X Financial (XYF) 2018 Q3 法說會逐字稿

Good day, and welcome to the X Financial third-quarter 2018 earnings conference call. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Jennifer Zhang. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. The Company's results were released earlier today and are available on the Company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Justin Tang, Founder, Chairman, and CEO; Mr. Simon Cheng, President; and Mr. Kevin Zhang, Chief Financial Officer. Mr. Tang will give a brief overview of the Company's business operations and highlights, followed by Mr. Zhang who will go through the financials in guidance. They are all available to answer your questions during the Q&A session.

I remind you that this call may contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on 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 Company's to control, which may cause 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, and factors is included in the Company's filings with the US 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.

It is now my pleasure to introduce Mr. Justin Tang. Mr. Tang, please go ahead.

Yes. Thank you, Jennifer. Hello, everyone, and thank you for joining us for our first earning call as a public company. I'd like to take this opportunity to thank our shareholders, as we are now publicly listed on the New York Stock Exchange. Our IPO is an important milestone in our corporate history. We consider it a giant step forward in our mission as we utilize big data and Internet technology to build a leading personal finance company in China. We are very early in our growth curve, and we believe in the long term, there is tremendous potential in this market.

In the near term, I think a major theme is economic outlook in China remains uncertain, so in the near term I think we have three major focus. Our number-one focus is to preserve shareholder value during an uncertain economic environment. Our number-two focus is to operate our business under the highest compliance standards possible to insure we are fully compliant in upcoming implementation of our new regulatory standard. Our number three focus was to deliver a healthy and a sustainable revenue and net income growth.

Let me now turn to our performance for the third quarter of 2018. I'm pleased to report strong financial and operational results in our first quarter as a public company, with net revenues increased 83% to RMB830 million, and adjusted net income more than doubling to RMB249 million. Our business continue recover follow the lows we saw in July when the market turmoil was at a peak. We expect this trend to continue going forward.

Total loan facilitation is gradually improving. We are decreasing by about 13% during the quarter, year-over-year; and 32% sequentially from Q2 this year. We expect the total loan facilitation in the fourth quarter to increase sequentially from RMB7.6 billion this quarter to between RMB8.0 billion to RMB8.5 billion in fourth quarter.

On the regulatory front, I think that there is some good news. I think the regulatory policy today is more visible and more friendly than any period over the last couple years. We were one of the first P2P platform to submit our P2P Compliance Self-Inspection Report before the deadline. This is the first step to getting full compliance with the industry reform the government has been rolling out through the National P2P Rectification Offices.

And recently government body have mentioned more than a couple times: online lending, P2P lending, are an important part of China's financial system to provide credit to individual and small business. We fully support the government's initiative, and are working closely with them to create a healthier and more sustainable environment for P2P platforms.

We continue to strengthen risk control across our platform. If you look at our Q3 results, we have a decline in loan facilitation that's mainly due to two drivers. Number-one driver is the lack of funding during the July and August time. That actually is already over. Right now we have very sufficient funding. But number-two driver is we consciously reduced our average loan size because of our concern of external economic environment and credit environment. So if you look at the average loan size that we have on our credit card loan during the Q3, we cut it down by about 20% from our normal period.

After IPO, we start to invest more aggressively in our brand. Historically, actually, our Company have not invested too much in our brand. But we feel during the industrial downturn is a good time to invest in our brand.

Recently we signed a multi-year marketing partnership with NBA, which we will see our brand integrated with their own marketing and media platforms. It is the NBA's first time to cooperating with a company in China's online lending P2P industry. We appreciate the core value the NBA represents, and we share the same vision with the NBA, which is encouraging people to chase their dreams.

Although, today, our online lending platform still provides for most of our funding; but at the same time, actually there are more and more financial institutions recognize the quality of our product and want to partner with us.

Recently we start to have a partnership with CITIC Trust, which is one of the China's largest trust company. And this important cooperation, this important cooperation is good opportunity to leverage our advanced technology and extensive experience in operating online lending platform to assist the CITIC Trust in acquiring qualified borrowers and facilitate loans. Together, we will jointly develop a new data-driven credit assessment system that combines CITIC Trust's vast amount of borrower credit data with our big data analytical capabilities and technology.

Overall, we strongly believe we are ideally positioned to benefit from the enormous growth opportunity in China's online lending industry, and will continue to execute our strategy to generate long-term, sustainable value to our new shareholders.

