X Financial (XYF) 2021 Q4 法說會逐字稿

Hello, and welcome to the X Financial Fourth Quarter 2021 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 our call today form X Financial are Mr. Kan Li, President; and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr. Li 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 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 the management's current expectations and the current market and operating conditions. And relate to events that involve known or unknown risks, uncertainties and other factors 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 and factors is included in the company's filings with the U.S. Securities and Insurance Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise expect as required on the law.

It is now my touches to introduce Mr. Kan Lee. Mr. Li, please go ahead.

Hello, everyone. We are very pleased to conclude 2021 with another solid quarter of financial results, delivering profitability for the full year. Both our top and bottom line for the fourth quarter significantly improved over the same period of 2020. Despite the challenging macro economy and the regulatory environment in 2021, we have successfully turned our business back on track and maintained a steady growth momentum compared with 2020. The total loan amount facilitated and provided in 2021 increased by 75% year-over-year to RMB 52 billion from RMB 30 billion. With a very focused product strategy and effective cost counter initiatives, we turned profitable in 2021, and our bottom line outperformed the full year of 2019, the year before COVID-19 outbreak.

During the fourth quarter, our total loan amount facilitated and provided reached RMB 13 billion, an increase of 51% year-over-year. As mentioned in our previous guidance, we saw a moderated sequential decline in the loan volume in the fourth quarter, which was mainly attributable to the year-end outstanding loan balance requirements of our institutional funding requirements.

In the first quarter of 2022, the level of available funds has resumed its normal level. Since 2020, we have shifted our product focus to selling Xiaoying Card Loan, which contributed 100% to the total loan amount fa ciliated and providing in 2021. With this focus and proven product strategy, we are confident in our ability to sustain steady growth in the loan-facilitation business in 2022.

Regarding asset quality, the delinquency rates for all outstanding loans that are past due for 31 to 60 days as of December 31, 2021, was 1.48%, higher than 0.96% as of September 30, 2021, and 0.79% as of December 31, 2020. This fluctuation is mainly attributed to liquidity particularly in the first quarter of 2021. Since February 2022, we have seen our asset quality gradually improving as a result of ample liquidity in financial markets and our stricter risk management measures.

In 2021, we officially commenced operation of our Microcredit business in the third quarter after we received the regulatory approval for our Microcredit items. And during the fourth quarter, with further increase in registered capital to RMB 1 billion in compliance with regulations, we are on track with our Microcredit business and look forward to creating more value for our shareholders.

In the fourth quarter of 2021, we invested RMB 350 million and become an indirect minority shareholders of Newup Bank of Liaoning, a PRC company and a non-state-owned bank. We are exploring opportunities to cooperate with the Newup Bank to better serve our SMEs, and we are confident in that based on our advantage in technology and risk management capabilities. The cooperation with the Newup Bank could bring move possibilities to our business to jointly empower and support the development of the economy in China.

Heading into 2022, we expect regulatory uncertainties to subside with clearer guidance from authorities. The Chinese government has affirmed the value of fintech industry to address people's inclusive financial needs, and support the development of SMEs. We remain cautiously optimistic about our business outlook while being prepared for any macro uncertainties that may emerge in 2022. In order to pass our confidence to the market and increase shareholders' value, our Board has been timely evaluating based on our current market environment, regulatory policy and conditions of business operation, multiple ways of returning profits to our shareholders, including share repurchase as well as cash dividend distribution.

Recently, our Board approved a USD 15 million share repurchase plan, which reflects our confidence in the company's fundamental strategy and sustainable growth. We are looking forward to an increase of our shareholders' value in the future.

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

Thank you, Kan, and hello, everyone. We are pleased to deliver solid financial results for both the fourth quarter and the full year of 2021. The total net revenue increased by 15% year-over-year to RMB 823 million in the fourth quarter. We saw a significant improvement in our bottom line with non-GAAP adjusted net income improved to RMB 183 million from a loss of RMB 631 million in the same period of 2020.

For the full year 2021, total revenue increased by 65% to RMB 3,626 million. Thanks to our relentless efforts on the cost management and total operation costs and expenses decreased by 36% to RMB 2,315 million. Non-GAAP adjusted net income improved to RMB 914 million in 2021 from a loss of RMB 1,228 million a year ago.

In conclusion, we are greatly encouraged by the strong results we delivered in 2021, which fully demonstrate the resilience and the growth potential of our business. Going forward, we will continue to expand and deepen our cooperation with more institutional funding partners to meet the needs of consumers and SMEs, and execute our proven strategy to drive sustainable long-term growth and the returns for our partners and shareholders.

Now I would like to brief some financial performance for the fourth quarter. Please note that all numbers stated here are in RMB. Total net revenue in the fourth quarter increased by 15% to RMB 823.4 million from RMB 716.3 million in the same period of 2020, primarily due to an increase in the total loan amount facilitated and provided of Xiaoying Card Loan this quarter compared with the same period of 2020.

