositary in connection with any meeting of, or solicitation of consents or proxies from, holders of deposited securities, distribute to the registered holders of ADRs a notice that provides such holders with, or otherwise publicizes to such holders, instructions on how to retrieve such materials or receive such materials upon request (i.e., by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials). We have advised the depositary that under the Cayman Islands law and our constituent documents, each as in effect as of the date of the deposit agreement, voting at any meeting of shareholders is by show of hands unless a poll is (before or on the declaration of the results of the show of hands) demanded. In the event that voting on any resolution or matter is conducted on a show of hands basis in accordance with our constituent documents, the depositary will refrain from voting and the voting instructions received by the depositary from holders shall lapse. The depositary will not demand a poll or join in demanding a poll, whether or not requested to do so by holders of ADSs. There is no guarantee that you will receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Reports and Other Communications Will ADR holders be able to view our reports? The depositary will make available for inspection by ADR holders at the offices of the depositary and the custodian the deposit agreement, the provisions of or governing deposited securities, and any written communications from us which are both received by the custodian or its nominee as a holder of deposited securities and made generally available to the holders of deposited securities. Additionally, if we make any written communications generally available to holders of our shares, and we furnish copies thereof (or English translations or summaries) to the depositary, it will distribute the same to registered ADR holders. 13 Amendment and Termination How may the deposit agreement be amended? We may agree with the depositary to amend the deposit agreement and the ADSs without your consent for any reason. ADR holders must be given at least 30 days’ notice of any amendment that imposes or increases any fees or charges (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, SWIFT, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or otherwise prejudices any substantial existing right of ADR holders. Such notice need not describe in detail the specific amendments effectuated thereby, but must identify to ADR holders a means to access the text of such amendment. If an ADR holder continues to hold an ADR or ADRs after being so notified, such ADR holder is deemed to agree to such amendment and to be bound by the deposit agreement as so amended. Notwithstanding the foregoing, if any governmental body or regulatory body should adopt new laws, rules or regulations which would require amendment or supplement of the deposit agreement or the form of ADR to ensure compliance therewith, we and the depositary may amend or supplement the deposit agreement and the ADR at any time in accordance with such changed laws, rules or regulations, which amendment or supplement may take effect before a notice is given or within any other period of time as required for compliance. No amendment, however, will impair your right to surrender your ADSs and receive the underlying securities, except in order to comply with mandatory provisions of applicable law. How may the deposit agreement be terminated? The depositary may, and shall at our written direction, terminate the deposit agreement and the ADRs by mailing notice of such termination to the registered holders of ADRs at least 30 days prior to the date fixed in such notice for such termination; provided, however, if the depositary shall have (i) resigned as depositary under the deposit agreement, notice of such termination by the depositary shall not be provided to registered holders unless a successor depositary shall not be operating under the deposit agreement within 60 days of the date of such resignation, and (ii) been removed as depositary under the deposit agreement, notice of such termination by the depositary shall not be provided to registered holders of ADRs unless a successor depositary shall not be operating under the deposit agreement on the 120th day after our notice of removal was first provided to the depositary. After the date so fixed for termination, (a) all direct registration ADRs shall cease to be eligible for the direct registration system and shall be considered ADRs issued on the ADR register maintained by the depositary and (b) the depositary shall use its reasonable efforts to ensure that the ADSs cease to be DTC eligible so that neither DTC nor any of its nominees shall thereafter be a registered holder of ADRs. At such time as the ADSs cease to be DTC eligible and/or neither DTC nor any of its nominees is a registered holder of ADRs, the depositary shall (a) instruct its custodian to deliver all shares to us along with a general stock power that refers to the names set forth on the ADR register maintained by the depositary and (b) provide us with a copy of the ADR register maintained by the depositary. Upon receipt of such shares and the ADR register maintained by the depositary, we have agreed to use our best efforts to issue to each registered holder a Share certificate representing the Shares represented by the ADSs reflected on the ADR register maintained by the depositary in such registered holder’s name and to deliver such Share certificate to the registered holder at the address set forth on the ADR register maintained by the depositary. After providing such instruction to the custodian and delivering a copy of the ADR register to