CNFinance Holdings Ltd (CNF) 2021 Q2 法說會逐字稿

Good day, and welcome to the CNFinance Second Quarter and First Half of 2021 Financial Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ms. [Jun Jei].

Please go ahead.

Good morning, and good evening, and welcome to CNFinance's Second 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 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-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, projects, 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 the 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 this 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 statements as a result of new information, future events or otherwise, except as required under law.

Now please welcome our CEO, Mr. Zhai.

[Interpreted] Thank you, operator, and thank you, everyone, for joining us in the conference call.

On today's call, we will introduce the company's financial and operational results of second quarter and the first half of 2021 followed by a Q&A section.

Following a good first quarter, the loan facilitation volumes increased again in second quarter.

After adding another RMB 3.8 billion of originating loans in the second quarter, the total loan facilitation reached RMB 6.6 billion in the first half of 2021, representing an increase of 100% and 113%, respectively, to the same period of last year.

The net income in the second quarter and the first half of the year was RMB 55 million and RMB 150 million, respectively, both increased significantly, comparing to a net profit of RMB 25 million and a net loss of RMB 40.5 million in the same period last year.

We not only delivered solid operational results in the second quarter, but also in the first 6 months of 2021, the loan facilitation volume even reached a new high since the inception of collaboration model.

The reasons of our success are threefold.

The huge demand for home equity loans in the second quarter as China's GDP grew 7.9%, the [vital] business operations of over 80 million [run through] micro and small enterprises in China led to a huge demand for working capital.

However, MSEs in China are usually covered with small scale and a stable cash flow.

These cultures of MSEs made it difficult to meet the loan approval criteria at banks.

Their demand for working capital cannot be satisfied by traditional financial institutions.

In this market environment, we call ourselves the last-mile courier to build a network of an inclusive financial system in China.

In the past 2 years, we have ordered loan services to over 40,000 MSEs in China.

On the other hand, home equity loan is still one of the best interest-bearing assets in the market.

As we witnessed transitions, increase of property price in major cities since the second half of 2020.

Since the inception of collaboration model, we have built a national worldwide consisting of 50 branches in 40 cities by collaborating with over 2,000 sales partners across China.

With this network, we are able to establish a wide market coverage and serve MSE owners' financing needs in a timely manner.

In the first half of 2021, we facilitated loans with a total amount of RMB 6.66 billion, representing a year-on-year growth of 118% from RMB 3.05 billion.

The company's growth is back on a fast track.

The collaboration model has been well recognized by the market as we kept refining the operation in the past 2 years.

To secure sales partner's loyalty to our platform, we have been optimizing our services providers buy.

First, we have been consistently adding talent to our professional management team.

We also offer training programs for our sales partners to help them -- to help their team members gain deep understanding of the product and risk control criteria of the trust company partners so that they could serve MSE owners efficiently.

Second, we optimized the data processing and storage of our online system to make it more efficient and visible to its users.

We also serve MSE owners in time and cut our own costs at the same time.

The drastic increase in loan origination volume was approved through the capacity and efficiency of our loan process system.

Based on our internal assessment, our current system is capable to support an annual capability of RMB 30 billion to RMB 50 billion in the loan origination volume.

We delivered strong results in the past 2 quarters.

But at the same time, we also noticed some challenges to our future growth, including...

We are highly dependent on trust companies as funding partners.

Since the beginning of 2021, the regulation on trust companies loan products was tightened.

As a result, trust companies reduced our funding quarter.

We also suffer from a subsequent rise of financing costs.

We do not expect this regulation to move them up in the rest of 2021.

And therefore, our loan automation will possibly be affected.

We have noticed the uncertainties of property price and liquidity due to the government policies in controlling property prices and impacts from the COVID-19 pandemic.

In 2021, the government actively initiated measures to control property price, including announcing suggested prices through secondhand property in multiple cities as well as tightened mortgages to slow down property transactions.