Origination and servicing expenses in the fourth quarter decreased by 29.9% to RMB 385.8 million from RMB 550.7 million in the same period of 2020, primarily due to decline in the collection expenses resulting from the asset quality improvement, and a decrease in insurance fee paid to the insurance company.

Provision for accounts receivable and the contract assets in the fourth quarter was RMB 19.5 million compared with reversal of provision for accounts receivable and contract assets of RMB 13.2 million in the same period of 2020, primarily due to an increase in accounts receivable from facilitation services as a result of increase in the total facilitation amount in the first quarter of 2021 compared with the same period of 2020.

Provisions for the loans receivables in the fourth quarter was RMB 40.3 million compared with RMB 33.7 million in the same period of 2020, primarily due to an increase in loans receivable held by the company as a result of increase in total loan amount facilitated and provided in the fourth quarter of 2021 compared with the same period of 2020. Increase from operations in the fourth quarter was RMB 311.6 million compared with the loss from operations of RMB 857.3 million in the same period of 2020.

Net income attributable to X Financial shareholders, in the fourth quarter, was RMB 145.5 million compared with the net loss attributable to X Financial shareholders of RMB 655.5 million in the same period of 2020. Non-GAAP adjusted net income attributable to X Financial shareholders in the fourth quarter was RMB 183 million compared with a non-GAAP adjusted net loss attributable to X Financial shareholders of RMB 630.8 million in the same period of 2020. For further financial information, please refer to the earning release on the company's IR website.

Now for our business outlook. We expect total loan facilitation amount for the first quarter of 2020 (sic) [2022] to be between RMB 15 billion and RMB 15.4 billion and the range of incremental in total loan amount facilitated and provided for 2020 (sic) 2022 to be from 15% to 25%. This forecast reflects our current and preliminary views 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) The first question comes from Mason Bourne of AWH Capital. Please go ahead.

To start, I was hoping you could give more background on your investment in Newup. Why now and your main goals?

This is Frank. Thanks for your question. The Newup Bank is one of the 7 banks owned privately. So it's not a state-owned bank. And the purpose is only -- one purpose only, as we try to -- with this equity interest, we try to explore the opportunity and a new way to develop jointly to develop our SME business, which is a great courage by the government at the current time.

So yes, sorry. So you will not see -- in terms of the business volume or otherwise, there is much -- it's more like a long-term strategic investment for us.

And then on the SME side, how do you think about potential profitability of that segment compared to your current business?

That side is kind of tough. That market is quite -- is different from us, but have some overlap with the current business -- with our current market that we serve. We are mainly right now served consumer market for the individual mainly, up to like 80% or whatever. The overlap is about somewhere -- anywhere between 10% to 30%. But the bank is -- they are -- especially for the small bank, they are mainly lack of technology ability to develop their SME market.

They have their own market, but they have kind of reached -- approached that market in a very traditional way. It's mainly by person, not we. So we -- by this cooperation, we try to leverage each other's advantage from us. So we are merely provide maybe technical approach to their -- they are seeing and there you will maybe provide some other market -- assets marketplace for us. But I'd be cautious. Any outcome at this stage is very preliminary, which we would not strongly advise anyway, should not give any forecast projections regarding the results about it.

Great. And then on your guidance, you provided total loan volume expectations. How do you think about profitability in 2022?

So we are kind of -- not just us, our competitors are kind of cautious in general for an outlook from -- for this year. We gave like 15% to 24% increase in terms of volume for this year. And do not give any earnings forecast at this time, mainly because even though on the regulatory side, it's -- we believe it will be in a quite stable situation in 2022. But from the economic side, it's quite uncertain, especially the current right now is zero tolerance on COVID-19.

Right now, the biggest city in China, like Shanghai, is right now in like a total lockdown and not just Shanghai, many, many, many cities in the COVID situation is prevent -- it's quite spread. Among the 27 provinces, many, many city, it's kind of a semi- they're doing the testing -- COVID test every day just -- otherwise -- so there's supply situation and some industry affect a lot like a restaurant [high growth], entertainment are all greatly affected. People -- a lot of people in those industries are kind of in furlough status, you know what I mean? So -- but those employees in those industry, I think it's at same time related to our business as a market differential. They arethe people we serve. We ask people are you sure? (inaudible) market basically, you know what I mean?

So we're kind of all cautious, did not give -- that's the main reason we do not give earnings at this time. But one thing we are pretty sure and we will be profitable substantially this year. But not -- maybe not as big as much as last year. But we are kind of reluctant to provide exact figure at this time.

And then lastly, it was good to see buyback put in place. Could you talk more about how you think about capital allocation going forward?

We -- as we stated in the press release, we will do the buyback from time to time, but we are not trying to so-called correct with the -- so-called this very severe undervalued share price situation that I think we are not in a position to correct that situation by -- all alone. It's an industry-wide situation. It's tied to many, many other things. But we definitely will do where we think it's very much outlined in terms of the share price. So we will still use our mainly -- and use our cash to explore the new business opportunity and acquire more customers and grow our business basically. Do you want to say something on -- that's our intention.

