X Financial - Q4 2022
March 31, 2023
Transcript
Operator (participant)
Good day. Welcome to the X Financial fourth quarter 2022 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 and then one on your telephone keypad. 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)
Okay. Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on the company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. 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 current market and operations conditions and relate to events that are involved known and unknown risks, uncertainties, and other factors, all of which were 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 statement. Further information regarding these and other risks, uncertainties, 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 statement as a result of new information, future events or otherwise, 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 end the year with another solid quarter. The known facilitating amount in the fourth quarter of 2022 exceeded our guidance, and our total net revenue grew rapidly, increasing on both an annual and quarterly basis. Despite the very challenging environment in the midst of the COVID-19 resurgence throughout the year, we achieved a 42% increase in the known facilitation amount in 2022 and maintained our asset quality at historically high levels. This further demonstrates the resilience of our business model, especially during the challenging times, and confirms that we are on the right track for sustainable growth, thanks to strong execution by our team and the continuous optimization of our risk control system.
In Q4, our total known amount facilitated and originated reached approximately RMB 22 billion, up 66% year-over-year and 9% quarter-over-quarter, bringing our total loan amount for the full year to approximately RMB 74 billion. Our premium borrower base remained stable, and we continued to improve asset quality by leveraging our data-driven and technology-empowered risk control system. Our delinquency rate for all outstanding loans past due for 31-60 days decreased to 1.02% as of the end of December 2022 from 1.48% a year ago. In addition, we have continued to strengthen collaborations with our institutional funding partners and with our credit line provided by them since Q4. We see further opportunities to optimizing our funding costs and improve operating efficiency.
With the end of the strict COVID control policy and the reopening of China in December last year, the country's focus has shifted back to stimulating economical growth. We believe that domestic consumption will play an important role in driving China's economy growth this year, and so far in Q1, we have seen a recovery in consumer sentiments. In addition, small and medium-sized enterprises are expected to receive more support from the government to drive their business recovery and further growth. All of these factors will benefit the overall personal finance market in China, where our business is rooted. On the regulatory side, according to the central bank, Ant Group and certain other platforms companies have basically completed business liquidation under the government's guidance and supervision, and the regulators will continue to promote the healthy development of the platform economy.
While we believe that the overall regulatory environment will be broadly stable this year, we will closely monitor and adapt quickly to any policy changes and ensure compliance in our operations. In conclusion, we are cautiously optimistic about the outlook for this year and expect to continue the rapid growth in our loan facilitation amount and expansion in both our top and bottom lines. I will turn the call to Frank, who will go through our financials.
Frank Fuya Zheng (CFO)
Thank you Kan. Hello, everyone. We were pleased to resume year-over-year top-line growth in Q4. Total net revenue was RMB 966 million, up 16% year-over-year, and 7% quarter-over-quarter. We have also significantly improved our bottom line on both annual and quarterly basis. Net income for the quarter was RMB 275 million, up 89% year-over-year and 30% quarter-over-quarter. Despite macro headwinds in 2022, we remained confident in our prospects and continue our efforts to reward our shareholders. Through our expanded shareholder repurchase program, we purchased a total approximately 267,000 ADS and 46 million Class A ordinary shares in 2022, which will be accretive to the earnings per share in 2023 as certain shares will be canceled or held as treasury shares during the year.
In 2023, we will continue to execute our share repurchase program, which will further enhance shareholders value. With sizable regulatory environment, stabilized regulatory environment and a gradual post-pandemic economic recovery, we expect revenue growth to accelerate and earnings to improve in line with top line growth. Looking ahead, we remain committed to returning value to our shareholders while maintaining sustainable business growth with healthy fundamentals, a proven strategy and strong execution capabilities. I would like to brief some financial performance for the first quarter. Please note that all numbers stated here are in RMB and rounded up.
Total net revenue increased by 60% to RMB 966 million from RMB 823 million in the same period of 2021, primarily due to an increase in the total loan amount of facilities and originated this quarter compared with the same period of 2021. Origination and servicing expenses increased by 53% to RMB 589 million from RMB 386 million in the same period of 2021, primarily due to an increase in commission fees resulting from and the increase in total loan amount of facilities and originated this quarter compared with the same period of 2021.
