CNFinance Holdings Ltd (CNF) 2019 Q3 法說會逐字稿

Good day and welcome to the CNFinance Third Quarter 2019 Financial Results Conference Call and Webcast.

(Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Christian Arnell.

Please go ahead, sir.

Thank you.

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

CNFinance's earnings release was distributed earlier 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 business operations and company highlights, followed by Mr. Li who will discuss 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 and 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 operating conditions and relate 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 U.S. Securities and Exchange Commission.

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.

[Interpreted] Thank you, Christian.

Thank you all for joining our call today.

On today's call, I would like to cover some business and operational development and discuss our strategy and future plans for creating shareholders value despite the softening economy.

After that, our CFO and I will be happy to take your questions.

During the third quarter of 2019, revenue came in at CNY 680 million, while we were able to generate net income of CNY 180 million.

We recorded a provision for private losses of CNY 55 million in accordance with U.S. GAAP and sustained a recovery rate of 101%.

As we discussed on the last quarter's call, in order to provide more effective and convenient services for our sales partners, we launched the loan partnership services platform, which include training services, IT services, follow-up communication and site visit with borrowers following loan approval.

I would like to give a more detailed introduction of the application we designed for the sales partners this quarter.

Whilst their identification are verified, sales partners use this app to upload due diligence files of candidates, check with managed assessment process, following up with borrowers about their repayment status and track incentives they will receive.

This application has been widely recognized for its quality and usefulness by sales partners since its launch.

The number of verified users was 100 -- 1,170 as of September 30, 2019.

We believe our core competitive advantage is providing customized services to sales partners, and our IT team will keep upgrading this application to provide our sales partner with better user experience and help them develop better sense of indemnity and compatibility with the platform.

Although we have made relatively stable adjustment to our business based on more than 10 years of experience in home equity loan industry, we are also deeply aware that we are in a special period, where there are both challenges and opportunities facing the current market condition, which make it more important to us than ever to keep sharp and make timely responses.

The People's Bank of China reiterated during the quarter that properties should not be used for speculation, which continue to drive down property sales.

Given the impact that macroeconomic headwinds are having on the value and the liquidity of collaterals, in order to decrease our risk profile and safeguard interests of our shareholders, we decided to put a more stringent control over our LTV ratio.

Our overall LTV ratio decreased to 58% at the end of the third quarter of 2019.

Facing those challenges and opportunities, our experienced management team take its commitments to shareholders seriously when developing strategies that are stable, effective and can drive long-term sustainable growth despite all the challenges in business developments.

By the end of September 30, 2019, CNF still holds the record of 0 loss on overall disposed loans.

On one hand, we continue to build our own loan partnership services platform and are now successfully turning many former competitors into sales partners.

By the end of third quarter, we have signed collaborational -- collaboration agreement with 1,150 sales partners, 600 of which are have already facilitated loans.

Total loan origination volume reached CNY 1.7 billion during the quarter also, as we devoted extensive resources to the collaboration model, we have sunk into all aspects of the project and have conduct in depth discussions with sales partners.

We were able to understand their most urgent needs and gained a lot of valuable experience.

Right now, the number of sales partners has reached a certain scale.

We will emphasize on upgrading the sales partner systems such as gradually carry out diversified services, establish a long-term incentive mechanism, all in an effort to support future development of the collaboration model.

We expect the number of sales partners to reach 1,400 by the end of this year and total loan origination volume of CNY 6 billion.

On the other hand, we continue to explore collaboration opportunities with various other financial institutions.

During the quarter, we deepened collaborations with existing trust company partners such as China FOTIC Trust and Zhonghai Trust and also began partnering with new ones including Hunan Trust and Shaanxi International Trust and have successfully launched new lending business during the quarter.

In addition, we also proactively reached out to a number of banks and fund companies to discuss potential business opportunities.

As our collaboration model expands to scale and we further reduce funding cost, we believe we'll be ideally positioned to provide customer with more affordable and acceptable financial services in the near future.

This will help the development of inclusive finance and as part of our effort to meet the financial needs of macro and small enterprise owners.

With that, I will now hand the call over to our Chief Financial Officer, Li Ning, who will walk through our financial results this quarter.

Thanks, Mr. Zhai, and thanks again to everybody joining us today.