With that, I will turn the call over to Kevin, who will go over the financials. Thank you.

Thank you, Justin. Hello, everyone. For the first quarter of 2018, we delivered a solid result despite a difficult market environment. We continue to invest heavily in our risk management systems, product development, mobile platforms, and big data analysis capabilities to further strengthen our credit rating abilities, to carefully manage risk as the market environment gradually improves.

I'm going to have a brief -- on the financial update. For the interest of time, I will not go through every line item, but focus on the key ones. And you can refer to more details in our earning release.

Our net revenue in the third quarter of 2018 increased by 83% to RMB830 million from RMB453 million and the same period of 2017, primarily due to a change in product mix resulting from a significant increase in the proportion of revenue generated by Xiaoying Card Loan, which carries a higher service fee rate compared to the Company's other products.

But when comparing to the results in Q2 2018, our net revenue declined by 22%, but while the loan volume decreased about 32%. And this results from the increase of our revenue take rate from 9.5% in Q2 to 11% in Q3. But for best comparing, I would suggest to use an adjusted run take rate (inaudible), which equals to our revenue net provision for accounts receivable and the change in fair value of financial guarantee derivatives. The adjusted revenue take rate increased from 8% in Q2 to 8.9% in Q3.

Our origination and service expenses in the third quarter of 2018 increased by 40% to RMB284 million, comparing to the same period result 2017, primarily due to the increase in customer acquisition cost from credit side, share-based compensation expenses, and the increase -- increasing our collection effort. Compared to Q2 (inaudible) it remain nearly unchanged in the total amount, but increased from 2.6% of loan volume to 3.8% of loan volume in Q3. This is because that a large portion of the origination cost is a fixed cost. That means our labor cost.

Sales and marketing expense in the third quarter of 2018 increased a lot, both by the amount and the percentage of loan volume, primarily due to an increase in our advertising campaign aimed at strengthening our corporate image and increase investor confidence, such as the IPO rating event and the NBA sponsorship.

I would like to highlight income tax expense in this quarter. The effective tax rate decreased a lot due to the corporate income tax rate applicable to our major subsidiary of the company (inaudible) adjusted to 15%. And we also expect our pre-tax additional deduction for RMB expenses recorded in the third quarter of 2018.

Our net income and our non-GAAP net income in the third quarter of 2018 was RMB198 million and RMB249 million, respectively; and about double, or more than double, back in the same period of 2017.

On the balance sheet side, our cash and cash equivalents as of September 30, 2018, was RMB1,460 million, about an increase of RMB840 million from both the net proceeds from IPO and the traffic generated from our operating activities.

This concludes our prepared remarks for today. I would now like to turn the call over to the operator to begin the Q&A portion of call.

Yes, please go ahead.

Thank you, Kevin. At this time, we'd like to open up for the QA. Please note that our Chairman, Mr. Tang; and President, Simon; and our CFO, Kevin, will take your calls. Operator, please.

(Operator Instructions). Jacky Zuo, Deutsche Bank.

This will have two. One is on the asset quality. I saw during the quarter the 30 to 90 days delinquency ratio rose to about 3%. Just want to get a sense about the rise in the short-term delinquency ratio. And I saw we proactively shortened the -- sorry, to lower the ticket size of our card loan. Is that because of we're actually seeing some asset quality pressure from our borrowers? And what's the outlook and trend going forward?

Secondly, the question is on the model guidance. Our guidance imply around 6% to 12% quarter-on-quarter volume growth. And we understand fourth quarter is actually -- traditionally, it's the peak season for online borrowing and the credit card loans. So just want to get some sense about the reason behind our softer-than-expected guidance. And also is good to share what's the mix of the loan volume. Like what percentage of the loan volume will come from card loan and also from preferred loans? Thank you so much.

Yes. Simon, maybe you want to answer the first question, and I answer the second question.

Sure. This is Simon. Hello, Jacky. For the delinquency increase, there are basically two reasons. One is actually we are at a high growth momentum. So as our business grow, absolutely we will see the delinquency grow as well. This is about -- we get the loan size percent, we see the delinquency rate (inaudible). This is one of the driver.