Provision for loan receivables was RMB 75 million, compared with RMB 40 million in the same period of 2021, primarily due to an increase in loans receivable held by the company as a result of the increase in total loan amount of facilities originated this quarter compared with the same period of 2021. Income from the operations was RMB 274 million, compared with RMB 312 million in the same period of 2021. Net income was RMB 275 million, compared with RMB 146 million in the same period of 2021. Non-GAAP adjusted net income was RMB 278 million, compared with RMB 183 million in the same period of 2021. For further financial information, please refer to the earnings re-release on our website.
Regarding our share repurchase plan, in November 2022, we announced our board authorized to increase our share repurchase program to $30 million from $20 million, effective through September 2023. In Q3, we repurchased an aggregate of approximately 49,000 ADSs and 18 million Class A ordinary shares for a total consideration of approximately $18 million. For our business outlook. For full wind this year, we expect the total loan amount facilities and originated to be between RMB 23.8 billion to RMB 24.8 billion. This concludes our prepared remarks, we would like to open the floor 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Bo Hinds of Equinox Capital. Please go ahead.
Bo Hinds (Owner)
Hi. Good evening and thank you for taking my questions. The first couple of questions I have is about the current state of regulation. Can you just tell us what is your view of how do the regulators look at the capital light business model? I'm specifically concerned about their view of your risk-taking. How much and, you know, how many of the loans that you have on your book are you considered to be at risk with? Just in general, you know, how do you feel about the state of regulation right now in the country?
Kan Li (President)
Okay. I'll take that question. This is Kent. Thanks for your question. It's really difficult for me to tell what do the regulators think in their heads, I guess. In terms of our business model, I think the one thing about our business model is that we've been in the market for several years already, and in terms of the competition, in terms of the quality and our brand has been recognized by our institutional funding partners. No matter what the regulator is thinking about the whole industry, the cooperation between us and our partners has been fairly smooth. That is a very good thing for our business growth.
In terms of our portfolio risk, because if you look at our portfolio closely, that our average loan amount per client is really small. One client's risk doesn't really factor into our overall portfolio risk. I think that is one of the most important in our risk, portfolio risk. The management has been fairly confident in terms of our risk management, risk management skills. We are not particularly concerned about how the external shock will bring negative effect on our portfolio. That being said, as a loan business that our number one focus has always been risk management.
We spend, we have been investing a lot in terms of human capital, in terms of our in terms of other resources in order for us continuous to improve our risk management.
Frank Fuya Zheng (CFO)
This is Frank. I add on a few words. Regarding to your question, I think that is not a direct answer for that. We can infer some, you know, for what regulators have been doing to answer your question. First of all, I think from regulators' perspective, they would like so-called this for consumer loan. They would like the bank or whoever provide the money, you know, for the loan, are directly responsible for their stuff, you know. That's the whole thing for the last year or so, you know. You know, in China kind of, you know, class is a not pure financial institution. We're kind of a financial institution. Okay?
You know, take example, like Ant Financial. You know, because Jack Ma have a big mouth attack in Pudong and you know, they stopped, you know, Ant Financial to go IPO the day before, a few days ago because of that speech. You know, nobody ever talk about Ant Financial, that their portfolio, which is much bigger at a time of over like a RMB 2 trillion portfolio at a time, you know. They never talk about you have a - you know, portfolio risk issue. What did they talk about is you do the financial, you know, do the loan business, but under the sky of a technology company which is not allowed. You have to have license to do that business.
Second of all, they set up a threshold. If you do joint loan, you have to put up the capital, your own money at least 30%. That's why for the last few years or so, you know, Ant Financial, their business size has been dramatically shrink because they, even Ant Financial cannot put that much big capital to finance or facilitate this size of a loan. That's what the, you know, the thinking. You know, that's some area affect the regulator emphasize. You have to have license to do loan business.
