CNFinance Holdings Ltd (CNF) 2020 Q4 法說會逐字稿

Good day, and welcome to the CNFinance Report for the Fourth Quarter and Fiscal Year of 2020 Financial Results Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to [Jane Jiane]. Please go ahead.

Good morning, and good evening, and welcome to CNFinance Fourth Quarter and Fiscal Year 2020 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 CFO, Mr. 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 the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as view, expects, anticipates, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectation and current markets 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 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] In our call today, we would like to report on the business operations, business development and financial results in the fourth quarter and fiscal year of 2020. During the year, the outbreak of COVID-19 presented both challenges and opportunities to our business. However, CNFinance was able to maintain operation and continue to create value to our shareholders while ensuring the health and safety of our employees, partners and clients. Later, we will answer your questions.

During the fourth quarter, we facilitated loans amounted RMB 2.7 billion, representing an increase of 35% from the same period of 2019. The revenue and net income were RMB 420 million and RMB 105 million, respectively, during the quarter. For the fiscal year of 2020, we facilitated loans amounted RMB 8.8 billion, representing an increase of 40% as compared to 2019. We recorded revenue of RMB 1.84 billion and a net income of RMB 115 million. This result a strong proof of the effectiveness and efficiency of the collaboration model, and they also further increase our confidence in growing this model in the future.

2020 was a special year. It was the second year of our transformation to the collaboration model. Since 2019, we have started smooth transition from the old model to the current collaboration model. In 2020, we refined the collaboration model, which proved its capability to overcome obstacles brought up by the changing environment of business.

At the beginning of 2020, COVID-19 spread throughout China and later the entire global. China's national production and business operation during February and March was halted. As a result, we hardly facilitated any loans during that 2 months. Our delinquency ratio also increased drastically in the first quarter. At that moment, we endured pressure. We were also fortunate to benefit from the advantages of our collaboration model implemented in 2019.

Under the pressure, we quickly responded and initiated communications with sales partners as well as trust company partners to develop action plans. We implemented modifications to improve product terms, loan approval process and post-loan management, all in an effort to provide financing services to meet MSE owners most urgent needs.

After a whole year of adjustment into the collaboration model, in 2019, we were able to cut down first costs drastically. The collaboration model also made us resilient when facing unexpected difficulties since we share profits and bear risks with our sales partner. We were able to keep 100 recovery rates -- 100% recovery rates when we experienced the rise of delinquency and NPLs.

In the second half of 2020, the government ordered financial institutions to lower financing cost to the economy. Subsequently, our industry took another hit from the new order of the Supreme People's Court on interest rates. As we collaborate with licensed trust companies, we are not subject to this new court order. However, we proactively communicated with our funding partners and sales partners and reduced the interest rate of our loan products to follow the court order.

This decision present us with both challenges and opportunities. The reduced interest rate impacted our interest income. It also created problems in disposing NPLs. In response to these issues, we started negotiations with trust company partners and sales partners in order to assure profit margins for all 3 parties and will still apply to the court's order.

If when the adjusted profit margin became lower for all parties, the increasing demand for our loan products help boost the original volume in third and fourth quarter of the year. The loan origination volume doubled in the second half of the year as compared to the first half and was 57% higher than the same period in 2019. In 2021, we believe that the interest rate on our products will gradually recover to a higher rate but still comply to the regulations.

In November, the government rolled out regulations to limit the scale of nonstandard products issued by the trust companies. In order to satisfy the massive demand of prospective borrowers, we proactively started collaboration with new financial institutions such as Hunan Trust and (inaudible) Bank. These new collaborations not only provide us sufficient funds but also strengthens the trust between the sales partners and our platform with sufficient funding. Our financing service continued to meet the most urgent needs of the MSE owners.

