CNFinance Holdings Ltd (CNF) 2020 Q3 法說會逐字稿

Good day, and welcome to the CNFinance Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Matthew Lou. Please go ahead, sir.

[Interpreted] Thank you. Thank you. Good morning and evening -- good morning and evening, and welcome to the CNFinance Third Quarter of 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 section.

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 will, expects, anticipates, future, intends, plans, believes, estimates, targets, 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 statements 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 all for joining this conference call today. On today's call, I will introduce the operation and financial results of CNFinance during the third quarter. We will also introduce the new challenges and opportunities present in this quarter. And last, I will take your questions with our CFO.

During the third quarter of 2020, the company witnessed recovery in major operating and financial indicators by collaborating with multiple trusts formally, with facility loans of RMB 3,093 million, representing an increase of 64% from the last quarter. We recorded a net income of approximately RMB 50 million, representing an increase of 99% from the last quarter.

The recovery in operating and financial results are mainly attributable to the following reasons. Firstly, China has successfully contained the COVID-19 pandemic. As a result, national consumption and production have recovered. Micro and small enterprises across the country have started to operate in full capacity. GDP in this quarter was also the highest of the year. As I have introduced in the past 2 quarters, based on the management's estimations, MSE owners would have resurge of demand for capital when they resume operations and our example of multiple and efficient loan products will well serve their time-sensitive financing needs. Such judgment was very well proved by the high loan origination volume in the third quarter.

Secondly, the collaboration model has gone into play to its competitive advantage. The first advantage of the collaboration model is that it ensures a compliance to regulation. We have always been collaborating with well-established and licensed trusts only. The leverage ratio of our joint established trust plan is finally compliant with the regulation. On August 20, the Supreme People's Court has issued a new order to set the cap of private lending interest rate at 4x LPR as we collaborate with licensed trust companies. We are not subject to this new regulation. However, after dedicating the team to provide more detailed read on the new regulation, we have actually communicated with our trust fund partners and sales partner, and we decided to support the court’s order that benefits MSE owners by voluntarily reducing the interest rate of our loan product. As soon as August 23rd, we successfully rolled out our loan product that is within the interest rate cap of this new regulation.

Another advantage of the collaboration model is its efficiency and flexibility. In 2020, the collaboration model has overcome 2 major challenges. When the industry was facing the deterioration caused by the COVID-19 in the first half of the year, we are able to keep both operating costs and risks low. When the market start to recover rapidly in the third quarter, sales partner under collaboration model responds quickly to the market demand and captured the opportunity to expand market condition and growth.

During the quarter, we have held our trust company partner facility loans amounting RMB 3.1 billion, representing an increase of 64% from the last quarter. This quarter has seen high risk in loan origination volume since the launch of the collaboration model.

I also want to point out since the third quarter, we have been facing 2 major regulatory challenges. One is the regulation to limit the scale of nonstandard products issued by the trust company. And the other one is the new cap on interest rate of private lending.

Firstly, we are seeing regulator suppressing the total loan size of trust companies. This may cause a higher funding cost to our business, which might negatively affect our growth and raise difficulty of further reducing the funding cost. However, CNF will try to start to collaborate with more trust companies to avoid such possibilities.

Secondly, our profit margin is lower after we voluntarily reduced the interest rate of loans facilitate. In response to that, we will consistently be working on reducing financing costs while optimizing the efficiency of our operations.

Thirdly and most importantly, since CNF is sharing profit and bearing risk together with the sales partner in our collaboration model, we have also adjusted profit split with sales partner and the trust company partners to assume their profitability.

Fortunately, this challenge also present along with opportunities to us. After this quarter in which new regulation were published infrequently, we were pleased to find our model and product being well received by the market. During the quarter, number of client sales partners has reached 1,617 compared with 15,000 of last quarter -- 1,500 of last quarter, while the number of sales partners who have facility loans have reached 1,020 compared with 814 of last quarter, representing an increase of 11% and 21%, respectively.

On the other hand, even the profit margin after interest rate adjust is lower for CNF, sales partner and trust companies, the huge demand for our new loan product has helped boost the loan origination volume during the quarter by 40 -- 64% to RMB 3.1 billion from RMB 1.8 billion in Q2. We are keeping monitoring the implementation and development of this high court order. When opportunity shows, we might talk to our sales partner and trust partners to readjust the interest rate of our product on the premise of being fully compliant.

The result of third quarter has shown our response to the new regulation. Our interest rates are timely and effective. We believe that this new regulation will bring another consolidation to the industry. Unqualified participants with poor cost control will be gradually ruled out. However, to CNFinance, we believe it will be our great chance to increase market share.

Facing the future, we are aware that the era of extensive growth for loan industry is over. It is time for an industry leader to consolidate the market. To maintain our lending growth in the next decade, we will focus on scaling and detail-orient practice.

In terms of operating with a bigger scale, our advantage is that the collaboration model has already been well received. The service sector for sales partner are well established at the moment, and we have been consistently looking for more economical funding sources. Our future focus is to continue upgrading the service [system] and launching our profit split with sales partners in order to invite more qualified loans facilitated to join our platform and capture larger market share with our partners.

At the same time, another strategic focus is to push our diversified products to serve the needs of customers. Our plan is to discover more specific demand of our prospective customers by analyzing the existing customers to better match the needs of new customers with different types of financial institutions and enhance our role of the leading service provider in the home equity loan industry.

The detail-orient practice means achieving higher efficiency with lower costs. To achieve that, we plan to invite -- invest more on technology to enhance our capacity of system management and data analysis. The ultimate goal is to improve the efficiency of the whole business procedure, from receiving loan applications, reviewing materials, to facilitating and disposing of loans. At the same time, we will also work on broadening our funding resources such as launching our own ABS products to reduce funding costs.

