CNFinance Holdings Ltd (CNF) 2019 Q2 法說會逐字稿

Good day and welcome to the CNFinance Second Quarter Half Year 2019 Earnings Conference Call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Tip Fleming.

Please go ahead.

Thank you, operator.

Hello, everyone, and thank you for joining us today.

CNFinance's earnings release was distributed earlier today and is available on the IR website at ir.cashchina.cn as well as on PR Newswire Services.

On the call today from CNFinance are Mr. Bin Zhai, Chairman and Chief Executive Officer; and Mr. Ning Li, Chief Financial Officer.

Mr. Zhai will review the business operations and company highlights, followed by Mr. Li, who will discuss the financials.

Both will be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, target, going forward, outlook and similar statements.

Such statements are based upon management's current expectations and current market and operating conditions, and relates to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the SEC.

The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce Mr. Zhai.

Please go ahead.

(foreign language)

[Interpreted] Thank you all for joining us today.

On today's call, I'd like to cover some business and operational developments and review our strategies and future plans for building shareholder value despite the softening economy.

We will then be happy to take your questions.

During the second quarter of 2019, revenue came in at RMB 800 million, while we were able to generate net income of RMB 160 million.

We recorded a provision for credit losses of RMB 95 million in accordance with U.S. GAAP, and our recovery rate during the quarter remained at 104%.

During the quarter, while we certainly faced a number of challenges, we also tried to take advantage of some opportunities.

First, the People's Bank of China and China Securities Regulatory Commission tightened regulations for property developers who are looking to the credit markets for financing.

These, along with the 151 policy mandate, largely served to drive down selling prices and contracted sales for property.

The tighter market conditions and lower liquidity allowed us to test our capabilities against fluctuations in the economic cycle.

As a home equity loan service provider that has been in the market for over 10 years, we have extensive experience in facing market fluctuations.

In such an environment where mortgage liquidity began to shrink in some cities, we decided to put further control on our LTV ratio.

With our overall LTV ratio decreased from 62% in 2018 to 59% as of the end of second quarter of 2019, our risk has also lowered.

Second, the China-U.

S. trade friction and the softening economy impacted operation of our primary target borrowers, which are micro and small enterprise owners, or MSE owners.

Their ability to service debt has indeed been affected, which was reflected by the increase of our delinquency ratio.

However, our recovery rate remained at 104% this quarter, demonstrating that our efforts to control loan quality and LTV ratio have paid off.

We plan to maintain our stringent approach going forward.

Since the beginning of the year, we have continued to dispose nonperforming assets by selling them on our own, and we have also been cooperating with asset management companies to explore opportunities to offload nonperforming assets in bulk, all in an effort to increase our efficiency at disposing nonperforming assets.

While facing these opportunities and challenges, our management team has always been hyper-cautious of our commitment to shareholders, and we are actively exploring different strategies that are stable, effective and sustainable.

As part of our efforts to enhance shareholder value, we will continue to partner with financial institutions to examine ways for lower financing costs.

On the other hand, leveraging our competitive advantages, we have shifted our business towards a collaboration model in an effort to help strengthen collusive financial system by promoting the loan partnership services platform that we discussed on our conference call last quarter.

Under this collaboration model, we cooperate with eligible local loan originators to act as our sales partners who source and recommend clients to us.

Our standardized risk control system assesses and recommends these clients to specific trust company partners who then facilitate the loans.

In order to guarantee the quality of loans, sales partners are required to pay up to 20% of the recommended loan amount to our platform as a credit risk mitigation position.

Consequently, the sales partners are motivated to bring high-quality assets as they stand to gain from the position they have to put up.

We are pleased to see that our loan partnership services platform has been well received by the market since its launch in early 2019.

As of June 30, 2019, we have signed cooperation agreements with about 950 sales partners, 470 of which have already facilitated loans by recommending borrowers to us.

Total loan origination volume reached RMB 2.7 billion during the first half of 2019.

More importantly, our platform is highly valued by our sales partners, 150 of which continue their efforts from preceding quarters to refer quality borrowers to us during the second quarter.

These new borrowers contributed a total of RMB 1 billion of loans by the end of June.

This shows us that our new strategy is already on the right track.

Our goal is to reach 3,000 sales partners and total loan origination volume of RMB 30 billion in the coming 3 years.

By continuing to recommend more clients to our platform and expand the loan origination volume, our excellent sales partners have shown that they have been able to successfully adapt to our platform, and their acceptance motivates us to keep optimizing our platform services.

