X Financial Q4 FY2023 Earnings Call

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.xiaoying.com. On the call today from 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 session. 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 US 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 the law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Hello, everyone. We are pleased to conclude the year with solid operational and financial results, emphasizing our commitment to sustainable growth. In 2023, we facilitated and originated 43% more loans than in 2022 and delivered notable year-over-year growth in both revenue and projects. Total net revenue increased 35% on an annual basis, while income from operations increased 33%, and net income improved by 46%. However, as we enter the second half of 2023, particularly in the fourth quarter, we experienced increased risk levels in asset quality. While we strengthened our risk control system and implemented various measures to manage delinquency rates, we also made the strategic decision to proactively reduce loan volumes in the fourth quarter, prioritizing profitability over sheer volume growth. During the fourth quarter of 2023, our total loan volume facilitated and originated was RMB 26 billion, a 20% year-over-year increase, but an 11% quarter-over-quarter decline. Delinquency rates for loans past due 31 to 60 days and 91 to 180 days were 1.57% and 3.12%, respectively, at the end of the quarter, compared with 1.02% and 1.93%, respectively, a year ago. Our team remains vigilant in monitoring asset dynamics and has taken further steps to mitigate risk by reducing our exposure to higher risk areas and adjusting our business approach to ensure sustainable profitability. We aim for continued gradual improvement over the course of 2024, and these measures have begun to have a positive impact on our risk indicators. For fiscal year 2024, our strategic approach will remain consistent and somewhat conservative, aligned with current market conditions in China. We believe the regulatory environment has become stable and the government is committed to promoting economic recovery. However, we recognize that challenges and uncertainties exist as the country undergoes a transformative shift in its economic growth model, away from the rapid expansion of the past, and structural adjustments are imperative. All of this has far-reaching impacts on various sectors, including our target market. Despite these challenges, we remain committed to executing our strategy and prioritizing profitable growth. Our commitment to delivering value to shareholders is unwavering, and we intend to pay dividends when profitability and smooth operation allow. This overall approach reflects our decision to navigate through the evolving economic landscape while ensuring the sustainable success of our business and returning value to our shareholders. Now I will turn the call to Frank, who will go through our financials.

Thank you, Ken. Hello, everyone. We are pleased to deliver solid financial results in 2023. Total net revenue increased by 35% year-over-year to RMB 4.8 billion, and net income rose by 46% to approximately RMB 1.2 billion. In response to heightened asset quality risk in the first quarter, we proactively reduced loan volumes to satisfy profitability, resulting in a 15% sequential decline in total net revenue for the quarter. We recognized RMB 26 million and RMB 46 million of impairment losses on long-term investment related to our indirect investment in Newup Bank of Liaoning in 2022 and 2023, respectively, mainly due to depreciation in the market evaluation of the Chinese banking sector. However, the banking loan portfolio and operation remain healthy, and we believe it continues to be a good investment for us. Looking ahead, we will not pursue pure loan volume growth at the expense of profitability, which is always our strategic focus to ensure long-term growth and returns to the shareholders. We will continue to strengthen our risk management system to improve asset quality and balance our revenue and profitability growth. Now I would like to provide some financial performance for Q4. Please note that all numbers stated are in RMB and rounded. Total net revenue increased by 25% to RMB 1,193 million from RMB 956 million in the same period of 2022, primarily due to an increase in the total loan amount facilitated and originated this quarter compared with the same period of 2022. Origination and servicing expenses increased by 28% to RMB 755 million from RMB 589 million in the same period of 2022, primarily due to an increase in the commission fees and collection expenses resulting from the increase in total loan amount facilitated and originated this quarter compared with the same period of 2022. Provisions for loans receivable were RMB 99 million compared with RMB 75 million in the same period of 2022, primarily due to an increase both in loan receivable held by the company as a result of an increase in total loan amount facilitated and originated this quarter and in the estimated default rate compared with the same period of 2022. Income from operations was RMB 254 million compared with RMB 274 million in the same period of 2022. Net income was RMB 189 million compared with RMB 275 million in the same period of 2022. Non-GAAP adjusted net income was RMB 231 million compared with RMB 278 million in the same period of 2022. For further financial information, please refer to the earnings release on our IR website. Regarding our share repurchase plan, in Q4, we repurchased approximately 36,000 ADS for a total consideration of US$143,000. Since the beginning of 2023, we have purchased an aggregate of approximately 838,000 ADS for a total consideration of US$3.5 million. We have approximately US$5.5 million remaining for the potential repurchase under our current plan. With respect to our dividends, our board has approved a semi-annual dividend policy. Under this policy, the determination to declare and pay such semi-annual dividends and the amount of dividends in any particular half-year will be made at the discretion of the board and will be based upon the company operations and earnings, cash flow, financial conditions, and other relevant factors that the board may deem appropriate. Pursuant to the semi-annual dividend policy, the board has approved the declaration and payment of a semi-annual dividend of US$0.17 per ADS in the second half of 2023. Now, our business outlook. For Q1 this year, we expect a total loan amount facilitated and originated to be between RMB 21 billion and RMB 22.5 billion. This concludes our prepared remarks and we would like to open the call to questions. Operator, please.