Nothing to do with your portfolio. Okay? Second of all, you have to do the joint loan. you should even you have a capability, you know, manage your loan at big as RMB a few trillion dollar with low, very low, manageable risk. Still, whatever job you do is not that important. The important is the loan should be issued by the banks and the financial system with license and provide the money for it. That's a good answer for you. A similar thinking goes for everybody else.
Bo Hinds (Owner)
Thank you both. That's very helpful. As far as you know, X Financial is fully compliant that stands right now in your interpretation of it and I assume you're in reasonably close contact with those regulators at this point. Is that fair to say?
Frank Fuya Zheng (CFO)
Yeah, fair.
Bo Hinds (Owner)
Okay. In terms of the loan ceiling of 24%, how is the company progressing towards meeting that goal? How much of the current loans on your book are above 24%?
Frank Fuya Zheng (CFO)
We rather not disclosure that kind of information, but we have been make great progress in this area for the last year or so. We are, you know, that's also the fact that we are not 100%, you know, within 24, you know, % yet. I don't think once again, the loan rate as current structure is not defined by us. As long as the banks or whoever provide the money for the loan, that's, you know, they have a right to issue that kind of loan. We are just to facilitate that. Strictly speaking, we are not legally determine that kind of a, you know, loan rate.
As long as, have financial institution with a license to issue those loan, their regulator is okay with that's okay with us. I think that that's the best way I can answer your question.
Bo Hinds (Owner)
Okay. Now it appears that the country is returning to a more normalized period of economic activity. Can you just remind us, you've given guidance for loan facilitation in the first quarter, and that's sequentially above the fourth quarter. Generally speaking, is the first quarter, in terms of seasonal impacts, is that a period of lower loan facilitation volume for you in terms of Q2, Q3, Q4?
Frank Fuya Zheng (CFO)
In terms of the volume that we normally will see, the first half of the year has the higher volume. If you look at our 2022, that we actually continue to grow in from Q1 all the way to Q4. I think this year, again, that we're talking about the expectations forecast, which I'm not 100% confident. We do expect that this year is likely to follow last year's trend. We should be able to see quarterly growth in our facilitate amount.
Bo Hinds (Owner)
Okay, great. Your tax rate was slightly elevated in 2022. It appears that it began to normalize a little bit in the fourth quarter. Can you provide us with an outlook on what you think your tax rate is gonna be in 2023?
Frank Fuya Zheng (CFO)
2023, the tax rate, effect tax rate will be lower. The reason is, you know, the tax, like the Chinese tax, the tax you actually pay will eventually reflect on what the U.S., you know, reflect on you see on the U.S. There's time lag, about six months, you know, because Chinese have a different collection cycle and so forth, so on. In terms of the number you see right now, we just apply to like 25%. As we more, because all our operation, all our entity, operational entity are based in China.
As those entity get a more favorable treatment into a tax, effect tax rate, US effect tax rate will also follow the downward trend. I can give you because it's very, it's a little bit harder to project the forecast for that. The overall trend is going down for this year, for 2023.
Bo Hinds (Owner)
I think there was some kind of change in the valuation allowance that impacted the reported tax rate that you show on your income statement.
Frank Fuya Zheng (CFO)
Oh.
Bo Hinds (Owner)
Fair to say that, it's gonna be about 20%-25% this year instead of what it was last year?
Frank Fuya Zheng (CFO)
I think, you know there are two things. Once again, I think effect tax rates for 2023 will somewhere between 15% to 20%. The line you see, I think that, you know, hold on a second. If you see the. - you can see the tax line, income tax expenses for 2023. There's - if you know, tuning our last, 2021 Q4, there's a special item called tax item, which is a allow, a tax, deferred tax allowance, which is, you know, about RMB 103.
That is, you know, because we, for some reason we - the reason I already explained last year, we couldn't use that, you know, deferred tax benefits. That would be added to the, you know, to the last year. Actually last year, 2021, the, you know, actual tax rate should be that number minus RMB 103 million. Okay? That's it.
Bo Hinds (Owner)
It appears that specific issue will not be there, not be present in 2023. Is that correct? That change in valuation allowance?
