CNFinance Holdings Ltd (CNF) 2020 Q2 法說會逐字稿

Good morning and evening, and welcome to the CNFinance 2Q 2020 Financial Results Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

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

Good morning, and good evening, and welcome to CNFinance Second Quarter and First Half of 2020 Financial Results Conference Call. Before this call, our financial results has been distributed through PR Newswire and CNFinance official website. 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 Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements. Such statements can be based -- are based on management's current expectations and current market and operating conditions and related to events that involve known and 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.

[Interpreted] Thank you all and thank you for taking the time to join this conference call. During today's call, I would like to discuss the business operation of CNF in the second quarter of 2020. We will also share with you the opportunities brought up during the COVID-19 recovery and the corresponding decisions made by the company. After all that, I will take your questions with our CFO.

In the second quarter of 2020, as China's economy recovered from COVID-19, our major operational and financial indicators have improved as compared to the first quarter. Loan origination volume this quarter increased by 51% to RMB 1.9 billion, we recorded a provision for quarter losses of RMB 57 million in accordance with U.S. GAAP. As a result, we were able to turn first quarter's loss into profit with a net income of RMB 25 million. We also maintained a recovery rate of 103% for NPL disposal. By the end of this quarter, the total number of client sales partners has reached 1,500, 840 of which have facilitated loans.

As our discussion in last quarter, the company implemented multiple measures immediately after the outbreak of COVID-19. First, to ensure the company's operations to the greatest extent. We took advantage of our IT infrastructure and moved majority of our business procedures online. Second, after thoroughly communicated with our trust company partners, we adjusted the qualifying criteria of the prospective borrowers, the LTV ratio as well as the risk assessment procedures based on the actual situation. And last, we have accelerated the disposal of non-performing assets and maintained a healthy liquidity.

These measures ensure our smooth transition through the pandemic, however, in the COVID-19 recovery period, we are also facing other challenges. On August 20, a revised regulation on interest rates was made public by the Supreme People's Court. The Supreme People's Court ordered a cap of private lending interest rates to be set at 4x China's 1-year loan prime rate. The cap is about 15.4% based on the latest LPR rates of 3.85%, representing a huge drop from the legal protected interest rates of 24% before the new regulation.

This new regulation materially affected almost every participant in the private lending business including consumer loans, business operation loans, online P2P loans and loan referral services. As CNF collaborates with licensed financial institutions to facilitate loans, we will honor our leading role in the industry and adjust our products to make it compliant with the revised regulations.

It is a big challenge to CNF. Our customers, sales partners and trust company partners are all affected by the change of regulation. Our short-term interest income is expected to be materially impacted due to the reduced interest rates. It is likely that our disposal of NPLs will be affected as well. We may also experience higher delinquency rates caused by intentional late payments during the time.

We have dedicated a team to provide a more detailed read on the new regulations based on which we will make consistent operating adjustments. Our mission remains unchanged, to provide accessible, adorable, affordable -- sorry, affordable and efficient financing solutions to micro and small-enterprise owners in China. We support the court order as it would help reduce the financing cost of MSEs. We also keep our communication with sales partners and trust company partners to set up visible plans to comply with the new regulations and to minimize our losses. Our goal is to maintain the same interest rate for our operations even an after the revision.

As we are facing this challenge, we believe it is also a good opportunity to test our business model and management ability. In order to capture this opportunity, we have made the following strategies.

We will focus on originating home equity loans for MSE's business operating purposes. Home equity loans are highly resistant even when the borrower's ability to service that is deteriorated. In adverse case scenario, we are still able to reduce loans by disposing the collaterals. For example, during the pandemic with both delinquency and NPL rates increasing, our actual loss remained in 0 and achieved an overall recovery rate of 103%.

Also, a majority of loan for business operating allowed us to engage with customers with solid business operations, which essentially generates strong cash flow to service their debt. In addition, Chinese government has devoted massive resources to ensure MSE stability and prosperity due to its importance in Chinese economy. We believe our tailor-made loan service for MSE owners are in line with government's intentions.

We will continue to promote and expand the collaboration model. As a result of upgrading our business to a collaboration model in 2019, we were able to cut costs in employee compensations and office-based rentals. At the same time, with the CRMP mechanism, the company and its sales partners share profits and bear risks altogether.

