CNFinance Holdings Ltd (CNF) 2021 Q3 法說會逐字稿

Good morning, and welcome to the CNFinance Third Quarter Financial Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to turn the conference over to Matthew Lou. Please, go ahead.

Good morning and evening, and welcome to the CNFinance Third Quarter 2021 Financial Results Conference Call. In today's call, our CEO, Mr. Zhai, will walk us through the operating results, followed by the financial results from our Vice President of Capital Markets Department, Ms. Li. After that, we will have a Q&A session.

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

Forward-looking statements can be identified by terminologies such as will, expect anticipate, future, intent, plan, belief, estimate, target, going forward, outlook and similar statements.

Such statements are based upon management's current expectations and current market and 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 law.

Now, please welcome our CEO, Mr. Zhai.

(foreign language)

[Interpreted] Thank you, operator, and thank you, everyone, for joining us in this conference call. On today's call, we will introduce the company's financial and operational results of the third quarter of 2021, followed by a Q&A section.

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[Interpreted] In this quarter, the loan scale, under the collaboration model, continued to grow at a high speed. The loans facilitated during the quarter, was RMB [3.1] billion, with the revenue and net income came in at RMB 450 million and RMB 90 (sic) [19] million, respectively. As of September 30, 2021, the outstanding loan principal, under collaboration model, remains over RMB 10 billion, which well exceeded our goal. We were able to finish with such results due to the following reasons.

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[Interpreted] First, the market demand for home equity loans remained strong. In the third quarter, China's economic growth maintained stable. The growth was driven by the fact that the MSE, which gathered (inaudible) was able to deliver fruitful operations. We have built a national network, consisting of 60 branches in 40 cities and over 2,000 sales partners across China.

With this network, we're able to establish a wide market coverage and serve MSE owners' financing needs in a timely manner. We were able to fulfill our responsibility as the last-mile courier to build a network of an exclusive financial system in China by servicing another 5,000 MSE owners in the third quarter.

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[Interpreted] Second, as the leader in the industry, we have established strong relationships with our trust company partners. Our loan products and operation capabilities are highly recognized by our trust partners. As a result, it drives to suppliers with sufficient funding, even with stricter regulatory guidelines.

Other than that, we also managed to deepen our cooperation with commercial banks. It is worth pointing out that not only did we increase our collaboration scale with the Blue Ocean Bank, but also finalized our terms to start a new collaboration with Everbright Bank and (inaudible) Bank.

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[Interpreted] Last, but not least, since the collaboration model earned its recognition in the market, we are now in the driver's seat to select sales partners. We have started to introduce the concept of senior sales partners since the beginning of the year.

Senior sales partners are usually experienced local loan facilitator with excellent operational history. CNF provides them with training programs, on a regular basis, to help them understand our product and risk-control mechanism. By doing that, we are also able to acquire customers more efficiently and improve the overall quality of the customers.

At the same time, we minimized risk exposure as senior sales partners are more capable to fulfill their post-loan obligation. The improvement of post-loan management was reflected by a decrease in our provisions for credit losses, under the collaboration model.

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[Interpreted] Through the hard-won results aside, we also noticed some challenges that may interfere with our future growth, including...

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[Interpreted] First, funding pressure. We have been reaching out to cooperate with various types of funding suppliers, yet, we are still highly dependent on trust fundings, at this moment. Since the beginning of 2021, the regulation on trust companies' loan product was tightened.

Although our funding demand was satisfied, the funding cost was, in fact, increased. We wanted to be responsible to the society and our customers. We decided not to further raise the interest rate of our loan products.

As I reported in the last conference call, the government would not loosen the regulation for the rest of 2021. And our experience told us that our earlier judgment was correct.

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[Interpreted] Second, under the collaboration model, sales partners bear the risks. However, due to the business structure, agreed upon with the trust companies, we are the holder of subordinated units in the trust plan. As a result, we have to carry the assets on our financial statements.

We seem like a company with heavy assets, whose revenue is generated from interest brands. The balance sheet cannot represent our asset-light business model. This has caused the concern of potential funding partners and is hurting our valuation in the capital market.

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[Interpreted] Third, with the liquidity of certain Chinese real estate developers in crisis, and considering the upcoming real estate tax, our management made an estimation that the Chinese property market is likely to fluctuate in the future.

As the holder of the subordinated units, our asset quality is likely to be negatively affected, while such fluctuation interrupt the efficiency of NPL disposal.

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[Interpreted] In response to those challenges, we will continue to promote the asset-led transformation to better serve MSE owners and improve shareholders' return. The key tasks, we will complete, are as follows.

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[Interpreted] First, we will continue to extend our cooperation with existing trust partners. It is even more critical than ever now, to look for innovative ways of collaboration, given the regulation shows no sign to loosen up in the near future.