The second driver is, yes, we saw an increase in delinquency in our product -- in our products, so that's the second driver. Maybe actually in the card loan, we saw slightly increase in the delinquency, but it's only the slight delinquency. We absolutely believe our credit card fee for card loan, our major revenue and profit contributor actually is at -- still at our early projection and our early projection.

We will adjust our credit policy, we tighten our credit policy, starting from Q3. Not only we lowered the ticket size, but also we increased -- we reject more applications. It's more like a prevention action. We anticipate a more difficult economic environment in Q4 and next year. We want to make sure our credit quality for card loan, actually, still at our projection we can have a stable credit quality in our portfolio; we can have a stable margin, risk-adjusted margin. And we can have a stable revenue and profit. It's more a prevention action for the -- for our card portfolio. Again, we still believe the card portfolio, the credit quality, and our early projection, we have still maintained the same healthy risk-adjusted margin going forward.

Our preferred loan, actually we do have a higher delinquency inclusively than before, and that is a challenge for us. That's a real challenge for us. Because for the preferred borrowers -- for the preferred loan borrowers, they are pretty much micro small business owners in China.

For the micro small business, micro small business in China actually is under -- it's a weak sector around all these economic downturn. We understand that all these private sector and future pressures from the deleverage (technical difficulty) process. And this micro small business owners who borrow unsecured loan, this is not a -- a weak point of the whole credit chain. So they are and the each pressure under liquidity and that they have ability to borrow and the abilities to pay. Because their business partners also under pressure. So we do feel [very high] increase default. So that's also the contribution for the delinquency increase in the preferred loan.

And from that perspective, we basically scale down the business of preferred loan. And that will lead to a higher delinquency ratio as well. Because you start growing the business, all the business deal have a delinquency, and that was also the driver for the increase in delinquency.

(multiple speakers) Jacky, for your second question, is the Q4 loan facilitation growth. Like I mentioned in my call, basically I say our near-term key focus, number one, is to preserve shareholder value. Because I think one of our key ability is to closely monitor the data, and real-time adjust our strategy and policy. So we be able to manage our risk on a very much real-time basis.

So in the near term, and our characterization of external environment is uncertain economic environment, and a challenging credit environment. So as a result, at this moment, we don't want to put the growth in our number-one priority. Our number-one priority is to preserve shareholder value.

At the same time, I still say number three, we will continue generally the healthy and sustainable growth. So that's our operating forecast. If you look at the underlying driver, like Simon also mentioned, actually our credit card loan, we are continue to grow in terms of number of loans being facilitated. But at the same time, we reduce average loan ticket size by 20% to even 25%. So although the loan amount continue to grow, but combining with the lower ticket size, the growth in loan facilitation amount is not that obvious.

Then on the preferred loan, because of the operating environment for SME owners are very difficult these days, and our preferred loan did suffer a higher-than-expected loss than our earlier estimate. And as a result, actually, over the last three quarters, we have been consistently reduce our preferred loan business.

I think we keeping saying is: if you look at the core competence of our Company, core competence of our Company is use Internet and use data to do the differentiated risk of pricing. So in the future, if you look at our core business, really is online loan facilitation use data and Internet technology.

So, based on what we've seen and what our plan at this moment, we target RMB8 billion to RMB8.5 billion for Q4. Certainly, we hope to do better.

Thanks a lot. Can I have a follow-up question on the delinquency rates? Is it possible to share the breakdown of what was the delinquency rate for the card loan and the preferred loan? Just to make sure I understand this correctly.

Simon, you want to answer that?

Yes. Actually, just a moment. We don't have a -- we don't share the separate delinquency for each product. But a general guidance is our delinquency and loss for card loan actually is pretty consistent as before, and is still in our estimate. And the preferred loan is much higher than our estimate. And we don't share the detailed breakdown, but that's the general picture of the situation. And our -- one big [strategy change] also because as we scale down the preferred loan business, the mix of our portfolio actually is more the online lending than card loan.

Yes. Jacky, one way you look at it is, if you look at the loans are newly facilitated loan, our card loan is a dominant part of our business. Our card loan down is probably -- almost every month is probably, like in terms of around 10 times our preferred loan amount. And so in the newly facility loans. So to understand our business going forward, you should just focus on the card loan.

But for the existing loan book, because our risk are fully provisioned and fully being -- sell to -- even covered by the insurance company. So you actually don't need to worry about the existing loan book that much. I think that's the reason I think we feel this is a better way to present our business just on the combined basis.