I'll walk you quickly through our third quarter of financials.

Maybe the 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.

As of September 30, 2019, total outstanding loan principles decreased to RMB 12 billion compared to RMB 16 billion as of December 31, 2018.

Total loan origination volume was RMB 1,709 million compared to RMB 2,603 million in the same period of 2018.

Interest financing service fee on loans was RMB 676 million, a decrease of 39%, 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 in the financing service fee on loans.

Interest expenses was RMB 295 million compared to RMB 522 million in the same period of 2018, primarily due to the decrease in interest-bearing borrowings resulting from a general decrease of the loan origination volume.

Collaboration cost for sales partner increased to RMB 57 million for the third quarter of 2019 from nil in the third quarter of 2018, primarily due to the development of the new collaboration model started in 2019.

Provision for credit losses was RMB 55 million, a decrease of 37% from RMB 87 million in the same period of 2018.

Total operating expenses were RMB 113 million, a decrease of 41% compared with RMB 191 million in the same period of 2018.

Income tax expenses was RMB 62 million, a decrease from RMB 83 million in the same period of 2018.

Net income was RMB 177 million, a decrease of 25% from RMB 235 million in the same period of 2018.

As of December 30, 2019, the company had cash and cash equivalent of RMB 1.5 billion compared with RMB 3.2 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 we originated since 2014 slightly decreased from 7.6% as of December 31, 2018 to 6.2% as of September 30, 2019.

With that, we'd now like to open up the call for Q&A.

Thank you.

(Operator Instructions)

Today's first question comes from [Z.

B. Yang] of [SWHY].

[Interpreted] I have 2 questions for CFO, Mr. Li.

The first one is cash and cash equivalents on the balance sheet is lower than the same period of last year.

And the second question is other liabilities shows an increase comparing to the same period of last year.

I want to ask Mr. Li to give a brief explain of that.

[Interpreted] Let's talk about cash first.

It decreased from CNY 3.2 billion from last year to CNY 1.5 billion now at the end of third quarter.

Most of our cash and cash equivalents, no matter, was RMB 3.2 billion or RMB 1.5 billion.

Most part of it was the cash we put in the trust plans.

The drop of the cash amount represents a better negotiation we made with the trust plans to better structure our fund.

It was restricted by its tenure in -- before.

So it wasn't really that efficient before.

So in the third quarter of 2019, we have reached pass-through agreements with many of the trust companies, so that way, we don't have that much idle cash.

That way, we are actually saving interest on that.

So we're using the cash more effectively, and the overall expense on the cash, so it's actually lower in the future.

That's about the decrease of cash.

And also, there's an account on the balance sheet called other liability, I want to talk about the increase for right now.

First thing I want to point out is that this increase of other liability is caused by our new model.

Under the new model for every loan we originate, the sales partners have to put up a credit risk mitigation position, which equals to around 20% of the loan amount.

So among the other liability, there is around RMB 0.7 billion.

That is the credit risk mitigation position put out by the sales partners.

This is somewhat special.

If the clients or the borrower, they repay on time, it's recognized as a liability because we will have to return those amount of money back to them, to the sales partners.

And in the circumstances when there is a delinquent loan and the sales partners refuse to buy, to repurchase the delinquent loan, this part of the other liability will just be used to reverse our asset and increase our quality -- the asset -- the quality of the asset.

So that's why I call this part of liability special.

I hope you find the answer helpful.

(Operator Instructions)

Okay.

We actually got an online question from Macquarie.

And it is asking, "I see the quality of your asset has been improved a little bit.

I want to ask CFO, Mr. Li, to give a brief explanation on that and how he see it goes in the future."

[Interpreted] The first thing I want to point out is the quality of the asset of the company has always been good in the past.

The first thing is we have collateral for every loan we facilitate.

Even -- it shows some of the delinquent loans on the financial report, as time pass by, we can always get back those part of -- we can always collect those part of the loans.

As we have completely shut down our old business model at the end of last year, so the delinquent loans under the old model has all been exposed, and we don't see much more coming from the old model in the future.

On the other hand, when it comes to the collecting of nonperforming -- collecting our delinquent loans, it takes time.

So most of the delinquent loans under the old model has entered into the collection period, so it shows lots of collection amount.