We have taken a few proactive steps in this quarter. For example, our partnership with National Trust was within the scopes of regulation, but not constrained by the type of nonstandard trust products. We will remain explorative to similar types of cooperation in the future.

Another goal of ours is to expand our collaboration with commercial banks. Our plan is to make the loan, under the bank-lending model, cut a relatively large share in the overall outstanding loan by next year.

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[Interpreted] Second, we will start dialogues with investors, who understand our business and have the intention to participate, and our trust company partners. Our goal is to finalize a deal with the terms that allow such investors to take CNF's current role as the holder of the subordinated units of the trust plans.

Upon the finalization of such negotiations, our role as the loan-service provider and the mezzanine-level investor will be clear, allowing us to focus on building an asset-light loan platform, with the prospect and capability to expand with quick turnover.

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[Interpreted] Third, to promote the company's strategic transformation to an asset-light platform, we plan to dispose of certain legacy loans, under the traditional model, in the fourth quarter. We believe, the three advantages are threefold.

First, this will improve our financial performance and help the company to broaden funding sources and improve its valuation in the capital market. Second, the company's compliance risk will be reduced. And third, when the legacy loans are disposed, we will be well positioned, when price of the property market fluctuate.

We have obtained quotation from several potential buyers. We will conduct evaluations and endeavor to sell such loans at fair market prices.

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[Interpreted] In the process of our transformation, we will keep frequent and constructive dialogue with regulator at all levels, and proactively consult our auditor, regarding the accounting treatment, to ensure we stay compliant in all aspects, the full time, during our upgrade.

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[Interpreted] As an ancient Chinese saying were, all are good efforts, but we should ensure that the cost achieved fruition. We believe, this also applies to our business operations. We have experienced ups and down, but never lost our dedication. We have made unwavering effort to follow the government's call of developing an inclusive financial system.

We hope to finish our transformation in the near future, and carry forward our mission of mixed finance, more human. Our pursuit to service MSE owners, will remain unchanged.

By leveraging our advantage gain from years of dedicated work, we will continue to provide MSE owners with affordable, accessible and efficient financial services.

(foreign language)

[Interpreted] With that, I would like to hand the call over to Ms. Jay Li from the Capital Market Department, who will walk you through the third quarter financials.

Thanks, Mr. Zhai, and thanks again to everyone joining us today. I will walk you through our third quarter 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. Also, unless otherwise stated, all numbers I'm going to give, will be in RMB.

The total outstanding loan principal was RMB 11.1 billion as of September 13 (sic) [30], 2021, compared to RMB 9.7 billion as of December 31, 2020. While the total loan origination volume remained stable at RMB 3.1 billion in the third quarter of 2021, compared with the same period of 2020.

Interest and financial service fees on loans decreased by 3.7%, to RMB [455] million for the first quarter of 2021, from RMB 473 million, primarily due to the combined effect of; a, the increase in the balance of average daily outstanding loan principles; and b, the lower interest rate on loan facilitated, in the effort to comply with the rules and regulations.

Interest and fee expense has increased by 18.8%, to RMB 219 million for the third quarter of 2021, compared to RMB 184 million, primarily due to the increase in principles of other borrowings as well as the funding cost from trust companies.

Collaboration cost for sales partners decreased to RMB 102 million for the third quarter of 2021, from RMB 113 million, primarily due to the fact that the company cut down the rate of incentive payed to sales partner, in response to the overall lower interest rate on loans.

Provision for credit losses increased by 4.8%, to RMB 33 million for the third quarter of 2021, from RMB 31 million. The increase was mainly attributable to the combined effect of; a, the increase in outstanding loan principle of non-delinquency loans and loans delinquent within 90 days, which result in the increase in collectively-assessed allowance; and b, the company revised recoveries in the third quarter after charging down the loan that are 180 days past due to the net realized value.

Total operating expense decreased to 21%, to RMB 93 million for the third quarter of 2021, compared with RMB 118 million in the last year. Income tax expenses decreased by 73%, to RMB 7 million for the third quarter of 2021, from RMB 25 million, primarily due to the decrease in the amount of taxable income.

Net income decreased by 62%, to RMB 19 million for the first quarter of 2021, from RMB 50 million. As of September 30, 2021, and December 31, 2020, the company had cash, cash equivalents and restricted cash of RMB 2 billion and RMB 2 billion, including RMB 1.4 billion and RMB 1 billion from structured funds, respectively, which could only be used to grant new loans and activities.

The actual delinquency rate for loans originated by the company, decreased to 20.4%, as of September 30, 2021, from 22.6%, as of December 31, 2020. The actual NPL rate for loans originated by the company, decreased to 7.5% as of September 30, 2021, from 11.7% as of December 31, 2020. With that, we'd like to open up the call for Q&A. Operator, please.

(Operator Instructions) Our first question comes from William Gregozeski with Greenridge Global.

