Financial risk management |
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| Financial risk management | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial risk management | 4. Financial risk management 4.1 Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the management of the Group. 4.1.1 Market risk (a) Foreign exchange risk Foreign exchange risk arises when future commercial transactions or recognized assets and liabilities are denominated in a currency that is not the Group entities’ functional currency. The Group manages its foreign exchange risk by performing regular reviews of the Group’s net foreign exchange exposures and tries to minimise these exposures through natural hedges, wherever possible and may enter into forward foreign exchange contracts, when necessary. The Group operates mainly in the Chinese Mainland with most of the transactions settled in RMB. The functional currency of the Group’s subsidiaries operate in the Chinese Mainland is RMB and whereas functional currency of the Company is USD. The Group’s subsidiaries located outside the Chinese Mainland, mainly including Hong Kong, Singapore, Brazil and Mexico are exposed to foreign exchange risk arising from various currency exposures. 4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.1 Market risk (Continued) (a) Foreign exchange risk (Continued) For the Group’s subsidiaries whose functional currency is RMB, if USD had strengthened/weakened by 5% against RMB with all other variables held constant, the foreign exchanges gains (losses) would have been approximately RMB263,135, RMB216,900 and RMB190,235 lower/higher for the years ended December 31, 2025, 2024 and 2023, respectively as a result of translation of net monetary liabilities denominated in USD at the end of the year. For the Group’s subsidiaries whose functional currency is USD, if RMB had strengthened/weakened by 5% against USD with all other variables held constant, the foreign exchanges gains (losses) would have been approximately RMB88,448 and RMB51,151 lower/higher for the years ended December 31, 2025 and 2023, as a result of translation of net monetary liabilities denominated in RMB at the end of the year. The foreign exchanges gains (losses) would have been approximately RMB28,467 higher/lower for the year ended December 31, 2024, as a result of translation of net monetary assets denominated in RMB at the end of the year. For the Group’s subsidiaries whose functional currency is USD, if MXN had strengthened/weakened by 5% against USD with all other variables held constant, the foreign exchanges gains (losses) would have been approximately RMB217,480, RMB66,185 and RMB71,139 higher/lower for the years ended December 31, 2025, 2024 and 2023, respectively, as a result of translation of net monetary assets denominated in MXN at the end of the year. For the Group’s subsidiaries whose functional currency is BRL, if USD had strengthened/weakened by 5% against BRL with all other variables held constant, the foreign exchanges gains (losses) would have been approximately RMB1,265, RMB1,520 and RMB198,284 lower/higher for the years ended December 31, 2025, 2024 and 2023, respectively, as a result of translation of net monetary liabilities denominated in USD at the end of the year. (b) Price risk The Group is exposed to price risk primarily in respect of its investments that classified either as other financial investments measured at FVTPL (Note 23) or other financial investments measured at FVOCI (Note 24). The Group is not exposed to commodity price risk. To manage its price risk arising from the investments, the Group diversifies its portfolio. Each investment is managed by management on a case by case basis. The sensitivity analysis is performed by management to assess the exposure of the Group’s financial results to equity price risk of other financial investments measured at FVTPL and other financial investments measured at FVOCI at the end of each reporting period. If prices of the respective investments held by the Group had been 5% higher/lower, the profit before income tax for the years ended December 31, 2025 and 2024 would have been approximately RMB274,462 and RMB180,103 higher/lower as a result of gains/losses on other financial investments measured at FVTPL, respectively (the loss before income tax for the year ended December 31, 2023 would have been RMB144,336 lower/higher), and the other comprehensive income for the years ended December 31, 2025 and 2024 would have been approximately RMB279,458 and RMB281,238 higher/lower as a result of gains/losses on other financial investments measured at FVOCI, respectively (the other comprehensive loss for the year ended December 31, 2023 would have been RMB481,228 lower/higher). (c) Interest rate risk The Group’s interest rate risk primarily arose from borrowings with floating and fixed rates, cash and cash equivalents, restricted cash, loan receivables and treasury investments at amortized cost, and details of which have been disclosed in Note 21, Note 26, Note 27 and Note 34. Those carried at floating rates expose the Group to cash flow interest rate risk whereas those carried at fixed rates expose the Group to fair value interest rate risk. 4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.1 Market risk (Continued) (c) Interest rate risk (Continued) If the interest rate of borrowings with floating rate had been 50 basis points higher/lower, the profit before income tax for the years ended December 31, 2025 and 2024 would have been approximately RMB6,015 and RMB13,631 lower/higher, and the loss before income tax for the year ended December 31, 2023 would have been approximately RMB1,872 higher/lower. The fair value interest rate risk from financial assets and liabilities carried at fixed rates is not significant for the Group. The Group regularly monitors its interest rate risk to ensure there is no undue exposure to significant interest rate movements. 4.1.2 Credit risk The Group is exposed to credit risk mainly in relation to certain financial assets and contract assets, of which the carrying amounts represent the Group’s maximum exposure to the credit risk. The ECL arising from the credit risk are RMB2,077,109, RMB3,692,123 and RMB6,037,219 for the years ended December 31, 2023, 2024 and 2025, respectively (a) Cash and cash equivalents, restricted cash, treasury investment stated at amortized cost and debt instruments measured at FVOCI To manage credit risk arising from cash and cash equivalents, restricted cash, treasury investment stated at amortized cost and debt instruments measured at FVOCI, the Group only transacts with reputable financial institutions. Primarily these instruments are considered to have a low risk of default and the counterparty has a strong capacity to meet its contractual cash flows obligations in the near term. The identified credit losses are immaterial. (b) Accounts receivable To manage risk arising from accounts receivable, the Group has policies in place to ensure that credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. The credit period granted to the customers is usually no more than 30 days and the credit quality of these customers is assessed, which takes into account their financial position, past experience and other factors. