Earnings Call Transcript - CNF Q3 2022

Operator, Operator

Good day, and welcome to the CNFinance’s Third Quarter of 2022 Unaudited Financial Results Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded today. I would now like to turn the conference over to Matt Lou, IR Specialist. Please go ahead.

Matthew Lou, IR Specialist

Thank you. Good morning, and evening, and welcome to the CNFinance’s third quarter of 2022 financial results conference call. On 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 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, believes, 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 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.

Jun Qian, Director and Vice President

Thank you everyone for joining us in this conference call. On today's call, we will present the company's financial and operational results for the third quarter of 2022, followed by a Q&A session. In the third quarter, as China's economy began to improve, our business volume also increased. We facilitated loans exceeding RMB3.8 billion through our partnerships with trust companies and introduced loans amounting to RMB400 million to commercial banks. Our revenue sources became more diverse, with service fees tied to the commercial bank partnership and interest income from sales partners both rising. The company's gross profit margin surpassed that of the same period last year because of reduced collaboration and funding costs. We have remained cautious in assessing potential losses, recording a provision for credit losses of RMB42 million during the quarter. Consequently, we achieved a net income of RMB46 million, an increase of RMB27 million compared to the same period last year. Now, I would like to provide a more detailed overview of our efforts and share the management's perspective on our future growth. During this quarter, as China's economy began to rebound, its GDP increased by 3.9% from the second quarter of 2022. For our company, both the loans facilitated through the trust lending model and the loans introduced to commercial banks showed year-on-year growth. This quarter, we focused primarily on strengthening and empowering our sales system, lowering funding costs, and enhancing our collaboration with commercial banks. Our initiatives included building and leveraging technology to enhance our sales system. We diversified our sales approach by collaborating with channeling partners and empowering them through our platform. We launched a mobile app this quarter to enable our service team to efficiently communicate with sales and application reviewers about follow-ups, channel information, loan products, and funding data, thus boosting overall efficiency by coordinating the entire process promptly. Additionally, management anticipated a market turnaround in 2022 with sufficient funding available. To capitalize on this opportunity, we actively engaged in discussions with our trust company partners to reduce funding costs and have reached agreements that have significantly lowered our funding expenses compared to last year. As a result of our efforts in prior quarters, our collaboration with commercial banks has started to gain traction. In the first nine months of 2022, we introduced loans exceeding RMB600 million to commercial banks, and as of September 30, 2022, the outstanding loan principal under our commercial bank partnerships was about RMB640 million. Our cooperation with private banks has demonstrated particularly strong progress. Our partnership with Bank of Shanshan has expanded, and the outstanding loan principal has reached RMB150 million as of September 30, 2022. Furthermore, we initiated collaboration with [indiscernible] Bank this quarter, introducing loans of over RMB80 million for them. The reports from the 20th National Congress of the Communist Party of China emphasize support for the development of micro, small, and medium enterprises, reinforcing our management's belief that significant opportunities exist in China's inclusive financing sector. To take advantage of these opportunities, we will continue to develop our sales system, reduce funding costs, and employ technology to drive business growth. Our objectives include: Firstly, in addition to supporting current sales partners, we plan to allocate more resources to foster collaboration with channeling partners who have broader customer access and support them in providing refined services and management. We will utilize our platform and systems to empower these partners and help them achieve scale. Secondly, we will persist in sourcing low-cost capital from trust companies and expand our collaborations with commercial banks, making it a larger component of our product offerings. Additionally, we will negotiate with subordinated unit investors regarding refinancing non-performing loans and aim to reach a significant scale in this refinancing by the end of next year. We will also refine our processes to enhance loan application fundraising coordination and better manage [indiscernible] cash, allowing us to further lower interest rates on our loan offerings, thereby providing more support to MSE owners. Thirdly, we will continue to leverage technology in our business, simplifying and optimizing our products. In 2023, we plan to register and maintain an official public account to communicate with borrowers, address customer inquiries, and handle complaints efficiently. We anticipate that these official accounts will enhance our tools for fostering customer loyalty and maximizing the value of our offerings. Finally, we aim to engage more actively in the capital market. In addition to pursuing a secondary offering, we are exploring acquisition opportunities through share exchanges using repurchased treasury shares. We will keep an eye on live fintech startups for these purposes. On behalf of the company and the Board of Directors, I would like to welcome Mr. Ge Yang to the Board as an Independent Director. Mr. Yang holds a Bachelor's degree from Nankai University in International Finance, an MBA from Tsinghua University, and an M.S. in Accounting from Seton Hall University. He brings over 30 years of experience in corporate finance, non-bank financial institutions, and wealth and asset management. He has a background working with public companies listed in Shanghai, New York, and Hong Kong and has gained international experience in China, Europe, and the U.S. Currently based in New York, Mr. Yang is expected to work with other Board members to identify further opportunities for growth in the capital market and increase shareholder value. I will now turn the call over to Ms. Li Jing, the Acting CFO, who will guide you through the third quarter 2022 financials.

