X Financial (XYF) 2020 Q3 法說會逐字稿

Good day, and welcome to the X Financial Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to [Tanya Wen]. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results are 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. Simon Cheng, President; and Mr. Frank Fuya Zheng, Chief Financial Officer.

Mr. Cheng will give a brief overview of the company's business operations and highlights, followed by Mr. Zheng, who will go through the financials. They are all available to answer your questions during the Q&A section.

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 operation -- 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.

For the information regarding risks and other risks, uncertainties and 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.

It is now my pleasure to introduce Mr. Simon Cheng. Mr. Cheng, please go ahead.

Hello, everyone. Despite the impact from COVID-19 and the tightened regulatory environment in China, we delivered encouraging operational and financial results in the third quarter. Thank you to the solid recovery in loan facilitation amount of Xiaoying card Loan. Our total loan facilitation amount increased by 30.4% quarter-over-quarter to RMB 8,027 million.

We continued to adhere to our prudent risk management approach. The delinquency rates for all outstanding loans that are past due for 31 to 90 days and 91 to 100 (sic) [180] days as of September 30, 2020, decreased further to 2.13% and 4.62%, respectively, compared to 3.53% and 9.44%, respectively, as of June 30, 2020.

As the pandemic continues to ease and macroeconomic environment recovers gradually in China, our credit risk profile continues to improve.

Based on the solid progress we have made on the operational front, we improved both our top and bottom line. Our total net revenue increased by 40.3% (sic) [44.3%] quarter-over-quarter, and the net loss contributable to X Financial shareholders narrowed to RMB 113 million from RMB 343.7 million in the previous quarter, demonstrating our strong capability to navigate in an uncertain regulatory environment and a challenging economy.

In August 2020, the Supreme People's Court of PRC lowered ceiling of the private lending interest rate protected by law. We believe this new policy is currently only applicable to private lending, which mainly refers to loan made to individuals or companies by private organizations or individuals instead of financial institutions. The regulation does put pressure on the whole lending sector, but it's not directly applicable to our business at this moment as we are a financial institution regulated by local financial regulatory authority.

Recently, the Chinese government also planned to improve -- impose tighter regulations on small loans offered online by macroloan companies. The regulators have started seeking public opinion on interim measures for the administration of online small lending business. The new ruling will significantly affect the fundamentals of online more than the industry with requirements on borrowing limit, fund leverage, prohibition of multiple -- multi-regional lending and other measures. It is expected that the new regulation will be finalized by the end of this year. Due to the low visibility caused by the regulatory uncertainties, it is difficult for companies in this sector to precisely evaluate its impact on the business at this moment. But they will need to adjust their strategies and bring substantial changes to their operations over traditional -- over a transitional period of 1 to 3 years to comply with the new policies.

Despite all the challenges ahead, we will continue to expand and improve our offerings to cater the growing demand for personal financing in China. We are on the track to apply for online microcredit license, and we'll keep a close watch on the evolving market dynamics and regulatory environment. We have experienced reforms and navigated difficult period before and emerged stronger as the key players in this industry. We are confident that we are capable of making strategic adjustments in a timely way to fit into the new business environment.

During the third quarter, we continue to expand our cooperation with financial institutions. In the third quarter, we successfully achieved 100% institutional funding for the new loans facilitated through our platform, compared with 97.4% in the previous quarter. Both the total available credit lines and the number of financial institutional partners have continued to expand. Our risk management capability and proven record have been fully recognized by our financial institutional partners.

Our exit from the P2P business has progressed in an orderly manner. The outstanding loan balance of P2P business continued to decrease from RMB 1.6 billion as of June 30, 2020, to RMB 0.4 billion as of September 30, 2020. And it further decreased to RMB 0.3 billion as of October 31, 2020. Protecting the interests of our investors is always our top priority, and we believe it will help us minimize regulatory risk and establish a solid foundation of trust and integrity in the personal finance sector.

