Recently, Zhonghe Nongxin Co., Ltd. (hereinafter referred to as "Zhonghe Nongxin") submitted its listing application to the Hong Kong Stock Exchange.
The main business of Zhonghe Nongxin is inclusive finance in rural areas. The company provides credit and loans, as well as distributes insurance products, to the vast rural areas through its own funds, joint grant loans, loan facilitation, and insurance agency, among other forms.
However, the prospectus shows that the annualized interest rate of loans obtained through Zhonghe Nongxin is close to 18%, which is much higher than the rural inclusive financial products of traditional financial institutions, also triggering industry doubts.
An industry insider in the small loan sector analyzed to the First Financial Daily reporter, "The loan interest rate of Zhonghe Nongxin is comparable to the interest rate level of credit card overdrafts or installments of traditional banks. However, due to the difficulty of credit cards to penetrate the rural areas, Zhonghe Nongxin is equivalent to a substitute for credit cards in terms of both the scale of individual loans and interest rates." He said.
Regulatory inquiries about independence
The prospectus shows that Zhonghe Nongxin is a comprehensive agricultural service provider, focusing on the rural market, providing rural inclusive credit services, agricultural production services, rural consumer goods and services, and rural clean energy services, etc., to empower small farmers and rural micro and small business owners.
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From 2021 to the first half of 2024 (hereinafter referred to as the "reporting period", the same below), the total revenue of Zhonghe Nongxin was 2.224 billion yuan, 2.429 billion yuan, 3.181 billion yuan, and 1.92 billion yuan, with net profits of -36.4 million yuan, -199 million yuan, 206 million yuan, and 79.1 million yuan. The company turned a profit in 2023. Regarding the losses in previous years, Zhonghe Nongxin stated that part of it was due to the loss caused by the change in the fair value of redeemable preferred shares.
The company uses an "online + offline" service system. In this regard, Zhonghe Nongxin stated that this is because rural users live in a dispersed manner, have a relatively low level of digitization, and rely more on the service scenarios of traditional acquaintance society. Therefore, a single online reach is difficult to fully meet the needs of rural customers, and a purely offline service model restricts the development of scale and sustainable operation.
The history of Zhonghe Nongxin can be traced back to the small credit poverty alleviation pilot project established by the World Bank in 1996 to provide loans for poverty alleviation projects in the Qinba mountain area of Sichuan Province. In 2000, the China Rural Development Foundation fully took over the pilot project, and then transformed the project within the charity organization into an independent legal entity through the establishment of the Zhonghe Nongxin Agricultural Group in 2008. Liu Dongwen, the chairman and CEO of the company's board of directors, has served in the China Rural Development Foundation.
Zhonghe Nongxin has also attracted many well-known investors, such as The Rise Fund under TPG, ABCImpact under Temasek, and Ant Technology Group.Among them, Ant Group Holding, through its wholly-owned subsidiary API under Shanghai Yunju Venture Investment Co., Ltd., holds 27.36% of the shares in Zhonghe Nongxin, making it the second-largest shareholder of Zhonghe Nongxin.
The China Securities Regulatory Commission (CSRC) had issued the "Supplementary Material Requirements for Overseas Issuance and Listing" on April 12, requiring Zhonghe Nongxin to explain its independence, including its independence from Ant Group in terms of personnel, business, assets, finance, and management, and whether there is a situation where Ant Group has long-term employees stationed at Zhonghe Nongxin or shares senior management personnel.
The prospectus shows that two senior executives of Zhonghe Nongxin have a background with Ant Group. This includes Zhao Zhansheng, the Chief Technology Officer and Vice President of Zhonghe Nongxin, who previously held several positions at Ant Group, including Senior Expert and Senior Technical Expert; in addition, Zhu Chao, a non-executive director, is a Senior Director of the Business Development Department of Ant Group and has been a director of Zhonghe Nongxin Agricultural Group since May 2018.

Increasingly relying on joint lending and loan facilitation
Rural inclusive credit services are the main business of Zhonghe Nongxin, accounting for about 60% of the operating income. In terms of rural inclusive credit services, Zhonghe Nongxin issues loans through three forms: loans with its own funds, joint allocation loans, and facilitated loans.
Among them, loans with its own funds mainly rely on its small loan companies. As of the end of 2023, Zhonghe Nongxin has 15 small loan companies, including 2 cross-province online small loan companies and 13 regional small loan companies. In addition, some funds come from trust plans established by cooperative trust companies, all of which are on-balance-sheet loans for Zhonghe Nongxin.
