X Financial - Earnings Call - Q3 2025

Transcript

Speaker 3

Hello and welcome to the X Financial Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yue. Please go ahead.

Speaker 4

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.xfinancial.com. On the call today from X Financial are Mr. Kan 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 Q3 metrics and highlights. After that, Mr. Zheng will share updates on financials, regulatory insights, and our 2025 outlook. Afterward, 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 the 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. Kan Li.

Speaker 1

Thank you, Victoria. Hello everyone. The third quarter of 2025 marked a very different phase for our business compared with the strong momentum we experienced in the first half of the year. After a record performance in Q2, we deliberately moderated our growth pace to navigate a more regulated and disciplined operating environment. During the quarter, we facilitated and originated RMB 33.64 billion in loans, representing an 18.7% increase year over year but a 13.7% decline sequentially from the previous quarter. This moderation was intentional as we prioritized asset quality and risk management over near-term volume expansion. Our team remained focused on maintaining prudent risk discipline while serving qualified borrowers and protecting portfolio health, enhancing our technology platform, data analytics, and underwriting precision to improve decision-making and efficiency, strengthening partnerships and operational processes to support long-term scalability under evolving regulatory standards.

We also continued improving borrower experiences by simplifying application flows, accelerating approval times, and expanding transparency across our credit and repayment channels. At the same time, we refined our collection infrastructure and monitoring systems to proactively manage credit risk and improve repayment outcomes. These initiatives allow us to better serve customers while protecting the platform's long-term stability. Despite a softer operating backdrop, we maintained solid profitability and positive earnings. Total net revenue reached RMB 1.96 billion, reflecting a 23.9% increase year over year, though down 13.7% sequentially from Q2 record level. This performance demonstrates our ability to adapt quickly and maintain resilience through disciplined execution and operational control. Credit quality: We did observe early signs of credit pressure during the quarter, consistent with broader market trends.

As of September 30, our 31-60-day delinquency rate rose to 1.85%, compared with 1.16% at the end of Q2 and 1.02% a year ago. Our 91-180-day delinquency rate increased to 3.52%, up from 2.91% in Q2 and 3.22% in Q3 2022. These movements reflect a more cautious borrower environment and rising repayment stress among certain segments. In response, we tightened our underwriting criteria, reinforced collection effectiveness, and expanded borrower engagement. While we expect conditions to remain challenging in the short term, these steps position us well to preserve asset quality and protect the long-term stability of our platform. With that, I'll now turn the call over to Noah, who will walk through additional financial and operational highlights from the third quarter.

Speaker 2

Great.

Speaker 1

Noah.

Speaker 2

Thank you. Hello everyone. It's great to speak with you again. As Kent mentioned, the third quarter required a measured approach following a very strong first half. We deliberately tempered origination growth to ensure prudent risk management and operational stability amid an evolving regulatory environment. I'll begin with an update on that context and then discuss our operational and financial positioning. On the regulatory environment, China's fintech sector remains under close supervision, with regulators continuing to prioritize consumer protection, transparency, and responsible lending practices. During the quarter, authorities reiterated these objectives and discussed further measures to lower borrowing costs for consumers and promote more sustainable development across the online lending industry. We fully support these efforts and continue to operate with a compliance-first mindset.

While these changes may continue to exert pressure on industry pricing and profitability, we believe that a clearer and more consistent framework will ultimately favor disciplined, well-capitalized, and transparent platforms. Our long-standing commitment to regulatory alignment and strong internal controls remains a core foundation of our business. On the operational overview, during the quarter, we facilitated RMB 33.64 billion in loans, up 18.7% year over year, and ended the period with RMB 62.83 billion in outstanding loan balance, up 37.3% from last year. We facilitated approximately 3.48 million loans, representing a 32% increase year over year, with an average loan size of RMB 9,654. Our active borrower base was approximately 2.44 million, 14.4% lower sequentially, but 24.2% higher year over year. These figures demonstrate the resilience of our franchise, even as we moderated new origination activity to preserve credit quality.

We refined our risk models, reduced exposure to lower-tier channels, and focused more heavily on established, higher-quality borrower sources. We also continued to strengthen our AI-driven analytics to improve borrower identification and early delinquency detection. On financial positioning, from a financial perspective, the third quarter reflected a necessary adjustment phase following our record first half. Profitability remained positive but contracted sequentially as overall activity normalized. Year over year, revenue and earnings growth was supported by the scale achieved earlier in the year, though we recognize that the operating environment will likely remain challenging for several quarters. Our focus now is on cost efficiency and disciplined execution, ensuring that every aspect of our expense structure reflects today's more measured pace of activity. We also maintained a conservative capital position and ample liquidity. Our balance sheet continues to generate healthy cash flow and remains a source of strength for the organization.