I'd like to spend a few minutes talking about some of the recent changes in regulation. I'm wondering how some of those changes will affect you as a smaller consumer financing company.

Can you tell us exactly which regulation you are referring to?

Yes, there are two that I'm speaking of. One is the requirement for a minimum registered capital of RMB 1 billion or US$139 million dollars, and the other regulation is to have a major investor hold a stake of at least 50%. I'm just wondering how the company is going to be able to comply with those two regulations.

I can take this question first because I received your email on that matter. First of all, we are not a consumer financing company in China. We are a fintech company, so that particular regulation does not directly apply to us, and it actually applies to consumer financing companies. Those kinds of companies are usually owned by major banks. They are mainly focused on issuing consumer loans. As you saw in the article, they haven't provided details regarding the timeline for implementing this. Mostly, companies have already met the RMB 1 billion capital requirement. About half, perhaps more than 10 consumer financing companies have not met the largest shareholder's requirement of at least 50% ownership. Once again, they have not come out with the details on when they need to comply with the second requirement from the article you sent me. We are a fintech company. What we primarily do is acquire the borrower through online or offline methods, and then we forward those consumer details with specific risk profiles to potential funding sources, such as banks and consumer institutions. Both banks and consumer institutions provide us funding for the loan portfolio, but those loan portfolios are legally under their ownership, not ours. Although we have a small loan company with our own capital of about US$1 billion, which allows us to directly issue loans, our main source of funding is from banks and financial institutions. Consequently, the current Chinese monetary policy is very loose, meaning that these requirements do not impact our lending capabilities or our available funding. Thus, we do not foresee any significant effects from this regulation anytime soon. Kan, do you want to add anything?

No, I think you covered it.

I have two questions. To start, could you talk about your growth outlook? And I know you gave guidance for Q1, but just how you're thinking about the opportunity to grow going forward, given the pullback in your aggressiveness on growth with what's happening on the risk side of things, and then how that looks longer term in 2024 and beyond?

Okay, I'll take this one. It's really difficult for me to give you a forecast for 2024 and beyond. Let's discuss 2024. Based on Q1 and looking forward, it appears that the environment is improving, moving from worse to a little better, but we still feel that this so-called better environment is not as good as the much better environment we experienced in the first half of 2023. In terms of growth, I believe we will gradually return to growth mode, but the growth rate will be slower than that of last year.

The second question: if I look at your dividend policy, it's good to see that you're returning some of the capital to shareholders. However, looking at peers, some of them are returning substantially more as a percentage of net income, about 50% through buybacks and dividends combined. Another competitor announced a large special dividend this week. I was wondering how you view your balance sheet, given where tangible book value is per share and whether you could do more on the dividend side of things.

