CNFinance Holdings Ltd (CNF) 2022 Q1 法說會逐字稿

Hello, and welcome to the CNFinance Announces First Quarter 2022 Unaudited Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. [Jane Jenn], Financial Manager of the Capital Market Department. Please go ahead.

Good morning and good evening, and welcome to CNFinance first quarter of 2022 financial results conference call. In today's call, our Vice President and Director, Mr. Qian Jun, will walk you through the operating results followed by the financial results from our acting CFO, Ms. Li. After that, we will have a Q&A session. Our CEO, Mr. Zhai Bin, will also be available during the Q&A.

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, beliefs, 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 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 and otherwise, except as required under law.

Now please welcome Mr. Qian Jun.

(foreign language)

[Interpreted] Thank you, everyone, for joining us in this conference call. On today's call, we will introduce the company's financial and operational results in the first quarter of 2022, followed by a Q&A section.

(foreign language)

[Interpreted] During the first quarter of 2022, we were able to maintain stable business operations despite external challenges. We facilitated loans of CNY 2.3 billion and recorded revenue and net income of approximately CNY 420 million and CNY 43 million, respectively, both of the daily average outstanding loan principle and revenue under the collaboration model has a year-on-year increase of over 20%, and CNY [10 billion] and CNY 40 million respectively.

Now I will share with you the challenges we faced and the measures we took in the quarter, together with our future plans.

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[Interpreted] In 2022, our business was impacted by the economy downturn. The growth of China's national economy has slowed down with GDP growth 1.3% as compared to Q4 2021. We experienced recent lockdowns caused by local outbreak of COVID-19 in cities within China, including major cities like Shanghai, Shenzhen and Dongguan. Moreover, our funding costs remain high as our major funding partners, the trust companies continue to be put under tightened regulations.

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[Interpreted] In response to those challenges, the company focus on stabilizing business operations and managing risks, we did the following works.

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[Interpreted] First, we continue to provide MSEs with inclusive financial services to help MSE owners whose business was interrupted by city lockdowns, pre-voluntarily, role of the interest rates of our loan products. In addition, we accepted more applications from sales partners to repurchase delinquency loans by installments with less (inaudible) room to give payment extensions to MSE owners.

(foreign language)

[Interpreted] Second, we expanded our funding sources and continue to promote diversified products which allowed us to reduce funding costs and cover more customers. During this quarter, we started to cooperate with [Zhonghai Trust] and facilitated loans of CNY 76 million. We also recommended prospective followers to commercial banks to facilitate loans of CNY 40 million. Besides we are close to start trial run of the 3-party cooperation with Shaanxi International Trust and PICC.

(foreign language)

[Interpreted] Third, we increased our support to sales partners. In order to help sales partners to grow their business under the current condition, we allow more sales partners to repurchase delinquent loans by installments. The company will charge a certain fee based on the terms of the installments. By allowing installment payments, we help the sales partners to improve their liquidity and also increase sales revenue of our own.

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[Interpreted] Fourth, given the ongoing fluctuation in China's property markets, the company maintained a rather low LTV ratio. The weighted average LTV for loans facilitated in Q1 was 56%. Besides, we took into account the operation, conditions of sales partners and took a conservative approach in evaluating the potential credit losses of loans to keep the allowance ratio at a safe level.

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[Interpreted] Going forward, we are likely to be continuously challenged by economic fluctuations. At the same time, we are also presenting with huge opportunities as the government is now encouraging financial institutions to offer more support to MSE owners. To see such opportunities, we will focus on diversifying our product profile, helping sales partners expand their business skill and reducing our own funding costs. The work plans are ...

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[Interpreted] First, we'll strive to finish upgrading an operation oriented and asset light model, under which we will act as service provider and manager of loans. Our plan is to introduce elite sales partners to sign contract directly with trust companies or bring in third-party subscribers to subordinate units of the new loans facilitated. As of today, several sales partners have already signed contracts with trust companies. And a number of our trust company partners have introduced -- have conducted due diligence on third-party investors introduced by us. Based on our estimation, such cooperation arrangement will be ready to facility loans before the end of Q2.