During 2020, we have overcome many challenges and facilitated loans amounted RMB 88 billion, representing 40% increase from the year before. Our collaboration model and new loan products were also approved by the market. Also, in 2020, the number of contracted sales partners grew to 1,700 from 1,300, representing an increase of 31%. From our experience in 2020, collaboration model has proved its efficiency and effectiveness. CNF is more confident to further build our business under this model.

Report on the work of government in 2021 has addressed on continuity in providing financial solutions to MSEs, and this decision is effectively what CNF has been dedicated to. In 2021, in order to better service our customers and sales partners and reach our set goal of exceeding RMB 10 billion in outstanding loans under collaboration model, we will invest more on technology and focus on refining our operations.

Our plans are: First, we rollout diversified products. Based on the borrowers' credit reports, we will match them with financial institutions with different risk preferences. Other than our current trust loan products, we plan to introduce new trust loan products with interest rates ranging from 20% to 22% for Class C customers, implying they have poorer credit compared with Class A and B applicants. We also plan to cooperate with large banks to decide loan products with interest rate of more than 10% for Class A customers.

Second, we will provide tailor-made terms with our sales partners based on the volume and quality of assets they introduce to our business. These new adjustments will incentivize them to achieve even higher efficiencies in our model. CNF also expect to capture a bigger market share in our industry.

Third, we will refine the platform operation. We will empower our business through technology, including a smarter and faster approval procedure, data integration, process utilization and other technological means in order to provide timely service in every business process.

We will also improve the service quality and efficiency of the document signing and post-loan management. We believe that after driving through the challenging 2020, the company will continue to improve itself and sees every opportunity to create higher value for shareholders in 2021.

Now I'd like to hand the call over to our CFO, Mr. Li Ning, who will walk you through the financial results of fourth quarter and fiscal year of 2020.

Thanks, Mr. Zhai, and thanks again to everyone for joining us today. I will walk you through our fourth quarter of 2020 financials followed by later our fiscal year of 2020. Briefly, 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 business. Also, unless otherwise stated, all numbers I'm going to give will be in RMB.

Total outstanding loan principal was CNY 9.7 billion as of December 31, 2020, as compared to CNY 11.3 billion as of December 31, 2019. Total loan origination volume was CNY 2.7 billion during the fourth quarter of 2020, representing an increase of 35% from CNY 2 billion. Interest and financing service fees on loans decreased by 29.5% to CNY 417.1 million for the fourth quarter of 2020 as compared to CNY 591.8 million, primarily due to the combined effect of the first, the decrease in the balance of average daily outstanding loan principal; and the second, the lower interest rate on loans facilitated in an effort to comply with recent rules and regulations issued by the relevant PRC regulatory authorities, including the decisions of the Supreme People's Court to amend the provisions on several issues concerning the application of law in the trial of private lending cases issued in August 2020.

Interest and fees expenses decreased by 32.7% to CNY 159.3 million for the fourth quarter of 2020 as compared to CNY 236.8 million, primarily due to the decrease in the principal of the borrowings under agreement to repurchase and other borrowings. Collaboration cost for sales partners representing sales incentives paid to sales partners increased to CNY 104.4 million for the fourth quarter of 2020 as compared to CNY 75.8 million, primarily due to the increase in average daily outstanding loan principal under the tabulation model since December 2018.

Provision for credit losses decreased by 171.6% and recorded a reversal of CNY 28.5 million for the fourth quarter of 2020 as compared to the provision of CNY 39.8 million for the same period of 2019. The increase -- the decrease was mainly attributable to the combined effect of the, first, the decrease in loan balance; and second, the increase in outstanding loan principal under the collaboration model that was guaranteed by credit risk mitigation position bought up by the sales partners; and third, the current expected credit loss model adopted since 2020 took into account the containment of COVID-19 pandemic, which led to the positive overlook of economy growth in China as compared to the same period of 2019.