Sure. Thank you. Thank you so much.

(Operator Instructions). John Cai, Morgan Stanley.

I have two questions. Firstly is on the adjusted net take rate. And we see an improvement on the Q-on-Q basis to around 8.9%. So, I understand there's a product mix shifting towards the card loan with higher fee rates. So just wonder if there's other reasons driving up the net take rate? And can we have more colors on the APR and the provisions and funding costs, a breakdown of the net take rate?

And the second question is on the cash balance. After the IPO, we have pretty sufficient liquidity with (technical difficulty) RMB1.5 billion cash. So just wondering how will we want to utilize the cash. Thank you.

Hi, John. Yes, I will take the first one and the second one first. Yes, we start with our run take rate, yes, you are absolutely right that our [relative bridge] increase in Q3 when compared to Q2 is mainly for the change of the further mix, a greater proportion of our card loan now in our loan books. But on the forward-looking, we do expect that we will have some slight increase to our APRs in the Q4, or in 2019, but mainly due to our [positions] when we are looking at the total credit environment and potential risk to exposure.

But on the contrary, I would like to suggest that in Q4, the total run take rate will remain faithful when compared to Q3.

So our second question with liquidity, now we have a lot of cash and (technical difficulty) -- the increase in our cash in Q3 is both from the IPO proceeds and our cash generated from operating activity. We are planning for -- to how to best utilize of cash. For example, we are looking for to more investment in our advertising and results marketing activities, such as the NBA and the other activities.

And at the same time, I believe we will keep investing our (inaudible) capitals? And that's one of our key driver that differentiates us from other companies. [And the project we just had results] to major [optics] to reduce our cash. And we will keep you posted if we have any [business] issues, if any -- there was any acquisition or other kinds of use of our proceeds that we will keep you posted. Thank you.

Yes, John, just to add -- this is Justin. So, as you can tell, we obviously have a strong balance sheet, with a bunch of cash and no debt. And our business continues to generate cash as well. So we will constantly evaluate what's the best way to use our cash to generate the best shareholder value. And I think we are very open-minded. And the external environment obviously is very dynamic, but we will very much evaluate what's the best way to utilize that, to provide the best value to shareholders.

Okay, thank you.

Michelle Li, AMTD.

May I have two questions? The first on the funding side: could you please share with us your plans in terms of the funding mix? Do you plan to maybe expand your funding from the financial institutions as well?

A second is on the customer acquisition cost. Could you please share with us maybe the quarterly trend of your average customer acquisition cost for each borrowers, and also investors as well? Thank you.

(multiple speakers) Yes, I can take that. Yes. So for funding sources, actually during the Q3, our online lending platform continued to provide the majority of our fundings, 80%-plus our fundings; with the financial institutions provided less than 20% for our fundings.

One of the key theme is actually we have a lot of financial institutions actually wants to provide funding to us. But actually if you go to our APP, every day you can see almost 80% to 90% of the time, we have nothing to sell. So basically we are recover very strongly from the turmoil period that industry went through during the July and August. So, our investor continue to demonstrate a strong confidence to our product.

So, right now, honestly is that I think we have more appetite for our loan product, then we be able to supply at this moment. In the long run, I think we will increase our institutional funding percentage. In the near term, we just don't have too many extra assets to supply to them.

The second question, maybe Simon and Kevin can address.

With regard to our customer acquisition cost, we just found that the customer acquisition both for the credit side and the wealth management side, they are very stable. They are very stable. We expect that the acquisition -- usually acquisition costs for our credit side will be right around RMB120 per new account. And from the wealth management side, that will be RMB330 per new account.

But, of course, I do -- I think we will have some increasing from the investment side for the acquisition cost. Because previously, we actually do very little in our -- for those advertising campaigns. But now we are -- we have to do some investment in that [first part] of the NBA sponsorship and other (inaudible) projects.

Michelle? I hope this will be [happy] for your questions.

Yes. Thank you very much.

(Operator Instructions). Okay. Seeing no further questions in the queue, this concludes our question-and-answer session.

I would like to turn the conference back over to Jennifer Zhang for any closing remarks.

Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your question, we'll be pleased to answer them for follow-up contacts. We look forward to speaking with you again in the near future. Thank you.

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