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[Interpreted] Second, we'll promote diversified products, expand customer coverage. The bank lending model will be one of our priorities as this model allowed us to reach customers with high credit ratings. Currently, the company is introducing and helping commercial banks facilitate loans of CNY 50 million each month. We are now seeking to establish cooperation with more commercial banks and make bank lending models a more important contributor to our revenue stream. Besides, we also want to start facilitating loans too under the aforementioned cooperation with PICC before the second quarter end.

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[Interpreted] Third, we will keep supporting our sales partners. We want to offer more flexible fee rate based on the terms and tender on the installment to suit that color with different operational and financial capabilities. At the same time, we want to get trust company involved. If a sales partner qualifies the standard of the trust company, the trust company could choose to pay us the full amount of repurchase on behalf of the sales partner and receive the installment payment from such sales partners.

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[Interpreted] Fourth, we will keep investing in technology and use it to empower the business growth. Our IT team is developing a mobile app that can integrate all the information related to loan application. By developing this app, we want to make it possible for our service team to obtain the status of borrower, channel information, loan products and fund in real time, and therefore, to timely interact with sales partners and our application reviewers. We hope this app could assist our service team with initial review and timely transfer of loan applications. The app is expected to be put into use in the second half of 2022.

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[Interpreted] Fifth, in order to offer loan product with lower interest rates, we will keep dialoguing with trust companies on reducing our funding costs. Consensus has been reached between us and several trust company partners on that. Once the deal is finished, we will soon apply the fee cuts of loans we facilitate.

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[Interpreted] The first quarter of 2022 was not all smooth, and we will surely be presented with both opportunities and challenges in the near future. We have gained valuable experience from frustrations in the past and have continuously refined our management's and business strategy. We have already stayed true to our commission of providing accessible, affordable and convenient financial service to MSE owners. With more supportive micro process taking effect, we are confident that there will be another source of capital demand from MSE owners. We believe we will be well prepared to see such opportunity and expand our business, increase our revenue and provide higher return to our shareholders.

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[Interpreted] With that, I would like to hand the call over to Ms. Jing Li, the acting CFO of the company, who will walk us through with the first quarter 2022 financials.

Thanks, Mr. Qian, and thanks again to everyone for joining us today. I will go you through our financials for the first quarter of 2022. Unless otherwise stated, all percentage changes I'm going to give will be on a year-over-year basis. Also, unless otherwise stated, all numbers I'm going to give will be in RMB.

Our first quarter of 2022, total interest and fee income were CNY 417 million as compared to RMB 425 million in the same period of 2021. Interest and financial service fees on loans decreased by 1.7% to CNY 415 million from CNY 422 million. It's primarily due to a, lower average effective interest rate of outstanding loans and b, the decrease of average daily outstanding loan principal in the first quarter of 2022 as compared to the same period of last year. The decrease in average daily outstanding loan principal was due to the lower loan facilitation volume in the first quarter of 2022, result from the lockdown due to local outbreaks of COVID-19 in multiple cities within China.

Interest and fees expenses increased by 28% to CNY 201 million compared to CNY 156 million, primarily due to the increase in the outstanding principal of other borrowings as well as the funding costs from trust company.

Collaboration cost for sales partners, representing the sales incentive paid to sales partners, decreased by 19% to CNY 80 million compared to CNY 98 million in last year. And it's primarily attributed to the lower fee rate the company paid to the sales partner results from lower average effective interest rate of outstanding loans.

Provision for credit losses was CNY 33 million as compared to a reversal of CNY 17 million in last year. The increase was due to the increasing economic uncertainties caused by lockdowns in reaction to local outbreaks of COVID-19 as well as the downward pressure faced by China's real estate market during the first quarter of 2022.

Net gains on sales of loans decreased was CNY 8 million as compared to CNY 9 million in the same period of 2021.

Total operating expenses decreased by 15% to CNY 80 million compared to CNY 94 million in the same period of 2021.

Income tax expense was CNY 15 million in the first quarter of 2022. Net income was CNY 43 million compared to CNY 86 million in the same period of 2021.

As of March 31, 2022, the company has cash, cash equivalents and restricted cash of CNY 1.7 billion compared to CNY 2.2 billion as of December 31, 2021, including CNY 1.2 billion and CNY 1.5 billion from structured funds as of March 31, 2022 and December 31, 2021 respectively, which would be used to grant new loans and activities.

