CNFinance Holdings Ltd (CNF) 2023 Q1 法說會逐字稿

Hello, and welcome to the CNFinance First Quarter of 2023 Unaudited Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded.

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

Thank you. Good morning and evening. Welcome to the CNFinance First Quarter of 2023 Financial Results Conference Call.

In today's call, our Director, Vice President, Mr. Jun Qian, will walk us through the operating results, followed by the financial results from our acting 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 terminologies 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 Mr. Jun Qian.

(foreign language)

[Interpreted] Thanks, everyone. For taking your time and attend this conference call. Today, we will introduce CNF's operational financial results in the first quarter of 2023 and followed by a Q&A session.

(foreign language)

[Interpreted] In the first quarter of 2023, we have maintained our momentum and achieved year-on-year growth in key operational and financial indicators. In this quarter, loan origination volume increased 48% from the same period of 2022 to RMB 3.4 billion, including RMB 1.2 billion under commercial bank partnership. Net revenue under the commercial bank partnership model came in at RMB 21.5 million for the first quarter of 2023. The total interest and fees income for Q1 2023 was RMB 450 million, representing a year-on-year increase of 9%.

We continued to provide installment services and funding support for sales partners were obligated to repurchase delinquent loans and recorded interest income charged to sales partners of RMB 37.5 million. And net income in Q1 2023 increased 14% year-on-year to RMB 49 million. In the first quarter of 2023, we have done the following works.

(foreign language)

[Interpreted] We continued to promote and refine commercial bank partnership. Targeted borrowers of commercial bank partnership have better credit ratings in general and bank lending products require less own capital of the company. Since its launch in 2021, the commercial bank partnership model has gradually gained recognition from the market and our partners because of this low interest rate. After deepening cooperation with private banks, the origination volume of bank lending products began to increase quickly in the second half of 2022 and continued growth in the first quarter of 2023.

In Q1 2023, loan origination volume of bank lending products accounted for 35% of total loans originated by the company and has become one of the company's major revenue streams. In this quarter, we have brought sales partners into the commercial bank partnership and further reduced our risk exposure.

(foreign language)

[Interpreted] We have reduced the funding cost and diversified the financing mix. As we have reached consensus with funding partners are reducing interest rates in the second half of 2022, our interest and fees expense in Q1 2023 has decreased 8% year-on-year, RMB 180 million. In this quarter, we successfully established a couple of [funds] with third-party AMC and provided sufficient and consistent funding support for sales partners who needed to repurchase [delinquent] loans. With that, those partners' liquidity was improved and were far motivated to expand their business.

(foreign language)

[Interpreted] We have improved the asset quality. In this quarter, we analyzed historical loan originations and conducted risk factor analysis on defaulted loans. Based on the results, we refined our model for risk assessment and shifted our prioritization to business operations, Tier 1, new Tier 1 and other major cities. As a result, delinquency ratio at the end of Q1 of 2023 has decreased as compared to the end of the (inaudible).

(foreign language)

[Interpreted] We continued to be confident that China's inclusive financing industry is in its window period. At the same time, (inaudible) environment has made it very important for us to pursue high-quality development (inaudible) expand our business (inaudible).

(foreign language)

[Interpreted] We will focus on increasing loan origination volume. We will continue to take measures to better service high-quality sales partners and support their growth. We will keep promoting commercial bank partnership, refining trust lending model, and discovering opportunities to deepen our collaboration with (inaudible). So we will adjust our products based on market conditions. We are looking forward to rolling out a new bank lending product that charges an annual interest rate less than 12% in the second quarter of 2023.

(foreign language)

Second, we will keep refining our funding model. First, we will maintain dialogues with [trust] company partners on adjusting the structure of trust [plans]. Second, we will negotiate with AMCs on reducing the interest rates they charge in order to further ease liquidity pressure of our sales partners.

(foreign language)

This is the operator. I'm sorry, we're getting a lot of noise. I'm going to see if we can reconnect. Just give me one moment, please. (technical difficulty).

Welcome back, and we'll just pick up from wherever we probably hung up. Now please welcome again Mr. Jun Qian to give his remarks.

(foreign language)

[Interpreted] Our future tasks [include], first, we will focus on increasing our origination volume. We will continue to take measures to better service high-quality sales partners and support their growth. We will keep promoting commercial bank partnership, refining trust lending model and discovering opportunities to deepen our collaboration with insurance companies. So we will adjust our products based on market conditions. We are looking forward to rolling out a new bank lending product that charges an annual interest rate less than 12% in the second quarter of 2023.

(foreign language)

[Interpreted] Second, we will keep refining our funding model. First, we will maintain dialogue with trust company partners on adjusting the structure of trust plans. Second, we will negotiate with AMCs on reducing the interest rates they charge in order to further ease liquidity pressure of our sales partners.

