Earnings Call Transcript - CNF Q2 2022

Jane Jenn, Director and Vice President

Good morning and good evening, and welcome to CNFinance Second Quarter and First Half of 2022 Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Qian Jun, will walk us through the operating results followed by the financial results from our acting CFO, Ms. Jing Li. After that, we will have the Q&A section. 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, as defined in U.S. Private Securities Litigation Reform Act of 1995. This forward-looking statement can be identified by terminology such as will, expect, anticipates, future, intends, plans, beliefs, 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 this 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. Qian Jun.

Jun Qian, Director and Vice President

Thank you, everyone, for joining us on this conference call. Today, we will discuss the company's financial and operational results for the second quarter and the first half of 2022, followed by a Q&A session. In the second quarter of 2022, our business continued to face challenges due to pandemic prevention and control measures, but we managed to maintain stable business volume. During this quarter, we originated loans totaling 3.1 billion through our partnerships with trust companies and introduced loans of 200 million to commercial banks. The interest revenue from our collaboration model for this quarter was slightly higher than in the same period in 2021, while interest expenses decreased marginally. After adjusting our commission policy, our gradation cost went down significantly year-over-year, improving the company's gross profit margin. However, due to the ongoing impact of pandemic policies and uncertainty in China's real estate market, we remain cautious in assessing potential losses, leading to a recorded provision for credit losses of 18 million for the quarter. This primarily contributed to our net income being lower compared to the same period in 2021. Now, I will provide a more detailed overview of the challenges we face and the actions we have taken, as well as share management's insights on future developments. Our business continues to confront challenges due to pandemic control measures. Several cities, including Shanghai, faced lockdowns during the quarter, resulting in a 2.6% drop in China's GDP compared to the first quarter of 2022. Additionally, uncertainties in the real estate market persist. The economic downturn has adversely impacted our business growth, and rising delinquency rates have affected the liquidity of our sales partners. In response to these conditions, we focused on stabilizing our business model, reducing financing costs, managing risk, and empowering our SaaS vendors. Our efforts included the following: First, to support followers and assist market owners, we partnered with two new trucks and successfully originated loans of 39 million during the quarter. We also reduced the interest rate on previous loan products. Second, we continued to strengthen our collaboration with commercial banks, recommending loans of 200 million to them and facilitating loans with PICC. Third, for cost control, we engaged in discussions with major funding partners and achieved a consensus on reducing financing costs and optimizing repayment policies, with effective measures expected to be implemented in the third quarter of 2022. Fourth, regarding risk control, several drug companies signed agreements with third-party subordinated unit subscribers, allowing these institutions to invest directly in subordinated units of the transplant. By involving these third-party investors, we were able to reduce the amount our fund required, thereby lowering our risk exposure. Fifth, to empower sales partners, we are allowing more partners to repurchase delinquent loans in installments. We also plan to collaborate with an asset management company to offer our sales partners post-loan management services, including bad debt collection, arbitration, and judicial processes. We hope this partnership will help our sales partners manage risks better and secure steady returns on delinquent loans. Moving forward, we will face both challenges and opportunities. Recent data from the People's Bank of China indicates that new RMB loans in July were 679.4 billion, reflecting a year-on-year decline of 404.2 billion. This suggests that the financing demands of enterprises and customers are contracting, meaning we must work harder to maintain growth. Nevertheless, we believe our micro policies aimed at stimulating the economy and supporting micro and small enterprises (MSEs) will yield positive results. Opportunities still exist within the realm of inclusive financing in China. To leverage these opportunities and expand our business while providing affordable and accessible financing services to more MSE owners, our focus will be on enhancing sales, lowering funding costs, and improving portal management. Our plans include the following: First, we will concentrate more on demand and establish a sales-oriented system in light of changing market conditions. We aim to create a comprehensive sales partner system through data collection and resource coordination, utilizing technology to enhance overall efficiency. Second, we will further our partnership with commercial banks and PICC, as we believe these collaborations will complement our work with trust companies, enhancing our product range and customer reach. In the future, we will create promotional plans to incentivize the sales teams of commercial banks and PICC while also partnering with third-party sales channels to broaden our customer base and boost sales volume. Third, continuing to reduce financing costs will be a key long-term goal. We will engage with funding partners primarily to address mismatches between funding supply and loan applications, aiming to lower the overall cost of our loan products by minimizing idle fund balances. Lastly, we will enhance our collaboration with third-party executions to expedite the management of delinquent loans and recover cash. This endeavor aims to improve our sales partners' liquidity, allowing them to allocate more resources for business expansion. With that, I would like to hand the call over to Ms. Jing Li, the acting CFO of the company, who will provide insights into our financials for the second quarter and the first half of 2022.