us, the depositary and its agents will perform no further acts under the deposit agreement or the ADRs and shall cease to have any obligations under the deposit agreement and/or the ADRs. 14 Limitations on Obligations and Liability to ADR holders Limits on our obligations and the obligations of the depositary; limits on liability to ADR holders and holders of ADSs Prior to the issue, registration, registration of transfer, split-up, combination, or cancellation of any ADRs, or the delivery of any distribution in respect thereof, and from time to time in the case of the production of proofs as described below, we or the depositary or its custodian may require: ● payment with respect thereto of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or registration fees in effect for the registration of transfers of shares or other deposited securities upon any applicable register and (iii) any applicable fees and expenses described in the deposit agreement; ● the production of proof satisfactory to it of (i) the identity of any signatory and genuineness of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange control approval, beneficial ownership of any securities, compliance with applicable law, regulations, provisions of or governing deposited securities and terms of the deposit agreement and the ADRs, as it may deem necessary or proper; and ● compliance with such regulations as the depositary may establish consistent with the deposit agreement. The issuance of ADRs, the acceptance of deposits of shares, the registration, registration of transfer, split-up or combination of ADRs or the withdrawal of shares, may be suspended, generally or in particular instances, when the ADR register or any register for deposited securities is closed or when any such action is deemed advisable by the depositary; provided that the ability to withdraw shares may only be limited under the following circumstances: (i) temporary delays caused by closing transfer books of the depositary or our transfer books or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends, (ii) the payment of fees, taxes, and similar charges, and (iii) compliance with any laws or governmental regulations relating to ADRs or to the withdrawal of deposited securities. The deposit agreement expressly limits the obligations and liability of the depositary, ourselves and our respective agents. In the deposit agreement it provides that neither we nor the depositary nor any such agent will be liable if: ● any present or future law, rule, regulation, fiat, order or decree of the United States, the Cayman Islands, the People’s Republic of China (including the Hong Kong Special Administrative Region, the People’s Republic of China) or any other country or jurisdiction, or of any governmental or regulatory authority or securities exchange or market or automated quotation system, the provisions of or governing any deposited securities, any present or future provision of our charter, any act of God, war, terrorism, nationalization, expropriation, currency restrictions, work stoppage, strike, civil unrest, revolutions, rebellions, explosions, computer failure or circumstance beyond our, the depositary’s or our respective agents’ direct and immediate control shall prevent or delay, or shall cause any of them to be subject to any civil or criminal penalty in connection with, any act which the deposit agreement or the ADRs provide shall be done or performed by us, the depositary or our respective agents (including, without limitation, voting); ● it exercises or fails to exercise discretion under the deposit agreement or the ADRs including, without limitation, any failure to determine that any distribution or action may be lawful or reasonably practicable; ● it performs its obligations under the deposit agreement and ADRs without gross negligence or willful misconduct; ● it takes any action or refrains from taking any action in reliance upon the advice of or information from legal counsel, accountants, any person presenting shares for deposit, any registered holder of ADRs, or any other person believed by it to be competent to give such advice or information; or ● it relies upon any written notice, request, direction, instruction or document believed by it to be genuine and to have been signed, presented or given by the proper party or parties. 15 Neither the depositary nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory to us against all expense (including fees and disbursements of counsel) and liability is furnished as often as may be required. The depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf in connection with the deposit agreement, any registered holder or holders of ADRs, any ADRs or otherwise related to the deposit agreement or ADRs to the extent such information is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative or judicial process, banking, securities or other regulators. The depositary shall not be liable for the acts or omissions made by, or the insolvency of, any securities depository, clearing agency or settlement system. Furthermore, the depositary shall not be responsible for, and shall incur no liability in connection with or arising from, the insolvency of any custodian that is not a branch or affiliate of JPMorgan. Notwithstanding anything to the contrary contained in the deposit agreement or any ADRs, the depositary shall not be responsible for, and shall incur no liability in connection with or arising from, any act or omission to act on the part of the custodian except to the extent that the custodian has (i) committed fraud or willful misconduct in the provision of custodial services to the depositary or (ii) failed to use reasonable care in the provision