(foreign language)

[Interpreted] Third, we will keep investing in (inaudible) and fully recognize the importance of technology in refining product design and risk assessment. We will continue to analyze historical data of loans originated. We will tailor products or loans served by collaterals in core areas of Tier 1 and new Tier 1 cities. We will also roll out trust lending products that charge lower interest to increase our market share through deeper analysis on different factors of collaterals and borrowers to help refine risk assessment model in order to improve asset quality and our resistance to market fluctuations.

(foreign language)

[Interpreted] Now I would like to hand the call over to our acting CFO, Mr. Jing Li, who will walk you through the financial results of Q1 of 2023.

Thank you. Thank you, Jun. So the first quarter of 2023 financial results. Before we start, I want to remind you that unless otherwise stated, the currency we use is in RMB. Also, unless otherwise stated, all comparisons will be made on a year-over-year basis.

The interest and financial service fees on loans increased by 5% to RMB 412 million from RMB 391 million, primarily attributable to the increase of average daily outstanding loan principals in the first quarter of 2023 as compared to the same period. (inaudible) charged to sales partner, representing fee charged to sales partner who choose to repurchase default loans in installments, increased by [60.3%] to RMB 38 million from RMB 23 million. This is primarily due to the fact that the company allows more sales partners to repurchase (inaudible) in installment to help sales partner ease their pressure on cash flow. And fees expense decreased by 8% to RMB 185 million as compared to RMB 200 million in last year.

Finally, due to a decrease in (inaudible) and as well as the funding cost from the trust company, net income and fees income (inaudible) was RMB 22 million.

The company has started to collaborate with commercial bank since 2021 and such collaboration growth and scaled in second quarter of 2022. The outstanding loan principal under the commercial bank partnership was RMB 3.4 billion as of March 31, 2023 (inaudible) compared to [RMB 70.4] million as the same period of last year.

Collaboration cost of our sales partners. This represents sales incentives paid to sales partners, 4% to RMB 83 million compared to RMB 80 million same period, primarily attributable to the increase of average daily outstanding loan principal in the first quarter of 2023 as compared to the same period.

Provision for credit losses. The provisions for credit losses under the trust lending model and the expected credit losses of guarantee under the commercial bank partnership model in relation to certain financial guarantee arrangements the company entered into with a third-party guarantor, who provides guarantee services to the commercial bank partners was RMB 79 million in the first quarter of 2023 as compared to a reversal of RMB 14 million in the same period of 2022. The reversal in last year was primarily due to the transfer of the remaining loans under the traditional facilitation model to third parties and allowance of such loans was reversed.

(technical difficulty)

This is the operator. I'd like to reintroduce Matthew once again. Please go ahead, sir.

Thank you. Thank you. Welcome again to this conference call. Sorry for the connection issue. Now I would like to hand the call over and introduce our acting CFO, Mrs. Jay Li, who will go over the financial results with you of Q1 2023. Please go ahead.

Thank you all. And I'm sorry for the issues. Now we reconnected, and we start. Now let's go for the first quarter 2023 financials.

Before we start, I want to remind you that unless otherwise stated, the currency we use would be in RMB. And also unless otherwise stated, all comparison will be made on a year-over-year basis.

Interest and financing service fee on loans increased by 5% to RMB 412 million from RMB 391 million, primarily attributable to the increase of average daily outstanding loan principals in the first quarter of 2023 as compared to the same period of 2022. Interest income charged to sales partner, representing fees charged to sales partner, who choose to repurchase deferred loans in installment increased by 16% (sic) [60%] to RMB 38 million from RMB 23 million, primarily due to the fact that the company allows more sales partners to repurchase default loans in installments to help sales partner ease their pressure on cash flow.

Interest and fee expense decreased by 8% to RMB 185 million as compared to RMB 201 million, primarily due to the decrease in daily average outstanding loan principals of other borrowings as well as the funding cost from trust companies. Net interest and fees income increased by 24% to RMB 269 million from RMB 216 million. Net revenue under the commercial bank partnership model was RMB 22 million. The company has started to collaborate with commercial bank since 2021 and such collaboration growth and scale in the second half of 2022. The outstanding loan principal under the commercial bank partnership was RMB 3.4 billion as of March 31, 2023 and compared to RMB 70.4 million as of the same period of last year.

Collaboration costs for sales partner, representing the sales incentive paid to sales partner, increased by 400 -- 4% to RMB 83 million compared to RMB 80 million in last year. This is primary attributable to the increase of average daily outstanding loan principal in the first quarter of 2023 as compared with the same period of last year.

