X Financial (XYF) 2020 Q1 法說會逐字稿

Hello and welcome to the X Financial First 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 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. Simon Cheng, President; and Mr. Kevin Zhang, Chief Financial Officer.

Mr. Cheng will give a brief overview of the company's business operations and highlights, followed by Mr. Zhang, who will go through the financials and the 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 the current market and operating conditions and related events that involve known or unknown risks, unconditioned -- 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 and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligations to update any forward-looking statements as a result of new information, further 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 challenges created by the corona disease, COVID-19, adversely impacting our operating environment, we made meaningful progress expanding institutional funding for all new loan products originated on our platform during the quarter. Institutional funding accounts for 81% -- 81.7% of the loan facilitated in the first quarter, an increase from 52 -- 50.2% in the previous quarter. We rapidly built upon this with institutional funding, which now accounting for 100% of loan facilitated throughout our platform.

As of March 30, 2020, the total credit line provided by our institutional partners expanded to RMB 50.6 billion (sic) [RMB 58.6 billion] from RMB 46.7 billion as of December 31, 2019. Given the current uncertainties in the market, this further proves our asset quality and risk management capabilities continue to be well recognized by our institutional partners, despite the impact from the pandemic. We remain in active negotiation with funding partners to further decrease our funding cost and further expand our funding partners, which could bring down funding costs going forward.

At [present], we have ample funding resources to meet growing demand as our consumer -- as consumer sentiment improves. We continue to adopt a strategic and disciplined approach to our risk management and have implemented stricter criteria when assessing borrowers because we believe it's even more important now for the sustainability of our business. To strengthening our ability to generate stronger results when the market is expected to rebound during the second half of 2020, an adjustment period is therefore expected and is reflected in the lower number of active borrowers during the quarter.

The number of active borrowers this quarter was [288,366] (sic) [428,366]. This is a decrease of 29.7% from 609,368 in the fourth quarter of 2019. Over the past few quarters, we continued to ramp up our technology-driven risk infrastructure and strengthened customer acquisition to successfully manage a rise in the delinquency rate during the peak of pandemic. While restrictions put in place to contain the pandemic continue to ease and life returns to normal, we have seen an improvement in delinquency rates from April 2020. We also saw a significant rebound both in loan facilitation amount and numbers of active borrowers, which strengthens our confidence in the gradual recovery taking place in China.

Overall, the evolving health crisis and growing impact from COVID-19 have weighed heavily on consumer sentiment in China, which is reflected in the performance of Yaoqianhua and Xiaoying Online Mall during the quarter.

Also, in order to control the impact of COVID-19, we have taken a more stringent risk policy. Therefore, the GMV of Xiaoying Online Mall declined 62.2% from the fourth quarter of 2019 to RMB 60.8 million. Despite of this, the number of active users of Yaoqianhua reached around 463,000 as of March 31, 2020, representing an increase from roughly 408,000 as of December 31, 2019.

Transaction volume of Yaoqianhua only declined slightly to RMB 2.192 billion from RMB 2.204 billion in the last quarter. Yaoqianhua's outstanding loan balance increased to RMB 1.801 billion as of March 31, 2020, from RMB 1.503 billion as of December 31, 2019.

Now it has an approved cumulative credit line of RMB 11 billion with credit utilization rate around 28% as March 31, 2020. We believe the pandemic has significantly affected consumer behavior, but in doing so, also create many more new opportunities for us to drive further growth.

In addition, China's central and local governments have recently rolling -- have recently been rolling out a series of policies to improve business. As we continue to involve from pure financial services provided to a more comprehensive business service provider, we are confident we are well positioned to not just survive this challenging environment and -- but thrive when the market rebounds.

Now I will take the call to Kevin, who will go through our financials.

Thank you, Simon, and hello, everybody. And the first quarter 2020 was a challenging quarter. The total loan position amount was mainly RMB 6,823 million, representing a decline compared with our previous announced guidance. We are taking decisive actions to streamline expenses against weaker top line, we remain confident that demand for our highly customized personnel finance solutions will once again strengthen as the recovery from the pandemic unfold. Our revenue and net income decreased both quarter-over-quarter and year-over-year, even though the total number of loans facilitated of Xiaoying Term Loan in the first quarter decrease year-over-year. The average loan amount per transaction was RMB 15,700, an increase of 37% from same period of 2019 and an increase of 7.8% sequentially. The average consumption amount per user of Xiaoying Revolving Loan also increased 3.8% from the fourth quarter of 2019 to RMB 8,600.