Frank Fuya Zheng (CFO)
Yes. If you see the - if you check the, you know, the Vertex line, on the balance sheet, you will find that the number will dramatically come down for it, okay. That's corresponding. You know, balance and income statement is corresponding, you know, two item.
Bo Hinds (Owner)
Great. Okay. Last question, then I'll drop back in queue for others to ask. You've done a very commendable job on your aggressive share repurchase. I just wanted to say that I appreciate that. I'm just curious, How much do you have left remaining on that share repurchase plan?
Frank Fuya Zheng (CFO)
About $9 million. About $9 million. Far we use up, for the $30 million, we use up like a little bit over $21 million, so we have $9 million left.
Bo Hinds (Owner)
Okay.
Frank Fuya Zheng (CFO)
A little bit less than $9 million.
Bo Hinds (Owner)
Okay. It sounds like it was kind of an unusual situation. You had a co-founder that wanted to receive cash for his shares.
Frank Fuya Zheng (CFO)
Yes.
Bo Hinds (Owner)
Do you - I mean, do you still have others, large domestic shareholders who are looking to sell? Do you think that, you know, you might be able to repurchase more of the ADSs as part of your repurchase plan?
Frank Fuya Zheng (CFO)
Yeah. The second largest shareholder, he sold his, you know, ordinary share. He never even convert to ADSs. He sold his ordinary share back to us in Q3 last year. I think we don't want to, you know, speculate the reason for that. If you check, he is also the individual shareholder of the largest, you know, private-owned banks in Shenzhen also. That may be the reason, but I'm not sure also.
To answer your question, I, you know, based on the current volume we have right now on daily basis, we don't think we can, you know, buy much, you know, buy a lot of share back. Even last year's, from public market that we haven't buy much back because the low, very low volume, almost no volume on our share, on our company trading volume. We will, we have, you know, one month, you know, two months to set up, you know, the foreign entity in Hong Kong, you know, to make that operational. That will take a little bit more than six months.
We hope we can finish that, you know change and that will make the entity to receive, you know, the dividend, you know, distribution from Chinese entity to the entity qualify, you know, maybe in end of April or May. We hope on next earnings call in May, some in middle May, we will issue a dividend for the first time, if I remember correctly. From that. We will just, you know, we still want to return the value to shareholder, but we probably have to more rely on, you know, on dividends instead of a share buyback starting this year.
Bo Hinds (Owner)
Yeah.
Frank Fuya Zheng (CFO)
Definitely we will keep enough money for the operation purpose, you know, first.
Bo Hinds (Owner)
Yes. No, I appreciate all the efforts that you're doing. Look, I mean, the valuation here is truly incredible.
Frank Fuya Zheng (CFO)
Yeah.
Bo Hinds (Owner)
what you have been able to do. You're not the only one in this.two or three others, U.S. listed Chinese Fintechs that are about the same size. You, you're all trading at multiples that do not reflect, I think what your business is, has been capable of doing. The challenge is how do you attract international investors? How do you attract people of size willing to invest in your company? You just, you don't have an institutional base of shareholders right now. That's your challenge.
Frank Fuya Zheng (CFO)
Yes.
Bo Hinds (Owner)
I mean, how do you think you can expand that investor base?
Frank Fuya Zheng (CFO)
You know, as the regulatory environment will stabilize this year, I probably will be starting doing roadshow in the second half this year. Definitely will do, you know, next year. We will start to do roadshow maybe end of starting second half this year. That's something we will try to do. I think in terms of valuation is, as you point out, it's a industrial issue. It's not like can be addressed by one company alone.
Bo Hinds (Owner)
Right.
Frank Fuya Zheng (CFO)
We will do what we could do, as a - you know, try the best and hope for the, you know, best luck.
Bo Hinds (Owner)
Well, good luck to you, on your end.
Frank Fuya Zheng (CFO)
Thank you.
Bo Hinds (Owner)
I appreciate all your efforts. Thank you.
Frank Fuya Zheng (CFO)
Thank you. Yeah. Thank you very much.
