CNFinance Holdings Ltd (CNF) 2021 Q4 法說會逐字稿

Good day, and welcome to the CNFinance Fourth Quarter and Fiscal Year 2021 Unaudited Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded. I'd now like to turn the conference over to Matthew Lou. Please go ahead.

Thank you. Good morning and evening. And welcome to the CNFinance Fourth Quarter and Fiscal Year of 2021 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 acting CFO, Ms. 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 terminologies such as will, expect, 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 statement as a result of new information, future events or otherwise, except as required under law.

Now please welcome our CEO, Mr. Zhai Bin.

(foreign language)

[Interpreted] Thanks. 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 fourth quarter and the fiscal year of 2021. And then me and my colleagues will answer your questions.

(foreign language)

[Interpreted] Our loan facilitation business maintained fast growth in the fourth quarter. We facilitated loans of CNY 3.1 billion during the quarter and CNY 12.8 billion for the year, representing a year-on-year growth of 15% and 45%, respectively. Such results were another proof of how the market has recognized our product and business model. The revenue for the fourth quarter and the fiscal year was CNY 450 million and CNY 19.8 million, respectively. Taken by the fluctuation of the economy and local outbreak of COVID-19, we disposed of a bulk of the liquid loans in the fourth quarter and were more conservative in evaluating potential losses. Yet, we were still able to record a net income of CNY 65 million for the year and delivered operational results that exceeded our estimations at the beginning of the year.

Now I'm going to review our work during 2021, introduce the challenges which we may face in 2022 as well as our business plans.

(foreign language)

[Interpreted] In 2021, the impact of external environment on our business persists to varying degrees. First, we experienced funding pressures as our major funding partners, the trust companies, were under tightened regulations. Second, the government imposed strict regulations on the demand side of housing markets, including introducing restricted measures on housing mortgages and purchasing houses, and the implementation of [government guidance plan]. Such regulations have posted downward pressure on the housing market. And third, our business operations was interrupted by local outbreaks of COVID-19 during the year.

(foreign language)

[Interpreted] Under such environment, the company focused on business expansion and risk control. Our main work in 2021 was as follows.

(foreign language)

[Interpreted] First, we'll work on expanding funding sources to ensure funding supply. Other than the current funding model, we'll also work with trust company partners to establish new funding models that are within the scope of regulation, but not constrained by the [shape] of nonstandard trust products. Our partnership with [National Trust] was one of the examples. Since the third quarter, we have partnered with the National Trust and facilitated loans of over CNY 900 million -- CNY 700 million. And we expect the loan scale under such funding model to grow continuously.

(foreign language)

[Interpreted] Since the third quarter, we have different collaboration with commercial banks. We expanded the scale of our partnership with Blue Ocean Bank and also finalized terms with Everbright Bank and Hua Xia Bank. Based on our estimation, loans under the bank lending model will cut a relatively large share in the overall outstanding loan by the end of 2022.

(foreign language)

[Interpreted] Our negotiations with insurance companies have also entered into the final stage. As of this date, the deal with [Sinosafe Insurance] has been signed. And we are close to finalize the terms with [PICC]. We believe the partnership with insurance companies will be very helpful for a potential ABS product of our own.

(foreign language)

[Interpreted] Second, we disposed of the bulk of legacy loans under the traditional facilitation model. We started our remodel transformation in 2019 and start facilitating loans under the traditional model. Following the transformation, as the current loans under this traditional model been servicing for gradually, part of the traditional model are now delinquent. It has been actively affecting the company's financial performance, our negotiations with potential funding partners as well as our valuation in the capital markets.

In the third quarter, sensing the fluctuation in the housing market, the management evaluated the relative expense of holding and disposing of those legacy loans and made the decision to dispose them. In the fourth quarter, we hired a professional appraisal firm and compared quotations from [a fellow MSE] and made a bulk sale of loans with the book value of CNY 1 billion at an average discount of 65%. The sale of such legacy loans was the main driver of the losses in the fourth quarter. We plan to sell the remaining legacy loan of CNY 300 million in the first half of 2022.

