CNFinance Holdings Ltd (CNF) 2019 Q4 法說會逐字稿

Good morning and evening, and welcome to the CNFinance Fourth Quarter 2019 Financial Results Conference Call and Webcast.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Simon.

Please go ahead.

Thank you.

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

CNFinance earnings release was distributed earlier and is available on our IR website as well as PR Newswire Services.

On the call today from CNFinance, Mr. Ning Li, Chief Financial Officer, will review business operations and the company highlights followed by financial results and the Q&A section.

Our CEO, Mr. Zhai, wanted me to extend his regrets.

He can't join our call today because he has meetings with our request regulators to ensure we are in a better market position when MSE are back in business.

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 U.S. Private Securities Litigation Reform Act of 1995.

These forward statements -- these forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intend, plans, believes, estimates, target, going forward, outlook and similar statements.

Such statements are based on management's current expectation and current market and operating conditions and related to events that involve known and unknown risks, uncertainty 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 and achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in 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 and otherwise except as required under law.

It is now my pleasure to introduce Mr. Ning.

Please go ahead.

[Interpreted] Thank you.

Thank you all for joining our call today.

We would like to report on business operations and development and financial results in the last quarter of 2019 and 2019 as a whole.

I know you are even more interested in, and I will talk more about, the impact of COVID-19 outbreak on CNFinance business, the challenges and potential opportunity it presents.

During the outbreak in China, CNFinance implements operating policy to ensure the health and safety of our employees, partners and clients.

We will continue to grow and create value for our shareholders.

Later, we will answer your questions.

The fourth quarter revenue and net income came in at CNY 598 million and CNY 61 million, respectively.

For the fiscal year of 2019, we recorded a revenue of CNY 3 billion and a net income of CNY 535 million.

After full year of business model upgrades, we transformed from a captive sales force business model to a collaboration model -- collaboration sales model.

2019 has proven to be a year of establishment and development of an effect -- efficient and more cost-effective business model.

Although the total loan generated from the new model was short of our original target, based on the lessons we learned, we are confident that the advantage of collaboration model will be fully realized in the near future.

First, CNFinance further tightened the risk-control criteria in the fourth quarter of 2019 due to the uncertainty of the market condition and slowdown of the GDP growth in China.

The average LTV ratio was adjusted down to 55% in fourth quarter.

Consequently, the total loan origination volume was short of our target.

Another contributing factor of the slower loan origination growth in 2019 was the longer-than-expected time for us to establish and fine-tune the collaboration model in the first half of 2019.

The loan origination volume started to show steady growth in the second half of 2019.

As a measure of risk control and a key factor of the collaboration model, we reduced in-house sales force significantly in 2019.

As a result, CNFinance was able to cut down fixed costs, such as employee compensation and office-based rentals, saving CNY 237 million in the whole year.

Therefore, the company has successfully transferred itself to the new business model and reached our goal in business operations.

Secondly -- second, we maintained a high liquidity.

In the second half of 2019, CNFinance came into new agreement with our existing trust partners.

It allowed CNFinance to transfer the repayment of loans to the trust partners without continuing to pay interest on idle cash until maturity of the loan.

The modification reduced amount of idle cash and interest cost owned by CNFinance, which was a major cost in the first half of 2019.

More importantly, as another key factor of the collaboration model, CNFinance has received CNY 1 billion in total in credit risk mitigation position paid upfront by our sales partners when they signed up to the collaboration model, which helped make the company more risk resistant.

Third, CNFinance accelerated NPL disposals in the fourth quarter based on our negative outlook on property price and liquidity in certain cities as a result of the government's continued emphasis on housing for living, not speculations, and associate housing regulations to stabilize land and property price in the long run.

In the fourth quarter of 2019, we disposed NPLs in the total amount of CNY 600 million, representing a collection recovery rate of 97%.

The quick turnaround of NPLs is crucial to reduce risk to our operating results.

We will continue to monitor the property market in China and adjust our NPL disposal process based on our assessment of the market conditions.

2020 will be a year of both challenges and opportunities for CNFinance.

Benefiting from the infrastructure of the collaboration model established in 2019, CNFinance has a solid foundation to access and respond to risk and achieve sustainable growth in the long run.