Since the beginning of this quarter, in order to provide excellent, effective and convenient services to our sales partners, we have established a sales partner service center and launched a series of supporting programs.

I'd like to discuss 3 areas in particular.

First, training.

Through off-line training and conference call [consultation] on a regular basis, we are able to better educate our sales partners about the standards of our products, customer choices and risk criteria.

These help enhance risk awareness among sales partners and ease their loan facilitation process.

Second, IT system.

We hired a top financial system-developing company who is currently developing a mobile app to help sales partners acquire clients, upload due diligence files, track risk assessment processes as well as review reward amounts.

This application could quickly enhance their confidence and compatibility with our platform and should help us establish a strong foundation to scale in the future.

And third, follow up after loan approval.

We will follow up with borrowers through phone calls and site visits, which help us to effectively monitor sales partners to stay compliant to regulations about growing the business as well as to ensure the right of MSE owners who borrowed from us.

This initiative is vital in building our platform to become a benchmark in the industry.

As our collaboration model continues to develop and expand, providing tailor-made services to our sales partners is becoming an integrated and increasingly important part of our business.

We expect to attract more high-quality sales partners to our platform and further serve the financing needs of micro and small enterprise owners.

At the end, I want to tell you that management will consider a dividend plan based on our operation, financial results and liquidity.

When condition allows, we will submit it to the Board for discussion and review.

And with that, I would like to hand the call over to our CFO, Mr. Li Ning, who will walk through our financial results this quarter and first half of 2019.

Thanks again for everyone joining us today.

I'm Li, CFO of the company.

I will walk you through our second quarter and the first half of our 2019 financials.

We believe year-over-year comparison is the best way to review our performance.

Unless otherwise stated, all percentage changes I'm going to give will be on that basis.

Let's review the financials.

We will go through the figures for second quarter of 2019 first, followed by the first half of 2019.

As of June 30, 2019, total outstanding loan principal decreased to RMB 13 billion compared to RMB 16 billion as of December 31, 2018.

Total loan origination volume was RMB 1,667 million compared to RMB 3,598 million in the same period of 2018.

Interest in financing service fee on loans was RMB 798 million, a decrease of 25%, primarily due to the decrease of the loan origination volume, which is a result of the company's strategic focus on ensuring loan quality over loan growth and devoting its resources on the new collaboration model.

This slowed down the loan facilitation and led to a decrease in the interest and financing service fee on loans.

Interest expenses was RMB 369 million compared to RMB 484 million in the same period of 2018, primarily due to a decrease in demand of funding resulting from a general decrease of the loan origination volume.

Collaboration cost for sales partners increased to RMB 32 million for the second quarter of 2019 compared to 0 in the second quarter of 2018, primarily due to the development of the new collaboration model started in 2019.

Provision for credit losses was RMB 95 million, an increase of 17% from RMB 81 million in the same period of 2018.

Total operating expenses were RMB 118 million, a decrease of 41% compared with RMB 200 million in the same period of 2018.

Income tax expenses was RMB 56 million, a decrease from RMB 70 million in the same period of 2018.

Net income was RMB 161 million, a decrease of 33% from RMB 241 million in the same period of 2018.

So for the second half, let's move on to our financials for the first half of 2019.

Again, total loan origination volume was RMB 2,665 million compared to RMB 5,799 million in the same period of 2018.

Interest and financing service fee on loans was RMB 1,686 million, a decrease of 21%, primarily due to a decrease of the loan origination volume, which is a result of the company's strategic focus on ensuring loan quality over the growth of the loan volume and the devoting its resources to the new collaboration model.

Interest expenses was RMB 778 million compared to RMB 952 million in the same period of 2018, primarily due to a decrease in demand of funding resulting from a general decrease of the loan origination volume.

Collaboration cost for sales partners increased to RMB 41 million for the first half of 2019 compared to 0 in the same period of 2018, primarily due to the development of the new collaboration model.

Provision for credit losses was RMB 268 million, an increase of 19% from RMB 225 million in the same period of 2018, primarily attributable to the combined effect of, first, the decrease in outstanding principal of nondelinquent loans and loans delinquent within 90 days, which resulted in a decrease in collectively assessed allowance there.

And the second, an increase in the amount of NPLs.

NPL refers to a loan being delinquent for over 90 days.

Total operating expenses were RMB 255 million, a decrease of 33% compared with RMB 380 million in the same period of 2018.

Income tax expenses was RMB 101 million, a decrease from RMB 149 million in the same period of 2018, primarily due to a decrease in taxable income in the first half of 2019.