A couple of questions. When you're talking about disposing of the legacy loans, are you talking about the loans prior to the current structure, with the sales partners? Or are you talking about getting rid of everything that you have a subordinated interest in, to really clean up the balance sheet?

(foreign language)

[Interpreted] Thank you for the question.

(foreign language)

[Interpreted] So when we say legacy loans, we are referring to those loans that was facilitated for the model transformation, which is under the traditional model prior to the sales partners model.

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[Interpreted] So the carrying value of such loans, we are talking about the current loans and the loans that are delinquent or nonperforming, is around RMB 590 million, right now, at this moment.

(foreign language)

[Interpreted] So by disposing of such loans, we are hoping to accelerate our transformation into an asset-light platform, which focuses on operations and bare-minimum risks.

(foreign language)

[Interpreted] So in many years of our development, especially when we transformed to the sales partners model, which is the collaboration model, there have been and there are many third-party investors, who understand our product and is interested in participating by investing through us.

So we have been in touch with them, and we have reached a couple of consensus. We hope to address the deals in the coming quarter, which is the fourth quarter of 2021.

(foreign language)

[Interpreted] So to sum up, just by doing another upgrade in our model, we are hoping to create -- to build a platform that is asset-light, which focuses on servicing and operations. And we are also hoping to improve our financial performance on the financial statements.

Okay. And then, next question is with regards to the availability of capital, has there been any change in what's available from trust companies to you guys, since the last conference call? And then, how much have you gotten from commercial banks so far, to (inaudible)?

(foreign language)

(foreign language)

[Interpreted] To answer your first question, the regulatory pressure is still there. We don't see any signs of loosen up, yet.

(foreign language)

[Interpreted] It is worth noticing though, our trust company partner strived, no matter how hard it was, to suppliers with a very sufficient fund, during the quarter.

(foreign language)

[Interpreted] I was rather concerned, by the end of the second quarter, about our funding supplies in the coming third and fourth quarter. However, just -- as I mentioned, our trust company partners, sort of, asset, and they strive to still supply us with sufficient funds during the third quarter.

(foreign language)

[Interpreted] We experienced the rise of the financing costs in the quarter though, due to such conditions.

(foreign language)

[Interpreted] So all in all, we don't expect the regulatory pressure to loose, especially on the nonstandard trust products. I think, their cap is still going to be very limited. However, from what we see in the third quarter, we are still the first priority of our trust company partners. They will first satisfy our funding needs.

So I think, that's also a proof of our leading position in the industry as well as our strong brand recognition of the market.

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[Interpreted] We could have just simply transferred the rise of our financing costs to the market, which will make things more -- which will make things much easier. However, we felt like that's not the really responsible thing to do.

So we did with the interest rate of our loan product a little bit, but not by much. We think -- we feel like by doing that, our revenue and net income, in the near term, will probably be a little bit lower than we estimate. But in the long run, this is to our best.

(foreign language)

[Interpreted] And what brought us more confidence is that our trust company partners promised to satisfy our needs and put it in the priority, too, in next year, when there is enough (inaudible).

(foreign language)

[Interpreted] As for your second question about the fundings from commercial banks, so this year, we mainly, was negotiating the term and finalizing them. So just as I introduced in my speech, I hope that the funding -- the loans principle, under the bank-lending model, will cut a relatively large share by next year.

(foreign language)

[Interpreted] So I would also mention one thing that except for commercial banks and the current trust companies, we have already -- we also made several constructive negotiations with insurance companies.

So maybe, in the near future, not only can we cooperate with trust companies and banks, the insurance companies will also be on our book.

Okay. Great. And last question, and I appreciate all the detail you're providing in the answers. You touched on the property prices, with the uncertainty with the developers. Do you think, those fluctuations in property prices are going to be nationwide or more geared towards, kind of, the smaller cities?

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[Interpreted] Well, first of all, we have a strong faith and confidence in the Chinese government.

(foreign language)

[Interpreted] So we feel like there are still plenty of tools in the toolkit of the Chinese government to prevent systematical and regional risks.

(foreign language)

[Interpreted] So for the short term, there is a potential decline in the -- of the property price.

(foreign language)

[Interpreted] But if we look at the long run, we believe, the Chinese government is capable to keep the property price in a stable range.

(foreign language)

[Interpreted] So let me address this again, the whole purpose of dispose of the legacy loans. So the first reason is that to avoid the short-term fluctuation of the property price.

And the more important thing is that we don't want our business to be fluctuating, if there is fluctuation in the property market and stuff. And again, we just want to finish our transformation and focus on servicing and operations.

(Operator Instructions) There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Lou for any closing remarks.

Thank you, again, for joining us today. If you have any further questions, please feel free to contact us, or log on to our website at ir.cashchina.cn. Thank you.

Thank you. (foreign language).

[Interpreted] Thank you again for joining us. That's from our CEO.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.