X Financial - Q1 2023

Transcript

Operator (participant)

Hello, welcome to the X Financial first quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Victoria Yu. Please go ahead.

Victoria Yu (Head of Investor Relations)

Thank you, operator. Hello, everyone, 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.xiaoying.group. On the call today from 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 Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations and current market and operating conditions, relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which uncertain are beyond the company's control, which may cause company's actual results, performance, or achievements to differ materially from those in 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 Exchange Commission. The company does not undertake any obligation to update any forward looking statements as a result of new information due to events or other ones, except as required under law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Kan Li (President)

Hello, everyone. We are very pleased to be off a good start in 2023. We delivered a solid operational and financial performance in the first quarter. The known facilitation amount was in line with our guidance range, and the net revenue grew steadily both year-over-year and quarter-over-quarter. We also saw a decent improvement in our bottom line. We have seen signs of economic recovery in China, with increased the consumer spending and better than expected GDP growth in Q1. However, as stated by the National Bureau of Statistics, inadequate domestic demand remains prominent, and the foundation for economic recovery is not solid yet. We saw increased competition in the personal finance industry, with challenges in borrower acquisition. Against this background, our first quarter performance is very encouraging and impressive, thanks to our strong business resilience and execution.

In Q1, our total loan amount facilitated and originated reached RMB 24 billion, increased by 58% year-over-year and 11% quarter-over-quarter. Despite intense competition, we continue to grow our premium borrower base. During the quarter, the number of active borrowers grew by 71% to more than 1.5 million. In addition, our asset quality remained stable sequentially and improved significantly year-over-year. Our delinquency rates for all outstanding loans past due for 31 to 60 days decreased to 1.05% as of the end of March 2023, from 1.31% a year ago. We do not expect our risk performance to fluctuate significantly for the remainder of the year.

With sufficient credit lines in place, we continue to negotiate the funding costs with our institutional funding partners and expect to see a positive impact in the near future. During the recent May Golden Week holiday, Chinese tourist spending has reached pre pandemic levels for the first time, according to government figures. The economic recovery is still in its early stages and there are concerns about the sustainability of the growth, we remain cautiously optimistic about the steady business growth this year as the government releases various measures to stimulate domestic demand and accelerate economic growth. We are keeping a close eye on the regulatory side and have been consistently cooperating with the government on this industry-wide rectification work previously scheduled to be completed by June 2023.

To date, no further guidance has been released by the Chinese government. We do not rule out the possibility that new interpretations or updated implementation details of the rectification work will be released, which could have an impact on the industry and our business. I will turn to Frank, who will go through our financials.

Frank Fuya Zheng (CFO)

Thank you, Kan. Hello, everyone. We were pleased to deliver solid financial performance in the first quarter. Total net revenue was RMB 1,005 million, increased by 13% year-over-year and 5% quarter-over-quarter. Our net income for basic ADS improved significantly to RMB 5.94 from RMB 2.52 in the same period last year, reflecting our strong profitability and the impact of our ongoing share buyback program to enhance shareholder value. Going forward, we will continue to diversify our channels to reach more borrowers while maintaining our strategy of a profitable growth with credit risk management at its core. We expect to deliver steady quarterly improvements in both our top and bottom lines throughout the year to create more value for our shareholders.

I would like to read some financial performance for Q1. Please note that all numbers stated are in RMB and round up. Total net revenue increased by 13% to RMB 1,005 million, from RMB 888 million in the same period of 2022, primarily due to an increase in total loan amount facilities and originated this quarter compared with the same period of 2022. Origination and service expense increased by 36% to RMB 634 million, from RMB 400 million, RMB 64 million in the same period of 2022, primarily due to the following factors: one, an increase in commission fee resulting from the increase in total loan amount of facilities and originated this quarter compared with the same period of 2022.

Second, an increase in interest expenses as a result of increased payable to institution funding partners and investors. Third, partially offset by a decrease in insurance fees paid to the insurance company. Provisions for loan receivable was RMB 20 million, compared with RMB 34 million in the same period of 2022, primarily due to a decrease in the average estimated default rate compared with the same period of 2022, and partially offset by an increase in loans receivable held by the company as a result of the increase in total loan amount of facility and originated this quarter compared with the same period of 2022. Income from operation was RMB 304 million, compared with RMB 314 million in the same period of 2022.