(foreign language)

[Interpreted] Third, we were more prudent in sizing the risks related to sales partners. We consolidated the business scale and operating record of each sales partner and adjusted the repurchase policy to better suit them. We have also taken a more conservative approach in evaluating the potential credit losses under the collaboration model.

(foreign language)

[Interpreted] In 2022, the economic fluctuations and local outbreak of COVID-19 are likely to continue. We will focus on promoting the collaboration model to its 2.0 version as we believe this will lay a strong foundation for our future growth. Our work plans are as follows.

(foreign language)

[Interpreted] First of all, we will cooperate with venture investors. Our goal is to bring in third-party investors to subscribe to the subordinated unit of new loans facilitated. Such plan was sent to our trust company partners and has already entered the stage of admission. We are also working closely with insurance companies to finalize the terms.

(foreign language)

[Interpreted] Second, we will diversify our loan products to cover more customers. We will continue to facilitate recurring Class B trust products and expand our partnership with commercial banks. Going forward, our product combination will consist of 4 differentiated products, from Class B to Class A+, to suit the needs of borrowers with different risk preferences and reduce our funding costs.

(foreign language)

[Interpreted] Third, we will adopt digital and smart technologies in our platform. We will refine the automatic evaluation and approval of loan application by increasing the capacity of data storage and the efficiency of data analysis. We expect to better manage our process and make it more efficient. We also expect to better coordinate the loan applications we receive and the fundings we obtain. We will also continue to maintain and upgrade the sales partner service platforms to make it [more friendly] to users.

(foreign language)

[Interpreted] We will keep communicating with regulators at all levels and make sure our operation and business model are in full compliance.

(foreign language)

[Interpreted] The year of 2021 was very important in our history. We faced many challenges and scored many achievements. In 2021, our service system was refined. Our management was more efficient. We stay true to our mission of providing affordable, accessible and efficient financial services to MSE owners. And we are now more confident in the meaning of our work.

As I have introduced on many occasions, CNF and many other enterprises like us have formed an important part in China's exclusive financial system. In 2022, we will keep refining our model and growing our business while we shoulder more responsibilities to provide MSE owners with financing services that are more convenient and with solid [fee cut].

(foreign language)

[Interpreted] Now I would like to hand the call over to Ms. Jay Li, the acting CFO of the company. And she will walk you through the fourth quarter and fiscal year of 2021 financials. Thank you.

Thanks, Mr. Zhai, and thanks again to everyone for joining us today. I will walk you through our fourth quarter of 2021 financials, followed by that of fiscal year of 2021. 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 GAAP basis. Also, unless otherwise stated, all numbers I'm going to give will be in RMB.

In the fourth quarter of 2021, total loan origination volume was CNY 3 billion during the fourth quarter of 2021, representing an increase of 15% from CNY 2.7 billion. Interest and financing service fees on loans increased by 7% to CNY 448 million (sic) [CNY 444.7 million] as compared to RMB 417 million, primarily due to the increase in the balance of average daily outstanding loan principal.

Total interest and fee expense increased by 79% to CNY 205 million as compared to CNY 159 million, primarily due to the increase in the principal of other borrowings as well as the funding cost from trust companies. Collaboration cost for trust partners representing sales incentives paid to sales partners increased to CNY 120 million as compared to CNY 104 million, primarily due to the increase in average daily outstanding loan principal under collaboration model as compared to the same period of 2020.

Provision for credit losses recorded a reversal of CNY 308 million as compared to a reversal of CNY 31 million, primarily due to the combined effect of: first, higher loss given default, LGD, under the current expected credit loss, CECL model, which takes into account the company's historical data of actual loss in the past few years; and second, the fact that the company transferred loans under traditional presentation (sic) [facilitation] model to third-parties in bulk during the fourth quarter of 2021, and the allowance of such loans was reversed.