Zhonghe Nongxin facilitates credit products funded by cooperative banks and records them as off-balance-sheet loans, confirming facilitation income for the loans funded by cooperative banks.
Public data shows that since 2021, the scale of on-balance-sheet loans of Zhonghe Nongxin has been shrinking, while the scale of off-balance-sheet loans has been rapidly expanding.
At the end of each reporting period, the credit balance of Zhonghe Nongxin was 15 billion yuan, 15.2 billion yuan, 19.1 billion yuan, and 20.2 billion yuan, respectively. Among them, the proportion of on-balance-sheet loans decreased from 71.1% at the end of 2021 to 65.1% in 2022, and further decreased to 52.7% at the end of 2023. As of the end of the first half of this year, the proportion of on-balance-sheet loans fell below 50%, to 49.4%. At the same time, the scale of off-balance-sheet loans increased from 28.9% at the end of 2021 to 47.3% at the end of 2023, reaching 50.6% at the end of the first half of this year.
Zhonghe Nongxin stated in the prospectus that in the past, when conducting loan facilitation business, if the loans funded by cooperative banks had actual defaults, Zhonghe Nongxin was required to bear the contractual responsibility of compensating the cooperative banks. From December 2021 to December 2022, Zhonghe Nongxin gradually terminated all contractual responsibilities related to financial institutions, and the loan facilitation business no longer has any related contractual responsibilities.When engaging in loan facilitation services, Zhonghe Nongxin may voluntarily purchase some overdue loans from cooperative banks to enhance its bargaining power when negotiating service fees and to promote debt recovery as relationships with borrowers become more intimate. The expected credit losses are provided for in the accounts as loan facilitation provisions.
At the end of each reporting period, the loan facilitation provisions for Zhonghe Nongxin were 830 million yuan, 640 million yuan, 1.03 billion yuan, and 1.03 billion yuan, respectively.
"Maximum" calculation of overdue penalties
Unlike urban areas, rural areas are typical communities of acquaintances, and focusing on credit business in such communities presents a different model.
For instance, as of June 30, 2024, Zhonghe Nongxin's business team included over 7,200 sales personnel and approximately 127,000 village-level partners. These village-level partners are a rather unique organization; they are not employees but can receive a certain percentage of service fees.
"Rural areas can be said to be the most challenging scenario in the microloan business, difficult to break through, and requiring long-term genuine immersion," a microloan industry insider revealed to the First Financial Daily reporter, stating that he understood that a Zhonghe Nongxin salesperson typically covers an area of about 50 square kilometers.
Zhonghe Nongxin also stated in its prospectus that when rural customers make purchases, especially of products they are not familiar with (such as financial products), they often rely on information provided by local community networks of acquaintances. Therefore, the trust customers have in local merchant and service provider teams and their relationships with them greatly influence their purchasing decisions.
However, behind this vast rural service network, there are also management risks. The China Judgments Online has disclosed multiple cases involving former employees of Zhonghe Nongxin and its subsidiaries engaging in improper operations. On the Black Cat Complaints platform, there are also customers claiming that they were asked by account managers to purchase 1,800 yuan worth of alcohol and 1,000 yuan worth of insurance when receiving loans.
Additionally, the prospectus shows that Zhonghe Nongxin's individual loan sizes are small, with an average transaction size of about 20,000 to 30,000 yuan during the reporting period, and an average term of between 11 and 12 months. At the end of each reporting period, the actual Annual Percentage Rate (APR) for loans obtained through the company's platform was 17.5%, 17.9%, 17.7%, 17.8%, and 17.8%. The most recent one-year Loan Prime Rate (LPR) is 3.35%, which means that Zhonghe Nongxin's loan interest rates exceed four times the LPR.
At the same time, the prospectus shows that as of June 30, 2024, the risk loan rates for Zhonghe Nongxin overdue by 30 days and over 90 days were 2.08% and 1.52%, respectively.Zhonghe Nongxin stated that if any loans become overdue, the local operation team is responsible for maintaining close contact with the delinquent clients to improve the collection rate. Zhonghe Nongxin does not outsource debt collection. In cases of malicious loan default (overdue for more than 90 calendar days), mediation can be conducted with the borrower and related guarantors, or legal action can be initiated against them by the local operation team or a request for compulsory enforcement can be made.
However, on the Black Cat platform, there have been multiple complaints regarding violent debt collection by Zhonghe Nongxin. Additionally, multiple judgments revealed by Chinese judicial documents show that Zhonghe Nongxin calculates overdue penalties at the "maximum" annual interest rate of 24%.