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the accounts receivable for the same types of contracts. To measure the ECL, accounts receivable and contract assets have been grouped based on shared credit risk characteristics and the days past due. Accounts receivables are written off when there is no reasonable expectation of recovery with indicators including, amongst others, the failure of a debtor to engage in a repayment plan with the Group, and a failure to make contractual payments after exhausting all practical recovery efforts. Subsequent recoveries of amounts previously written off are credited against the same line item. The Group has a large number of customers and there is no single external customer deriving more than 10% of the Group’s total revenues. (c) Other receivables For other receivables, management makes periodic collective assessments as well as individual assessment on the recoverability of other receivables based on historical settlement records and past experiences. In view of the history of cooperation with debtors and the sound collection history of receivables due from them, management believes that the credit risk inherent in the Group’s outstanding other receivable balances is not significant. 4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.2 Credit risk (Continued) (d) Loan receivables To manage credit risk arising from loan receivables, the Group performs standardized credit management procedures. For pre-approval investigation, the Group uses self-developed platform and systems using big data technology to optimize the review process, including credit analysis, assessment of collectability of borrowers, possibility of misconduct and fraudulent activities. In terms of credit examining management, the Group has established specific policies and procedures to assess loans offering. For subsequent monitoring, the Group has implemented credit examination on each borrower. Once the loan is issued, all borrowers will be assessed by fraud examination model to prevent fraudulent behaviours. In post-loan supervision, the Group has established risk monitoring alert system through periodical monitoring. The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using Probability of Default (“PD”), Exposure at Default (“EAD”) and Loss Given Default (“LGD”).
The impairment of loan receivables was provided based on the “three-stages” model by referring to the changes in credit quality since initial recognition.
Interest income is calculated on the gross carrying amount of loan receivables (without deducting the loss allowance) in Stage 1 and 2 and on the loan receivables (net of loss allowance) in Stage 3. The key judgments and assumptions adopted by the Group in addressing the requirements of the standard are discussed below:
The Group considers loan receivables to have experienced an SICR if the borrower is past due more than 1 day on its contractual payments.
The Group defines loan receivables as in default and credit-impaired, when the borrower is more than 30 or 90 days past due on its contractual payments depends on different loan products. 4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.2 Credit risk (Continued)
To manage credit risk arising from loan receivables, standardized credit management procedures are performed. The Group measures credit risk using PD, EAD and LGD. This is consistent with the general approach used for the purpose of measuring ECL under IFRS 9. ECL is the product of the PD, EAD, and LGD.
The calculation of ECL incorporates forward-looking information. The Group has performed historical analysis and identified Gross Domestic Product (“GDP”) and Consumer Price Index (“CPI”) as the key economic variables impacting credit risk and expected credit losses. As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes and has analyzed the nonlinearities and asymmetries within the Group’s different portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.
For ECL provisions modeled on a collective basis, a grouping of exposures is performed on the basis of shared risk characteristics, such that risk exposures within a group are homogeneous.
The credit loss allowance recognized in the year is impacted by a variety of factors, as described below:
4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.2 Credit risk (Continued) The following tables represent changes in the gross carrying amount of the loan receivables between the beginning and the end of each reporting period:
4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.2 Credit risk (Continued)
The following tables represent the changes in the loss allowance for loan receivables between the beginning and the end of each reporting period:
4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.2 Credit risk (Continued)
4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.2 Credit risk (Continued) The changes of allowance ratio (loss allowance divided by gross carrying amount) for each stage during the reporting periods presented were primary due to the business expansions.
The Group writes off loan receivables, in whole or in part, when it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of recovery. The Group may write off loan receivables that are still subject to enforcement activity. The Group still seeks to recover amounts it is legally owed in full, but which have been written off due to no reasonable expectation of full recovery.
The Group rarely modifies the terms of loans provided to customers due to commercial renegotiations, or for distressed loans, with a view to maximizing recovery. The Group considers the impact from such modification is not significant. 4.1.3 Liquidity risk The Group aims to maintain sufficient cash and cash equivalents. Due to the dynamic nature of the underlying businesses, the policy of the Group is to regularly monitor the Group’s liquidity risk and to maintain adequate cash and cash equivalents or to adjust financing arrangements to meet the Group’s liquidity requirements. The Group analyzes its non-derivative financial liabilities into relevant maturity grouping based on the remaining year at each reporting period end to the contractual maturity date. The amount disclosed in the table is the contractual undiscounted cash flows.