The management believes that such uncertainties will negatively affect the loan origination volume and NPL disposal.

And further collaboration model, sales partners bear risks.

However, due to the business structure agreed upon with the trust companies, we are the holder of subordinate units in the trust plan.

As a result, we have to consolidate the asset on our financial statements.

We seem like a company with heavy assets where our revenue is generated from interest spread.

The balance sheet cannot represent our true business model, which is, in fact, an asset-light loan origination platform.

In the meantime, the [work] of the balance sheet is also constrained when we reach out to new funding partners.

In order to consistently grow our business and serve MSE owners in a changing market, we plan to further refine the current platform model and introduce a new asset-light service platform by taking the following measures.

Transferring our assets and risks to any investor with preferences in high-risk and high-return asset backed by property.

Our company will focus on online and offline loan origination and post-loan management service.

Collaborating with different types of funding partners to serve MSE owners with different credit rating.

Other than strengthening our collaboration with trust companies, we have selectively reached out to various financial institutions.

We hope by introducing more diversified loan products, MSEs could enjoy the benefits of more affordable loans.

We have signed collaboration agreement with commercial banks, including Everbright Bank, Blue Ocean Bank and Guangzhou Bank with a possibility to issue ABS.

We believe that creating a broadened financial channel will help us bring diversification of our loan products and offer more choices to MSE owners.

We will continue to improve our service to MSE owners.

First, we will further expand our service network national wide.

The current network has 50 branches covered across 40 cities, penetrating into market and discovering the financing needs of MSE owners.

Other than that, we will prioritize technology development to improve the loan management system capability in storing data and to increase the efficiency in overall process to satisfying the financial needs of MSE owners.

Also with the goal to reduce the operating cost of our company.

To achieve our mission of make finance more human and follow the government's policy of developing an inclusive finance system, we will leverage our advantage gained from years of dedicated work in the industry and build a service platform that is asset light, turnover high and scale large.

We will proactively work with funding partners to push our diversified loan products, consistently provide MSE owners with affordable, accessible and efficient financial services.

And last, today, we announced our CFO, Mr. Li Ning will step down from CFO position in November.

I want to take the time to thank Mr. Li's years of hard work.

Mr. Li has served as the company's CFO since 2010.

In the past 11 years, he made significant contribution in leading finance -- CNFinance to become a leading home equity loan service provider in China and put dedicated work in transformation, from a privately held company into an NYSE-listed company.

On behalf of all of us here in CNFinance, I would like to thank Mr. Li Ning for his leadership, dedication and professionalism.

I wish him best of luck with his future endeavors.

We have already commenced the search for a new CFO.

With that, I would like to hand the call over to Ms. [Jay Li], the Vice President of the Capital Markets Department, who will walk you through the second quarter and first half financials.

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

I will walk you through our second quarter and first half of 2021 financials.

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

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

Also, unless otherwise we say, all number I'm going to give will be in RMB.

We will go through the figures for the second quarter of 2021 first and followed by that for the first half.

As of June 30, 2021, total outstanding loan principal increased to RMB 11.6 billion compared to RMB 9.7 billion as of December 31, 2020.

Total loan origination volume was RMB 3.8 billion, increased 103% from RMB 1.9 billion in the same period of 2020.

Interest and financial service fee on loans were RMB 449 million, a slight decrease of 0.2% primarily due to the combined effect of: a, increase of average daily outstanding loan principal; and b, lower interest rates on loans facilitated to comply with the rules and regulations issued by relevant PRC regulation authorities.

Interest expense was RMB 195 million compared to RMB 187 million, partly due to the increase in the principals of borrowing from the trust company.

Collaboration cost for sales partners increased to RMB 107 million for the second quarter of 2021 compared to RMB 104 million in the second quarter of 2020, primarily due to the higher outstanding loan balance, which was originated under the new collaboration model.

Provisions for the credit losses was CNY 15 million, a decrease of 74% on from RMB 57 million in the same period of 2020.

