CNFinance Holdings Ltd. Q1 FY2022 Earnings Call

Hello, and welcome to the CNFinance Announces First Quarter 2022 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms. Jane Jenn, Financial Manager of the Capital Market Department. Please go ahead.

Good morning and good evening, and welcome to CNFinance first quarter of 2022 financial results conference call. In today's call, our Vice President and Director, Mr. Jun Qian, will walk us through the operating results followed by the financial results from our acting CFO, Ms. Li. After that, we will have a Q&A section. Our CEO, Mr. Bin Zhai, will also be available during the Q&A. Before we start, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, targets, going forward, outlook, and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or factors is included in the company's filing 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, future events or otherwise, except as required under law. Now, please welcome Mr. Jun Qian.

Thank you everyone for joining us in this conference call. On today's call, we will introduce the company's financial and operational results in the first quarter of 2022 followed by a Q&A section. During the first quarter of 2022, we were able to maintain stable business operations despite external challenges. We facilitated loans of 2.3 billion and recorded revenue and net income of approximately 417 million and 43 million, respectively. Both the daily average outstanding loan principal and revenue under the collaboration model have a year-on-year increase of over 20% and were 10 billion and 40 million, respectively. Now, I will share with you the challenges we faced and the measures we took in the quarter together with our future plans. In 2022, our business was impacted by the economy downturn. The growth of China's national economy has slowed down with GDP growing 1.3% as compared to Q4 2021. We experienced regional lockdowns caused by local outbreaks of COVID-19 in cities within China, including major cities like Shanghai, Shenzhen, and Guangzhou. Moreover, our funding costs remained high as our major funding partners, the trust companies, continued to be put under tightened regulations. In response to those challenges, the company focused on stabilizing business operations and managing risks. We did the following works. First, we continued to provide micro and small enterprises with inclusive financial services to help owners whose businesses were interrupted by city lockdowns, pre-emptively lowering the interest rates of our loan products. In addition, we accepted more applications from sales partners who repurchased delinquent loans by installments with fewer sales partners able to provide payment extensions to MSE owners. Second, we expanded our funding sources and continued to provide diversified products, which allowed us to reduce funding costs and cover more customers. During this quarter, we started to cooperate with Zhongyuan Trust and facilitated loans of 76 million. We also recommended prospective borrowers to commercial banks to facilitate loans of 14 million. Besides, we are about to begin a trial run of third-party cooperation with Shaanxi International Trust and PICC. Third, we increased our support to sales partners. In order to help sales partners grow their business under the current conditions, we allowed more sales partners to repurchase delinquent loans by installments. The company will charge a certain fee based on the terms of the installments. By allowing installment payments, we help the sales partners improve their liquidity and also increase their revenue. Fourth, given the ongoing fluctuation in China's property markets, the company maintained a rather low loan-to-value (LTV) ratio. The weighted average LTV for loans facilitated in Q1 was 56%. Besides, we took into account the operational conditions of sales partners and adopted a conservative approach to evaluating the potential credit losses of loans to keep the allowance ratio at a safe level. Going forward, we are likely to be continuously challenged by economic fluctuations. At the same time, we are presented with huge opportunities as the government is now encouraging financial institutions to offer more support to MSE owners. To seize such opportunities, we will focus on diversifying our product profile, helping sales partners expand their business scale, and reducing our own funding costs. Our work plans are as follows: First, we will strive to finish upgrading an operation-oriented and asset-light model, under which we will act as the service provider and manager of loans. Our plan is to introduce elite sales partners to sign contracts directly with trust companies or bring in third-party subscribers to support the units of the new loans facilitated. As of today, several sales partners have already signed contracts with trust companies, and a number of our trust company partners have conducted due diligence on third party investors introduced by us. Based on our estimation, such cooperation arrangements will be ready to facilitate loans before the end of Q2. Second, we will promote diversified products as bank customer coverage. The bank lending model will be one of our priorities, as this model allows us to reach customers with high credit ratings. Currently, the company is introducing and helping commercial banks facilitate loans of 50 million each month. We are now seeking to establish cooperation with more commercial banks and make lending models a more important contributor to our revenue stream. Besides, we also want to start facilitating loans under the aforementioned cooperation with PICC before the end of the second quarter. Third, we will keep supporting our sales partners, offering more flexible fee structures based on the terms and conditions of the installments to suit partners with different operational and financial capabilities. Simultaneously, we hope to get trust companies involved. If a sales partner meets the standards of the trust company, the trust company could choose to pay us the full amount of repurchase on behalf of the sales partner and receive the installment payment from such sales partner. Fourth, we will keep investing in technology to empower business growth. Our IT team is developing a mobile app that can integrate all information related to loan applications. By developing this app, we aim to enable our service team to obtain the status of borrowers, channel information, loan products, and funding in real-time, allowing for timely interactions with sales partners and our application reviewers. We expect the app to be put into use in the second half of 2022. Fifth, in order to offer loan products with lower interest rates, we will maintain dialogue with trust companies on reducing our funding costs. Consensus has been reached between us and several trust company partners on this. Once the deal is finalized, we will soon apply the fee cuts on loans we facilitate. The first quarter of 2022 was not all smooth, and we will surely be presented with both opportunities and challenges in the near future. We have gained valuable experience from frustrations in the past and have continuously refined our management and business strategy. We have already stayed true to our mission of providing accessible, affordable, and convenient financial services to MSE owners. With more supportive micro policies taking effect, we are confident that there will be another surge of capital demand from MSE owners. We believe we will be well prepared to seize such opportunities, expand our business, increase our revenue, and provide a higher return to our shareholders. With that, I would like to hand the call over to Ms. Jing Li, the acting CFO of the company, who will walk us through the first quarter 2022 financials.