Net income was RMB 296 million, a decrease of 32% from RMB 438 million in the same period of 2018.

As of June 30, 2019, the company had cash and cash equivalents of RMB 2 billion compared with RMB 3 billion as of December 31, 2018.

The aggregate delinquency rate for loans originated by the company, which represents total balance of outstanding loan principal for which any installment payment is past due as a percentage of the aggregate total amount of loans that were originated since 2014, slightly decreased from 7.6% as of December 31, 2018, to 7.5% as of June 30, 2019.

That's all for the financials for this quarter and the first half of the year.

So we'd now like to open up the call for the Q&A session.

(Operator Instructions) The first question today comes from [Hao Bin Yang] with Shenwan Hongyuan.

(foreign language)

Just a brief translation of the question.

So it's a question from Shenwan Hongyuan Securities.

And the first question is how is CNF marketing to sales partners?

And how big is the new collaboration model going to be in the next 3 years?

And the second question is, we actually mentioned that our LTV ratio is lower than 60% this quarter.

And how has the company managed to stay competitive in the market?

And is this going to be a long-term behavior?

And the answer is going to be answered by our CFO.

(foreign language)

So if there is any complement, our CEO will follow-up after our CFO answers the question.

[Interpreted] First question about how we acquire our sales partners.

First, the home equity loan market is a very scattered market, as we mentioned before.

There are not really many big companies that's doing the business in China.

If you look into the market, there are only two we can say are a nationwide company.

One is us.

The other one is Ping An Puhui.

And there are many, many small companies in the market that's only doing localized business.

Since we had over 40 branches scattered across China, our first batch of sales partners were actually those peers who are competing with us in the local markets.

So there are a huge number of loan originators in each local market.

Our transfer -- we transferred to the collaboration model so that we can acquire those people who used to compete with us and make them our sales partners and work with us.

And while becoming partners is attractive to those people who used to be competing with us, I think there are twofolds.

First, I think through our platform, they can leverage their business and expand the business scale.

Second, since we are providing them with the pre- and the middle and post-loan services, we can help those sales partners to lower their operating cost.

So just to sum up, our platform can attract those people to become our sales partners because we can help them expand their business scale and lower without raising their operating costs at the same time.

And I think there are 2 positive points to us as well.

First of all, we can -- by collaborating with these sales partners, we can also expand our business scale.

And also, like we have mentioned in the CEO script, since they are putting up a credit risk mitigation position, they are actually bearing risk with us.

And we are able to lower our risk.

So also to sum up, by collaborating with all those sales partners in the market, we can not only expand our business scales but also lower our risks.

If, say, we are taking 100% risk in the past, now it's actually much, much lower.

About the LTV ratio, I want to first make a clarification.

So this -- under 60% -- 60% of LTV is actually on average LTV ratio, which contains both the collaterals from the old model and the new model.

Okay.

So since there is an uncertainty of the economic conditions, we have chose to control our risks just by using a more sophisticated evaluation system.

We are now not -- we are also taking a synthetical consideration of both the credit status of borrowers and the quality of their collaterals and also which city they're in.

We haven't changed our upper limit of the LTV ratio, it's still 70%.

However, if they are in some of the Tier 3 cities, we are considered to give them a lower percentage of LTV.

I hope this answers your question.

The next question today comes from Simon Tan with -- a private investor.

I'm Simon, I'm a private investor from Mainland China.

And I have 3 questions.

The first one would be, why would borrowers choose to borrow from CNFinance since CNFinance loan products charters a much higher interest rate compared with the rent -- the rate from the commercial banks?

And second one would be, would new business model lower your liabilities since you only contribute 5% of the total loan amount?

And the last one, you have mentioned that you guys are developing an app for -- a new app for the sales partners.

And how much is the company planning to invest in the system development?

Okay.

I'll just do a brief translation to our CFO, and then we'll answer your question, okay.

(foreign language) So this question is also going to be answered by our CFO and then be complemented by the CEO.

[Interpreted] First of all, we need to -- we want to admit that our products does have a higher interest rate than the commercial banks.

However, we are -- most of our businesses is -- most of the loans we granted are secured by a second lien interest.

And as for the second mortgage market, even though there are some banks that is participating in it, but the number of banks participating in the second mortgage market is far not enough.

So those borrowers who come to me and looking for a second mortgage, they usually do their first mortgage with the banks, and the banks usually give them a longer tenure.

And we -- as we grant them loans secured by second mortgage, we are actually supporting their liquidity by giving them a so-called liquidity facilitation.

