Earnings Call Transcript - XYF Q4 2022

Victoria Yu, Unidentified Company Representative

Good day, and welcome to the X Financial Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.

Kan Li, President

Hello, everyone. We are very pleased to end the year with another solid quarter. The loan facilitation amount in the first quarter of 2022 exceeded our guidance, and our total net revenue grew rapidly, increasing both on an annual and quarterly basis. Despite the very challenging environment during the COVID-19 resurgence throughout the year, we've achieved a 42% increase in the non-facilitation amount in 2022 and maintained our asset quality at historically high levels. This further demonstrates the resilience of our business model, especially during challenging times and confirms that we are on the right track for sustainable growth, thanks to strong execution by our team and the continuous optimization of our risk control system. In Q4, our total loan amount facilitated and originated reached approximately RMB 22 billion, up 66% year-over-year and 9% quarter-over-quarter, bringing our total loan amount for the full year to approximately RMB 74 billion. Our premium borrower base remained stable, and we continue to improve asset quality by leveraging our data-driven and technology-empowered risk control system. Our delinquency rate for all outstanding loans past due for 31 to 60 days decreased to 1.02% as of the end of December 2022 from 1.48% a year ago. In addition, we have continued to strengthen collaborations with our institutional funding partners and with our credit line provided by them since Q4. We see further opportunities to optimize our funding costs and improve operating efficiency. With the end of the strict COVID control policy and reopening of China in December last year, the Company's focus has shifted back to stimulating economic growth. We believe that domestic consumption will play an important role in driving China's economic growth this year, and so far in Q1, we have seen a recovery in consumer sentiment. In addition, small and medium-sized enterprises are expected to receive more support from the government to drive their business recovery and further growth. All of these factors will benefit the overall personal finance market in China where our business is rooted. On the regulatory side, according to the Central Bank, Ant Group and 13 other platform companies have basically completed business rectification under the government's guidance and supervision, and the regulators will continue to promote the healthy development of the platform economy. While we believe that the overall regulatory environment will be broadly stable this year, we will closely monitor and adapt quickly to any policy changes and ensure compliance in our operations as always. In conclusion, we are cautiously optimistic about the outlook for this year and expect continued rapid growth in our loan facilitation amount and expansion in both our top and bottom lines. Now I will turn the call to Frank, who will go through our financials.

Frank Fuya Zheng, Chief Financial Officer

Thank you, Kan, and hello, everyone. We were pleased to resume year-over-year top line growth in Q4. Total net revenue was RMB 956 million, up 16% year-over-year and 7% quarter-over-quarter. We have also significantly improved our bottom line on both an annual and quarterly basis. Net income for the quarter was RMB 275 million, up 89% year-over-year and 30% quarter-over-quarter. Despite macro headwinds in 2022, we remain confident in our prospects and continued our efforts to reward our shareholders. Through an expanded shareholder repurchase program, we purchased a total of approximately 267,000 ADSs and 46 million Class A ordinary shares in 2022, which will be accretive to the earnings per share in 2023 as certain shares will be canceled or held as treasury shares during the year. In 2023, we will continue to execute our share repurchase program, which will further enhance shareholders' value. With a stabilized regulatory environment and a gradual post-pandemic economic recovery, we expect revenue growth to accelerate and earnings to improve in line with top line growth. Looking ahead, we remain committed to returning value to our shareholders while maintaining sustainable business growth with healthy fundamentals, a proven strategy and strong execution capabilities. Now I would like to brief on some financial performance for the fourth quarter. Please note that all numbers stated here are in RMB and rounded up. Total net revenue increased by 16% to RMB 956 million from RMB 823 million in the same period of 2021, primarily due to an increase in the total loan amount facilitated and originated this quarter compared with the same period of 2021. Our origination and servicing expenses increased by 53% to RMB 589 million from RMB 386 million in the same period of 2021, primarily due to an increase in commission fees resulting from the increase in total loan amounts facilitated and originated this quarter compared with the same period in 2021. Provision for loan receivables was RMB 75 million compared with RMB 40 million in the same period of 2021, primarily due to an increase in loans receivable held by the Company as a result of the increase in total loan amounts facilitated and originated this quarter compared with the same period of 2021. Income from operations was RMB 274 million compared with RMB 312 million in the same period of 2021. Net income was RMB 275 million compared with RMB 146 million in the same period of 2021. Non-GAAP adjusted net income was RMB 278 million compared with RMB 183 million in the same period of 2021. For further financial information, please refer to the earnings release on our website. Regarding our share repurchase plan in November 2022, we announced our Board authorized an increase to our share repurchase program to $30 million from $20 million, effective through September 2023. In Q3, we repurchased an aggregate of approximately 49,000 ADS and 18 million Class A ordinary shares for a total consideration of approximately $8 million. Now for our business outlook. For Q1 this year, we expect the total loan amount facilitated and originated to be between RMB 23.8 billion to RMB 24.8 billion. Now this concludes our prepared remarks and we would like to open the call to questions.