We will leverage our advantage to seize opportunities.

First, we are highly risk-resistant.

In the first 2 months of 2020, the outbreak of the coronavirus has negatively affect all business in China.

CNFinance is no exception.

We expect loan origination volume and delinquency rates to deteriorate during the first half of 2020.

However, we are confident that we can further the temporary downturn on the strength of the collaboration model, which transfer our operation to a low fixed cost, low capital dependent and high liquidity model.

Secondly, I want to talk about our products and services.

Due to the shutdown and health of operation and production, we forecast a surge of demand for working capital by MSEs after the disruption of business and production in China.

The various financial support provided by the government will not [fully eliminate] the demand from the MSE [owners].

Therefore, we expect explosive demand in loans from our potential MSE customers.

To capitalize on this unique opportunities, we and our trust partner are working together to develop new products to meet the financing needs of highly qualified MSE customers.

At the same time, this epidemic will bring consolidation to home equity loan industry.

It is very likely that many smaller competitors in the industry will go bankrupt in the tough environment.

We believe that is -- that it will be the best time for us to further develop our collaboration model, expand our market share.

We will cherry-pick and invite the qualified loan facilitators across the country to join our platform.

A huge growth in the scale of collaboration model is expected.

In summary, 2020 will be a challenging year for CNFinance, but it will be also bringing many opportunities as a leader in the home equity loan business.

We will apply all of our resource and knowledge accumulated from the past decade to roll out better products and serve our customers.

We will continue to provide successful, affordable and efficient financing solutions to MSE owners in China.

Now I will walk you through our fourth quarter and fiscal year of 2019 financials.

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

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

We will go through the figures for fourth quarter of 2019 first, followed by the -- for the fiscal year of 2019.

As of December 31, 2019, total outstanding loan principal decreased to CNY 11 billion compared to CNY 16 billion as of December 31, 2018.

Total loan origination volume was CNY 1,970 million compared to CNY 1,130 million in the same period of 2018.

Interest and financing service fee on loans was CNY 597 million, a decrease of 43%, primarily due to the decrease of the loan origination volume, which is the result of the company's strategic focus on ensuring loan quality over loan growth and devoting its resource on the new collaboration model started since 2019.

Interest expenses was CNY 237 million compared to CNY 470 million in the same period of 2018, primarily due to: A, the decrease in interest-bearing borrowing, which have higher interest rate; and B, the instant payment (sic) [repayment] to trust companies after borrowers made statements for their underlying loans, which results in a decrease of idle cash.

Collaboration cost for sales partners increased to CNY 76 million for the fourth quarter of 2019 compared to the nil in the fourth quarter of 2018 primarily due to the development of the new collaboration model started since 2019.

Provision for credit losses was CNY 40 million, a decrease of 68% from CNY 122 million in the same period of 2018.

The decrease was primarily due to the following reasons: A, the decrease in the overall outstanding principal of nondelinquent loans and loans delinquent within 90 days result in a decrease in a collectively assessed allowance; and B, under the new collaboration model, the company's sales partners provide credit risk mitigation position as guarantees for loans originated through them.

Total operating expense were CNY 163 million, a decrease of 8% compared with CNY 176 million for the same period of 2018.

Income tax expense was CNY 23 million, a decrease from CNY 65 million in the same period of 2018.

Net income was CNY 61 million, a decrease of 68% from CNY 188 million in the same period of 2018.

And now we are moving on to our financials for the fiscal year of 2019.

Total loan origination volume was CNY 6,340 million compared to CNY 9,530 million in the same period of 2018.

Interest and financing service fee on loans were CNY 2,970 million, a decrease of 31% primarily due to the decrease of loan origination volume, which is the result of the company's strategic focus on ensuring loan quality over the growth of loan volume and develop -- devoting its resources to the new cooperation model started since 2019.

Interest expense was CNY 1,310 million compared to CNY 1,943 million in the same period of 2018 primarily due to: A, the decrease in interest-bearing borrowing, which have higher interest rates; and B, the instant repayment to trust company of prepaid loans from customers, which result in a decrease of idle cash.

Collaboration cost for sales partners representing sales incentive paid to sales partners was CNY 75.8 million for the fourth quarter of 2019, and it was nil for the same period of 2018, primarily due to the development of the collaboration model started since 2019.

