Earnings Call Transcript - CNF Q2 2023

Operator, Operator

Good day, and welcome to the CNFinance Holdings Ltd Second Quarter and First Half of 2023 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 being recorded. I would now like to turn the conference over to Matthew Lou, IR Manager. Please go ahead.

Matthew Lou, IR Manager

Thank you, Kate. Good morning and evening, and welcome to the CNFinance second quarter and first half of 2023 financial results conference call. In today's call, our Director and Vice President, 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 session. 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 the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believe, estimates, target, 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 this and other risks, uncertainties, or 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, future events, or otherwise, except as required under law. Now please welcome Mr. Jun Qian.

Jun Qian, Director and Vice President

Thank you for joining this conference call. We will review CNFinance's operating and financial results for the second quarter and first half of 2023, followed by a Q&A session. In these periods, the company saw year-on-year growth in key performance indicators. In the second quarter of 2023, we achieved a total loan origination volume of RMB4.5 billion, which is a 45% increase from the previous year. Total interest income reached RMB430 million, marking a 5% rise year-on-year. Net income was RMB44 million, up 142% year-over-year. In the first half of 2023, total loans originated amounted to RMB8 billion, reflecting a 43% increase year-on-year. Total interest income for this period was RMB885 million, representing a 7% yearly increase, while net income grew 52% to RMB93 million. During the first half of 2023, we focused on high-quality development and accomplished several important tasks. First, we enhanced our partnerships with commercial banks, gaining market recognition for our commercial bank partnership model, which offers competitive pricing and a high-quality borrower base. This model has become central to our business strategy. In this half, we generated loans of RMB3 billion through these partnerships, which accounted for 40% of our total loan origination, yielding a net revenue of RMB50 million. Second, we made strides in reducing funding costs and managed funds risk effectively to support sales partners needing to repurchase delinquent loans. We maintained discussions with funding partners to lower costs and optimize our financing structure, achieving notable progress. By the end of the second quarter of 2023, we had a total funding risk amount of RMB700 million dedicated to helping our sales partners with liquidity pressures. Third, we refined our credit decision-making process. Since the start of the year, we optimized borrower assessments by analyzing factors influencing historical defaults and began testing a new risk control model from a reputable commercial bank. We also enhanced collateral evaluations using our property rating system. By June 30, 2023, our delinquency rate was around 15%, down from 18% at the end of 2022. Despite ongoing uncertainties in China's economy and a prevailing downturn in the real estate market, we believe that China's commitment to effectively using monetary policy tools and promoting technological innovations will continue to create strategic opportunities. In this environment, we will focus on high-quality growth by balancing asset scale and quality while ensuring compliance. Our strategy will include expanding our borrower base, improving our product offerings, launching competitive low-interest products, and utilizing technology to empower our sales efforts. We will maintain a thorough assessment process for our borrowers, collateral, and sales partners to lower delinquency rates and support our partners further. Additionally, we are investing in technology to enhance our borrower evaluation capabilities. We are tailoring a big data model to suit our business needs, leveraging two decades of historical loan data. Our development team is progressing in this area while exploring collaborations with fintech companies that can complement our operations. Lastly, we will bolster compliance inspections and audits to reduce compliance risks through regular checks, audits, and training. Now, I will turn the call over to Ms. Jing Li, who will provide details on our financial results for the second quarter and first half of the year.