Total operating expenses decreased by 31% to CNY 112.6 million for the fourth quarter of 2020 compared with CNY 163.1 million. Income tax expenses increased by 4.8% to CNY 24.2 million for the fourth quarter of 2020 as compared to CNY 23.1 million, primarily due to the increase in taxable income for the fourth quarter of 2020. Net income increased by 72.6% to CNY 105.3 million for the fourth quarter of 2020 as compared to CNY 61 million.

Now let's move on to the financials of 2020 as a whole. Total loan origination volume was CNY 8.8 billion during the fiscal year of 2020, representing an increase of a 39.7% from CNY 6.3 billion in 2019. Interest and financing service fees on loans decreased by 38.1% to CNY 1,828.7 million for the fiscal year of 2020 as compared to CNY 2,953.5 million for the same period of 2019, primarily due to the combined effect of the: first, the decrease in the balance of average daily outstanding loan principal; and the second, the lower interest rate on loans facilitated in an effort to comply with recent rules and regulations issued by relevant PRC regulatory authorities, including the decisions of the Supreme People's Court to amend the provision on several issues concerning the application of law in the trial of private lending cases issued in August 2020.

Interest and fee expenses decreased by 44.2% to CNY 731.3 million for the fiscal year of 2020 as compared to CNY 1,309.8 million for the same period of 2019, primarily due to the decrease in the principal of the borrowings under agreement to repurchase and other borrowings. Collaboration cost for sales partners representing sales incentives paid to sales partners increased to CNY 415.1 million for the fiscal year of 2020 as compared to CNY 174 million for the same period of 2019, primarily due to the increase in average daily of outstanding loan principal under the collaboration model as compared to the same period of 2019.

Provision for credit losses decreased by 22.8% to CNY 280 million for the fiscal year of 2020 as compared to CNY 362.8 million for the same period of 2019. The decrease was mainly attributable to the combined effect of the: first, the decrease in loan balance; the second, 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 the third, the current expected credit loss model adopted since 2020 took into account the overlook of the economy growth in China impacted by the COVID-19 pandemic.

Total operating expenses decreased by 16.1% to CNY 445.3 million for the fiscal year of 2020 as compared to CNY 531 million for the same period of 2019. Income tax expenses decreased by 74.4% to CNY 47.8 million for the fiscal year of 2020 as compared to CNY 186.4 million for the same period of 2019, primarily due to the decrease in the amount of taxable income. Net income decreased by 78.5% to CNY 114.9 million for the fiscal year of 2020 as compared to CNY 534.6 million for the same period of 2019.

As of December 31, 2020, the company held cash and cash equivalent of CNY 2 billion compared with CNY 1.7 billion as of December 31, 2019. The aggregate delinquency rate for loans originated by the company, which is calculated by dividing the total balance of outstanding loan principal for which any installment payment is past-due for 1 or more days as of a particular date by the aggregate total amount of loans we originated since 2014 increased from 5.4% as of December 31, 2019, to 5.7% as of December 31, 2020. The actual delinquency rate for loans originated by the company increased from 17.1% as of December 31, 2019, to 22.6% as of December 31, 2020.

With that, I would like to open the Q&A session.

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

Couple of questions. With the -- you mentioned the new products for Class A, B and C applicants. Do you have an estimate of kind of what kind of split each of those 3 categories are going to make going forward?

[Interpreted] The products we have right now are more similar to those so-called Class B products. In the foreseeable future, say, 2021, I think the current products are still going to be our main products. As we still collaborate with trust companies to roll out the product for Class C customers, I think that's going to be easier to roll out, and we are hoping to roll that out in the second quarter of 2021.

Also, since those products for Class C customers, I mentioned before, also involve the problems with collaborating with sales partners, we will have to say if the sales partners are willing to accept those kind of new products. So as long as we are concerning the 2021, I think we are still going to use the products for Class B customers as the main product and product for Class C customers as supplement, not really going to push out any product for Class A customers in the near future as 2021 since the product for Class A customer is going to be a brand-new product.