Jing Li, Acting CFO

Thank you, Mr. Qian, and thanks again to everyone joining us today. I will walk you through our second quarter and first half of 2022 financials. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated, the percentage changes I am going to give will be on a GAAP basis. Also, unless otherwise stated, the numbers I am going to give will be in RMB. We will work through the figures for the second quarter of 2022 first, followed by that for the first half. As of June 30, 2022, the total outstanding loan principal decreased to RMB 9.4 billion compared to RMB 10.4 billion as of December 31, 2021. The total loan origination volume was 3.1 billion compared to 3.8 billion in the same period of 2021. Interest and financial service fees on loans were 408 million, a decrease of 9%, primarily due to the decrease in average daily outstanding loan principal in the second quarter of 2022 as compared to the same period of 2021. The decrease in average daily outstanding loan principal was due to the lower loan facilitation volume in the second quarter, resulting from the lockdown due to local outbreaks of COVID-19 in multiple cities within China. Interest expense was 187 million compared to 195 million in 2021, primarily due to the decrease in the principal of other borrowings. Collaboration costs for sales partners decreased to 77 million in the second quarter of 2022 compared to 107 million in the same quarter of '21, partly due to the lower fee rate the company paid to the sales partner in the second quarter of 2022. Provision for credit losses was 18 million, compared to 15 million in the same period of last year, primarily due to the increased economic uncertainties caused by lockdowns and reactions to local outbreaks of COVID-19, as well as the downward pressure faced by China's real estate market during the second quarter of this year. Total operating expenses were 91 million, an increase of 5% compared to 87 million in the same period of last year. Income tax expenses were 3 million, a decrease from 8 million in the same period of 2021, and net income was 18 million, a decrease of 72 million from 65 million in the prior year. Now we are moving on to our financials for the first half of 2022. The total loan origination volume was 5.4 billion, compared to 6.7 billion in the same period of last year. Interest and financing service fees on loans were 843 million, a decrease of 6%, primarily due to the decrease in average daily outstanding loan principals in the first half of 2022 as compared with the same period of last year. The decrease in the average daily outstanding loan principal was due to the lower facilitation volume in the first half of this year, stemming from the lockdown due to local outbreaks of COVID-19 in multiple cities within China. Interest expense was RMB 388 million compared to RMB 351 million in the same period of last year, partly due to the increase in filings from the trust company. Collaboration costs for sales partners increased to RMB 156 million in the first half of this year compared to RMB 205 million in the same period of last year, primarily attributable to the increase in loan balance under the collaboration model. Provisions for credit losses was a provision of RMB 112 million compared to a recovery of RMB 3 million in the same period of 2021. The increase was due to the increasing economic uncertainties caused by lockdowns, reactions to local outbreaks of COVID-19, as well as the downward pressure faced by China's real estate market during the first half of 2022. Total operating expenses were RMB 171 million, a decrease of 6% compared with RMB 182 million in the same period of 2021. Income tax expenses were RMB 19 million compared to RMB 38 million in the same period of last year, partly due to the increase in taxable income in the first half of 2022 as compared to the same period of last year. Net income was RMB 61 million compared to RMB 151 million in the same period of last year. As of June 30, 2021, the company had cash and cash equivalents of RMB 1.4 billion compared to RMB 2.2 billion as of December 31, 2021. The delinquency ratio, excluding loans held for sale, originated by the company decreased from 16.2% as of December 31, 2021, to 14.9% as of June 30, 2022. The NPL ratio, excluding the loans held for sale, originated by the company decreased from 2.1% as of December 31, 2021, to 1.9% as of June 30, 2022. With that, we would now like to open up the call for Q&A. Operator, please.

Operator, Operator

And the first question will come from William Gregozeski with Greenridge Global. Please go ahead, sir.

William Gregozeski, Analyst

Hi. You talked about trying to do different things to help the sales partners, and you obviously need the sales partners to grow the loan origination. You talked about some of the bringing in asset management companies. What's the financial health of your sales partners? Are they liquid enough to source new loans? Or are they just trying to manage what they have now?