Jing Li, Acting CFO

Thank you. Now I would like to present our second quarter and first half financial results. Please note, the currency in use is RMB. Total interest and fees expenses decreased by 3% to RMB182 million compared to RMB187 million, primarily due to lower funding costs from trust companies. Net interest and fee income was RMB250 million, representing an increase of 12% from RMB223 million. Net revenue under the Commercial Bank partnership model represented charges to commercial banks for services, including introducing borrowers, initial credit assessments, facilitating loans from the banks to the borrower, and providing technical assistance to the borrower and bank. Net of payouts to third-party insurance companies and commissions paid to sales channels was RMB29 million as compared to RMB0.7 million. The company has been collaborating with commercial banks since 2021, and such collaboration grew in scale in the second half of 2022. The outstanding loan principal under the Commercial Bank partnership was RMB4.5 billion as of June 30, 2023, as compared to RMB0.3 billion as of June 30, 2022. Collaboration costs for sales partners was RMB83 million as compared to RMB77 million, primarily due to the increase of loans recommended by sales partners under the Commercial Bank partnership. Net interest and fee income after collaboration costs was RMB196 million, representing an increase of 33% from RMB147 million. Provisions for credit losses—representing the provision for credit losses under the trust lending model and the expected credit losses guaranteed under the Commercial Bank partnership model in relation to certain financial guarantee arrangements—decreased by 26% to RMB51 million from RMB68 million, primarily due to the decrease in outstanding loan principals of delinquent loans resulting from our constantly improving credit risk control mechanisms. Realized gains on sales of investments net, representing realized gains from the sales of investment securities of RMB12 million as compared to RMB8 million, primarily due to effective risk management. Other gains net decreased by 97% to RMB0.8 million from RMB30 million, primarily due to the decrease of credit risk mitigation position forfeited by sales partners as a result of our refined management. Total operating expenses increased by 8% to RMB99 million compared with RMB91 million. Employee compensation and benefits were RMB51 million as compared to RMB49 million, primarily attributed to an increase in performance-based bonuses due to an increase in loan origination volume during the second quarter of 2023. Other expense bases increased by 26% to RMB36 million from RMB29 million, primarily due to the increase in fees paid to local channels for introducing sales partners to the company. Net income increased by 142% to RMB44 million from RMB18 million for the first half of 2023. Total interest and fee income increased by 7% to RMB885 million from RMB827 million. Interest and financing services on loans increased by 5% to RMB807 million from RMB766 million, primarily attributable to the increase in average selling outstanding loan principals in the first half of 2023 compared to the same period of 2022. Interest income charged to SaaS partners increased by 18% to RMB66 million from RMB56 million, primarily due to the fact that the company allows more SaaS partners to repurchase defaulted loans in installments to help those partners relieve cash flow pressure in the first half of 2023. Total interest trade and sales expenses decreased by 6% to RMB366 million from RMB388 million, primarily due to lower funding costs from trust companies in the first half of 2023. Net interest and fee income was RMB518 million, representing an increase of 18% from RMB439 million. Net revenue under the Commercial Bank partnership model was RMB50 million as compared to RMB0.9 million. Collaboration costs for sales partners increased by 6% to RMB166 million from RMB156 million in the same period of 2022, primarily due to the increase in loans recommended by sales partners under the Commercial Bank partnership. Provision for credit reserves increased by 136% to RMB130 million from RMB55 million. The increase was a combined effect of the increase in expected credit loss guarantees under the Commercial Bank partnership model as origination volumes grew and scaled rapidly in the first half of 2023 and a reversal of allowance in the first quarter of 2022 due to the company disclosing the remaining loans under the traditional facilitation model to third parties, with the allowance of such loans being reserved. Net losses on sales of loans was RMB4 million as compared to RMB42 million in the same period of 2022. The net losses in the first half of 2022 were primarily attributed to the company paying remaining loans under the traditional facilitation model, which were all facilitated prior to 2019, to third parties in bulk during the first quarter of 2022. Other gains net decreased by 65% to RMB17 million from RMB48 million in the same period of 2022, primarily due to the decrease of credit risk mitigation positions forfeited by the sales partners as a result of our refined management. Total operating expenses increased by 5% to RMB179 million compared with RMB171 million in the same period of 2022. Employee compensation and benefits increased by 4% to RMB95 million from RMB92 million in the same period in 2022. Other expenses increased by 14% to RMB60 million from RMB53 million, primarily due to the increase in fees paid to local channels for introducing sales partners to the company. Net income increased by 52% to RMB93 million from RMB61 million in the same period of 2022. As of June 30, 2023, the company had cash and cash equivalents and restricted cash of RMB1.9 billion compared with RMB1.8 billion as of December 31, 2022, including RMB1.3 billion and RMB1.2 billion from structured funds as of June 30, 2023, and December 31, 2022, respectively, which could only be used to grant new loans and activities. The delinquency ratio, excluding the cost of sales for loans originated by the company, decreased from 18.3% as of December 31, 2022, to 15.2% as of June 30, 2023. The NPL ratio, excluding loans held sales, for loans originated by the company, increased from 1.1% as of December 31, 2022, to 1.4% as of June 30, 2023. Now, we would like to start the Q&A section.