As for the borrowers, when they come to us for -- looking for a second mortgage, we are actually providing them a more flexible choice to satisfy their imminent need for finance.

And their creditworthiness is actually rising by loaning from us.

So they don't have to service their first mortgage in full and then come to us.

And our tenure offered to the borrowers is actually very short, averaging from 1.5 to 2 years, which better suit their needs for liquidity.

So even though if you just solely look at our interest rate, it's a little bit higher than the commercial banks.

If you look at it comprehensively and to take a more synthetic point of view of both first mortgage and second mortgage, it's actually not that high, our interest rate.

Our interest level in the market is actually in the middle.

I hope that answers your first question.

And we'll move into your second question.

So like we have mentioned before, also by doing the collaboration model, we are actually bearing risks with the sales partners because they have to put up a credit risk mitigation position ranging from 10% to 20% of the total loan amount they recommend.

When there is an NPL, we will collect the position they put up, so that's actually lowering our risk.

However, thinking of the contract we signed with our funding partners, which are the trust companies, so we set up trust plans with them and they still subscribe to senior tranches, we still subscribe to subordinated tranches.

However, they are still considered as our VIEs since we have to neither replace or repurchase or just put up a sufficient fund to recover any losses when there is an NPL.

So we are still consolidating those trust plans into our consolidated financial statements.

However, even though the liability amount does not reduce, but the risk it represents is actually a lot lower comparing to -- under the old model.

I hope this answers your second question.

And the third question, also just a brief translation.

(foreign language)

About our technological development, we actually have 2 perspectives.

One is aimed at our sales partners.

We want to allow them to just work on their phone to be able to facilitate loans and do their business just using a mobile app.

For our sales partners, this mobile app will allow them to track where they're at of their recommended loans.

Since our functions will include upload due diligence files, track risk assessment processes, even reveal reward amounts, and they can get information of -- have their -- the borrowers they recommend ever been -- held responsible for any past due loans.

And the second perspective is actually aimed for us.

So we are also just upgrading our system.

And we want to be able to just check, check their -- check the creditworthiness of the candidates of the borrowers.

And also, we want to see if we can get more data from the third-party data providers just to collect credit information of candidates and just get a rough estimation of their -- of the worth of their collaterals using big data or even a high tech -- high-technologies and to better control risk.

So since we are talking about 2 perspectives, one for the sales partners and one just for upgrading our system, I think that's now a one-step work.

It will take time from step to step.

I think our investment in the first step won't really be over RMB 100 million.

And the app for our sales partners is available for use right now, and the upgraded system will be online in the end of this year, we are hoping.

I hope this answers your third question.

The next question today comes from Neil Gagnon with Gagnon Securities.

On switching to sales partners versus doing it direct, I have 2 questions.

Can you talk about the cost of acquisition of the original plan versus the new one?

And two, talk about the quality and type of loans that you're bringing in versus what you originally had, please?

And then I have another question.

Okay.

I'm sorry, by asking the cost of acquisition, are you asking for the acquisition of sales partners or the funding?

Actually, the product itself.

If you get a new loan in, let's call it, RMB 100, did it cost you RMB 10 before [indirect], and now RMB 15 in general or vice versa?

I don't have a good feel for the effectiveness of the cost that you're bringing in this new business.

Just a brief translation.

(foreign language)

[Interpreted] Under the old model, we're relying solely on our sales force to acquire customers.

At our peak, the sales personnels we employed was about 2,000 to 3,000.

Okay, so the cost will include the basic salary of our sales force as well as a commission we pay to them, which is about 1.5% to 2%.

And under the new model, we are actually cutting out our sales force.

The sales partners we are employing now is just a couple of hundreds and that's mainly for maintaining the customer relations and customer service, all those.

And also, under the new model, it's our sales partners who will go out and look for business on theirselves and then recommend them to us.

Therefore, we barely pay anything as an acquisition cost.

So since we're having less people and we are not paying salaries and commissions, our cost for acquiring customers can be really, really low under the new model.

As we mentioned before, those sales partners, most -- many of them used to be our peers.

So in the home equity loan market, they actually had their connections, they had their sales force.

So as -- so they had -- they can acquire customers on their own cost.

So by transforming to a collaboration model, we are saving a lot of the cost used to acquire customers than we used to be in the old model.

Okay.

On the quality of the new product that you're getting with the partners, I guess you're telling us that you get a 10% to 20% deposit by them.

Does that ensure that the quality will be the same as you had before?

Might it be higher or might it be lower?