Bin Zhai, Executive

Under the current conditions, our sales partners are experiencing higher liquidity pressure than before, primarily due to an increase in the delinquency ratio. In our collaboration with them, they are responsible for repurchasing defaulted loans, which has intensified the strain on their liquidity. Since early 2022, we have been very supportive of our sales partners by allowing them to fulfill repurchase obligations in installments. In the second quarter of 2022, we began offering extensions so they could make smaller monthly payments. Additionally, we have been in discussions with third-party asset management companies to provide post-loan services, which could help our sales partners recover cash more quickly, thereby improving their liquidity and enabling business expansion.

William Gregozeski, Analyst

Yes. Could you also just talk about the quantity of sales partners you have? I mean, are you seeing more interest? Or are sales partners shrinking down in the quantity they're trying to source?

Bin Zhai, Executive

You mean the quantity for?

William Gregozeski, Analyst

Yes. So the total number of sales partners you have, is that number increasing or decreasing? And are they - are you seeing them being more active or less active?

Bin Zhai, Executive

It is still going up slightly. In terms of the number, I can provide data. So the sales partners who have signed the collaboration agreement with us has gone up slightly to 90,000 as of the end of the second quarter. We have also seen a rising number of active sales partners, which would be around 500 as of the end of the second quarter of 2022, representing a 9% increase compared to the same quarter of 2021. So as for your question, the number has gone up, as well as the number of active sales partners.

William Gregozeski, Analyst

Okay. Perfect. There's been a lot of news in the media about the real estate market from developers having cash shortfalls, the number of unfinished homes, and interest rate cuts. How do you guys view the real estate market as a whole and how it impacts CNF going forward?

Bin Zhai, Executive

Okay. So after nearly 20 years of high-speed growth in China's real estate market, it seems like we are reaching the end. I think this mainly affects consumers' views toward the housing market. As for us, like you mentioned, there are numerous problems in the real estate market, including cash shortfalls from developers and unfinished homes. Particularly for us, the development of home equity loans depends on property prices, which affects our business volume. If housing liquidity declines and the market becomes less active, it may influence our ability to dispose of delinquent loans and the quality of our collaterals. However, we remain positive about the future development of the real estate market because we believe our government will implement more macro measures to stimulate and control the real estate market in China. In the long run, we expect the prices and liquidity of houses to stabilize. We have observed that even amid fluctuations in the real estate market, properties in major blocks of Tier 1 and Tier 2 cities have remained relatively stable in terms of prices and liquidity. Since our collateral is mainly located in these areas, we believe our business is more resilient to fluctuations in the real estate market.

William Gregozeski, Analyst

Yes. Can you just - you said most of the loans are in Tier 1, Tier 2 cities. What percent of your portfolio is in Tier 1, Tier 2?

Bin Zhai, Executive

We are fortunate that, due to our experience in the home equity loan industry, our collaterals are mainly located in major blocks of Tier 1 and Tier 2 cities. In terms of detailed percentages, over 90% of our collaterals are in Tier 1 and Tier 2 cities. About 30% of the collaterals are in Tier 1 cities. This is regarding the loan origination under our collaboration with trust companies. For loans facilitated under our partnership with commercial banks, around 7% are located in Tier 1 cities, which is lower than that of our partnership with trust companies. However, about 70% of the collaterals in our commercial bank partnership are located in Tier 2 cities.

William Gregozeski, Analyst

Okay. Perfect. And the last question is, you've talked in the past about some technology upgrades you wanted to make. Can you just outline where you are on that process? What are you focusing on for the remainder of this year and next year? And what's the cost going to be for that?

Bin Zhai, Executive

In the past three years, under the COVID-19 pandemic, we have seen how important it is for a company to conduct business online. As our business volumes have kept increasing, we have been investing more in technology. I want to clarify that improving our technological capability is aimed at supporting sales by coordinating data, thus providing better services to sales partners and borrowers. As of today, the costs have not been very significant as the major project was executed by our in-house staff. For the future, we do not have a specific plan right now. Our thought is to allocate a certain percentage of revenue towards technology investment, meaning that as revenue increases, so will our investment in technology. Our long-term goal is to make CNFinance a company that can promote business both online and on site.

William Gregozeski, Analyst

Okay. Perfect. Thank you.

Operator, Operator

This will conclude our question-and-answer session as well as our conference call for today. You can view the company's information at ir.cashchina.cn. Thank you for attending today's presentation. You may now disconnect.