Net losses on sales of loans was CNY 469 million compared with a net gain of CNY 44 million, primarily attributable to the fact that the company transfer loans under traditional facilitation model to third parties in bulk during the fourth quarter of 2021, such loans were all facilitated prior to 2019. And the majority of them were long past due and therefore sold at a large discount.

Total operating expenses decreased by 8% to CNY 106 million compared with CNY 115 million. Income tax expense was CNY 15 million as compared to an income tax expense of CNY 24 million, primarily due to the fact that the company recorded a loss before income tax for the fourth quarter of 2021. Such loss was due to the loss associated with the sales of loans under traditional facilitation model in bulk during the fourth quarter of 2021. Net loss was CNY 105 million as compared to a net income of CNY 105 million.

Now let's move on to the financials of 2021 as a whole. Total loan origination volume was CNY 13 billion, representing an increase of 46% from CNY 9 billion. Interest and financing service fees on loans decreased by 3% to CNY 1,770 million as compared to RMB 1,829 million, primarily due to the lower interest rates on loans facilitated in an effort to comply with rules and regulations issued by relevant PRC regulators, 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 expense increased by 6% to CNY 776 million as compared to CNY 731 million, primarily due to the increase in the principals of other borrowings as well as the funding costs from trust companies. Collaboration cost for sales partners increased to CNY 4,026 million (sic) [CNY 426 million] as compared to RMB 415 million, primarily due to the increase in average daily outstanding loan principal under the collaboration model as compared to the same period of 2020.

Provision for credit losses record a reversal of CNY 279 million as compared to RMB 278 million, mainly due to the combined effect of: first, the fact that the company transferred loans under traditional facilitation models to 3 parties -- to third party in bulk during the fourth quarter of 2021 and allowance of such loans was reversed; second, the higher loss given default under the current expected credit loss model, which takes into account the company's historical data of actual loss in the past few years, partially offset by, first, the lower probability of default under the current expected credit loss model, which takes into account the outlook of the more positive economic growth of China in the fiscal year of 2021 as compared to that of the same period of 2020 under the impacts of COVID-19 pandemic.

Other gains were CNY 50 million compared to CNY 20 million. When a loan defaults and the sales partner choose to repurchase such loans in installments, the company will charge a certain percentage of the loan as the fund possession fee. The increase in other gains for fiscal year of 2021 was mainly due to the fact that there was a larger number of cases, where delinquency loans -- delinquent loans were repurchased by sales partner in instruments, which led to an increase in fund possession fee received by the company.

Total operating expenses decreased by 15% to CNY 381 million as compared to CNY 449 million (sic) [CNY 448 million]. Income tax expense decreased by 40% to CNY 29 million as compared to CNY 48 million, primarily due to the increase in the amount of taxable income. Net income decreased by 43% to CNY 65 million as compared to RMB 115 million. Total outstanding loan principal was CNY 10 billion as of December 31, 2021, as compared to CNY 10 billion as of December 31, 2020.

As of December 31, 2021, the company held cash and cash equivalents of 20 -- of CNY 2.2 billion compared with CNY 2 billion as of December 31, 2020, including CNY 1 billion and -- CNY 1.5 billion and CNY 1.5 billion (sic) [CNY 1 billion] from structured funds, which could only be used to grant new loans and activities. Financial delinquency rate for loans originated by the company increased to 24.1% as of December 31 from 22.6%. Under the collaboration model, the actual delinquency rates for the first lien loan increased to 29.1% as of December 31, 2021, from 18%. And the actual delinquency rate for second lien loans increased to 19.5 percentage as of December 31, 2021, as compared to 15.6%. The actual NPL rates for loans by the company decreased to 9.4% as of December 31, 2021, from 11.7%. Under the collaboration model, the actual NPL rate for the first lien loans increased to 12.5% as of December 31, 2021 from 6.7%. The actual NPL rates for second lien loans increased to 6% as of December 31, 2021 from 4.6%.

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

(Operator Instructions) And today's first question comes from William Gregozeski with Greenridge Capital.