We are also pleased to see total cumulative registered users on the platform reached to [43 million] as of March 31, 2020, demonstrating the continued value that we are able to offer borrowers, even during such challenging marketing condition. The percentage of loan products we facilitated that were covered by ZhongAn Insurance decreased further to 67.7% during the quarter, as we continue to reduce our insurance coverage rate to lower our customer borrowing costs. In this place, we have expanded our partnerships with additional third-party, high-quality financial guarantee companies to strengthen trust in the quality of our underlying assets and risk management systems.

We are squarely focused on our mission to create more value for our customers and shareholders. After successfully adapting to the regulatory change in 2019, we are now navigating the ongoing impact of health crisis is having on the industry in 2020. While regulatory and capital requirements continue to put pressure on the sustainability of sector this year, we remain in full compliance with current regulations and are confident in our ability to stand out among our peers by capitalizing on market consolidation and increasing protection for our investors. We will continue to prioritize operational efficiency in driving long-term value for our shareholders.

We believe that the worst phase was already passed. April is a turning months for the year, and we found a lower currency rate and a recovery in loan volume in the second quarter. We also see positive progress in regulations.

In May 2020, CBIRC issued a regulation on commercial bank's online lending limits. This significantly reduced the uncertainty of co-lending model, which was our current key business model. First of all, we are very confident in that we are close to get a nationwide online micro loan license. And we believe that the X Financial would be the first batch of companies in Shenzhen to get a macro loan license.

Now I would like to brief on financial performance.

I will not go through other detailed lines. You may refer to more details in our earnings release. Net revenues decreased by 31.9% to RMB 529 million from RMB 776 million in the same period of 2019 primarily due to a decrease in transaction volumes as more stringent risk policies taking place to address COVID-19 impact.

Originating and servicing expenses increased by 26.2% to RMB 425 million from RMB 336 million in the same period of 2019, primarily due to the following factors: First, an increased in customer acquisition cost for the revolving credit product, Yaoqianhua; and second, an increase in interest expense related to loan facilitated through the consolidated trusts. G&A expenses increased by 24% to RMB 69 million for RMB 56 million in the same period of 2019, primarily due to an increase in management fee paid to third-party trust companies compared with the same period of 2019.

Sales and marketing expenses decreased by 61.5% to an RMB 11.8 million from RMB 30.7 million in the same period of 2019, primarily due to a reduction in promotional and advertising expenses since the outbreak of COVID-19. Provision for contingent guarantee liabilities was RMB 17.9 million primarily attributable to the increase caused by the pandemic in estimated default rate of the loans subject to guaranteed liabilities facilitated in prior period. Provision for accounts receivable and contract assets increased by 23.7% to RMB 82.1 million from RMB 66.4 million in the same period of 2019, primarily due to a combined effect of: a, the new current expected credit loss model that took into account the deterioration in the economic outlook caused by COVID-19 pandemic; and b, an increase in the estimated default rate since the COVID-19 outbreak.

Provision for loss receivable was RMB 42.8 million compared with RMB 7.5 million in the same period of 2019, primarily due to the increase of expected credit loss for revolving loan product when compared with the first quarter of 2019.

Non-GAAP adjusted net loss attributable to X Financial shareholder was RMB 159.9 million compared with non-GAAP adjusted net income attributable to X Financial shareholders of RMB 251.2 million in the same period of 2019. Non-GAAP adjusted net loss per basic and diluted ADS were [RMB 1] and RMB 1 respectively, compared with non-GAAP adjusted net income per basic and diluted ads of RMB 1.64 and RMB 1.56, respectively, in the same period of 2019.

As the company continues to assess the impact of the COVID-19 outbreak and market indicators around the recovery in the first half of 2020, it is anticipated that the company's total loan facilitation amount of the second quarter of 2020 will also be negatively impacted, and the company expects a second quarter loss with drop in revenue. The company plans to provide a business update in the second quarter 2020 earnings release. This forecast reflects company's current and preliminary reviews, which are subject to change.

Now this concludes our prepared remarks, and we'd like to open the call to questions.

Operator, please.

(Operator Instructions)

Showing no 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.

Okay. Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we will 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.