Operator, Operator

And our first question today will come from Mason Bourne of AWH Capital.

Mason Bourne, Analyst

Nice to see the Company executing well. I guess I just wanted to dovetail off the last guy. And it sounds like you're planning to do a dividend and some of your peers have done that. How do you think about that as far as the potential size of it? And would it be a quarterly dividend that would be variable depending on earnings or what is your outlook for that?

Frank Fuya Zheng, Chief Financial Officer

It's a little bit premature for me to answer at this time because we haven't gone through Board approval or something like that. But most likely, we will do a one-time dividend once a year, something like that.

Mason Bourne, Analyst

Okay. And then I guess on valuation, I've got your stock somewhere under 2x earnings and about 0.3x book. And I hear what you're saying about the volume, that's an issue that we face just in the stock on the ADS. But could you do a tender where you could come to the market with a price and say show confidence do you think your stock is undervalued and maybe you get some people that offer up 1 million or 2 million ADS something like that or maybe even more, just if you put a price out in the market and say this is what we're willing to buy back at.

Frank Fuya Zheng, Chief Financial Officer

Yes. I think I answered your last time regarding the same question. I'm a little bit not familiar with this mechanism in terms of how to achieve that. And also, as I just pointed out, I don't think even if we did that, it's probably not going to significantly jump our share price. To be a little bit frank, I think to jump our price into whatever timeframe is not the first priority for us. Our priority is to run the business the best we can, and we will do whatever we should do, including returning shareholder value, and everything else will fall into place in due time.

Operator, Operator

Our next question will come from Boyd Heinz of Equinox Capital.

Boyd Heinz, Analyst

The first couple of questions I have is about the current state of regulation. Can you just tell us your view on how the regulators look at the capital-light business model? I'm specifically concerned about their view of your risk-taking. It seems that was a concern that they had. How many of the loans that you have on your book are considered to be at risk, and just in general, how do you feel about the state of regulation right now in the country?

Kan Li, President

Okay. I'll take that question. This is Kan. Thanks for your question. It's really difficult for me to tell what the regulators think. But in terms of our business model, one key aspect is that we have been in the market for several years already, and in terms of competition, our quality and brand have been recognized by our institutional funding partners. So no matter what the regulators think about the whole industry, the cooperation between us and our partners has been very smooth. That is a very favorable aspect for our business growth. In terms of our portfolio risk, if you take a close look at our portfolio, our average loan amount per client is relatively small. So one client's risk doesn't significantly impact our overall portfolio risk. I believe that is one of the most critical aspects of our portfolio risk management. Our management team is quite confident in our risk management skills, so we are not particularly concerned about how external shocks will adversely affect our portfolio. That said, as a loan business, our number one focus has always been risk management. We have been investing significantly in human capital and other resources to improve our risk management capabilities.

Frank Fuya Zheng, Chief Financial Officer

This is Frank. I'll add a few words. Regarding your question, I think it is not a direct answer, but we can influence what regulators are doing. First, from the regulators' perspective, they consider lenders with consumer loans to be directly responsible for the loans they provide. That's the principle we've seen over the last year. In China, our class is not regarded as a pure financial institution, we're somewhat of a hybrid. Take Ant Finance as an example, when they faced regulatory scrutiny, it was due to their public comments disrupting the regulatory landscape. Yet, despite their much larger portfolio, no one discussed their portfolio risk on the same scale. The lending operations are regulated, meaning that the loans should be issued by banks or financial systems that have the necessary licenses. As a result, there is a threshold set by regulators, where if you engage in lending, you need to fund at least 30% with your own capital. This has caused companies like Ant Financial to shrink dramatically, as they struggle to meet such capital requirements. The regulators are emphasizing that you need to have a license to do loan business, and it's essentially independent of your portfolio quality. The focus is on operating within the established financial system regulated properly.

Boyd Heinz, Analyst

That's very helpful. So as far as you know, X Financial is fully compliant as it stands right now, and your interpretation of it. And I assume you're in reasonably close contact with those regulators at this point. Is that fair to say?

Kan Li, President

Yes, that's fair.

Boyd Heinz, Analyst

Okay. And in terms of the loan ceiling of 24%, how is the Company progressing towards meeting that goal? And how much of the current loans on your book are above 24%?

Frank Fuya Zheng, Chief Financial Officer

We would rather not disclose that kind of information, but we have been making significant progress in this area for the last year. However, we're not 100% within the 24% limit. It is important to note that the loan rates under the current structure are not set by us, as long as the banks or financial institutions providing the capital for the loans have the right to issue those loans. We are just facilitators in this process. Our legal obligations are aligned with the financial institutions issuing loans, and that compliance is acceptable to us.

