X Financial - Earnings Call - Q1 2025

Transcript

Operator (participant)

Hello, and welcome to the X Financial First Quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference operator 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. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.

Victoria Yu (Head of Investor Relations)

Thank you, Operator. Hello everyone, and thank you for joining today's call. The company's financial results were released earlier today and are available on our investor relations website at ir.xiaoyingroup.com. On the call today from X Financial are Mr. Kent Li, President; Mr. Frank Fuya Zheng, Chief Financial Officer; and Mr. Noah Kauffman, Chief Financial Strategy Officer. Mr. Li will start with a brief overview of our business progress and financial performance. Mr. Kauffman will go over some key Q1 metrics and highlights. After that, Mr. Zheng will share updates on financials, regulatory insights, and our 2025 outlook. Afterwards, Mr. Li, Mr. Zheng, and Mr. Kauffman will be 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 involve known or unknown risks, uncertainties, and other factors. These factors are difficult to predict, and many are beyond the company's control, which may cause actual results, performance, or achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our SEC filings. The company undertakes no obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. It is now my pleasure to introduce Mr. Kent Li.

Kent Li (President)

Thank you, Victoria, and hello everyone. We are pleased with how 2025 has begun. In the first quarter, we facilitated RMB 35.15 billion in loans, an 8.8% sequential increase and 63.4% growth year-over-year. It was one of our strongest quarters for originations, reflecting solid borrower demand and continued progress in risk management. Our team remained focused on expanding opportunities through both new partnerships and existing relationships, enhancing our technology platform and underwriting models to support profitability and scalability, balancing growth and risk as we broaden access to qualified borrowers. We are also working to improve the borrower experience by delivering faster decisions, simplifying application processes, and enhancing transparency. In parallel, we continue to strengthen platform reliability and support tools to help customers make informed borrowing decisions and manage repayment with confidence.

Despite the typical seasonal impact from Chinese New Year, we achieved sequential growth in both loan volume and revenue. Total revenue reached RMB 1.94 billion, up 13.4% from Q4 and over 60% year-over-year. These results reflected steady progress in growing the platform responsibly. Operational and credit quality updates. We also made continual progress on asset quality as of March 31. Our 31-60 day delinquency rate was 1.25% compared to 1.61% a year ago, reflecting a 22% improvement year-over-year. The 91-180 day delinquency rate was 2.7%, down from 4.7% in Q1 2024, a 37% reduction year-over-year. These improvements reflect disciplined borrower screening and underwriting practices. We have also continued to enhance borrower engagement and repayment behavior through timely communication and tailored repayment assistance programs. These initiatives have contributed meaningfully to our risk management outcomes and supported further portfolio stability.

Now, I will turn the call to Noah to go over some key Q1 metrics and highlights.

Noah Kauffman (Chief Financial Strategy Officer)

Yeah, thank you, Kent. Hello everyone. It's a pleasure to speak with you today. Let me share several highlights from our Q1 operational and financial performance. On the operational metrics, we facilitated approximately RMB 35.15 billion in loan originations, marking a 63.4% year-over-year increase. Our total loan outstanding balance, excluding loans over 60 days delinquent, reached RMB 58.4 billion, growing by more than 33% from Q1 2024. We facilitated over 3.14 million loans with an average loan amount of approximately RMB 11,181. On the financial highlights, total revenue grew to RMB 1.94 billion, up 13.4% sequentially and 60.4% year-over-year, primarily driven by higher borrower volumes and originations. Our income from operations expanded substantially, reaching RMB 573 million, up 52% year-over-year. This demonstrates our improved operational leverage and disciplined expense management.

Our average funding cost improved year-over-year, supported by a more optimized funding structure and sustained commitment from our core institutional partners. This reflects the strength of our platform and deepening trust within our funding network. With these metrics, we continue to see notable gains in operational efficiency and market positioning. I'll now hand the call over to Frank to walk through the financials, discuss capital allocation priorities, provide regulatory insights, and outline our growth outlook for 2025.

Frank Fuya Zheng (CFO)

Thank you, Noah. It's great to speak with everyone today. I will provide additional insights into our profitability metrics, liquidity, and the strategic plans for the capital allocation. Non-GAAP adjusted net income for Q1 reached RMB 467 billion, increased 44.9% year-over-year, reflecting sustained earnings strength. Basic earnings per ADS improved significantly to $1.50, an approximately 45.6% year-over-year increase, underscoring enhanced profitability per share. Return on equity increased to 25.5%, rising 1.4 percentage points year-over-year and 3.2 percentage points sequentially, reflecting our sustained financial discipline and growing operational efficiency. Our liquidity remains strong, positioning us well to support ongoing operations, investments, and capital returns. Share repurchase plan. We have recently authorized a new share repurchase plan that allows us to buy back up to $100 million worth of our Class A shares and ADS.