2020 is a special year. Like many other financing enterprise, CNFinance has experienced significant disruption to its operations. Due to the COVID-19 pandemic, China's new regulation on trust companies’ nonstandard products and private lending have also adversely affect our business.

Fortunately, our resilient and dedicated teams have worked closely together to overcome those challenges. We were able to improve our governance while cooperating with trust company partners to make necessary adjustments. We were also able to make timely response to the new regulation on private lending interest rates. Just as our President, Xi Jinping, once said, counting new opportunities in crisis significantly starts in (inaudible). CNF is competent and capable, as always, to keep refining itself and seize every opportunity. We will carry forward the momentum from a good third quarter, continuously achieve new growth that ultimately increase our shareholders' return.

Now I would like to hand the call over to our CFO, Mr. Li Ning, who will walk you through the financial results of third quarter 2020. Thank you.

Okay. Thanks, Zhai Bin, and thanks again for everyone for joining us today. I will walk you through our third quarter of 2020 financials.

Briefly, year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentages I'm going to give will be on that basis. Also, all numbers I'm going to give will be in renminbi.

As of September 30, 2020, total outstanding loan principal decreased to RMB 10.4 billion compared to RMB 11.3 billion as of December 31, 2019. Total loan origination volume was RMB 3,093 million compared to RMB 1,709 million in the same period of 2019. Interest and financing service fee on loans was RMB 473 million, a decrease of 30%, primarily due to the combined effect of: first, the decrease in the balance of average daily outstanding loan principal. Such decrease was the result of smaller loan origination volume as compared to the amount of loan repaid or collected since the third quarter of 2019; and second, the lower interest rate on loans facilitated after the publish of new regulation on private lending interest rates on August 20, 2020.

Interest expenses was RMB 184 million compared to RMB 295 million, primarily due to the decrease in the principals of the borrowing under agreement to repurchase and other borrowings.

Collaboration cost for sales partners increased to RMB 113 million for the third quarter of 2020 compared to RMB 57 million, primarily due to the increase of outstanding loan principal under the new collaboration model as compared to the same period of 2019. Provision for credit losses was RMB 31 million, a decrease of about 43% from RMB 55 million in the same period of 2019. The decrease was mainly attributable to the combined effect of: the first, the decrease in outstanding principal of nondelinquent loans and loans delinquent within 90 days, which resulted in a decrease in collectively assessed allowance; and the second, the increase in credit risk mitigation position put up by the sales partners, which led to larger amount of guarantee assets recognized compared to the same period of 2019.

Total operating expenses were RMB 118 million, an increase of 5% compared with RMB 113 million in the same period of 2019. It's primarily due to the combined effect of: the first, the increase in share-based compensation expenses related to the new option was grant on December 31, 2019; and the second, the decrease on employee expense and operating lease costs.

Income tax expenses were RMB 25 million, a decrease of 60% from RMB 62 million in the same period of 2019, primarily due to a decrease in the amount of taxable income.

Net income was about RMB 50 million, a decrease of 72% from RMB 177 million in the same period of 2019.

As of September 30, 2020, the company had cash and cash equivalents of RMB 1.7 billion, which remained the same as of December 31, 2019. The aggregate delinquency rate for loans originated by the company, which represents total balance of outstanding loan principal, of which any installment payment is past due, as a percentage of the aggregate total amount of loans we originated since 2014, slightly increased from 5.4% as of December 31, 2019 to about 5.6% as of September 30, 2020.

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

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

Were all the loans changed after the regulation or just the new issuances?

[Interpreted] I will answer your question. We haven't done any adjustments to loans facilitated previous to the publish of the new order, which is on August 20.

As for the loans we facilitated after the new order came out, we have strictly controlled the interest rate under its order, which is around 15.4% annually.

And we have been communicating and monitoring the reactions and implementations of the new rules and monitoring different regulators and the markets. Based on the information we get from the regulators and related authorities, our -- we have came to -- their opinion is that this new rule only apply to private lenders and unlicensed lenders, not for institutional lenders, which means that the licensed institutional lenders such as banks, trusts are not subject to this new order.

So as I have introduced, all the loans we facilitate are collaborated with trust companies. Thus, we consider ourselves as licensed and institutional lenders, too. So we don’t think we’re subject to this new order.

So for -- in the coming months, we might readjust our interest rate to products with a longer tenure, but not by too much. We won't exceed 18% annually for any products we facilitate. We will take actions gradually in the coming months, and then it will appear on our financial result as well.

Okay. Great. And then what was the average loan size and loan duration in the quarter?

(foreign language)

[Interpreted] And there are a couple of factors in the coming -- I mean in the fourth quarter. The first thing is the national holiday of China. This may have an adverse effect on the loan origination in our business. But based on our experience in the past, the first quarter tends to be one of the best quarters in the year. So with these 2 factors offsetting each other, we still have, I think, the results of the fourth quarter will be positive.

In terms of average ticket size, we don't expect it to be too much different than as usual. But since the regulators are now asking the trust companies to be more actively managing trust products, I think the time period for us to facilitate loans will be longer than before. And based on our results from first quarter to the third quarter, we are mainly focusing on facilitating 1-year loans. And as I introduced just now, if we are to readdress the cap of the loan -- of the interest rate on the loans we facilitate, we might shift our focus back to the 3-year loans in the November and December.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Lou for closing remarks. Please go ahead, sir.

That will be all for today. Thank you for joining us. If you have any further questions, please feel free to contact our IR services 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.]