The decrease was mainly attributable to the combined effect: a, the increase in outstanding loan principal under the collaboration model that was guaranteed by credit risk mitigation position put up by the sales partners; and b, lower probability of default under the current expected credit loss model, which take into account a more positive outlook for the Chinese economy in the second quarter of 2021 as compared to that of the same time of 2020 under the impact of COVID-19 pandemic; and c, the company received recovery in the quarter after charged down loans that are 180 days past due to net realizable value.

Total operating expenses were RMB 87 million, a decrease of 24% compared with RMB 114 million in the same period of last year.

Income tax expense was RMB 8 million, a decrease of 46% from RMB 16 million in the same period of 2020.

This is primarily due to the decrease in the amount of taxable income.

And net income was RMB 65 million in this quarter, an increase of 159% from RMB 25 million in the same period of 2020.

Now we are moving on to our financials for the first half of 2021.

Total origination volume was RMB 6.7 billion compared to RMB 3.1 billion in the same period of last year.

Interest and financing service fee on loans were RMB 871 million, a decrease of 7% probably due to the combined effect of, a, increase of average daily outstanding loan principal; and b, lower interest rate on loans facilitated in an effort to comply with the rules and regulations issued by relevant PRC regulation authorities.

Interest expenses were RMB 351 billion -- RMB 351 million, sorry, compared to RMB 388 million in the same period of 2020, probably due to the decrease in principals of borrowings under guarantee on repurchase.

Collaboration cost for sales partners increased to RMB 205 million for the first half of 2021 compared to RMB 198 million in the same year of 2020, primarily attributable to the increased loan balance under the collaboration model.

The provision for credit losses was a recovery of RMB 3 million, while there was a provision of RMB 277 million in the same period of 2020.

This is primarily due to the result of: one, the increase in outstanding loan principal under the collaboration model that was guaranteed by the credit risk mitigation positions put up by the sales partners; and b, lower probability of default under the current expected credit loss model, which takes into account more positive outlook for the Chinese economy in this year as compared with that in last year, the same period under the impact of COVID-19 pandemic; and c, company received recovery in the first half of 2021 after change (sic) [charged] down the loans that are 180 basis plus due to net realizable value.

Total operating expenses were RMB 182 million, a decrease of 16% compared to RMB 215 million in the same period of last year.

Income tax expense was RMB 38 million, an increase from RMB 1 million in the same period of 2020, primarily due to the fact that we recorded an income before income tax expense for the first half of 2021 as compared to a loss before income tax expenses for the same period of 2020.

Net income was RMB 151 million compared to a loss of RMB 41 million in the same period of 2020.

As of June 30, 2021, the company had cash and cash equivalents of RMB 1.6 billion compared with RMB 2 billion as of December 31, 2020.

The actual delinquency rate for loan origination by the company decreased to 19 -- 18.9% as of June 30, 2021, from 22.6% as of December 31, 2020.

The actual NPL rate for loan origination by the company decreased to 8.6% as of June 30, 2021, from 11.7% as of December 31, 2020.

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

Operator, please begin.

(Operator Instructions) And our first question will come from William Gregozeski of Greenridge Global.

Congratulations on the big loan origination volume number.

Are you seeing a continuation?

Or do you expect to see a continuation in that number or growth?

And also, do you have the availability of funds to support that level of demand?

Bill, could you repeat your first question again?

We kind of had a bad connection just now.

Yes.

I just said you had huge loan origination volume growth.

Do you see that continuing?

Is that demand going to continue?

And do you have the access to the capital to support that demand?

[Interpreted] All right, I will take your question.

Like CEO just mentioned in his remarks, as China's economy grows by a high speed, we continually to see the huge demand from the MSE owners for capital.

And we had a very established sales network and our system is capable to support our loan facilitation.

So like I just -- like the CEO just mentioned in his remarks, too.

Our system is capable to support the annually loan facilitation of RMB 30 billion to RMB 50 billion.