Thank you, Mr. Qian, and thanks again to everyone for joining us today. I will walk you through our financials for the first quarter of 2022. Unless otherwise stated, all percentage changes I'm going to give will be on a year-over-year basis. Also, unless otherwise stated, all numbers I'm going to present will be in RMB. For the first quarter of 2022, total interest and fees income was RMB417 million as compared to RMB425 million in the same period of 2021. Interest and financing service fees on loans decreased by 1.7% to RMB415 million from RMB422 million, primarily due to (a) lower average effective interest rates of outstanding loans, and (b) the decrease of average daily outstanding loan principal in the first quarter of 2022 as compared to the same period of last year. The decrease in average daily outstanding loan principal was due to the lower loan facilitation volume in the first quarter of 2022, resulting from the lockdowns due to local outbreaks of COVID-19 in multiple cities within China. Interest and fees expenses increased by 28% to RMB201 million compared to RMB156 million, primarily due to the increase in the outstanding principal of other borrowings as well as the funding costs from trust companies. Collaboration costs for sales partners, representing sales incentives paid to sales partners, decreased by 19% to RMB80 million compared to RMB98 million last year, primarily attributable to the lower fee rate the company paid to the sales partners resulting from lower average effective interest rates of outstanding loans. Provision for credit losses was RMB33 million as compared to a reversal of RMB17 million last year. The increase was due to the increasing economic uncertainties caused by lockdowns in reaction to local outbreaks of COVID-19 as well as the downward pressure faced by China's real estate market during the first quarter of 2022. Net gains on sales of loans decreased to RMB8 million compared to RMB9 million in the same period of 2021. Total operating expenses decreased by 15% to RMB80 million compared to RMB94 million in the same period of 2021. Income tax expense was RMB15 million in the first quarter of 2022. Net income was RMB43 million compared to RMB86 million in the same period of 2021. As of March 31, 2022, the company had cash, cash equivalents, and restricted cash of RMB1.7 billion compared to RMB2.2 billion as of December 31, 2021, including RMB1.2 billion and RMB1.5 billion from structured funds as of March 31, 2022, and December 31, 2021, respectively, which could only be used to grant new loans and activities. The delinquency ratio for loans originated by the company increased from 24% to 26% as compared to December 31, 2021, in this quarter. The delinquency ratio, excluding loans held for sale, for loans originated by the company increased from 16% as of December 31, 2021, to 17% as of March 31, 2022. The non-performing loan (NPL) ratio for loans originated by the company increased from 9.4% as of December 31, 2021, to 10.4% as of March 31, 2022. The NPL ratio, excluding loans held for sale, for loans originated by the company decreased from 2.1% as of December 31, 2021, to 1.8% as of March 31, 2022. With that, we would like to open the Q&A. Operator, please begin.

