X Financial Q1 FY2022 Earnings Call

Hello and welcome to the X Financial First Quarter 2022 Earnings 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 Tanya Wen. Please go ahead.

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 for 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 section. 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 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 and 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, as required under the law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Hello everyone. We are pleased to start 2022 with a solid performance for the first quarter despite multiple challenges from the resurgence of COVID-19 and the economic slowdown in China. The total loan amount facilitated and provided in the first quarter increased on both a yearly and quarterly basis. We also saw our asset quality remain stable during the quarter. However, given the uncertainties of the macroeconomic environment, we are cautious about the business outlook for the coming quarters. We will continue to closely monitor market dynamics and remain vigilant to any inefficiencies and issues related to the pandemic in China. During the first quarter, our total loan amount facilitated and provided reached RMB 15 billion, up 40% year-over-year and 17% quarter-over-quarter in line with our previous guidance. The delinquency rates for all outstanding loans that are past due for 31 to 60 days as of March 31, 2022 decreased to 1.31% from 1.48% as of December 31, 2021. We are pleased to see that our tightened risk control measures have successfully stabilized our asset quality amid the complex environment, especially during the recent COVID-19 resurgence and lockdowns. In the meantime, we have been actively working with various partners to jointly explore new opportunities in the personal financing market. In the fourth quarter of 2021, we became an indirect minority shareholder of the Newup Bank of Liaoning. Since the second quarter of 2022, we have started to provide loan facilitation services to Newup Bank. Now we are in active discussions with Newup Bank to jointly design and develop products and programs that cater to the financing needs of small and micro businesses, in line with the government’s call to support the development of small and medium enterprises in China. We look forward to deepening our cooperation with Newup Bank by leveraging our extensive experience in the personal financing market and our capabilities in cutting-edge and tech-driven risk control and assessments. We believe helping licensed financial institutions to grow their business will benefit both parties in the long run. On the regulatory side, the Chinese government recently highlighted the importance of promoting the healthy development of the platform economy in China. We believe a more visible market with clear and standardized regulations will benefit all market participants, including us. We're fully compliant with and support the government's initiatives and policies to promote the long-term development of the industry. We have laid a strong foundation and are very confident in our expertise to capture growth opportunities aimed at a healthy regulatory environment. Recently, we were included in the list for the first year under the Holding Foreign Companies Accountable Act, which allows the US regulator to delist companies if they fail to comply with the audit standards for three consecutive years. According to the Foreign Ministry of China, the Chinese securities regulator has regularly been in communication with US regulators in this regard. Whether these companies will be delisted or not from the US stock exchange depends on the progress and the results of the China-US audited supervision cooperation. We hope and look forward to the two governments reaching an agreement in the near future. In the meantime, we have been proactively exploring possible solutions to protect the interests of our stakeholders and maintain our listing status on the New York Stock Exchange. Now, I will turn the call to Frank, who will go through our financials.

Thank you, Kan, and hello everyone. We are pleased to see our top line increased 8% quarter-over-quarter sequentially in the first quarter. As per the guiding principles of the government, we are on track to further reduce the total borrowing cost for borrowers in order to jointly promote and stimulate economic growth. We have been stepping up our efforts to acquire more high-quality borrowers and secure a large user base for long-term sustainable growth. This strategy has put some pressure on our bottom line due to our increased user acquisition cost, but we believe that a solid foundation of borrowers is critical to the long-term development of our business. We will continue to strengthen our user acquisition while implementing disciplined cost control measures to deliver balanced top line and bottom line growth. Now, I would like to brief you on our financial performance for the first quarter. Please note that all numbers stated are in RMB and rounded. Total net revenue decreased by 2% to RMB 888 million from RMB 906 million in the same period of 2021, primarily due to a decrease in the average total borrowing cost for borrowers, and partially offset by an increase in the total loan amount facilitated this quarter compared with the same period of 2021. Origination and servicing expenses decreased by 19% to RMB 465 million from RMB 573 million in the same period of 2021, mainly due to a decrease in insurance fee paid to the insurance company. General and administrative expenses increased by 7% to RMB 45 million from RMB 43 million in the same period of 2021, primarily due to an increase in consulting service fee expenses in the first quarter of 2022. Provision for accounts receivable was RMB 26 million compared with RMB 17 million in the same period of 2021, primarily due to an increase in accounts receivable from facilitation services as a result of an increase in the total loan facilitation amount in the first quarter of 2022 compared with the same period of 2021. Provision for loans receivable was RMB 34 million compared with RMB 27 million in the same period of 2021, primarily due to an increase in the loan receivable held by the company as a result of an increase in total loan amount facilitated and provided in the first quarter of 2022 compared with the same period of 2021. Income from operations was RMB 314 million compared with RMB 251 million in the same period of 2021. Net income was RMB 140 million compared with RMB 189 million in the same period of 2021. Non-GAAP adjusted net income was RMB 154 million compared with RMB 212 million in the same period of 2021. For further financial information, please refer to the earnings release on the company's IR website. Now for our business outlook. We expect total loan amount facilitated and provided for the second quarter of 2022 to be between RMB 15 billion and RMB 16 billion and the range of incremental total loan amount facilitated for 2022 to be from 15% to 25%. This forecast reflects our current and preliminary views, which are uncertain. Now, this concludes our prepared remarks, and I would like to open the call to the questions. Operator, please.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Boyd Haynes with Equinox Capital. Please go ahead.