The target customer group is going to be a little different from what we are having right now. So it's brand new to the company. It's going to be a new journey. We are starting the negotiation process with the banks in the second quarter and with the hope to start to roll out the product for Class A customers in about 0.5 year with scale.

As I mentioned earlier, because the target customer groups are different, so we don't really think it's going to make up a large percentage of our products in the -- in 2021. More -- it's more like a -- to build a solid foundation for our future development. That's my answer to your question.

Okay. All right. Great. The -- do you think the level of interest for the sales partners will increase with the -- you mentioned a tiered offering. Do you think that will make the existing sales partners more active and possibly bring in new sales partners onto the platform?

[Interpreted] My answer is simple yes. I will illustrate in the following aspects. First, as I mentioned, as we are pushing out products to satisfy different classes of customers, it gives the sales partners more choices. Second, as we are refining our platform, I think we're going to be able to provide them with better services. And as we are refining our services, I think it will be possible also to transform, say, a customer from Class B to Class A. And I think that's going to expand our customer base as well. And I hope that answers your question.

Okay. And then last question is it seems like the average loan size has been going up over the course of 2020. Do you think that will continue on into 2021?

[Interpreted] We believe the average ticket size is going to be maintained in a rather steady level. And in 2020, even though we've been through the COVID-19 pandemic, the overall property price in China was still rising a little bit slightly. Because we're holding a very stringent cape of LTV to the 70% of the collateral value, as the market price of the property goes up, our average ticket size also goes up.

Besides, as the loans we facilitated scattered across the cities, this city may take a different percentage of the -- of our total -- of our whole picture. Once that changed, it's going to influence the average LTV ratio as well. But just, all in all, the LTV didn't really change that much and so does the average ticket size.

(Operator Instructions) The next question is from Neil Gagnon from Gagnon Securities.

First of all, let me congratulate you on getting through 2020. You did it very well, and all of your teams is to be congratulated. My first question is management thinking about balancing growth and profitability, given that it seems as if you have almost unlimited opportunity if you want to go after. So what's the balance between? How fast you want to grow? And what kind of profitability you'd like to achieve?

[Interpreted] We have been through the fluctuations in the market conditions during the year. As I mentioned earlier, one of the fluctuations was the COVID-19 pandemic. We also experienced the Supreme People's Court order to limit the cap of private lendings. And the interest we charge our customers make up the main percentage of our revenues. And our profit margin is mainly made up by our -- the interest difference between what we charge the customers and what we pay to the trust companies.

And the sales partners, mainly their revenue is made up by the interest we charge our customers and the interest we charge them. So in the past year, first, the income of our prospective customers has dropped as compared to past years. However, to respond to the fluctuation of the market, we also adjusted our profits with our sales partners. For example, once the overall interest we can charge a customer drops, it's not only beared by us, but rather by the joint party of us and the sales partners. So the incentive we paid to the sales partners are usually not as sensitive as what we charge from the borrowers. When there is a change, it's usually smaller.

After a whole year of adjustment, I think the profit split we are having with our sales partners right now has reached a rather steady level. So based on that, I don't think the scale-up is really conflict with remaining the profitability, but rather it's a leaner So our main focus in future is to get a more economic financing cost from the trust company partners. So I think that will be the main driver of our profitability. So if we can get the financing cost to be stable, our profit margin will stay rather stable as well. I hope that answers your question.

Yes, it does. That was a very good explanation. If you achieve those kinds of levels, of course, there are no guarantees in life. But if you achieve them, what is the thinking about beginning to share some of the profitability with your shareholders in the form of a cash dividend?

[Interpreted] That's always in our daily schedule of consideration. But we will also mutually consider our revenue, profitability, liquidity before we put that into the Board meetings for discussion.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to [Jane Jiane] for any closing remarks.

That should be all Thank you for joining us. If you have any further questions, please feel free to contact us at ir@presschina.cn. 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.]