of custodial services to the depositary as determined in accordance with the standards prevailing in the jurisdiction in which the custodian is located. The depositary and the custodian(s) may use third party delivery services and providers of information regarding matters such as pricing, proxy voting, corporate actions, class action litigation and other services in connection with the ADRs and the deposit agreement, and use local agents to provide extraordinary services such as attendance at annual meetings of issuers of securities. Although the depositary and the custodian will use reasonable care (and cause their agents to use reasonable care) in the selection and retention of such third party providers and local agents, they will not be responsible for any errors or omissions made by them in providing the relevant information or services. The depositary shall not have any liability for the price received in connection with any sale of securities, the timing thereof or any delay in action or omission to act nor shall it be responsible for any error or delay in action, omission to act, default or negligence on the part of the party so retained in connection with any such sale or proposed sale. The depositary has no obligation to inform ADR holders or other holders of an interest in any ADSs about the requirements of Cayman Islands or People’s Republic of China law, rules or regulations or any changes therein or thereto. Additionally, none of us, the depositary or the custodian shall be liable for the failure by any registered holder of ADRs or beneficial owner therein to obtain the benefits of credits on the basis of non-U.S. tax paid against such holder’s or beneficial owner’s income tax liability. Neither we nor the depositary shall incur any liability for any tax consequences that may be incurred by registered holders or beneficial owners on account of their ownership of ADRs or ADSs. Neither the depositary nor its agents will be responsible for any failure to carry out any instructions to vote any of the deposited securities, for the manner in which any such vote is cast or for the effect of any such vote. The depositary may rely upon instructions from us or our counsel in respect of any approval or license required for any currency conversion, transfer or distribution. The depositary shall not incur any liability for the content of any information submitted to it by us or on our behalf for distribution to ADR holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the deposited securities, for the validity or worth of the deposited securities, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of the deposit agreement or for the failure or timeliness of any notice from us. The depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the depositary or in connection with any matter arising wholly after the removal or resignation of the depositary. Neither the depositary nor any of its agents shall be liable to registered holders or beneficial owners of interests in ADSs for any indirect, special, punitive or consequential damages (including, without limitation, legal fees and expenses) or lost profits, in each case of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought. 16 In the deposit agreement each party thereto (including, for avoidance of doubt, each holder and beneficial owner and/or holder of interests in ADRs) irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any suit, action or proceeding against the depositary and/or us directly or indirectly arising out of or relating to the shares or other deposited securities, the ADSs or the ADRs, the deposit agreement or any transaction contemplated therein, or the breach thereof (whether based on contract, tort, common law or any other theory). The depositary and its agents may own and deal in any class of securities of our company and our affiliates and in ADRs. Disclosure of Interest in ADSs To the extent that the provisions of or governing any deposited securities may require disclosure of or impose limits on beneficial or other ownership of deposited securities, other shares and other securities and may provide for blocking transfer, voting or other rights to enforce such disclosure or limits, you agree to comply with all such disclosure requirements and ownership limitations and to comply with any reasonable instructions we may provide in respect thereof. We reserve the right to instruct you to deliver your ADSs for cancellation and withdrawal of the deposited securities so as to permit us to deal with you directly as a holder of shares and, by holding an ADS or an interest therein, you will be agreeing to comply with such instructions. Books of Depositary The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs, which register shall include the depositary’s direct registration system. Registered holders of ADRs may inspect such records at the depositary’s office at all reasonable times, but solely for the purpose of communicating with other holders in the interest of the business of our company or a matter relating to the deposit agreement. Such register may be closed at any time or from time to time, when deemed expedient by the depositary or, in the case of the issuance book portion of the ADR Register, when reasonably requested by the Company solely in order to enable the Company to comply with applicable law. The depositary will maintain facilities for the delivery and receipt of ADRs. Appointment In the deposit agreement, each registered holder of ADRs and each person holding an interest in ADSs, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the deposit agreement will be deemed for all purposes to: ● be a party to and bound by the terms of the