Can you -- with regards to the commercial bank lending, what -- can you disclose the amount you lent from commercial banks in the fourth quarter? In regards to your target for the year-end of this year, is that incremental to the trust lending or replacing that amount of trust lending?

(foreign language)

[Interpreted] Thank you. We actually started negotiating with the commercial banks since the beginning of 2021. And the main reasons are twofold. First of all, our main funds provide funding for others, which is the -- which are the trust companies who are under tightened regulations throughout the year. And we think they like to take one step ahead and expand our funding sources.

(foreign language)

[Interpreted] And our second thought was to just cover more customers with different risk preferences. As you know, the funding cost with the trust companies are high as compared to commercial banks. And this has limited our ability to reduce our interest rate charge in our loan product, which has also limited our customer reach.

(foreign language)

[Interpreted] And in 2021, we were mainly negotiating with the commercial banks and entering to the stage of admission. That's the main work in 2021.

(foreign language)

[Interpreted] So the overall loan facilitation under the bank lending model wasn't as high.

(foreign language)

[Interpreted] Yes. In the first 2 months of 2022, we have maintained a facilitation under the bank lending model of over CNY 10 million in each month.

(foreign language)

[Interpreted] To answer your second question, we don't think the bank lending model is going to replace the current trust lending model. We think in 2022, the partnership with trust companies will still made up the majority of our loan facilitation.

(foreign language)

[Interpreted] So our most updated estimation is that to make the loans under the bank lending model to amount to 10% to 15% of the total outstanding loan principal by the end of 2022.

(foreign language)

[Interpreted] That's the answer to your question. Thank you.

Okay. My next question is about the investment in technology in the platform you talked about on the call. How much are you looking to spend? And is that investment going to change at all depending on how much you do on a share repurchase?

(foreign language)

[Interpreted] Okay. So first of all, we have to admit that the investment in technology is only -- has a very small proportion of our expenses at this moment.

(foreign language)

[Interpreted] And I think one of the reasons is that the development of the technology have slashed down the overall costs of the information technologies and -- no matter if hardware or software.

(foreign language)

[Interpreted] And I think (inaudible), and of course, its current expenses at this moment are the technological talent. I think our plan is to cooperate with them in the future.

(foreign language)

[Interpreted] So I don't expect this to take up a whole lot of our cash. And I don't think the repurchase program is going to interfere with our investment in technologies.

(foreign language)

[Interpreted] Thank you.

Okay. Great. And last question is about the property market. Has the uncertainty with that affected your ability to assess borrower risk or facilitate loans? I know loans are obviously up. But is it impacting what you guys are able to do going this year based on how the market is right now?

(foreign language)

[Interpreted] To answer your question, so starting from the fourth quarter of 2022, we have been rather conservative when it comes to the estimation in -- of housing market in China.

(foreign language)

[Interpreted] So as I have introduced, we disposed of certain legacy loans invoked during the fourth quarter of 2021 and also took a more conservative approach too in the evaluation of potential credit losses.

(foreign language)

[Interpreted] But we are positive of the government -- we are positive and confident in the government's ability and the anticipation to stabilize the economy and further grow the economy.

(foreign language)

[Interpreted] So based on my estimation, I think the price of properties and houses will stop the downward turn and remain rather stable in 2022.

(foreign language)

[Interpreted] So in terms of loan applications and risk assessments and the evaluation of borrowers, our tenders didn't really change a whole lot in this year. And with -- one of our intention is to roll out cheaper loan products to the high-quality borrowers whose collaterals are also with high quality.

(foreign language)

[Interpreted] So as I introduced, our -- one of our goals is to give very customized loan products to each customer depending on the conditions of their collateral as well as their credit record.

(foreign language)

[Interpreted] Thank you.

(Operator Instructions) And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any final remarks.

Thank you again. Thank you for joining us in today's conference call. If you have any further questions, please feel free to reach us at any time at ir@cashchina.cn. Thank you.

Thank you. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.