The delinquency ratio for loans originated by the company increased from 24% to 26% as compared to December 31, 2021 (sic) [2022] to this quarter. And the delinquency ratio, excluding loan held for sale for loans originated by the company interest from [60%] at December 31, 2021 to 70% as of March 31, 2022.

The NPL ratio for loans originated by the company increased from 9.4% as of December 31, 2021 to 10.4% as of March 31, 2022.

The NPL ratio, excluding loans held for sale for loans originated by the company decreased from 2.1% as of December 31, 2021, to 1.8% as of March 31, 2022.

With that, we would like to open the Q&A. Operator, please begin.

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

I have a few questions. Can you disclose what the average interest rate you're lending at right now is? And in the prepared remarks, it was mentioned the rates paid to the sales partner was lower. Is that a change in what they're getting or just lower because there's less interest income in the quarter?

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[Interpreted] So for your first question, the weighted average interest rate of our loans right now is around 16.4%.

(foreign language)

[Interpreted] And the lower interest rate is not only because of our voluntarily adjustment, but also based on the macro economic condition and the regulation and policies of the government.

(foreign language)

[Interpreted] So this is a trend for overall rate cut, no matter it's for us or the sales partners. And we did adjusted our policy of collaboration cost to the sales partners. And we do want to keep their margin, but that has to be based on the growth of our business and the expansion of our scale. No, go ahead.

Okay. Yes. So I guess if you could just talk kind of more generally about the impact the COVID lockdowns have had on the first quarter and having now. In the past, you've mentioned that you've had more demand than you had capital available to lend out, but you've also mentioned that Shanghai is a big market for you guys. So just curious if you can talk about how much of an impact that's had on what you've just reported today and then what's going on right now?

(foreign language)

[Interpreted] So yes, like you said, there was a relatively large impact on the demand for capital because of the lockdown policies in the first quarter. And as we have introduced, there wasn't only Shanghai, but also Shenzhen and Dongguan was -- they were locked down during the first quarter. And we wouldn't say there wasn't demand. But it's just you cannot satisfy those demand due to the lockdown policies. And surely, we will last in the second quarter too, the impact.

(foreign language)

[Interpreted] So you can see the impact based on our financial results, especially on the loan facilitation, which had a year-on-year decrease. But I wouldn't really say that the impact was that large. I think it's still could be overcome.

(foreign language)

[Interpreted] So as for us, first off, we have a network that is scattered across China. So we will take advantage of this network and push the business growth in other areas that is not locked down. Also, the second thing is we will push to reduce our funding cost as well as refine our profit split with the sales partners to maintain a reasonable margin.

Okay. And I have 2 more questions. You've talked about trying to get to about 30% of your lending from commercial -- from the commercial model by the end of the year. Do you think that's still achievable?

(foreign language)

[Interpreted] We are still -- we still remain positive about the development of the commercial bank model because the government's policy that urges the banks to give more support to the MSEs has never been so strong and it's getting even stronger. And our goal -- it's one of our priorities to start collaboration with more commercial banks and to help them to facilitate loans to MSE owners. So we remain positive of our goal to make the balance under the commercial lend model 20% to 30% of the total loan book at the end of the year.

Okay. And you kind of touched on in that answer, but the push from the government towards the SMEs, have you seen any impact on seeing more demand from SMEs or anything government-related that's helping drive demand to you from SMEs?

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[Interpreted] Okay. So the government's support towards MSE's are mainly reflected from 2 aspects. So the first one is the supporting policies of our refinance is one of the -- so there was a meeting from the state council saying that they will have the support to refinance doubled. And also today, the People's Bank of China also released a document that saying the commercial banks should give financial support to MSE owners and it's reflected in the tolerance in terms of the ...

(foreign language)

[Interpreted] So there was a policy made by the People's Bank of China that say, we should give more freedom and more room for commercial banks to support the financing needs of the MSEs. And also -- so we estimate that at the end of June, there will be another surge of demand from the MSE owners for capital.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. [Jane Jenn] for any closing remarks.

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