The mechanism of the collaboration model enabled us to mitigate risks and maintain a stable operation when the market conditions deteriorates. During the unexpected outbreak of COVID-19 and a change of regulation that caused efficient and risk controllable nature of our model provided a solid infrastructure to consistently scale up in loan origination volumes and likely to bring an increasing ROE in the future.

We will continue to promote and expand the collaboration model and keep upgrading the service system for sales partners. The recent new regulation will further consolidate the industry. As the leader of home equity loan industry, we will invite and cherry-pick the qualified loan facilitators to join our platform and together capture larger market share.

In an effort to realize the potential of those sales partners who are highly qualified while keeping risk under control, we will customize service plans, analyze feasibility of lowering the portions of CRMP and appoint specialized service personnel to assist them throughout the loan origination process.

We will broaden financing process to reduce financing costs. We will continue to negotiate with our existing trust partners, further optimize the repayment method and better manage our cash on both all in an effort to benefit MSE owners.

Also, the management believes that property-related ABS and ABM products in China are now on the verge of being developed. We are well positioned to launch our own asset-backed products with a huge collection of collateral assets we hold. The company will collaborate with our trust partners to carry forward the plan of asset securitization.

We will leverage science and technology to empower our home equity loan business. It is our improved IT systems which enable the company to complete major business procedures online during the pandemic. We believe that technology not only protects the company from unexpected challenges, but also provides strong amendment to make operations more efficient and drive down operating costs and ultimately contribute to the escalating growth of the collaboration model.

To sum up, it is always our mission to provide financing solutions to MSE owners. We will use technology as driving force to achieve higher efficiency. With the collaboration model as the strong foundation, we are aiming to scale up the loan origination volume and reduce the overall financing costs in the long term. Our ultimate goal is to improve the ROE and maximize return to shareholders.

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

Thanks, Ms. [Jane]. Thanks again to everyone joining us today. I will walk you through our second quarter and the first half of 2020 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. We will go through the figures for second quarter of 2020 first, followed by that for the first half.

As of June 30, 2020, total outstanding loan principles decreased to RMB 9.8 billion compared to RMB 11.3 billion as of December 31, 2019.

Total loan origination volume was RMB 1,883 million compared to RMB 1,667 million in the same period of 2019. Interest and financing service fee on loans was RMB 450 million, a decrease of 44%, primarily due to a decrease in the total outstanding loan amount. Such decrease was caused by the smaller loan origination volume as compared to the amount of loans repaid or collected in the second quarter of 2020, given the slower economic growth under the COVID-19 pandemic as well as the company's focus on ensuring loan quality over loan growth since the adoption of the collaboration model.

Interest expenses was RMB 187 million compared to RMB 369 million, primarily due to the decrease in the principles of the borrowings and the agreement to repurchase our other borrowings. Collaboration cost for sales partners increased to RMB 104 million for the second quarter of 2020 compared to RMB 32 million in the second quarter of 2019, primarily due to the development of the new collaboration model.

Provision for credit losses was RMB 57 million, a decrease of 40% from RMB 95 million in the same period of 2019. Total operating expenses were RMB 114 million, a decrease of 3% compared with RMB 118 million in the same period of 2019.

Income tax expenses was RMB 16 million, a decrease from RMB 56 million in the same period of 2019. Net income was RMB 25 million, a decrease of 84% from RMB 161 million in the same period of 2019.

Now we are moving on to our financials for the first half of 2020. Total loan origination volume was RMB 3,050 million compared to RMB 2,665 million in the same period of 2019. Interest and financing service fee on loans was RMB 939 million, a decrease of 44%, primarily due to a decrease in the total outstanding loan amount. Such decrease was caused by the smaller loan origination volume as compared to the amount of the loans repaid or collected in the second quarter of 2020, giving us lower economic growth under the COVID-19 pandemic as well as the company's focus on ensuring loan quality over loan growth since the adoption of the collaboration model.

Interest expenses was RMB 388 million compared to RMB 778 million in the same period of 2019, primarily due to the decrease in the principals of the borrowings under agreements to repurchase our other borrowings. Collaboration cost for sales partners increased to RMB 198 million for the first half of 2020 compared to RMB 41 million in the same period of 2019, primarily due to the developments of the new collaboration model.