deposit agreement and the applicable ADR or ADRs, and ● appoint the depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in the deposit agreement and the applicable ADR or ADRs, to adopt any and all procedures necessary to comply with applicable laws and to take such action as the depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of the deposit agreement and the applicable ADR and ADRs, the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof. 17 Governing Law and Consent to Jurisdiction The deposit agreement and the ADRs are governed by and construed in accordance with the laws of the State of New York. In the deposit agreement, we have submitted to the jurisdiction of the courts of the State of New York and appointed an agent for service of process on our behalf. By holding an ADS or an interest therein, registered holders of ADRs and owners of ADSs each irrevocably agree that any legal suit, action or proceeding against or involving us or the depositary, arising out of or based upon the deposit agreement, the ADSs or the transactions contemplated thereby, may only be instituted in a state or federal court in New York, New York, and each irrevocably waives any objection which it may have to the laying of venue of any such proceeding, and irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding. Notwithstanding the foregoing, the depositary may, in its sole discretion, elect to institute any action, controversy, claim or dispute directly or indirectly based on, arising out of or relating to the deposit agreement or the ADRs or the transactions contemplated thereby, including without limitation any question regarding its or their existence, validity, interpretation, performance or termination, against any other party or parties to the deposit agreement (including, without limitation, against ADR holders and owners of interests in ADRs) in any competent court in the Cayman Islands, Hong Kong, the People’s Republic of China and/or the United States, or, by having such disputes referred to and finally resolved by an arbitration either in New York, New York or in Hong Kong, subject to certain exceptions solely related to the aspects of such claims that are related to U.S. securities law, in which case the resolution of such aspects may, at the option of such registered holder of the ADSs, remain in state or federal court in New York, New York. Any such arbitration shall be conducted in the English language either in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association or in Hong Kong following the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). Jury Trial Waiver The deposit agreement provides that, to the fullest extent permitted by applicable law, ADSs holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. If we or the depositary were to oppose a jury trial demand based on such waiver, the court would determine whether the waiver was enforceable in the facts and circumstances of that case in accordance with applicable state and federal law, including whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. The waiver to right to a jury trial of the deposit agreement is not intended to be deemed a waiver by any holder or beneficial owner of ADSs of the Company’s or the depositary’s compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder. 18 Exhibit 8.1 LIST OF SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITY OF CNFINANCE HOLDINGS LIMITED Subsidiaries Sincere Fame International Limited 诚名国际有限公司 China Financial Services Group Limited 泛华金融服务集团有限公司 Fanhua Chuang Li Information Technology (Shenzhen) Co., Ltd. 泛华创利信息技术(深圳)有限 公司* Shenzhen Fanhua United Investment Group Co., Ltd. 深圳泛华联合投资集团有限公司* Guangzhou Chengze Information Technology Co., Ltd. 广州诚泽信息技术有限公司* Chongqing Liangjiang New Area Fanhua Micro-credit Co., Ltd. 重庆市两江新区泛华小额贷款 有限公司* Beijing Lianxin Chuanghui Information Technology Co., Ltd. 北京联鑫创辉信息技术有限公司* Shenzhen Fanlian Investment Co., Ltd. 深圳泛联投资有限公司* Jurisdiction of Incorporation British Virgin Islands Hong Kong PRC PRC PRC PRC PRC PRC Consolidated Variable Interest Entity Jinghua Structured Fund 1外贸信托菁华1号集合资金信托计划* Zhonghai Lanhai Structured Fund 1 中海信托蓝海1号集合资金信托计划* Jurisdiction of Incorporation PRC PRC * The English name of this subsidiary or consolidated variable interest entity, as applicable, has been translated from its Chinese name. Exhibit 12.1 Certification by the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Bin Zhai, certify that: 1. I have reviewed this annual report on Form 20-F of CNFinance Holdings Limited (the “Company”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. Date: April 25, 2023 /s/ Bin Zhai By: Name: Bin Zhai Title: Chief Executive Officer Exhibit 12.2 Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Jing Li, certify that: 1. I have reviewed this annual report on Form 20-F of CNFinance Holdings Limited (the “Company”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. Date: April 25, 2023 /s/ Jing Li By: Name: Jing Li Title: Acting Chief Financial Officer Certification by the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 13.1 In connection with the annual report of CNFinance Holdings Limited (the “Company”) on Form 20-F for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bin Zhai, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 25, 2023 /s/ Bin Zhai By: Name: Bin Zhai Title: Chief Executive Officer Certification by the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 13.2 In connection with the annual report of CNFinance Holdings Limited (the “Company”) on Form 20-F for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jing Li, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 25, 2023 /s/ Jing Li By: Name: Jing Li Title: Acting