We are managing funding and capital deployment with caution, maintaining flexibility to adapt to any future regulatory or market adjustments. Our financial strategy remains centered on capital efficiency and long-term value preservation. We continue to deliver returns on equity above 20%, supported by tight cost management and share repurchases that have reduced our outstanding share count. Even as industry conditions soften, we remain focused on stability, liquidity, and financial discipline rather than pursuing growth at the expense of prudence. Looking ahead, our priorities remain clear: safeguard asset quality, strengthen liquidity, and maintain financial resilience. The external environment may stay uncertain, but our disciplined financial management and focus on operational control position X Financial to navigate continued volatility and adjust responsibly as the market evolves. With that, I'll now hand the call over to Frank to discuss our financial performance in greater detail. Go ahead, Frank.

Speaker 0

Thank you, Noah. Hello everyone. I will walk through our third quarter financial results and discuss our capital position and outlook. The financial highlights: In the third quarter of 2025, total net revenue was RMB 1.96 billion, representing a 23.9% increase year over year, but a 13.7% decline from Q2. The year-over-year growth was supported by higher average loan balances and the carryover effect of our prior facilitation activity, where the sequential decline reflects our intentional reduction in loan volumes. Income from operations was RMB 331.9 million, down 29.9% year over year and 46.4% sequentially, primarily due to higher provision for credit losses and guarantee liability. Our operation margin was 18.5% compared with 29.7% in Q2 and 32.2% a year ago. Net income came in at RMB 421.2 million, up 12.1% year over year, but down 20.2% sequentially.

Non-GAAP adjusted net income was RMB 438.2 million, up 1% from last year and down 26.1% from Q2. Basic and direct earnings per ADS were RMB 10.56 and RMB 10.08, respectively, while return on equity stood at 21.5%. These results reflect the impact of high provision and lower volume, but also show that our core business remains profitable and cash-generative despite a more cautious operation environment. Balance sheet liquidity: Our balance sheet remained strong. Total assets stood at RMB 14.69 billion, up 26.4% year over year, and the total shareholders' equity was RMB 7.93 billion, up 15% year over year. We ended the quarter with approximately RMB 1.55 billion in cash and reserved cash, providing equity to support operations and capital returns.

Capital return to the shareholders: From January 1, 2025, through November 20, 2025, X Financial repurchased an aggregate of approximately $4.26 million ADS, including approximately $3.8 million ADS and $2.76 million Class A ordinary shares, for a total consideration of approximately $67.9 million under its share repurchase programs. The company now has approximately $48 million remaining under its existing $100 million share repurchase plan, which will be in effect through November 30, 2026. This program underscores the company's confidence in its long-term growth outlook and its commitment to enhancing shareholder value. The purchases under the program remain subject to market conditions and other factors and may be modified or suspended at management discretion. Outlook for Q4 2025: Based on current trends, X Financial expects the total loan amount facilitated and originated in the fourth quarter of 2025 to be in the range of RMB 21 billion-RMB 23 billion.

The total loan amount facilitated and originated for the full year 2025 is expected to be in the range of RMB 128.8 billion-RMB 130.8 billion. This guidance reflects a measured pace of origination following the sequential decline in the third quarter and the management's continued focus on asset quality, credit discipline, and the probability of capitalization rather than aggressive volume expansion. The company remains attentive to the involved regulatory landscape and the changing credit conditions, while maintaining confidence in resilient borrower demand, prudent risk control, and disciplined execution to support sustained long-term growth. With that, I hand the call back to our President, Kan Li, for closing remarks.

Speaker 1

Thank you, Frank. The third quarter marked a period of recalibration for our company. We made a deliberate choice to prioritize quality and discipline over near-term growth, ensuring our platform remains resilient amid a changing operating landscape. While we expect challenges to persist in the coming quarters, we remain confident in our ability to navigate them with prudence, maintain profitability, and position X Financial for steady, sustainable performance over time.

Speaker 4

Okay, this concludes our prepared remarks. We will now open the call for questions. Operator, please go ahead.

Speaker 3

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone 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 Chen Yang with Runjiao. Please go ahead.

Speaker 6

Hello, thank you for taking my question. My first question is around the take rate guidance. The management has provided guidance on the fourth quarter loan origination volume, which is quite 30% lower than prior levels. What will be the expected take rate for the fourth quarter given the current risk situation, which may be stabilizing or deteriorating in the past week or so, or the past two months? My second question is around the capital allocation. Given the business volume is already lower since the third quarter and maybe even further reduced in the coming years, the return on equity may drop significantly in the future. Is the company considering returning more capital to shareholders and keep the company running on a smaller book while higher capital efficiency? I will also translate my question in Chinese if that would help.

the company with a lower net asset base. Thank you very much.