Net income was RMB 284 million, compared with RMB 140 million in the same period of 2022. Non-GAAP adjusted net income was RMB 307 million, compared with RMB 154 million in the same period of 2022. For further financial information, please refer the earnings release on our website. For our business outlook. For Q2 this year, we expect the total loan amount facility and originated to be between RMB 25 million and RMB 26 million billing. This concludes our prepared remarks, and we would like to open the call to questions. Operator, please?

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Matthew Larson from Fincadia. Please go ahead.

Speaker 5

Good evening, everybody. Thanks for taking my call. Great quarter. I mean, you guys just do it every quarter, year in, year out. What is frustrating as a long-term shareholder, for me, is that your valuation really makes no sense relative to what a fintech company would trade at anyplace else. I mean, if I were to annualize your earnings for the first quarter, you're trading at less than 1 times earnings. You're trading at cash value and a fraction of book value. How many ADSs are outstanding, by the way? I see there's 294 million shares fully diluted. What's the conversion into ADS? Can you answer that technical question for me first, please?

Frank Fuya Zheng (CFO)

It's a equal about 6 shares of our Class A share. So, you know, that's the conversion ratio.

Speaker 5

Thank you.

Frank Fuya Zheng (CFO)

Yes, we have about outstanding, about 22 million ADS outstanding. I think that's total 22 million.

Speaker 5

22 million ADS outstanding, and the float is?

Frank Fuya Zheng (CFO)

Yeah, yeah. Yeah, yes. Well, 46 million equivalent, total, but, you know, tradable, you know, has been converted to ADS, is only about 22 million.

Speaker 5

That's what's available on the float?

Frank Fuya Zheng (CFO)

Yes.

Speaker 5

Because if there's 294 million shares divided by six, yeah, it's 40 some odd. The float's only 20 million shares. Okay, just a couple of questions. I mean, the valuation, this stock should be $10 at least, and that's would be because if you make... If you're going to grow your revenues and top and bottom line every quarter for the rest of the year, you know, you're looking at $4 a share in earnings potential. Which is up a little bit this morning in heavy volume. Who knows if it'll hold? Because it did that about a month ago. It traded 1 million shares and came right back down. You know, this has just been stuck in a narrow range. I know you're buying back some shares, which, by the way, was there a reason you didn't buy back any in the first quarter?

Frank Fuya Zheng (CFO)

Because of the first quarter, there's no open window for that, and we only so far, we only, you know, did a buyback through open window. I actually for the whole buyback, which was about CNY 20 million so far, most of it is buy through Class A share which do not affect our flow much. We our ADS for the total last year, we only bought like, I don't know, maybe over 200,000 shares. That's about it. All the buybacks, you know, mass majority is buyback through Class A share, which we try to avoid, you know, have a less impact on the flow, which our flow is not big as I stated before.

Speaker 5

Sure. You know, for a U.S. investor, I can't buy the A shares, okay? It's only the ADS.

Frank Fuya Zheng (CFO)

Yeah.

Speaker 5

Even though you've reduced your share count, of the A shares, the valuation just is, it just doesn't make sense. Now, there's some other companies that are in your similar space, which I'll give you the symbols, you know where they are. I'm not saying they're exactly the same, but they were all underwritten by Morgan Stanley, FINV, for example, QFIN just reported, even YRD, okay? Companies that initially were peer-to-peer lenders and have migrated to, you know, lenders using capital-light models and things like that. The frustration is there's a lot.

Every day, there's some small cap companies that are domiciled either in China or Hong Kong, that go up five or 10 fold on no news and it would be great if one of them I own worked. Let me ask you this, you all should could be putting out more information. I mean, you've been using AI as far as I'm concerned, for years, or some variation of artificial intelligence. You use an algorithm to make immediate credit assessments, you know, from all the people who have your app on the phone.

You know, they tap in, from what I understand, how much they want to borrow, kind of like a credit card, and you make an assessment based on their credit history, their zip code, whatever it is, but it's not a human making that decision on these small loans. Why don't you put out some news saying that, you know, I mean, just look at the stocks in the United States that are involved in artificial intelligence, NVIDIA, for example, you know, as I'm sure you're familiar with that company. It's just such a high growth thing. You all could be putting out more news because I assume you want your stock higher. Why not?

I mean, you've, you, it's a fraction of where it was when it came public, but you performed extraordinarily well. You might want to rethink, you know, your public relations, your news releases, because you should be... I mean, you didn't even mention on the news release, you know, what price to book you're trading at. I couldn't figure that out. Well, that's why I was asking how many shares are outstanding. Is there, besides a share buyback, which frankly, even though your float isn't big here, if you guys bought 1 million shares just out of the market here, it would at least put a bid in the market for U.S. investors to benefit from it, because the small float isn't helping.