Jing Li, Acting CFO

Thanks, everyone, for joining us today. I will provide an overview of our third quarter 2022 financials. We will use year-over-year comparisons to assess our performance. Unless noted otherwise, all percentage changes will be based on this comparison, and all figures will be in RMB. As of September 30, 2022, our total outstanding loan principal was RMB10.5 billion, compared to RMB10.4 billion on December 31, 2021. The total origination volume in the third quarter of 2022 was approximately RMB3.9 billion, up from RMB3.1 billion in the same period of 2021. Interest and financial service fees decreased by 9% to RMB413 million for the third quarter of 2022 from RMB455 million in the same period last year, mainly due to a reduction in the average daily outstanding loan principal. This decline was largely due to transferring loans under traditional facilitation to third parties in bulk during the fourth quarter of last year, which was somewhat offset by an increase in the outstanding loan principal under our collaboration model. Interest expense fell 11% to RMB195 million for the third quarter of 2022, down from RMB219 million last year, primarily because of a decrease in principal amounts of other borrowings and lower interest rates from trust companies. Interest income charged to sales partners, fees for those who repurchase default loans in installments, surged by 213% to RMB34 million in the third quarter of 2022, increased from RMB11 million in the same period last year, due to a rise in delinquent loans repurchased by sales partners. Collaboration costs for sales partners decreased to RMB85 million in the third quarter of 2022 from RMB102 million, mainly due to a lower average fee rate paid to sales partners this quarter compared to last year. The fee rate under the collaboration model varies by model type and loan terms. The provision for credit losses rose by 30% to RMB42.3 million in the third quarter of 2022 from RMB33 million a year earlier, driven by economic uncertainty from the COVID-19 pandemic and related preventive measures, along with downward pressure in China’s real estate market. Total operating expenses dropped by 11% to RMB83 million in the third quarter of 2022 from RMB93 million. Income tax expense grew by 153% to RMB17 million for the third quarter of 2022 from RMB7 million, mainly due to higher taxable income. Net income surged by 142% to RMB46 million for the third quarter of 2022 from RMB19 million last year. As of September 30, 2022, the company had cash, cash equivalents, and restricted cash totaling RMB1.4 billion and RMB2.2 billion. The delinquency ratio for loans originated by the company declined from 24.1% as of December 31, 2021, to 22.9% as of September 30, 2022. The delinquency ratio, excluding loans held for sale, fell from 16.2% as of December 31, 2021, to 13% as of September 30, 2022. The non-performing loan ratio for loans originated by the company rose from 9.4% as of December 31, 2021, to 10.8% as of September 30, 2022. Excluding loans held for sale, the NPL ratio decreased from 2.1% as of December 31, 2021, to 1.5% as of September 30, 2022.

Matthew Lou, IR Specialist

We would like to open the Q&A session with that. Operator, please?

Operator, Operator

We will now begin the question-and-answer session. And our first question here will come from William Gregozeski with Greenridge Global. Please go ahead, sir.