Speaker 0

Thank you for the question. This is Frank. I'll answer your takeaway question and let Kan answer your return on capital question. Noah, Noah. Take a capital return question. You started to see the effect of impact of this so-called new regulation in the third quarter a little bit, but I think the full impact will not be fully realized in another quarter or so. I think at this time, whatever talking about next year regarding even take rate is very premature and will be very wide gaps there. We also did not disclose the take rate before, so we are now going to do that. I will say that I think that this new regulatory regime will have a material negative impact on everything: on volume, on margin, on profitability. Take rate is a part of a key factor of profitability.

You can assume the take rate will have material negative impact in the future. That's the best I can discuss with you. Noah, you want to have a second question to answer?

Speaker 2

Yeah, yeah. Yeah, thanks, Chen, for the question. On capital return, capital return remains an important part of our strategy. We've been making active share repurchases, buying approximately 67.9 million shares through November 20th. As Frank mentioned before, we still have about $48 million remaining under the $100 million authorization, which runs through November 2026. We will continue to use the program in a disciplined manner, subject to market conditions, and we view repurchases at current valuation levels as an attractive investment in our own business. On the dividends, of course, we maintain a recurring dividend, and based on the current profitability profile, even with the industry-wide margin pressure that Frank just spoke to, we expect to be able to maintain and sustain the dividend at the current level. We believe we have sufficient earnings power and balance sheet strength to support that commitment.

More broadly, just in terms of how we think about capital allocation, the board regularly evaluates optimal capital allocation, including balancing organic growth, share repurchases, and dividends. Today's share price buybacks, I think, still remain a compelling use of capital, but we remain open-minded and focused on whichever option delivers the highest long-term value for shareholders. In summary, we intend to continue executing the buyback program prudently, maintain the current dividend, and allocate capital in the way that best supports sustainable growth for shareholders.

Speaker 0

Thank you.

Speaker 3

The next question comes from Joseph Martelli with Spark Capital. Please go ahead.

Hi, good evening. Thanks for taking my question. How does the team view the regulatory environment going ahead into early 2026? May we have more color on the uptick in delinquencies? Thank you very much.

Yeah, I'll take that question. I think, again, it's very difficult to forecast what the regulators will do in the future. Our approach has always been just be compliant with whatever regulations specify. That being said, what we saw right now is regulators are very focused on the consumer protection. Our approach has, considering that we have lowered our loan volume, that we are not aggressively growing our portfolio in the sense that we are trying to shrink our portfolio a bit in order to make sure that we are not generating lots of complaints from our side. I think that's probably what we can do at this moment. Sorry, what's your—I think you have the—can you repeat your second part of it?

I was just asking about the delinquencies, the uptick in them, and how we might see that continuing.

Yeah, I think we do. Yeah, I think whenever there's a huge impact on the industry, and especially considering that the overall economy in China right now is not at the greatest time. I think it's natural for us to see an uptick in the portfolio delinquency. I think that's what we are experiencing right now. Our forecast, again, the forecast future is very difficult for us, but we do think that the delinquency rate will continue to climb. As Frank just mentioned, we think it's going to take one or two quarters for it to stabilize. Even though we are not sure when it's going to stabilize, our approach can only be that we are trying to be very stringent in our credit policy. That is why you see our portfolio scale begin to drop.

Speaker 0

Let me just say a few more words. The redisclosure, 91 days and 100 days delinquency rate, and for the Q3 is like 3.52%, which is higher than previous quarter 2.91% and previous 3.22%. It is higher than previous quarter, higher than last year. We have been—everyone is trying their best to control it. By the time we try, the delinquency rate is still developing, still not stabilized yet. We believe maybe in a month or two, it should be stabilized unless there is more negative impact from the new measure we are coming down. Otherwise, we fully anticipate within one or two months, delinquency rate will be stabilized very soon in one or two months. I hope that will add some color to your question.

Yes, thank you.

Speaker 3

Hey, Joseph.

Speaker 2

Hey, Joseph. If I could just add a little bit to what Frank and Kan have already said just on the delinquency side. Of course, we see higher delinquencies in Q3 consistent with the broader industry environment. The macro backdrop has been challenging, and that has affected borrower repayment behavior across multiple segments and response. Of course, we have tightened the underwriting standard and shifted further toward higher quality borrowers and intensified our collection and verification process. These actions basically give us confidence that we will be appropriately reserved for current delinquencies and potential losses. I think a key point that both Frank and Kan were pointing to is that the loans typically have a duration of 10-12 months. When delinquencies rise in a particular period, those vintages generally run off within a few quarters.