Provision for credit losses was CNY 363 million, a decrease of 16% from CNY 434 million in the same period of 2018, primarily due to the following reasons: A, the decrease in the overall outstanding principal of nondelinquent loans and loans delinquent within 90 days result in a decrease in collectively assessed allowance; and B, under the new collaboration model, the company's sales partners provide a credit risk mitigation position as guarantees for loans originated through them.

Total operating expense is CNY 531 million, a decrease of 29% compared with CNY 747 million in the same period of 2018.

Income tax expenses was CNY 186 million, a decrease from CNY 297 million in the same period of 2018, primarily due to the decrease in taxable income in the fiscal year of 2019.

Net income was CNY 535 million, a decrease of 38% from CNY 861 million in the same period of 2018.

As of December 31, 2019, the company had cash and cash equivalent of CNY 2 billion compared with CNY 3 billion as of December 31, 2018.

The aggregate delinquency rate for loans originated by the company, which is calculated by dividing: A, total balance of outstanding loans principal for which any installment payment is past due as of particular date; B, the aggregate total amount of loans we originated since 2014 decreased from 7.6% as December 31, 2018, to 5.4% as December 31, 2019.

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

Operator, please begin.

(Operator Instructions) The first question comes from William Gregozeski of Greenridge Global.

Thanks for the commentary on the coronavirus and what looks to be an opportunity for you guys longer term.

Shorter term, are you seeing any impact from your sales partners where they might not have enough capital to bring as many loans to you guys as you would like?

[Interpreted] We are seeing the epidemic more serious, bringing more impact than we expected.

We have gave you a brief introduction in our former stated script.

As for your question, we would like to say that we have 2 types of partners: one for sure is the existing ones who will keep on investing; and the other combination is the new partners we want to bring in.

As for the existing partners, there are some of them, there is sufficient funding sources and they are very competitive in the market.

I think they will keep on investing and bringing more business to us.

And we couldn't deny that there are some other existing sales partners that are lack of capital and are not that competitive.

They will contribute less than they used to do in the future.

As for the company, our primary service target are those with sufficient funding sources, and they will be eligible to expand the market share with us.

And as for those smaller ones, they will be our secondary service targets.

As for the incremental sales partners, I think this epidemic is beared by all of us, including us and the sales partners in the market.

However, as a leader in the home equity loan industry, I think we will be competitive enough to just bring them in to join us.

As we have mentioned in our script, I think this epidemic will bring a consolidation to the entire market.

And I think we'll just bring in more and more sales partners who will just join into our platform and expand our market share together.

And I think the advantages of the collaboration model just will be fully recognized by the market in the future -- in the near future.

Just to sum up, we will just provide better service for our existing sales partners as well as trying to attract more incremental sales partners from the market.

Okay.

Two other quick questions.

You mentioned working with your trust partners to lower the interest rates.

Can you say where the interest rates are or what the average rate is you're seeing?

And then also, what is the average duration on the loans outstanding right now?

[Interpreted] We'll answer your questions one by one.

For our funding cost right now, for the fundings that's under 1 year, it's maximum of 9.5%.

For over 1 year, it's around 11.5%.

We don't use to separate those funding matters in the past, it was around 12.5%.

Our primary target is to separate funding sources with different durations and to lower the cost.

The goal we want to achieve in the future for the funding that's under 1 year, our funding costs won't exceed 9%; for those more than 1 year, we are hoping to reduce it to under 11%.

As for your second question, for those equal installment, our average duration is around 18 months to 24 months, just like in the past.

And for the interest only, we are seeing a average of 12-month duration.

Does that answer your question?

Yes.

(Operator Instructions) The next question comes from Rong Zhang of Cathay Capital.

[Interpreted] I want to ask, what's your expectation for the scale of the new collaboration model in 2020?

And how did the management get that expectation?

[Interpreted] We made our first forecast during 2019.

And after the epidemic, I think our forecast results will be influenced a little bit.

Our loan origination volume during the fiscal year of 2019 was RMB 6 million -- RMB 6 billion, sorry.

Taking into the -- even though taking into the consideration of the epidemic, we are still thinking double the loan origination in 2020.