We will now begin the question-and-answer session. The first question comes from Will Gregozeski with Greenridge Global. Please go ahead.

Hi, everyone. I have a few questions. Can you disclose what the average interest rate you're lending at right now is? And in the prepared remarks, you had mentioned the rates paid to the sales partner were lower. Is that a change in what they're getting or just lower because there's less interest income in the quarter?

So for your first question, the weighted average interest rate of our loans right now is around 16.4%. And the lower interest rate is not only because of our voluntary adjustments but also based on the macroeconomic conditions and the regulations and policies of the government.

Okay.

This is a trend for overall rate cuts, whether it is for us or the sales partners. We did adjust our policy on collaboration costs to the sales partners, and we want to keep their margin, but that has to be based on the growth of our business and the expansion of our scale.

Okay. Sorry. I guess if you can just talk kind of more generally about the impact the COVID lockdowns have had on the first quarter and having now? In the past, you've mentioned that you've had more demand than you had capital available to lend out. But you've also mentioned that Shanghai is a big market for you guys. So just curious if you can talk about how much of an impact that's had on what you've just reported today and then what's going on right now?

So, yes, like you said, there was a relatively large impact on the demand for capital because of the lockdown policies in the first quarter. And as we have introduced, there was not only Shanghai but also Shenzhen and Dongguan, which were locked down during the first quarter. We wouldn’t say there wasn’t demand, but it’s just you cannot satisfy that demand due to the lockdown policies. And surely it will last into the second quarter as well, the impact. So you can see the impact based on our financial results, especially on the loan facilitation, which had a year-on-year decrease. But I wouldn’t really say that the impact was that large. I think it could still be overcome. First off, we have a network that is scattered across China. We will take advantage of this network to push the business growth in other areas that are not locked down. Also, secondly, we will push to reduce our funding costs as well as refine our profit split with the sales partners to maintain a reasonable margin. Thank you.

Thank you. And I have two more questions. You've talked about trying to get to about 30% of your lending from the commercial model by the end of the year. Do you think that's still achievable?

We still remain positive about the development of the commercial bank model. Because the government's policy that urges the banks to give more support to the MSEs has never been so strong, and it is getting even stronger. Our goal is one of our priorities is to start collaboration with more commercial banks and to help them facilitate loans to MSE owners. So we remain positive about our goal to make the balance under the commercial lending model account for 20% to 30% of the total loan book by the end of the year.

Okay. And you've kind of touched on in that answer, but the push from the government towards the SMEs, have you seen any impact or seen more demand from SMEs or anything government related that's helping drive demand to you from SMEs?

Okay. So the government's support towards MSEs is mainly reflected in two aspects. The first one is the supporting policies about refinancing. There was a meeting from the State Council stating that they will double the support for refinancing. Additionally, today, the People's Bank of China released a document saying that commercial banks should provide financial support to MSE owners, and it's reflected in the tolerance in terms of the policies made by the People's Bank of China, which states commercial banks should give more freedom and more room to support the financing needs of MSEs. Moreover, we estimate that by the end of June, there will be another surge in demand from MSE owners for capital.

All right. Thank you, guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Jane Jenn for any closing remarks.

Thank you for joining us. If you have any further questions, please feel free to contact our IR associates at [email protected]. Thank you.

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