The newer vintages originated under the tighter underwriting become a larger share of the book. The result is a natural credit cycle effect where you have elevated delinquencies from prior vintages working through the system, and then performance gradually reverts towards historical norms as the tightened vintages season. The entire industry is, of course, in a contractionary phase with most platforms tightening risk criteria and pulling back from higher risk segments. While this environment can temporarily put pressure on borrowers and repayment behavior, it also sets the foundation for better quality vintages going forward. As the older, weaker vintages mature and exit the portfolio, we expect credit metrics to gradually normalize over the medium term, though near-term volatility is still possible and presumably likely. Our focus remains on prudent underwriting and disciplined portfolio management and strong collections.

We will continue to provision conservatively and manage the book to ensure losses remain within our tolerance. That is all for me, thanks for the question, Joseph.

Speaker 3

As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Ramzi with NTS Trading. Please go ahead.

Hello, everyone. Thank you for the call today. I have two questions. The first one is, given the concerns around the credit quality, I'm curious if any of the funding partners have reduced their funding commitments or changed or structured their terms. The second question, which I think, Noah, you did go over, but I want to know if management, or what would it take for management to consider being more aggressive on the share buyback program, just given the depressed price? Have you guys ever considered anything such as an accelerated share purchase program? That is all yes.

Speaker 2

Hey, Ram. Hey, this is Noah. Thanks very much for your question. First, to the first part on the funding and liquidity. Our funding and liquidity position remains stable. As of September, we held about RMB 1.5 billion in total cash and restricted cash, which provides a solid liquidity buffer for our operations. We manage liquidity conservatively and maintain sufficient cash to support near-term needs across servicing, collection, and platform operations. On the funding side, we work with a diverse network of institutional partners, including banks and licensed consumer finance companies that originate loans through the platform. These relationships have been built over many years, and the vast majority of our partners have completed the required regulatory whitelisting and continue to operate with us normally.

Regarding our actual funding costs, we did see a general rise in funding rates from 2024 into 2025 in line with the broader industry trends. However, on a quarter-to-quarter basis, funding costs have been relatively stable, and we've not experienced any material disruption in accessing funding. Looking ahead, as regulatory implementation becomes clear and both banks and platforms adapt fully to the new framework, we're hopeful that the funding costs will gradually normalize from the elevated levels seen this year. Basically, clarity and consistency in the regulatory environment should also help reduce risk premiums over time. We will continue to maintain prudent liquidity management, keeping adequate cash reserves and coordinating closely with funding partners, and ensuring our platform remains compliant and attractive from a risk management standpoint.

As far as what would motivate us to do a more aggressive buyback, I don't know, Frank, do you have any comments on that?

Speaker 0

Yes. We have almost continuously to do the buyback in this year from May 2025 all the way down to late November. We did most of the buyback from open market. We still believe the buyback is the best way to return shareholder value. The result is not that great. Currently, our stock is a little bit higher, maybe 60% higher than the same period last year. A lot of our peers, their stock is already below last year's period. Almost everyone, the balance sheet is more strong than at this time, the balance sheet is more strong than the same time last year. I think the market is assuming we do not have a the stock price tells us the market believes us probably do not even have a future. Also, we will waste our money in our hands and just waste it.

Otherwise, not make anything new. I think that is not the belief we have. We think we can do, we believe we can do both. We can take care of the shareholder return and maybe do something new. Whether Chinese cash loan market is totally dead or not, once again, we will have that judgment maybe a little bit long, maybe in another quarter or two. I think even with that new regulatory regime, I think we still have at least we still have cash to do something new, right? Try something new. That is regarding the buyback. I say that again, we are, as Noah already said, we are determined to maintain the current dividend rate, which is $0.28 for two times in a year. Based on current stock price of $9, it is a 6% yield.

I think even without buyback, it's a decent return for the shareholder. It's better than you put the money in the bank, right? That's our thinking. We will continue to do, and we will maybe rely on more next year, rely more on the dividend side instead of on the buyback side. That's all I try to say. Thank you.

I see. Makes sense. Thank you.

Speaker 2

Yeah, Ram, just to add on really quickly to what I think is the valuation became deeply disconnected from the fundamentals of the stock trades at levels that imply excessive credit or regulatory risk relative to our performance. Buybacks would become the highest return on capital. I think as it stands historically, it's always a trade-off between ROIC from organic growth versus share repurchases versus dividends. Hope that answers your question.

Yeah. We can say too now, right now, the markets are pricing that that isn't the case, but it's just a matter of what makes the most sense for X Financial.

Speaker 3

This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

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. A prayer back to you.

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