Provision for credit losses representing provision for credit losses under the trust lending model and the expected credit loss of guarantee under the commercial bank partnership model in relation to the [certain] financial guarantee arrangements that company entered into with a third-party guarantor, who provides guarantee services to commercial bank partners. It was RMB 79 million in the first quarter of 2023 as compared to a reversal of RMB 14 million in the same period of last year. The reversal in last year was primarily due to the transfer of remaining loan under the traditional facilitation model to third parties and the allowance of such loans with the reversals.

Operating expense remained stable at RMB 80 million. The income tax expense was RMB 18 million compared with RMB 15 million in the same period of last year, primarily due to the increase in taxable income in the first quarter of this year. Net income increased by 14% to RMB 49 million compared to RMB 43 million last year. As of March 31, 2023, the company has cash, cash equivalents and restricted cash of RMB 2.2 billion compared to RMB 1.8 billion as of December 31, 2022. The delinquency ratio for loan originated by the company decreased from 18.3% as of December 31, 2022 to 15.2% as of March 31, 2023. The NPL ratio for loan originated by the company was 1.8% of the March 31, 2023 as compared to 1.1% at December 31, 2022.

Now we would like to go ahead and start the Q&A section. Please?

(Operator Instructions) The next question -- or the first question comes from William Gregozeski of Greenridge Global.

The provision for credit losses bounced around the last few quarters. How should we look at that going forward for modeling purposes?

(foreign language)

(foreign language)

[Interpreted] So we have always maintained a very consistent provision policy. And it's based on a model that is provided and supported by our auditors as well as the peers in the financing industry. And since we introduced the collaboration model 4 years ago and after 4 years of operation, we believe that the sales partners are providing very good guarantee to the loans we are introduced.

(foreign language)

[Interpreted] And especially in this quarter, as the sales partners are providing guarantee and protection to the loans they introduced, our delinquency ratio is actually lower -- has actually decreased. And that's why, based on the model -- the provision model, we have [occurred] less provision.

(foreign language)

[Interpreted] And also as the -- since the pandemic -- the pandemic control is over in China and the macro economy has turned -- has made a good turn and that also impacts our forecast for the future. And that's another reason why the provision is lower in this quarter.

(foreign language)

[Interpreted] So going forward, as we have recognized the advancement of the collaboration model and, more importantly, we have also brought sales partners into our partnership with commercial banks, I think we will just hold on to this collaboration with sales partners and -- in the future because, not only does it help us to contain the risk, it also helps us to expand our scale.

Does that answer your question?

Yes. Yes. On the commercial lending side, you've talked in the past about that being around 1/3 of origination. Do you think that will stay around that level because that's where you're at now given how fast the origination numbers are taking off of that and the new product you mentioned you're rolling out?

I didn't catch your first line. Could you repeat that?

Yes. You guys have talked in the past about the commercial lending being about 1/3 of origination. Do you think that will get higher given how fast it's growing and the new product you're bringing out?

Okay. (foreign language)

(foreign language)

[Interpreted] So if you look back to the data in the first quarter, the loans originated under our collaboration with commercial banks actually accounted for 35%. And I think that's well above our estimation. But I think that's the planned pick. So in the future, I think the origination volume of commercial bank partnership will just continue to grow. But as long as the overall loan originated keeps growing as well, I think the percentage -- the proportion of commercial bank partnership is going to keep -- to be kept at 35% to 40%.

(foreign language)

[Interpreted] And that proportion is based on our current expectations -- just based on the current market conditions and our analysis. But if it is possible for us to, like we said, roll out the loan product under the commercial bank partnership, which charges the interest rate that’s lower than 12% annually. I think the proportion of loan products -- loans facilitated under the commercial bank partnership will just grow as well. And it will just cut a higher share in our overall loan origination. Thank you.

Okay. Okay. And since I guess you're kind of implying to them that the trust company origination will be increasing as well, are you guys seeing more demand now for those products? You mentioned in the previous question that the macro economy is improving. Are you seeing more demand for kind of the traditional lending that you guys have done?

(foreign language)

(foreign language)

[Interpreted] So based on the status and data released in the first quarter of 2023, I think the lending demand is rather stable as compared to the same period of 2022. And looking forward to the second quarter and after, we are -- we remain confident in China's economy. And I think it is going to kick up gradually in the future. So there is still room for us to expand our business. But as we have said, we will pursue high-quality development. So that means we will focus more on the asset quality as well as to operate in a more compliant way to build the compliance -- to operate fully in a compliance way. That's why I think we are going to keep our estimation for the year of total loan origination of RMB 20 billion.

(Operator Instructions) Seeing there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Matthew Lou any closing remarks.

Thank you. And thank you, guys, again for attending this conference call and just apologize again for the connection issues. So on this call, we'll have a replay on our IR website at ir@cashchina.cn. If you have any questions, you can also contact us via ir@cashchina.com. Thank you. Thank you, again.

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.]