Hi. Thank you for taking my questions. I have three at the moment. What was your average interest rate in the quarter that you charge customers? The second question is on the tax rate. Why was it so high this quarter and in Q4? And what is your outlook for the tax rate for the full fiscal year? And the last question is, can you provide us with any update on your share repurchase program? Thanks.

Okay. Regarding your first question, we do not provide exactly the number regarding our general rate charged for the borrowers. But I will tell you that, in general, it is going down. We can provide regarding the 24% borrowing rate for the loan, which is about between 40% to 50% range in the first quarter this year. So we are on track for the majority of our business to be based on a 24% rate going forward. I think that process will carry all the way to the end of this year, okay? Regarding the tax rate for the last quarter and this quarter, especially this quarter, we have one subsidiary in China that has deferred tax assets. Since that business and subsidiary will not generate enough revenue in the future to offset those deferred tax assets, for example, in this quarter, we have around RMB 90 million on the tax line. Our overall tax rate is relatively stable, around a little bit over 20%, but below 25%. For the first quarter this year, the reason the tax amount is so high is due to that special RMB 90 million charge. That's the second question. Regarding the share buyback program, the company’s share buyback program is still subject to the insider trading rules, specifically 10b-5 and 10b-8, so we will start the buyback this Friday. So, in other words, we haven't had any buyback yet because there has been no buyback window allowed to us until this point.

Okay. Let me just follow up on the tax rate question. I'm trying to understand what you're implying. Are you saying that the tax rate is going to drop going forward so that starting in the second quarter, it should be closer to that 20% to 25% statutory rate?

No. I'm saying that for the last quarter and the first quarter of this year, the number on the tax line is abnormal because of one subsidiary that we had losses back in 2020, giving us tax credits. Normally, if you generate profit, you could offset those credits, resulting in a lower tax rate. But because we do not have enough revenue now, that’s why we prudently took that charge of RMB 90 million in the first quarter. So yes, the tax amount for the first quarter is abnormal and we expect it will normalize back to the range of 20% to 25% starting next quarter.

Great. Thank you. My last question is really to the management team. Have you considered taking this company private?

No. We understand our valuation is very low and like P/V is well below 1%. We are still making money; we are not losing money, except for special years like 2020 due to the COVID situation, mainly in China. Normally, we are making money, so that’s one reason why we cannot make a reasonable valuation for the shareholder. We believe that in normal situations, the depressed valuation level primarily due to uncertain regulatory environment right now in China. As we indicated in this quarter, if you pay attention to government news, we feel that at this moment the Chinese government may refrain from implementing stringent regulatory measures for this industry. Thus, we could potentially move toward a more normal regulatory environment in the future. It does not mean we are adopting new measures; we'll still have regular consumer protection regulations. It is expected. We believe that both depressed valuation measures, like P/V or P/E will return to normal, but we don't know how and when. However, we believe the trend will see a return to a normal state.

Right. Well, most of your competitors have initiated stock repurchase plans. They have followed through. They also pay a dividend, and some of them have even seen their top senior executives purchase stock instead of selling stock. So if you believe that your shares are undervalued and they are not going to be delisted, I would urge you to aggressively do all of that.

All our management team, as far as I know, has not sold any shares. Certainly, I personally haven't sold any shares yet. Our company is the biggest shareholder, adjusting a substantial share personally more than 30%. I believe and I think that he did some small purchases, although not a big one, he did buy some shares. So I think we will, for the share buyback, we will do it at every opportunity. We will buy back shares every day available for us, and when the time is right, we will also consider dividends, but no promise for that.

I agree that share dividends don't make as much sense as share repurchases. But could aggressive repurchase 10% to 15% of the company right now for very little?

If they permit us, we will proceed with it. As you can see, we have allocated RMB 15 million for this purpose. In terms of the current market capitalization, this amounts to approximately 15%. However, the regulation only permits us to purchase 25% of the available shares daily. At the moment, the availability of shares is quite limited. So, we will acquire everything that is accessible to us, but we still need to adhere to the regulations.

Okay. Thank you. I appreciate you answering my question.

Thank you.

Thank you. And ladies and gentlemen, this concludes your question-and-answer session. I'd like to turn the conference back over to Tanya Wen for closing remarks.

Okay. Thank you everyone for joining us on the call today. We look forward to speaking with you again in the new quarter. Thank you.

Thank you. And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.