Chief Financial Officer Exhibit 15.1 Date: April 25, 2023 CNFinance Holdings Limited 44/F, Tower G, No. 16 Zhujiang Dong Road Tianhe District, Guangzhou City Guangdong Province 510620 People’s Republic of China Dear Sirs/Madams, We hereby consent to the reference to our firm in CNFinance Holdings Limited’s annual report on Form 20-F for the fiscal year ended December 31, 2022 (the “Annual Report”), which will be filed by CNFinance Holdings Limited in April 2023 with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and further consent to the incorporation by reference of the summaries of our opinions that appear in the Annual Report on Form 20-F into the Registration Statement (No. 333-230955) on Form S-8 and the Registration Statement (No. 333-259304) on Form F-3. We also consent to the filing of this consent letter with the SEC as an exhibit to the Annual Report. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder. Yours Sincerely, /s/ Merits & Tree Law Offices Merits &Tree Law Offices Exhibit 15.2 Our Ref: NASD/BLUI/C6410-H18817 25 April 2023 The Board of Directors CNFinance Holdings Limited 44/F, Tower G No. 16 Zhujiang Dong Road Tianhe District Guangzhou City Guangdong Province 510620 People’s Republic of China Dear Sir or Madam CNFinance Holdings Limited FORM 20-F We consent to the reference to our firm under the heading “Item 3.D. Risk Factors— Risks Related to our American Depositary Shares” and “Item 10.E. Additional Information—Taxation —Cayman Islands Taxation” in the Annual Report on Form 20-F of CNFinance Holdings Limited for the year ended 31 December 2022 (the “Annual Report”), which will be filed with the U.S. Securities and Exchange Commission (the “Commission”) on 25 April 2023 under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). We further consent to the incorporation by reference of the summaries of our opinions that appear in the Annual Report into the Registration Statement (No. 333-230955) on Form S-8 and Registration Statement (No. 333- 259304) on Form F-3. We also consent to the filing with the Commission of this consent letter as an exhibit to the Annual Report. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under the Exchange Act, or the Rules and Regulations of the Commission thereunder. Yours faithfully /s/ WALKERS (Hong Kong) WALKERS (HONG KONG) Consent of Independent Registered Public Accounting Firm Exhibit 15.3 We consent to the incorporation by reference in the registration statement (No. 333- 230955) on Form S-8 and registration statement (No. 333-259304) on Form F-3 of CNFinance Holdings Limited of our report dated April 25, 2023, with respect to the consolidated financial statements of CNFinance Holdings Limited, its subsidiaries and variable interest entities. /s/ KPMG Huazhen LLP Guangzhou, China April 25, 2023 Exhibit 15.4 April 25, 2023 VIA EDGAR Division of Corporation Finance U.S. Securities & Exchange Commission 100 F Street, NE Washington, D.C. 20549 Re: CNFinance Holdings Limited Submission under the Item 16I(a) of Form 20-F Attn: Division of Corporation Finance Office of Technology Dear Sir/Madam, In compliance with the Holding Foreign Companies Accountable Act, CNFinance Holdings Limited (the “Company”) is submitting via EDGAR the following information as required under Item 16I(a) of Form 20-F. For the immediately preceding annual financial statement period, the Company’s auditor, KPMG huazhen LLP (a registered public accounting firm that The United States Public Company Accounting Oversight Board was unable to inspect or investigate completely) issued an audit report for the Company. To the Company’s best knowledge and based on an examination of our register of members and public filings made by our shareholders, the Company respectfully submits that it is not owned or controlled by a governmental entity in the foreign jurisdiction as of the date of this submission. As of March 31, 2023, Kylin Investment Holdings Limited owns approximately 17.8% of the Company’s total outstanding shares, respectively. Based on an examination of the Company’s register of members and public filings made by the Company’s shareholders, no other shareholder owns more than 5% of the Company’s outstanding shares as of March 31, 2023. Kylin Investment Holdings Limited is incorporated in the British Virgin Islands and approximately 50% owned by Mr. Bin Zhai who serves as the sole director of Kylin Investment Holdings Limited. As a result, Mr. Bin Zhai may be deemed to have the power to direct voting and disposition of the shares held by Kylin Investment Holdings Limited. Meanwhile, Mr. Bin himself has the right to acquire within 60 days upon the exercise of outstanding options granted by the Issuer 40,000,000 ordinary shares. Hence, Mr. Bin Zhai may be deemed to have the power to direct voting and disposition of 20.1% of the Company’s issued and outstanding shares. In addition, the Company is not aware of any governmental entity that is in possession of, direct or indirect, of the power to direct or cause the direction of the management and policies of the Company, whether through the ownership of voting securities, by contract, or otherwise. Should any member of the Staff have any questions or comments regarding the Company’s submission set forth above, please do not hesitate to contact by email at ir@cashchina.cn, or you may contact our outside legal counsel, Li He, Davis Polk & Wardwell, at (852) 2533-3306. [Signature page to follow] cc: Bin Zhai, Chief Executive Officer, Director Jing Li, Acting Chief Financial Officer Li He, Davis Polk & Wardwell Very truly yours, /s/ Bin Zhai Name: Bin Zhai Title: Chief Executive Officer, Director 

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