4. Financial risk management (Continued) 4.1 Financial risk factors (Continued) 4.1.3 Liquidity risk (Continued)
4.2 Capital risk management The Group’s objectives when managing capital are to:
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to Shareholders, return capital to Shareholders, issue new shares, repurchase the Company’s shares or sell assets to reduce debt. The Group monitors capital (including share capital, share premium, treasury shares and shares held for shares award scheme) by regularly reviewing the capital structure. As a part of this review, the Group considers the cost of capital and the risks associated with the issued share capital. In the opinion of the Directors of the Company, the Group’s capital risk is low. 4. Financial risk management (Continued) 4.3 Fair value estimation 4.3.1 Fair value hierarchy This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognized and measured at fair value in the consolidated financial statements. To provide an indication about the reliability of the inputs used in determining the fair values, the Group has classified its financial instruments into three levels prescribed under the accounting standards. The Group analyzes its financial instruments carried at fair values by level of the inputs to valuation techniques used to measure the fair values. Such inputs are categorized into three levels within a fair value hierarchy as follows:
The following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy as of December 31, 2023, 2024 and 2025.
4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.1 Fair value hierarchy (Continued)
4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.1 Fair value hierarchy (Continued)
4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.2 Valuation techniques used to determine fair values The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. Specific valuation techniques used to measure financial instruments of level 2 and level 3 include:
There was no change to valuation techniques in use during the years ended December 31, 2023, 2024 and 2025. 4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.3 Fair value measurements using significant unobservable inputs (level 3) The following table presents the changes in level 3 instruments of financial assets and financial liabilities except for preferred shares issued by subsidiaries for the years ended December 31, 2023, 2024 and 2025:
4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.3 Fair value measurements using significant unobservable inputs (level 3) (Continued)
For the changes in level 3 instruments of preferred shares issued by subsidiaries, please see Note 33. 4.3.4 Valuation process, inputs and relationships to fair value The Group has a team that manages the valuation of financial instruments for financial reporting purposes. The team manages the valuation exercise of the investments on a case by case basis. At least once every quarter, which coincides with the Group’s quarterly reporting dates, the team performs assessments and make updates, if necessary. On an annual basis, the team uses valuation techniques to determine the fair values of the Group’s level 3 instruments. External valuation experts will be involved when necessary. The Group’s level 3 instruments are listed in the table in Note 4.3.3. As these instruments are not traded in active markets, their fair values have been determined using various applicable valuation techniques, including discounted cash flows, market approach, etc. 4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.4 Valuation process, inputs and relationships to fair value (Continued) The following table summarises the quantitative information about the significant unobservable inputs used in recurring level 3 fair value measurements except for preferred shares issued by subsidiaries.
The fair value of the investments in limited partnerships recorded in other financial investments measured at FVTPL is based primarily on the portion of the net asset value (“NAV”) reported by the limited partnerships that is attributable to the Group. The NAV is derived from the fair value of these investments at the reporting date of the Group and the Group understands and evaluates the valuations provided by the general partners of the limited partnerships and makes necessary adjustments based on the results of the evaluation. The Group has not made any adjustments to the underlying values. 4. Financial risk management (Continued) 4.3 Fair value estimation (Continued) 4.3.4 Valuation process, inputs and relationships to fair value (Continued) For preferred shares issued by subsidiaries,with the assistance from an external valuer, the Group applied the discounted cash flow method or the back-solved method to determine the underlying equity value of its subsidiaries and adopted option-pricing method and equity allocation model to determine the fair value of the preferred shares. The Group classifies the valuation techniques that use these inputs as Level 3 of fair value measurement. Key assumptions based on the Group’s best estimates are set out as below:
If the risk-free interest rate of preferred shares issued by subsidiaries had been 5% higher or lower, the aggregate profit before income tax for the year ended December 31, 2025 would have been approximately RMB9,475 higher or RMB9,582 lower (profit before income tax for the year ended December 31, 2024 would have been approximately RMB2,787 higher or RMB1,355 lower; loss before income tax for the year ended December 31, 2023 would have been RMB14,073 lower or RMB18,266 higher). If the DLOM of preferred shares issued by subsidiaries had been 5% higher or lower, the aggregate profit before income tax for the year ended December 31, 2025 would have been approximately RMB74,955 higher or RMB74,955 lower (profit before income tax for the year ended December 31, 2024 would have been approximately RMB77,887 higher or RMB77,887 lower; loss before income tax for the year ended December 31, 2023 would have been RMB66,683 lower or RMB70,741 higher). If the expected volatility of preferred shares issued by subsidiaries had been 5% higher or lower, the aggregate profit before income tax for the year ended December 31, 2025 would have been approximately RMB4,942 higher or RMB628 lower (profit before income tax for the year ended December 31, 2024 would have been approximately RMB38,209 higher or RMB41,613 lower; loss before income tax for the year ended December 31, 2023 would have been RMB97,910 lower or RMB99,222 higher). The carrying amounts of the Group’s financial assets and financial liabilities measured at amortized cost are approximately their fair values. |
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