Looking into the future, we don't really see the delinquent rate to go higher.

It's just going to be lower and lower as time passes by.

As for the new model, since we have a repurchase or buyback clause with our sales partners, we have seen some delinquent loans, but most of them has been repurchased by the sales partners.

So again, looking into the future, for the new model, considering all those factors with bank, the delinquent rate will remain stably low in the future.

I hope this -- I hope you find this answer helpful.

(Operator Instructions) .

Our next audio question comes from William Gregozeski of Greenridge Global.

What was the average loan size during the quarter?

And what was the amount of loan origination between the sales partners and your existing customer base?

[Interpreted] As for your first question on the average ticket size wasn't -- didn't really change a lot comparing to other time.

It remained at around RMB 0.6 million.

And since we have shut down our old model completely, so in these 3 quarters, all the loans was facilitated under the new model.

(Operator Instructions) And today's next question comes from [Jin Niang] of [First Trust].

[Interpreted] I have a question for Mr. Li.

Under the new model, since there is a credit risk mitigation position, has the company considered to go to more cities to facilitate loans?

[Interpreted] That was a good question.

I think the new model has brought us to opportunities as of the development of our business.

Since there is the -- since the existence of sales partners, the first thing is they can reach out for business.

The second thing is, since they are putting out 20% -- around 20% of the credit risk mitigation position, it's actually lowering our risk as of -- the risk of the platform.

So that way, it gives us more choices in designing products and selecting cities.

Under the new model, when we have -- want to develop business in a new city, we have to train our own sales personnel.

But since the sales partners, they come to us with business, it saves us a lot of time in regarding of training sales.

So that gives us more choices when entering into new cities.

Speaking of the risks, when we enter into a new city and we consider it as a city with highly risk, we will adjust the percentage of credit risk mitigation position.

So that way, it will lower our risk.

It will protect us from the risk profile as well.

And it won't really be a problem for us to enter into new areas.

I hope you find this helpful.

Our next question today comes from [Ruth Kwan] of FOTIC.

[Interpreted] I have 2 questions for the management.

You have mentioned that you've been exploring collaboration opportunities with new trust companies under the new model.

So first thing I want to ask that under the new model and the old model, what's the structure of trust companies you have been working with?

And second thing is I heard from you that you're considering and trying to lower the financial expense of the company.

I want to ask what's the average financial expense rate as for right now?

[Interpreted] For right now, in this particular period until now, our biggest partner is still China FOTIC Trust.

I think every trust company has its own competitive advantage.

And some of the trust companies are really good at raising funds.

For example, China FOTIC has the best long-term bank providing to us.

And there are other trust companies such as Hunan Trust and Shaanxi International Trust or Zhonghai Trust, that they have an advantage that they are cheaper in short-term fundraising.

And there are other trust companies that have even cheaper rate on the even longer term fundraising, because they are bringing in bank money.

So that way, they can provide us with a 5-year tenure or 8-year tenure products.

We really take it seriously with all the trust companies that we have been working with and we are working with right now.

And we're hoping that by creating such a portfolio will bring us a better structure of the fund source of the company.

As for the financing cost, for those products that's short -- that's within 1 year, we have an interest rate at around 10%.

For the long-term fund, we're raising is around 11%?

11%.

I hope my answer could help you.

Thank you.

And ladies and gentlemen, our next question today comes from [Summer Sue], a private investor.

[Interpreted] I heard from the CEO during -- in his speech that the recovery rate of the company during the third quarter was around 101%.

So does that mean there is no actual loss for the company?

[Interpreted] Yes.

To speak overall, yes.

There is no actual loss.

But we do recognize loss on maybe on certain transactions.

But to speak overall, we do not recognize any loss.

The transactions which cause -- causes a loss to us is very rare.

And just again, we -- from -- since the beginning to right now, we have been able to recover every loan as a product.

(Operator Instructions) And ladies and gentlemen, seeing no further questions, I'd like to turn the conference back over to Christian Arnell for any closing remarks.

Thank you.

That concludes tonight's call.

If you have any further questions or comments, please don't hesitate to reach out to the IR team.

Thank you, and good night.

And thank you, sir.

Today's conference has now concluded.

We thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful evening.

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