During the third quarter, our number of active borrower continue to grow to 692,997, representing an increase of 10.8% from 625,707 in the previous quarter, mainly due to increase in the numbers of active borrowers of Xiaoying Credit Loan. This is further acknowledgment of high value and quality of the loan products we offer to borrowers as well as the traction and gross momentum we gained as the market continues to gradually recover.

Overall, we will continue to strengthen our cooperation and relationships with financial institutions and keep diversifying our institutional funding sources. With China's steady economical rebound and implementation of favorable policies to support domestic consumption, we are confident in our executing capability to create a long-term value for our investors and shareholders.

Now I will turn the call to Frank, who will go through our financials.

We are pleased to have seen gradual recovery during the third quarter, thanks to the overall improving market conditions and our continuous efforts to enhance the top line growth and reduce the cost across the various parts of our business. We continued to strengthen our risk management capabilities and focused on expanding the quality of our borrower base. The improvement in our credit risk profile has bought a significant decrease of RMB 56.3 million in the bad debt provisions for account receivable and loans achievable in the third quarter when compared with the previous quarter. Together with other cost control measures, we successfully narrowed the net loss for the quarter. So far into the fourth quarter, we are seeing more positive signs on the borrower side. As of October 31, 2020, the delinquency rates for all outstanding loans that are past due for the 31 to 90 days and 91 days to 180 days further dropped to 1.94% and 3.84%, respectively, an outstanding performance showing a high effectiveness of our risk control model and improvements in the quality of our borrowers.

In addition, our efforts to expand and deepen our cooperation with the financial institutional partners continue to bear fruit. The total number of financial institutions, which we cooperated with, continued to increase during the third quarter. And at the same time, we also managed to reduce the overall funding costs in this quarter. We will continue to engage with more financial institutions to further optimize our cost structure. And in the meantime, we continued to diversify our partnerships with third-party financial guarantee companies.

In conclusion, we will continue to closely monitor regulations and market conditions, ensure we will adapt quickly in response to any potential impact on our business due to change in the macro environment. In addition, we will continue to provide more active loan products, further improve the credit quality of our borrower base and explore additional cooperation opportunities with the financial institutions to capture untapped goals in the personal finance industry.

Now I would like to brief on some financial performance for the third quarter 2020. Total net revenue decreased by 34.5% to RMB 559.8 million, about USD 82.5 million, from RMB 854.3 million in the same period of 2019, primarily due to a decline in the total loan facilitation amount in this quarter when compared with the same period of 2019.

Origination and the servicing expense increased by 19.9% to RMB 561.2 million, about USD 82.7 million, from RMB 468.2 million in the same period of 2019, primarily due to the following factors: one, an increase in collection expenses, resulting from a more active policy taken to address the impact of COVID-19; and two, an increase in expense -- interest expenses related to the financing income.

Provision for accounts receivable and contract assets decreased by 71.2% to RMB 24.3 million, around USD 3.6 million, from RMB 84.7 million in the same period of 2019, primarily due to the combined effect of: one, a decrease in account receivable and contract assets; and a decrease in the estimated default rates.

Provision for the loan receivable was RMB 58.1 million, about USD 8.6 million, compared with RMB 3.9 million in the same period of 2019, primarily due to increase in loans receivable from credit loans and the revolving loans.

Net loss attributable to the X Financial shareholders was RMB 113 million, about USD 16.6 million, compared with net income attributable to X Financial shareholders of RMB 169.6 million in the same period of 2019.

And finally, business outlook. Given the ongoing regulatory changes, all market players are taking more prudent risk management approach, and the company is in the process of reassessing its institutional cooperators. Based on the company's preliminary assessment, the deposits paid to its institutional cooperators are subject to the impairment risk. Consequently, the company is unable to reasonably determine a near-term outlook for its business.

Now this concludes our prepared remarks, and we would like to open the call to the questions. Operator, please.

(Operator Instructions) Showing no further questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to [Tanya Wen] for any closing remarks.

Thank you, everyone, for joining us on the call today. If you haven't got the chance to raise your questions, we'll be pleased to answer them through 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.