Provision for credit losses was RMB 277 million, an increase of 3% from RMB 268 million in the same period of 2019, primarily attributable to the combined effect of: first, the impact of the new current expected credit loss, loss model that took into the account of deterioration in the economic outlook caused by the COVID-19 pandemic; and the second, an increase in the amount of NPLs, namely the loans being delinquent for over 90 days as a result of the inefficient legal proceedings under the COVID-19 pandemic.

Total operating expenses were RMB 215 million, a decrease of 16% compared with RMB 255 million in the same period of 2019. Income tax expenses was RMB 1 million, a decrease from RMB 101 million in the same period of 2019, primarily due to a decrease in taxable income in the first half of 2020.

Net loss was RMB 41 million, a decrease of RMB 114 million -- 14%, sorry, from a net income of RMB 296 million in the same period of 2019. As of June 30, 2020, the company had cash and cash equivalents of RMB 1.9 billion compared with RMB 1.7 billion as of December 31, 2019. The aggregate delinquency rate for loans originated by the company, which represents total balance of outstanding loan principal for 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 6.4% as of June 30, 2020.

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

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

Can you talk more about the sales partners? Are you seeing a lot of demand, given the current economic environment, are you seeing -- are they seeing a lot of demand for loans? And then looking forward with the new interest rate, it seems like their fees are going to get cut quite a bit. I mean how are they feeling about the change in what I imagine is going to be a pretty big cut to their fees?

[Interpreted] I will answer the question. First, from our second quarter financial status. On the matter from the outstanding loan principal, by the second quarter, we see a great reduce compared with the first quarter. We can see in the (foreign language) for now. And we've been promoting our new model for 1.5 years for now. And it starts to show its advantage at this stage.

I think from what we are seeing right now, the compatibility from our sales partners to the new collaboration model is increasing for right now. So for your first question, I think the new model is pretty well recognized by the sales partner and the market at the same time.

About your second question regarding the Supreme People's Court order of cutting interest. As our CEO, Mr. Zhai introduced in his statement earlier today, this is -- this will bring material effect to every participant in the market from these 2 perspectives. So there have been rumors like this going on in the market for a long time. But there are 2 parts we haven't really expected earlier. The first one is how much -- by how much the interest rate has been cut. And the second one is how immediate it was to be effective. So no matter to us or to our sales partners is a huge rush.

Since -- like I have introduced, there was rumor going on in the market for a long time, we have been adjusting our products since the beginning of the year. So in our product structure for right now, the loans with shorter tenure has taken more and more percentages. 40% of our outstanding loans right now are those of tenures shorter than 1 year. So comparing to those long tenure products, shorter tenure loans usually bear lower interest for the customers. Also, our financing costs, the funding cost we are getting from trust companies are also lower.

So if we and our sales partners bear this interest rate cut together, we all lower a little bit of our risk. It won't be that huge of an influence. But we will still have to keep communicating with every sales partner as well as see how the market reacts to this regulation change. So as I have mentioned, we think our loan origination in August and September will be mostly -- will be more severely impacted by this rate cut. That's the answer to your 2 questions.

Okay. So to clarify, you guys are -- are you expecting to see lower rates from the trust partners on either the short term and the long term because of this? Or are you and the sales partners solely going to take the hit on this cut in rates?

[Interpreted] Okay. First, to clarify, for right now, our loan product with shorter tenure is already about 2% lower than that of longer tenure products. So to see in the long run, since we have to comply with the new regulation to cut our interest rate as well, we think it will be our only choice to reduce our financing costs in the future by negotiating with trust company partners. And I think by optimizing our customers' quality, it is possible in the future to reduce our financing cost.

And as of reducing fees and reducing the interest we charge for our customers, I think it will have to be bear by both parties, us and the sales partners together.

I think our option, we will have to be optimizing our services to the sales partners to make it up for the part of -- as part of increase their earnings. Does that answer your question?

Yes, thank you.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to [Jane] for any closing comments.

That would be all for today's call. Thank you for joining us. If you have any further questions, please feel free to contact our IR service at ir@cashchina.cn (sic) [ir.cashchina.cn]. Thank You.

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

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