I guess I'm frustrated because your stock should be several times where it's at, but it kind of falls between the cracks because there's no analyst that follows the company, and there's few people even know about it. What, you know, what can you tell me about other efforts to get your stock price higher?

Frank Fuya Zheng (CFO)

Well, let me try to answer your question. First of all, I completely agree with you. Our stock is severely undervalued. Not just our stock and our peer stocks, all undervalued to a large extent. You know, you know, see, like our, you know, PB is right now is $0.22 on the dollar, you know. I have more cash than my market cap, you know, I audited by KPMG, for sure, I did not do anything, you know, funny thing. I have RMB 22.4 million cash deposit in the bank in order to support my business.

You just, you know, not including the cash on my balance sheet. You just figure, you know, how much we undervalue. Our peer, whatever the name you mentioned, you see they all book, they all value below the book value, when, you know, so they, you know, like, you know, somebody put a little bit better than me. We will, you know, take your advice. We'll do some marketing roadshow, and you see, you know, right now we are, so there's a regulatory, you know, deadline on June 30. Let's get that passed.

We are have so in some sense, we are, you know, legit, you know, first, we are now, our survivability is not in question, but the prospector, you know, the future of our industry, future of our, you know, definitely in doubt, you know, that's why I believe, that's why we have this kind of valuation. We will take you the advice, we will do some, you know, PR stuff and, you know, stuff you just mentioned, starting second half of this year.

In addition, the buyback, which we did last year, which we would reduce our total share counted by 16%, which is a lot, but still not much, did not help much in terms of the stock price. You know, I don't know how to answer that, but I think, you know, whoever else did a buyback also did not work that well either. So I'm not alone in that category also.

We will, definitely, one thing I will tell you is we will, starting this year, we will pay, you know, definitely we'll pay dividends. Our company, our shares, for our shareholder value, and relative will be higher, compared with, you know, compared with the other industry and so far, so on. We will consistent do that for the next few year. That's our intention, that's our board intention and so far so on. Let's see how that will work out.

Speaker 5

All right, I'm, there's usually not many people on this conference call, so I'm gonna take a little more time. You talk about the regulatory response, which is due in June. You know, since your companies have come public, they've been under regulatory review or scrutiny by the government. I mean, again, there was a lot of peer-to-peer lending companies and that was, you know, a business model that was pretty much outlawed, and, you know, for various reasons, there was some bad actors. Okay. We go through the same thing in our country, you know, where financial, you know, a loose financial structure can lead to, you know, disappointment among consumers.

You discussed that the survivability of your industry might even be at risk. I mean, you, it seems to me you all provide an important service to consumers in the PRC. You're allowing them credit. You're doing so in a very businesslike fashion by capital light type of structures, where you're, you know, you're syndicating the loans through a bunch of banks. You're just, you know, providing the credit check, the credit, you know, review and the customers, and the banks may loan the money for the most part. That's good for the economy, because from what I understand, there's an interest to grow the consumer-based economy versus export-based economy in the PRC.

Why would your industry be even, you know, at risk of survivability if you're providing a service? I mean, credit makes the world go round. You know, it greases the wheels of commerce.

Frank Fuya Zheng (CFO)

Yes. I understand what you mean. I think I can answer that question. I think our industry having gone through a very treacherous for the last few years, and all the, you know, most of bad actors has been cleaned, you know, like, you know, so called P2P, you know, it's been cleaned by company.

I think everyone, including governments, will agree on this. The survival of this industry is much healthy and much, you know, comply everything, in every respect, comply with government rule and regulation, on both, you know, most of in Chinese, also on the regulatory front, on U.S. side also. That definitely is true. The issue is government, you know, for the last two years, and you know, government always, you know, try to strongly promote a small business owner, small business, that's for sure. They are supporting for the, you know, companies who provide a loan.

The only thing is not very clear is, they seem like to, you know, provide very low interest loan from from mostly state owned banks. Our business model, you know, mainly is based on risk factor, and we not make a ton of money. Our interest spread, you know, spread we earn on our business is comparable with big banks, but probably a little bit higher, wider than them. We also take more risk, you know, so that's why I think that we charge a little bit a little more in terms of interest spread, and I think this is fully justified, but that is not.

Probably that's the, you know, the fundamental reasons not totally be endorsed by the government or regulatory. That question has still have made very clear or very clear for everyone. That is why, you know, that is why because we relatively speaking, the people we charge is still very high. You know, if you see, you know, the so called loan provided to the small business individual owner, whatever form of government, they only charge about, you know, maybe 4%, 7%, some in that range anyway. Once again, I think that is not based on risk factor, you know.