Yes, we do have a decided dividend payout. We are looking for additional ways to return shareholder value. Right now, we have just issued the Q4 and last year's financial reports, and we will do the 20-F filings by the end of next month. In May, we will present the first-quarter financial reports. After that, we definitely will look for more ways to return shareholder value this year. Our situation differs from that of our peers because our trading volume is very thin, which you know as well. Due to regular open window periods, we just cannot buy much. We are restricted to purchasing 25% of the float on a daily basis. Therefore, we are seeking more ways to return shareholder value. That's all I can say at this moment.

My questions are a follow-up to the previous callers. I appreciate the dividend since it places you on the radar and returns some capital to shareholders. What I'm asking is somewhat abstract. Your company trades at a multiple that one would never see in the United States and probably not in many parts of the world, slightly above 1 to 1.5 times earnings. The dividend will definitely attract a few more investors. However, in the past, when discussions around potentially going private or finding a means to elevate your share price arose, the answer was that this was not an option. Therefore, I'm curious, what is your plan? A couple of your competitors trade at four times earnings or so, and they pay a dividend similar to what you are forecasting. If you could push your multiple to four, that would at least triple your price, which would likely make your primary shareholders happier from a financial perspective as well as for any long-term investor. Your stock has been in an upward trend, which contrasts with the indices from the PRC, so there's not much to complain about over the last six or eight months. However, is there a plan to improve awareness of your company, considering your stable and consistent earnings? More investors should be made aware of your stock. It's thinly traded, but that could work in both directions. If social media or other outlets in the United States became more aware of a company trading at 1.3 times earnings with significant cash on the balance sheet, it wouldn't take much to move the stock. Sorry for rambling, but for investors frustrated with a stock trading at a low multiple, what strategy do you have?

We operate in a not particularly appealing industry. However, we are definitely among the leaders in this sector, like Ant Financial, and so forth. As for visibility regarding the sector, there are numerous factors that contribute, and we aren't very interested in discussing those aspects, but everyone agrees that many of those factors are beyond our control, like US-China relations. We believe that things will improve over time, and we should continue to focus on running our business effectively while ensuring the return of shareholder value. We understand this will play out over time, though we cannot predict when. Regarding privatization, this is a bit tricky. US investors often view privatization as a value play, as there are fewer obstacles to reshape and return anytime they desire. In contrast, it's different in China. If you don't believe me, just look at a major real estate company that operated the biggest mall in China. They were listed in Hong Kong and, having deemed the valuation poor, pursued privatization, but they were unable to relist back in Hong Kong. The rules apply to us as well. For any company with a customer base exceeding one million, government approval is necessitated for overseas listings, especially in the US. It's a bit of a gray area if it's in Hong Kong since one can argue it's considered part of China territory. Thus, if we were to delist, it would be uncertain whether we could relist. As for our plan, I don't have a detailed roadmap, but I have a general plan. Our first objective is to ensure our stock exceeds $5. If our stock maintains this price for over half a year, institutional investors could technically look to engage with us. If we achieve a sustained level of around $5, we could reconsider our public relations strategy, perhaps going on more road shows and undertaking typical outreach efforts, with hopes for positive results.

Yeah, you addressed it somewhat. You're somewhat constrained in your current status because going private would eliminate your exit strategy. But I'm looking for clarity regarding the game plan because your stock's been struggling with low multiples. There are one or two fintech companies trading below one times earnings in Hong Kong, so it's a sector that raises regulatory concerns. But when you're trading at a multiple close to your cash value, as we have options available here in the capital markets, such as going private or merging, what would prevent you from selling to a partner, perhaps a bank or another entity that has a significantly higher multiple? This could be very accretive for them given your client base and reach with millions of customers. But I'll leave that for you to ponder. Thank you for your time.

Okay, thank you everyone for joining us on the call today. If you haven't had a chance to raise your questions, we will be pleased to answer them through follow-up contacts. We look forward to speaking with you again in the near future. Thank you.

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