(foreign language)

[Interpreted] First of all, I can assure you that the quality of their collaterals and the borrowers is on the same level as in the old model.

And no matter which -- I mean no matter what the sales partners recommend to us, they will still have to go through our risk control system.

And if they don't meet our risk control criteria, we can just always reject their business.

They will always have to wait on our final approval to just facilitate the loans.

So no matter if the credit check of the customers or we do a on-site visit to see actually how much their collateral is worth, is still done by us.

All the investigation is still done by our workforce.

So just to sum up, if the borrowers that they recommend to us meet and exceed the quality of our risk criteria, we'll approve them.

If not, they will just be rejected.

So looking into that, we're actually having a higher quality of collaterals and borrowers than we used to have under the old model.

And just again, we are asking the sales partners to put up a credit risk mitigation position, which is worth 10% to 20% of the total loan amount, is that we want them to bear risks with us.

And they'll consider that when they recommend clients to us and do a just better risk check and credit check on them.

I hope you find the answer helpful.

Those are good answers.

A second question area, you had projected for this quarter in your guidance earlier, RMB 100 million to RMB 150 million and you actually came in RMB 160 million.

Can you lead us through what gave you the upper range of your guidance this quarter versus what your range of expectations were?

(foreign language)

[Interpreted] Okay.

So first of all, there sure is uncertainties about our business.

That's why we are offering a range from RMB 100 million to RMB 150 million as our estimation.

And since there are still loan amount that is under our old model, so we have to consider the change of the market, say, there is NPLs and stuff.

And for the upper limit of our profit estimation, we are holding a more optimistic view.

That's why we are citing it at RMB 150 million.

And for the lower limit, we're actually taking a more conservative view of it.

That's why we're setting it at RMB 100 million.

And also, we talked about the recovery rate.

In a good quarter or a good period of time, we will just set it higher.

We are saying, in this quarter, we are setting it at 104%.

We are setting it as high as 205% when the business runs good and our operation is good and the market is good, everything is in a good condition.

But when there are outside influence on our business, we'll just take a lower rate, lower to 95%.

The next question today comes from Dexter Hsu with Aquarion (sic) [Macquarie].

It's Dexter from Macquarie.

I have only one question regarding the asset quality.

Can management talk -- briefly talk about the [asset] supply chain?

Especially last year, the company had been -- had higher litigation costs and coming from more delinquency loans.

And can you maybe share your view on what's the trend and -- if the worst is over?

Sorry, could you repeat your question again?

I wasn't so clear about the last part.

So were you asking about our...

Asset quality.

Delinquency.

Asset quality.

So are you asking how we are disposing the nonperforming asset or...

What I would like to know actually what the delinquency trend, is it getting better?

And do we -- because last year, the thing was -- actually, this year also, the provision cost is higher and we -- and we'd like to know that is the worst of the provisioning is over?

Okay.

(foreign language) So were you asking about the provision?

Just to make it clear.

Yes.

Okay.

So you're saying the provision expense, you want to hear the CFO to explain that?

We would like to know, actually, do we think the trend, will we see higher or lower provision going forward?

Okay.

(foreign language)

[Interpreted] So since our outstanding loan amount is actually reducing, so if you'll just look into the rate, yes, it is increasing.

However, the absolute value of delinquent loan amount is actually in a very, very steady level.

So under the old model, since we are just transforming to the new collaboration model, so the outstanding loan amount under the old model is actually reducing.

Also, we have made our calculation.

The most loan side that's delinquent is in the range from 8 months to 12 months.

So with our estimating now, we have passed that period of time.

So the delinquent loan amount under the old model will just decrease as time passes by, so does the NPL under the old model.

(inaudible) stable.

Okay.

It will remain rather stable.

[Interpreted] And talking about the new collaboration model, just, again, since the sales partners are putting up the credit risk mitigation position, bear risks as a result, when there is an NPL happening, they are actually -- they will actually repurchase them.

As for now, under the new collaboration model, we have only seen one case of NPL and is already repurchased by the sales partner.

Even the loan that is delinquent for over 60 days, it's very low.

So overall, looking into both the old model and the new model, since the NPL under the old model is going to remain stable in the future, we are assuming that the provision expense is going to be lower in the future.

Does that help you with the question?

Yes, very clear.

Thank you.

This concludes our question-and-answer session today.

I would like to turn the conference back over to Tip Fleming for any closing remarks.

Thank you, everyone, for joining us today.

If you have any further questions, please don't hesitate to contact us directly.

Thank you for joining.

Goodbye.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]