This authorization will be effective for an 18-month period, running from January 1, 2025, through November 30, 2026. This new authorization comes in addition to our existing repurchase plan approved last December, which still has approximately RMB 15.9 million remaining. Regulatory environment update. The regulatory environment in China remains dynamic, and we remain fully committed to compliance and align with the overall policy direction. The recent notice from the National Financial Regulatory Administration affirms the current trajectory, with a clear focus on responsible credit assets and financial stability. We see increased oversight as a positive step that supports long-term industry development and reflects growing recognition of our role while evolving rules may introduce high compliance requirements. They also create space for innovation and more sustainable growth. We continue to engage proactively with regulators and remain focused on responsible execution and the evolving framework. 2025 growth outlook.

Based on current trends, X Financial expects the total loan amount facilitated and originated in the second quarter of 2025 to be in the range of RMB 37.5 billion-RMB 39.5 billion, reflecting continued strong demand and consistent execution following a robust first quarter. With that, I will pass the call back to our President, Kent Li, for closing remarks.

Kent Li (President)

Thank you, Frank. As we progress through 2025, we remain confident in our strategic direction, grounded in strong underwriting, disciplined risk management, and ongoing operational improvements. With a solid financial foundation and a clear focus on long-term value creation, we are well positioned to sustainable and profitable growth. Thank you.

Victoria Yu (Head of Investor Relations)

Operator, back to you. We can go to the Q&A session.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Kenning Zhao with Norton Andrews. Please go ahead.

Kenning Zhao (Analyst)

Hi, I'm Kenning from Norton Andrews. Congratulations and thank you for the great performance in the first quarter. My first question is, there's a strong growth in your business, both in new loan origination and active users, and you mentioned there will be further growth. I wonder if that means you like the current macroeconomic environment and the loan market. It's not big, but the delinquency rate has also ticked up a little bit compared to the end of last year. If the loan volumes continue to grow, should we expect further increase in the delinquency rate? Oh, can I have a second question?

Kent Li (President)

Can we get this first question first, and then you can ask the next one?

Kenning Zhao (Analyst)

Sure, of course. Thank you.

Kent Li (President)

Just for me to respond to your... I think you mentioned several questions in your comments, so let's get to them one by one. The first one is how we view the current environment. I think our company has never been trying to grow our portfolio for the sake of growth. We are always trying to manage our portfolio based on the current, based on our assessment of the future environment. That being said, I think right now, based on our historic trend and our analytical, based on our analysis, I think the overall environment is still good for the portfolio growth. That is why we are still focused on the growth at this moment. Another thing from this is that since the second half of last year, we have been investing a lot in acquiring new customers.

As this customer matures in our portfolio, we are able to offer them better lines and better products so they stick with us longer. That is also the basic foundation for our growth. In terms of the delinquency rate, I think the reason that you see an uptick from the lower level that we achieved somewhat in the last year is that I would say that probably was the bottom of our delinquency rate. Even with this uptick, I think our delinquency rate with regard to our portfolio is still very healthy. We are not particularly concerned about that. Going forward, we do expect that our delinquency rate will still have some uptick, but those upticks will be more than offset by our overall scale. That basically means that our profit will not be impacted by the delinquency.

Frank Fuya Zheng (CFO)

Let me add a few words regarding the delinquency rate. That number is actually, actually the risk profile situation from last quarter to Q1 actually is stable. The number is a little bit skewed. If you take another look, if you look at our Q1 income statement under the operation cost expenses, the first one is origination and services. Basically, it is operation expenses. The second one is the marketing acquisition, customer acquisition. The third one is general and administration costs. That is three general costs. The rest of it is from like a provision this way and a provision that way. If you add up together, this is all risk-related cost.

If you add on this quarter, Q1, and you add on Q4 last quarter, all the provision together, you will find that all the Q1 provision is about RMB 60 million less than last quarter. Among this RMB 60 million, actually, because this RMB 57 million, almost RMB 57 million, is related to our own insurance business, which means because our own insurance business, the revenue you book on one period and the cost you're booking the whole thing together in one time. The last quarter, Q4, they did more, our guarantee company did more business, so they have more of that. You take out this RMB 57 million, actually the cost, apple to apple, and the cost related, you take out all the risk related to the guarantee business, actually we have like RMB 3 million-RMB 4 million less cost as Q1 compared with Q4.