The next question comes from [Matthew Larson] with National Securities.

Do you have an explanation why your company plus some of your I'll call them competitors, whether it's 360 or even to a certain extent, YRD and FINV, you're trading at 1 or 2x earnings and yet your earnings are growing. You faced the same headwinds that any lender has, uncertainty about the economy, delinquencies where your underwriting has to be strong and regulatory issues. We've experienced those for year this year with our lending companies, whether the payday loan companies or peer-to-peer lenders.

There's a company called UpStart, which trades at probably 50x your multiple. It seems to have a very similar business model. I think the share buyback is very smart because your volume has dried up and it really could make a difference by putting a floor on the stock, and it's very, very accretive, of course, also to be buying your stock down here, and you could buy it even up quite a bit. Do you have any explanation why your industry groups trade essentially -- some of them trade below cash on the balance sheet. I mean is that just an anomaly because U.S. investors have lost interest? Or is there something else out there?

I believe this is your first time joining our call. And I think that if we get like the cash value for our share, we've been very happy actually that we are actually much lower than cash, okay? And -- but the short answer for your question is because our industry right now -- difficult future for our industry because the regular environment, that's I will put it very bluntly...

I think what Frank is trying to say is that in some of the investor says that this industry has no future, right? I think it's very difficult to comment on why other people think that this industry should be valued like this. And we, as a management team, we certainly think our stock is undervalued. That is why that we put in this repurchase plan as we just mentioned. And we think that at this moment, it's just a natural move for us to buyback some of our shares.

I think meanwhile, it's really the risk, right, different people associated with different industries with different risk levels. And in our particular case, I think one is this industry is still, I would say, even though with a lot of governance -- with the amount of governance, it's still not very clear how this industry will be going -- or how that industry is going to develop in the -- going forward.

And another one, of course, is the relationship between China and the U.S. is not -- I would say it's not great, right? So I think that the investors are thinking about Chinese companies that they naturally put it or we put some discount on it. I think that in the end, it's really nobody knows what the correct valuation is. You probably have a feeling now of where it should be. And at this moment, we certainly think that we are lower than where we should be.

What's your guys comment on that?

There is an issue for this. All the Chinese companies listed in the U.S. is caught in kind of a trade war between China and U.S., as you all know. So there's a PCAOB issue. I'm sure you're all aware of that. And that is a question whether the all Chinese listed company or Chinese companies could be continue to be listed in the U.S., it's in doubt right now.

And we hope that will be solved some time when we are (inaudible). But for our particular industry, I think another answer is very simple. It's -- the visibility is almost 0 because of the regular environment and the regular uncertainties for our industry. The issue you -- I also believe you are aware of our industry. I think that's the answer for your question.

Well, if I could just -- I'm sorry, just a couple more moments here because it's a frustration for investors because I don't look at your industry as a value trap. It's been -- you guys were -- some of your competitors were underwritten. Yes. As a long-term investor, obviously, I'm interested in growing my investment. And your company has done very well, and it had a couple of runs at considerably higher prices, and hopefully, that will occur again. But I guess I would say that the share buyback is very, very -- is a very good thing to do because it's a large enough buyback, 7% or 8% of your market cap. And I don't know what percentage of the float. But I just would be very -- for me, just looking at how accretive it is and you have enough spare cash on the balance sheet to do such a thing.

And I mean you could really put a bid in the stock, and we could get not only this company and others to really see some upward trajectory after being kind of just forgotten. They just -- they've been orphaned almost because investors kind of ignore stocks once they get down to the share price that your stock has been at $2 or maybe $3 if we're lucky.

And so I just hope you continue to see ways to not only continue to show good operating earnings and do well within your industry. But find a way to elevate your stock because you could easily trade at twice where it is now, which would give it still a small earnings multiple and a big discount to book. But you would bring in more investors if the stock were to get above, say, $5, which is a minimum for many investors. So that would be a goal to do it one way or another besides just the obvious, which is to continue to operate your business in a very profitable manner.

So I look forward to you guys being aggressive with share buybacks particularly at the price where it is now, where it's extremely attractive and accretive. I mean, you're trading at with less than 2x earnings -- trailing earnings, which is you would never find that in the United States. So thank you for listening to me, and congratulations for the quarter and I like the guidance going forward.

Thank you, Mr. Larson, and thank you for your question. And that's exactly -- regarding to the share buyback, that's exactly what we will try to do. We believe -- we try to -- basically, we try to set up a flow for the share price. And -- but as you know, the flow is not updated. So I'm afraid we probably -- there's no ability to buy a lot of shares unless we get to the price in a very big way.

That's also -- that's not something we want to do because we are in the that industry, everybody has traded below the 5x PE or something like that. We are kind of very low, but we can improve a little bit, but we are definitely not in like a 10x earning -- PE earning -- trade at a 10x PE earnings. That's kind of the same. So we basically do something as you expect and thank for your question again.

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