And we believe the huge demand from the MSE owners will continue and carry through.

And our CEO has something to supplement.

[Interpreted] This year, so far, we have seen huge demand for capital from MSE owners, and we think this will carry through to the remaining of the year.

And the main challenge to us right now is that we are, like as said, we are highly dependent on the trust companies to support our capital, our fundings.

And -- but they are facing tightened regulations so that our quarter was kind of brought down from -- by the trust companies.

And we have taken many measures to reduce the effect of tightened trust companies' fund, but we will see that to be of our assistance not until Q4, the fourth quarter or the first quarter from -- in 2022.

So that's my answer to your question.

Okay.

And you mentioned signing up the commercial banks, which seems like a great thing for you guys in the platform and getting that access to capital from that channel.

How much availability do you have?

I mean are these trials?

Or is it a good amount of capital you're going to have?

And what's the rate on that?

[Interpreted] So we have already signed collaboration agreements with 3 commercial banks.

So one being the Everbright Bank.

One being the Guangzhou Bank.

And there's a smaller one comparing to the last 2 mentioned, the Blue Ocean Bank.

The main advantage that brought up by collaborating with commercial banks is that we can cover MSE owners with different credit ratings.

So the agreement deal is signed.

Right now, we are just trying to see if we are compatible in our collaborations and trying to see how the system is going.

So yes, that's my answer to your question.

Okay.

So there hasn't been any large-scale lending from the banks yet.

It's just more in a test run?

[Interpreted] Yes, you're correct.

Okay.

And last question is, on previous calls, you've talked about Class A, Class B and Class C loan products you were going to roll out with different rate structures.

Can you provide an update on those?

[Interpreted] So first, our initial ambition.

When we said we are trying to collaborate with the commercial banks is that we want to just cover customers with different ratings -- with different credit ratings.

So when we were solely collaborating with trust companies, the customer we could cover was mainly sold in our internal classification, the Type B and Type C customers.

But based on our past experiences, we don't really see that they have too high a risk.

So by collaborating with the commercial banks, we are trying to cover the so-called Type A customers.

But however, we are not sure at this moment if they are really going to be a -- be of higher quality than the customers we are serving now.

Because right now in China, the credit system -- credit rating system is fully established.

So we really have -- we are not really fully sure of whether the Type A customers are going to be [by] their customers than B and C customers.

So what we are hoping right now is that we could offer loan products with interests -- with annual interest rates from 10% to 18% so that we can cover more customers, more borrowers.

That's my answer to your question.

(Operator Instructions) The next comes from Neil Gagnon of Gagnon Securities.

Yes.

Can you give us your review on this quarter?

How did it live up to your expectations?

And what base does it set for your expectations for the second half?

[Interpreted] First of all, we are seeing sufficient huge demand for the whole year.

So from -- based on our internal record, the application every month is well over RMB 2 billion.

However, we could only facilitate around RMB 1 billion every month.

So there is a 50% gap in between the demand and supply.

And since last year, we have seen a consistently increase of property price in China.

The increase was even over 30% in some major cities in China.

So those 2 factors lead us to believe that there is going to be huge demand in the remaining of the year, in the second half of the year.

But there are 2 considerations.

First of all is to secure enough -- secure access to enough funding.

And the second thing is that starting from this June, we have seen a tightened regulations on the property price as well.

So we tend to be more conservative when doing businesses in those cities where the property price is considered to be too high.

But after all, we are still very confident to reach our set goal from the beginning of the year, to reach RMB 10 billion in outstanding loan principal by the end of the year.

Actually, we have already reached that goal at the end of the second quarter.

So we are working on refining our business at this moment.

That's our priority.

This concludes our question-and-answer session.

I would like to turn the conference back over to Ms. [Jun Jei] for any closing remarks.

This will conclude the conference call today.

If you have any further questions, please reach us at ir.cashchina.cn.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation, and you may now disconnect.

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