Overall, the conclusion is the risk situation is to remain basically the same, not much better, not much worse. That is the thing. Having said that, we all expect because this regulatory new derailment will be coming in October, we prepare, and because of that, there will maybe some uptick, cost and risk situation, we have some uptick down the road, but not in Q1, not in Q2. We have not found the risk situation changed much at all. That is why we continue to invest a lot in customer acquisition also. Thank you.

Kenning Zhao (Analyst)

Thank you for the detailed answer. My second question is about the repurchase. You haven't repurchased any shares in the first quarter, but you have approved another share repurchase program. Just wondering if you repurchased any during April's market volatility, and should we expect you continue the aggressive stock buybacks as you did last year? Thank you.

Frank Fuya Zheng (CFO)

Yes. Yes. Because Q1 is no open window, we usually do the buyback during the open window from the own shareholders. Right now, I mean, the incoming open window, we pretty much show the remaining almost RMB 60 million is not, it will be used up in the coming open window, and we will very likely kick in to the buyback during the non-window period also. That is why we have this newly authorized RMB 100 million to cover that. I hope answered your question.

Kenning Zhao (Analyst)

Yes, sir. Thank you very much. Thank you again for the wonderful quarter.

Operator (participant)

As a reminder, if you would like to ask a question, please press star then one to be joined into the question queue. The next question comes from Alex Yee with UBS. Please go ahead.

Alex Yee (Equity Research Analyst)

Hi. Good evening, Frank. Thanks for taking my question. This is Alex from UBS. I have two questions, if I may. First one is regarding your loan growth guidance for the next quarter. It seems it's still going to be a bit of good growth. Just wondering what's driving the growth behind, and how do you see the underlying loan application or credit demand in the last two months in April or May? Have you seen any softening trend given a lot of the noise on the microphone? Yeah. The second question is a bit on your funding supply. Given there has been this new regulatory announcement since April, I'm wondering, have you heard any feedback from your funding partners with regard to their attitude towards this loan pricing, which is going above 24%?

Do you see anything we need to adjust in our current practice in order to ensure that we are more compliant? Thank you.

Kent Li (President)

Okay. I'll first answer the first question about the growth. As I mentioned in the last investor, our growth has always been based on our assessment for the upcoming risk environment. At this moment, I think that the way that we grow our portfolio has always been acquiring new customers and getting the customer on board and graduating into a better product, which largely means lower fees and higher lines. Our growth has largely grown from this strategy. You ask about the April or May or June, our growth path will always be like that. In terms of our funding institutional partners, right now we are in very close conversation with them about the upcoming changes. At this moment, what I can say is that we expect there will be changes, and we are going to make some adjustments.

I don't see our company has always been confident that we will be fully compliant with the new regulation before the October 1 deadline. We are not particularly concerned about that. That being said, any new regulation will always bring some small shocks to the industry. We do expect there will be some shocks in our industry. I think our company is in a very good position to take those shocks. I think our growth prospect will not be changed based on whatever that we are providing for the investor.

Frank Fuya Zheng (CFO)

Hi, Alex. First of all, welcome to our online call and welcome. Regarding, let me just basically ask the same question again. I think we really took advantage of the risk environment, good risk environment since the second half of last year. Our run rate is, at the end of last year, is already pretty high. You see that we spend very aggressively in acquisition in Q1. We will keep the same pace in terms of acquisition effort in the second quarter. Based on our current forecast for Q2 this year, we are ahead of the 30% growth volume growth for this year. We are not, not have no intention to increase the forecast anytime soon because we will see when in Q3 what is the effect on the regulatory policy impact on the industry.

The white card, it's a little bit uncertain regarding Q4 volume. That's what I'm trying to say. Overall, I think we are confident to achieve 30% volume goals for this year, but maybe not more. It's all because Q4 volume is kind of in limbo right now. Regarding the preparation for the new regulatory, possible regulatory impact, we do some talking to the people and talking to mostly our institution partners and some regulatory authorities. We are prepared technology-wise. If there's a new policy that comes down, we can accommodate it very quickly, efficiently from technology, operation-wise. Other than that, like anybody else, we do not know much what's going to come down. Thank you.

Alex Yee (Equity Research Analyst)

Understood. Thank you very much.

Operator (participant)

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 today. If you have additional questions, please reach out to our investor relations team directly. We appreciate your interest and look forward to speaking with you again soon. Operator, back to you. Thank you.

Operator (participant)

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