Boyd Heinz, Analyst

Okay. Now it appears that the country is returning to a more normalized period of economic activity. So can you just remind us, you've given guidance for loan facilitation in the first quarter, and that's sequentially above the fourth quarter. But generally speaking, in terms of seasonal impacts, is that a period of lower loan facilitation volume for you in terms of Q2, Q3, Q4?

Kan Li, President

In terms of volume, we normally see the first half of the year with higher volumes. However, if you look at our performance in 2022, we actually continued to grow from Q1 all the way to Q4. I think this year, again, that we are discussing forecast expectations, which I'm not 100% confident about, but we do expect this year to likely follow last year's trend. Therefore, we should be able to see quarterly growth in loan facilitation.

Boyd Heinz, Analyst

Okay. Great. Your tax rate was slightly elevated in 2022. It appears that it began to normalize a little bit in the fourth quarter. Can you provide us with an outlook on what you think your tax rate is going to be in 2023?

Frank Fuya Zheng, Chief Financial Officer

In 2023, the effective tax rate will be lower. The reason is the Chinese tax you actually pay will eventually reflect the effective U.S. tax rate, but there's a time lag of about 6 months since China has a different collection cycle. Currently, we apply a tax rate of around 25%, but as we proceed further into the year, our operational entities in China receive a more favorable treatment in terms of tax rates. Thus, the effective U.S. tax rate will also trend downwards. I can't provide exact figures for projection, but overall, the trend is downward for 2023.

Boyd Heinz, Analyst

I believe there was a change in the valuation allowance that affected the reported tax rate on your income statement. Is it correct to say that it will be around 20% to 25% this year compared to last year?

Frank Fuya Zheng, Chief Financial Officer

Yes, I think that's correct. Effective tax rate for 2023 will be somewhere between 15% to 20%. Additionally, you will see in the tax line for income tax expenses in 2023, there's a special item called tax item, which is deferred tax allowance, about RMB 103 million. This reflects some complexities where we couldn't use that deferred tax benefits, which will augment the last year's liabilities. Therefore, last year's additional tax rate should be calculated as that number minus RMB 103 million.

Boyd Heinz, Analyst

It seems that the specific issue will not be present in 2023. Is that correct? That change in valuation allowance?

Frank Fuya Zheng, Chief Financial Officer

Yes. If you check the deferred tax allowance on the balance sheet, you will find that the number has dramatically decreased.

Boyd Heinz, Analyst

Great. Okay. Last question, and then I'll return to the queue for others to ask. You've done an impressive job with your aggressive share repurchase. I just wanted to express my appreciation for that. I'm curious about how much is remaining in the share repurchase plan.

Frank Fuya Zheng, Chief Financial Officer

About $9 million. So far, we have used a little over $21 million from the $30 million allocation, leaving us with about $9 million remaining.

Boyd Heinz, Analyst

Okay. It seems there was an unusual situation with a cofounder wanting to cash out his shares. Do you still have other large domestic shareholders looking to sell, or do you think you might be able to repurchase more of the ADS as part of your repurchase plan?

Frank Fuya Zheng, Chief Financial Officer

Yes. The second largest shareholder sold his ordinary shares; he never even converted them to ADS. He sold his ordinary shares back to us in Q3 last year. I think we don't want to speculate on the reason for that. If we check, he is also an individual shareholder of the largest private bank in Shenzhen, which may be part of the reason, although I'm not sure. To answer your question directly, based on the current trading volume, we don't think we can repurchase shares significantly. Even last year, we could not buy back much due to very low trading volume on our company's stocks. We have one or two months before we set up a firm entity in Hong Kong to make that operational. This will take a little more than 6 months. We hope to finish that change, and we anticipate issuing a dividend for the first time in late April or May during our next earnings call. We will still seek to return value to shareholders, but we may have to rely more on dividend distributions instead of share buybacks from this year forward, ensuring we have enough funds for operational purposes first.

Mason Bourne, Analyst

Yes. No, I appreciate all the efforts that you're doing. Look, I mean, the valuation here is truly incredible based on what you've been able to accomplish. Yet you're not alone; there are several other U.S.-listed Chinese fintechs about the same size. You're all trading at multiples that do not reflect what your business has been capable of doing. The challenge is how do you attract international investors? How do you attract sizeable investors willing to invest in your company because you don’t have an institutionally strong shareholder base right now? That's your challenge.

Frank Fuya Zheng, Chief Financial Officer

Yes.

Mason Bourne, Analyst

So, I mean, how do you think you can expand that investor base?

Frank Fuya Zheng, Chief Financial Officer

As the regulatory environment stabilizes this year, we will likely begin roadshows in the second half of this year and continue next year. However, regarding valuation, as you pointed out, this is an industry-wide issue, not just one that can be addressed by a single company. We'll do what we can and hope for the best.

Operator, Operator

Our conference call has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.