Operator (participant)
Again, if you would like to ask a question, please press star then one. Our next question will come from Mason Bourne of AWH Capital. Please go ahead.
Mason Bourne (Long and Short Equity Analyst)
Hi guys. Nice to see the company executing well. I guess I just wanted to dovetail off the last guy and it sounds like you're planning to do a dividend and some of your peers have done that. How do you think about that as far as the potential size of it? Would it be a quarterly dividend that would be variable depending on earnings or what is your outlook for that?
Frank Fuya Zheng (CFO)
It's this is premature for me to answer at this, you know, at this time because we haven't go through the, you know, board approval, something like that. Most likely we will do like a one time dividend once a year, you know, one time one year stuff, something like that.
Mason Bourne (Long and Short Equity Analyst)
Okay. I guess on valuation, I've got your stock somewhere under 2x earnings and about a 0.3 times book. I hear what you're saying about the volume. That's an issue that we face just in the stock on the ADS. Could you do a tender where you could come to the market with a price and say, you know, show confidence, you think your stock's undervalued, and maybe you get some people that offer up 1 million or 2 million ADS, something like that, or maybe even more, just if you put a price out in the market and say, this is what we're willing to buy back at.
Frank Fuya Zheng (CFO)
Yes. I think as I answered you last time regarding this same question, I'm little bit not familiar with this mechanism in terms of how to achieve that. Also, you know, as I just pointed out, I don't think even we, you know, we did that, probably not gonna, you know, to jump our share price. To be a little bit frank, I think to jump our the price into whatever timeframe is not, you know, the first priority for our guys.
Our still is the priority is to run the business the best that we could, we will do whatever we should do, including return the shareholder value. Everything else will, you know, will fall into place in due time.
Mason Bourne (Long and Short Equity Analyst)
Yeah, I get that. I just - I guess a tender can kind of serve the purpose where you get people that are looking to arbitrage the stock, so it doesn't necessarily have to be a huge bid. If you're looking, you know, substantially above the current price, but, you know, just if it's a 1% or 2% spread, you can get people that kind of bring volume into the stock even without necessarily, you know, running it up. I get that you try to buy back at the most accretive levels, but it just seems like maybe it's something potentially worth exploring, in my opinion.
Frank Fuya Zheng (CFO)
Yes, yes. I definitely put it under consideration. I just said before, let me move my money in terms of from RMB into the US, turn into U.S. dollar first. With money in hand, we can talk about it. You know, maybe, you know, why not? Maybe we'll try to do that one time or not, you know. You know, you know my view on that. I don't think that, you know, by one deal will solve the valuation issue. I think the valuation issue is not our company specifically. Actually it's the industry wide, you know, something like that.
That definitely maybe will improve like, from PB at 0.2% to maybe 0.6% or 0.5%. If we can do that, if we can achieve that, why not, you know? You know, we'll put that out into consideration. You know, once again, let me focus on, you know, convert the RMB into the U.S. dollar first which will be done. You see the news, you know. There's a big mutual firm based in U.S. They have a little bit of trouble move their own money, about $5 million-$6 million to overseas. They're actually in their own account. You know, they just make big news out of that because you move money out, even its own money is not an easy thing. You know, China has a capital control issue. Let me do that first. When I have money in the Hong Kong bank, we will consider, okay?
Mason Bourne (Long and Short Equity Analyst)
Okay. On the Hong Kong piece, last thing for me, is there anything about a separate listing there or this is still just kind of more in trying to move currency?
Frank Fuya Zheng (CFO)
Just more currency. You know, as you can see our market cap, we are a little bit far from the, you know, Hong Kong listing requirement. That's probably not gonna be an issue anytime soon.
Mason Bourne (Long and Short Equity Analyst)
Okay. That's all for me. Thank you.
Frank Fuya Zheng (CFO)
Thank you.
Operator (participant)
At this time, we will conclude the question and answer session. I would like to turn the conference back over to Victoria Yu for 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 the follow-up contacts. We look forward to speaking with you again in the near future. Thank you.
Operator (participant)
The conference has now concluded. We thank you.