If you ask me, you're taking the risk factor, those loan, I think is, most of them will be bad. You know, to be frank, I think I don't know how that, you know, economically are workable, but we do different model. Our model is not, once again, not fully endorsed by the authorities. That's what I.

Speaker 5

I see.

Frank Fuya Zheng (CFO)

Not. Yeah.

Speaker 5

Well, you're, you have unsecured loans. All right? If you're having discussions with them, I can tell you what credit cards, which would be as similar to, you know, how you loan money on an unsecured basis. Credit cards in the United States, Bank of America, Citibank, American Express, they're 23% or 24%. All right? They got to be paid back every month, or you got to pay the 23% or 24%. If I were to get a collateralized loan, you know, a secured loan from a bank, like a mortgage, it would be 6%. You know, it just there's a, as you said, it's a different model. If this, if I have a small business and I have cash flow, I can borrow against my receivables, right?

If I just want to borrow money on an unsecured basis, when I go to a restaurant or want to buy a laptop, and I use a credit card, it's 22% or 23% or 24%. Your rates are not out of line by any means. Because credit cards, you still have to have a credit history and to even get one. And if you haven't, you know, in the past, paid it back, you can't even get a credit card. You're right. Your business model is different than when banks are loaning small businesses who they can loan against secured revenues. In any case, I wish you the best.

I'd love to see your I mean, your stock could be 10x higher, for Pete's sake. If you make $4 a share, why wouldn't it be trading at, you know, $25? Okay, by any measure, because that's a financial institution has shown your track record of keeping loan losses down to, like, 1%, I think you're at. You know, that's very, very good credit assessment. All right? Whatever business model you have, whatever algorithm you have for assessing who to loan to and who not to, is extremely good. All right, well, thank you for the time. Put out more news, please. If you're using AI or some sort of artificial intelligence, computation to make your loans, make that known that you're a technology company, okay? As much as a finance company. You use technology and you use it very effectively.

Frank Fuya Zheng (CFO)

Thank you. Thank you for the question.

Speaker 5

All right.

Frank Fuya Zheng (CFO)

Thank you for encouraging us.

Speaker 5

Very well. I'll let somebody else, if they're on the phone, call in. Thank you.

Frank Fuya Zheng (CFO)

Thank you.

Operator (participant)

Again, if you have a question, please press star one. Our next question comes from Boyd Hines from Equinox Capital. Please go ahead.

Speaker 4

Hi, thank you for taking my questions. I also wanted to focus on regulation, because I think that's the primary issue here that's held back the valuation of the stock. In the discussions that you've had with the regulators, what have been the primary concerns that they have with your business model?

Frank Fuya Zheng (CFO)

We don't have a much regulatory dialogue with the regulator regarding the business model. Regulatory, you know, sometimes just the only issue they care right now for the last year or so, is, you know, customer complaint. We address the best, that's their KPI, the number one KPI. We do our best to address those issues. Other than that, we the other area, we are, you know, comply voluntarily. We are, you know, you know, so, we frankly, we never have a discussion with the regulator regarding our business model. I don't think that, I don't think that's their concern. Our business model is not their concern.

Kan Li (President)

Let me take this question. I think Frank has been maybe very clear. It's not that we have a huge barrier between us and the regulators. I think one of the key issue here is that the Chinese government has made it very clear that if you are doing the financial activities, then you need to be licensed.

In terms of licensing us, should we get a license or should we just be some other company who should not be doing any financial activities. I think the regulator is down into this one question, and they haven't made it very, very clear. I think that this answer in this has been kind of hanging over there, and we don't have any answers for that question. I think this is a key issue between, for the fintech companies in China, because that our business actually, you know, our business is actually the financial activities, you know.

Frank Fuya Zheng (CFO)

Yes, we are, you know, we are engaged in financial activities as a facilitator, as syndicator, whatever you call it. The question is, you know, according to philosophy of government, all financial activities should be licensed and whether they will issue a license for a company like us, you know, maybe not. That, that probably is the key question.

Speaker 4

Yeah, I think they're having a hard time understanding whether you should be regulated as a bank or not.

Frank Fuya Zheng (CFO)

Mm-hmm. Yes. Yes. Yes.