But it all depends when will the epidemic be well-contained.

But as for now, we are still sticking to the number, RMB 12 billion in loan origination.

And it is -- the answer around how we are planning to achieve that goal is quite similar to the first question.

It all depends on how big the scale of the number of the sales partners and how much they can invest in, they can -- how much they can introduce to us.

We will work from both perspectives.

First of all, we will provide better services to the existing sales partners who are very competitive.

I just hope -- so that they can introduce more loans to us.

And secondly, we will go out into the market and seek more sales partners to join us.

We are hoping that the effective sales partners will be just one half more than what we are having right now.

Also as the existing sales partners keep on introducing more loans to us, we are optimistic that we will achieve the goal we set.

And that's how we are going to devote the company's resources.

And this is based on the market condition as of right now.

If there are fluctuations in the future, we will report to our investors in the future conference calls.

The next question comes from [Ni Pani].

[Interpreted] I'm here from (inaudible).

I have 3 questions.

The first one is, how is the company planning exactly to scale the collaboration model?

The second one is under the epidemic, how is the company's collections going?

And the third one is, how is the disposing system of the company going?

[Interpreted] Excellent questions.

I will answer one by one.

About how we're going to acquire effective sales partners, like I have introduced, the -- we have been fine-tuning our system, our policy regarding the sales partners during 2019.

And based on the information we are having now, we have tried to set up networks scattered across the country, and we have feedback from our sales partners.

Based on the feedback we are getting from them, our platform is highly attractive to the sales partners and there is a certain wait-and-see period for the sales partners as well.

And so again, based on the feedback from our sales partners, first of all, we don't see many competitors that's doing the similar model as us.

And second thing is that our model is very well recognized by the sales partners as well.

So what we're thinking about now is just how to roll out this model to the whole country.

Starting from the second half of 2019, we have been giving seminars and just introduced this new model to the potential sales partners.

As the very first group of our sales partners, they have achieved very positive goals sending up to our collaboration model.

I think their experience, their success was very convincing to the other sales partners, other potential sales partners.

I think the main source of the potential sales partners are our former competitors in the market.

As we keep on promote our collaboration model, I think its advantages will quickly show itself to our potential sales partners.

And we have started the market.

As we said, there are many small and scattered loan facilitators in the country.

So we think the potential market of the sales partners are very huge in China.

Just to sum up to -- our key factor to success was just to do more promotion and let the sales partners earn what they deserve, and I think that's the key factor to our potential success.

That's for your first question.

We have to admit that under the epidemic, our collection was somehow troubled.

But it's not just for us, it's for -- it's beared by the entire industry.

And it is because of the epidemic, many -- some of our former collection methods could not be conducted at the moment, such as on-site collecting.

Well, it is also a great opportunity to see if what we did last year was successful.

We have set up several methods, several different ones to -- for the loan collections.

On-site collection is only one of the procedure we could be using.

We have [drove] more for juridical procedure during 2019.

And the third one is -- and also, we seek to transfer nonperforming loans to third parties in bulk as well.

That made our collection procedure more flexible.

And we had disposed about RMB 2 billion of nonperforming loans during 2019.

I think our advantage is the variety of collection method we could be using, and that's our biggest competitive advantage as well.

So under this very -- under these circumstances where everybody in the market is impacted, I think we, on the contrary, isn't impacted as much as our competitors.

And especially under the new model, we have developed another very helpful collection method, where the -- our sales partners will also try to dispose or collect those nonperforming loans for us.

Because they have to put up the credit risk mitigation position as a guarantee to the loans they introduced, they are also very motivated to deal with the delinquent loans with us.

And if there are delinquent loans and the sales partners choose to forfeit the credit risk mitigation position they have put up, it actually gives us more room in the price -- in negotiating the price whenever we try to dispose the nonperforming loans.

It gives us a possibility to put more discount on it.

It couldn't be achieved under the original model.

So I think our collection method, our collection procedure is very competitive in the market, in the industry.

I think your third question is pretty much contained in the second one.

I hope this answers your question.

This concludes our question-and-answer session.

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

Thank you.

That concludes tonight's call.

If you have any further questions and comments, please feel free to reach out to IR room.

Thank you, and good night.

[Interpreted] Thank you.

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.]