Operator, Operator

We will now begin the question-and-answer session. The first question is from William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski, Analyst

Hi. I was hoping you could provide an update on the demand you're seeing from the SME clients in terms of the number of SMEs trying to take out loans, the size, the type, whether it's the trust or the commercial, and how does that compare to last year?

Jun Qian, Director and Vice President

So based on the release for July, we're seeing a decrease in overall loan demand from SME owners. In July, China's new loans amounted to RMB528 billion, down to RMB270 billion compared to the same period last year. New loans issued to the real economy totaled RMB36 billion, which is a decrease of RMB389 billion from last year. For CNFinance, in the second quarter and the first half of 2023, we completed 60 to 69 transactions and 11,812 transactions respectively, representing year-on-year growth of 18% and 16%. The loan origination volume was RMB4.5 billion for the second quarter and RMB8 billion for the first half of 2023, showing year-on-year growth of 45% and 43%. In the second quarter of 2023, we originated 4,101 loan transactions under the trust lending model, while 2,167 transactions were completed through commercial bank partnerships. For the first half of 2023, the trust lending model accounted for 7,734 transactions and the commercial bank partnership accounted for 4,074 transactions. Our growth during this downward market trend can be attributed to two main reasons. First, in the same period of 2022, our business faced negative impacts due to pandemic control measures, resulting in low business numbers. Second, given our relatively small size and market share, our continued investment in building our sales team and expanding our product offerings allowed us to grow despite the overall market decline in the first half of 2023. Regarding the average ticket size, it rose from around RMB600,000 in 2022 to about RMB700,000 in 2023. This increase is primarily due to our decision since the fourth quarter of 2022 to focus on maintaining overall asset quality by shifting our business to core areas of Tier 1 and new Tier 1 cities. We believe that, despite the overall downward trend and uncertainties in China's real estate market, assets in these core areas will hold their value and may even appreciate over time. Thank you.

William Gregozeski, Analyst

Great. Thank you for all that. Are you guys, even with the uncertainty of the economy, do you still think you'll see origination growth over the remainder of the year?

Jun Qian, Director and Vice President

First off, we are still committed to our target set at the beginning of the year to achieve loan origination of RMB20 billion. Secondly, we will maintain our focus on high-quality development without compromising borrower evaluations or collateral value assessments. As I mentioned, our market share remains relatively low, even with the RMB20 billion origination goal. Thank you.

William Gregozeski, Analyst

Okay. Thanks. And then the last question is regarding the sales partners. The interest on the loans to the sales partners was down this quarter. Is that a sign of just fewer loans going into defaults or sales partners having more liquidity, and how active are the sales partners right now?

Jun Qian, Director and Vice President

We see this change as a positive indicator. We believe it suggests fewer defaults, indicating that overall asset quality is improving. This has led to a reduction in the number of sales partners needing to repurchase defaulted loans, resulting in a decrease in those numbers. If this trend continues, it would suggest our business is improving and that our sales partners are performing well. Anything else?

William Gregozeski, Analyst

Okay. Thank you.

Operator, Operator

That concludes the question-and-answer session. I would like to turn the conference back over to Matthew Lou for closing remarks.

Matthew Lou, IR Manager

Thank you and thank you again for joining us today. If you have any other questions, please feel free to contact us at [email protected]. Thank you.

Operator, Operator

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