Speaker 4

I mean, you seem to be doing a fantastic job at managing the credit risk. I think that's also, at least if, you know, the regulators in the U.S. would be concerned about, would be issues like, you know, do you have a lot of undisclosed risk that's not on your balance sheet? I think that's what some of the other competitors in the fintech space are beginning to address, which is, you know, they're actually making more of the loans themselves. They're going back to a capital-heavy model, which is where they're actually holding the loans on their balance sheet.

They're not just facilitating the loans where you've got corporate or institutional partners that you have, that are actually making the loans, and they're just taking the information that you're giving them about the borrower. You're basically, that's what your model is based on facilitating those loans. People just don't know how to treat you. They're worried that you're helping to provide information without potentially any, you know, risk that you're should be showing on your balance sheet. I think that's probably the key issue here, is, you know, and how would you address that? I mean, you have, you do a lot of work with third-party guarantors. Have you analyzed their financials?

Because, you know, and I know you do back-to-back guarantees, so you are in effect, taking on the risk, but is it shown on your balance sheet? I think that's probably the key issue here.

Kan Li (President)

Well, in terms of business model, we don't show that in our balance sheet. I think that's true. On the other hand, if you just take a very crude leverage count, right? We're managing around RMB 40 billion loan business. Our total net capital is around RMB 6 billion. If we take that very rough ratios, it's about one to six or one to seven, right? Which in terms of the way that we can, the risk that we can handle, I think that the room over there is quite high.

What I will be looking at is when we compare across industry, and I normally have to take a look at that ratio. Another thing is that, just as Frank mentioned, that we have about RMB 2.7 billion that deposit in different institutions, and that is another buffer that we can use to we can use to offset any credit risk that is coming out. In terms of our overall business that we are very that we generate various cash flow. Our company itself does not need to need to take that much of a risk for our business.

Another thing that you just mentioned, that in terms of moving the balance from the, let's say, banks or other financial institutions to our own balance sheet, that this is another dilemma that I cannot solve, because our company cannot directly issue loans, right? Other than the microloan company that we own. That microloan is under very heavy supervision, so we can't really offer a lot of loans to that company. Some of the solution actually does not apply to our business here.

Speaker 4

I mean, could you potentially partner or sell yourself to, you know, a larger financial institution that already has the proper licensing? I mean, there's got to be a way for you to recognize the value that you've created here, because the market clearly doesn't care.

Frank Fuya Zheng (CFO)

That's probably not likely. But as you say, this is, you know, since our model is not, you know, recognized by government through a license or through other kind of means, so there's no big institution in China will acquire us, that kind of business. Because in term of the cultural, in term the compatibility, you know, between our business and their business, I don't think they are, you know, the big financial guy in China will likely, you know, acquire a, you know, at a valuation desirable for you guys. I think that's highly unlikely.

Speaker 4

Just one last housekeeping question about the tax rate. Do you expect that rate to be consistent with what you've reported in the first quarter going forward?

Frank Fuya Zheng (CFO)

I think that I answered that question before. I think that the because, you know, the most entity, our entity in China, we operate in China, its tax rate is about 15%. We actually, you know, you know, charge U.S. tax rate is about 25%. That is being, you know, there's a way to being reconciled over the time. I think once again, our effect tax rate will be below 25% on going forward base, and it will be stabilized.

Speaker 4

Okay. In terms of that date of June 30th, is that kind of a, like, once you get past that date, and there's no, you know... I mean, are you in the clear after June 30th, or is there still gonna be, you know, ongoing?

Frank Fuya Zheng (CFO)

I don't-

Speaker 4

Theories of regulatory issues?

Frank Fuya Zheng (CFO)

I don't know. I don't know. You know, you know, you know what I mean? We are not in the, even including that 13 plus one, you know, which is Ant Group. As, you know, as they are being marked to be, you know, re-regulated and first, and to reification. We're not even marked, but no one ever mentions that 14, you know, others. We are others. All the work, I think the government, I think is pretty much focused on the Ant Group alone. Ant Group, as far as I know, you know, from the news, as everybody, they're basically finished.

Other 13, what they will do to comply fully, I think they will. I don't know, maybe just pass the magic stage, June 30, maybe. We hope, you know, they all pass. If they all pass, we maybe pass along. You know, I don't know. You asked me, I'm not the one, you know, in the position to answer that type of question.

Speaker 4

Okay. Thank you very much for answering my questions, and good luck to you. Thanks.

Frank Fuya Zheng (CFO)

Thank you very much.

Operator (participant)

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Victoria Yu (Head of Investor Relations)

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 our follow up contacts. We look forward to speaking with you again in the near future. Thank you.

Operator (participant)

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