Earnings Call Transcript - XYF Q1 2025

Operator, Operator

Hello, and welcome to the X Financial First Quarter 2025 Earnings Conference Call. All participants will be in a 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 Victoria Yu. Please go ahead.

Victoria Yu, IR Representative

Thank you, operator. Hello, everyone, and thank you for joining today's call. The company's financial results were released earlier today and are available on our investor relations website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Kent Li, President; Mr. Frank Fuya Zheng, Chief Financial Officer; and Mr. Noah Kauffman, Chief Financial Strategy Officer. Mr. Li will start with a brief overview of our business operations and financial performance. Then Mr. Kauffman will go over some key Q1 metrics and highlights. After that, Mr. Zheng will share updates on financials, regulatory insights, and our 2025 outlook. Afterwards, Mr. Li, Mr. Zheng, and Mr. Kauffman will be 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 provision of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and involve known or unknown risks, uncertainties, and other factors. These factors are difficult to predict, and many are beyond the company's control, which may cause actual results, performance, or achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our SEC filings. The company undertakes no obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. It is now my pleasure to introduce Mr. Kent Li.

Kent Li, President

Thank you, Victoria, and hello, everyone. We are pleased with how 2025 has begun. In the first quarter, we facilitated RMB35.15 billion in loans, an 8.8% sequential increase and 63.4% growth year-over-year. It was one of our strongest quarters for originations, reflecting solid borrower demand and continued progress in risk management. Our team remained focused on expanding opportunities through both new partnerships and existing relationships, enhancing our technology platform and underwriting models to support profitability and scalability, balancing growth and risk as we broaden access to qualified borrowers. We are also working to improve the borrower experience by delivering faster decisions, simplifying application processes, and enhancing transparency. In parallel, we continue to strengthen platform reliability and support tools to help customers make informed borrowing decisions and manage repayment with confidence. Despite the typical seasonal impact from Chinese New Year, we achieved sequential growth in both loan volume and revenue. Total revenue reached RMB1.94 billion, up 13.4% from Q4 and over 60% year-over-year. These results reflected steady progress in growing the platform responsibly. Operational and credit quality update. We also made continued progress on asset quality. As of March 31, our 31 to 60-day delinquency rate was 1.25% compared to 1.61% a year ago, reflecting a 22% improvement year-over-year. The 91 to 180-day delinquency rate was 2.7%, down from 4.7% in Q1 2024, a 37% reduction year-over-year. These improvements reflect disciplined borrower screening and underwriting practices. We have also continued to enhance borrower engagement and repayment behavior through timely communication and tailored repayment assistance programs. These initiatives have contributed meaningfully to our risk management outcomes and supported further portfolio stability. Now, I will turn the call to Noah to go over some key Q1 metrics and highlights.

Noah Kauffman, Chief Financial Strategy Officer

Yeah. Thank you, Kent. Hello, everyone. It's a pleasure to speak with you today. Let me share several highlights from our Q1 operational and financial performance. On the operational metrics, we facilitated approximately RMB35.15 billion in loan originations, marking a 63.4% year-over-year increase. Our total loan outstanding balance, excluding loans over 60 days delinquent, reached RMB58.4 billion, growing by more than 33% from Q1 2024. We facilitated over 3.14 million loans with an average loan amount of approximately RMB11,181. On the financial highlights, total revenue grew to RMB1.94 billion, up 13.4% sequentially and 60.4% year-over-year, primarily driven by higher borrower volumes and originations. Our income from operations expanded substantially, reaching RMB573 million, up 52% year-over-year. This demonstrates our improved operational leverage and disciplined expense management. Our average funding cost improved year-over-year, supported by a more optimized funding structure and sustained commitment from our core institutional partners. This reflects the strength of our platform and deepening trust within our funding network. With these metrics, we continue to see notable gains in operational efficiency and market positioning. I'll now hand the call over to Frank to walk through the financials, discuss capital allocation priorities, provide regulatory insights, and outline our growth outlook for 2025.

Frank Fuya Zheng, Chief Financial Officer

Thank you, Noah. It's great to speak with everyone today. I will provide additional insights into our profitability metrics, liquidity, and the strategic plans for capital allocation. Non-GAAP adjusted net income for Q1 reached RMB457 million, an increase of 44.9% year-over-year, reflecting sustained earnings strength. Basic earnings per ADS improved significantly to $1.50, an approximately 45.6% year-over-year increase, underscoring enhanced profitability per share. Return on equity increased to 25.5%, rising 1.4 percentage points year-over-year and 3.2 percentage points sequentially, reflecting our sustained financial discipline and growing operational efficiency. Our liquidity remains strong, positioning us well to support ongoing operations, investments, and capital returns. Share repurchase plan. We have recently authorized a new share repurchase plan that allows us to buy back up to $100 million worth of our Class A shares and ADS. This authorization will be in effect for an 18-month period running from January 1, 2025, through November 30, 2026. This new authorization comes in addition to our existing repurchase plan approved last December, which still has approximately $15.9 million remaining. Regulatory environment update. The regulatory environment in China remains dynamic, and we remain fully committed to compliance and alignment with the overall policy direction. The recent notice from the National Financial Regulatory Administration affirms the current trajectory with a clear focus on responsible credit assets and financial stability. We see increased oversight as a positive step that supports long-term industry development and reflects growing recognition of our role. While evolving rules may introduce high compliance requirements, they also create space for innovation and more sustainable growth. We continue to engage proactively with regulators and remain focused on responsible execution within the evolving framework. 2025 growth outlook. Based on current trends, X Financial expects the total loan amount facilitated and originated in the second quarter of 2025 to be in the range of RMB37.5 billion to RMB39.5 billion, reflecting continued strong demand and consistent execution following a robust first quarter. With that, I will pass the call back to our President, Kent Li, for closing remarks.

Kent Li, President

Thank you, Frank. As we progress through 2025, we will remain confident in our strategic direction grounded in strong underwriting, disciplined risk management, and ongoing operational improvements. With a solid financial foundation and a clear focus on long-term value creation, we are well positioned for sustainable and profitable growth. Thank you.

Victoria Yu, IR Representative

Operator, back to you. We can go to the Q&A session.

Operator, Operator

The first question today comes from Kenning with Norton Andrews. Please go ahead.

Unidentified Analyst, Analyst

Hi, I'm Kenning from Norton Andrews. Congratulations, and thank you for the great performance in the first quarter. Well, my first question is, there's a strong growth in your business, both in new loan origination and active users. And you mentioned there will be further growth. I wonder if that means you like the current macroeconomic environment and the loan market. It's not big, but the delinquency rate has also ticked up a little bit compared to the end of last year. If the loan volumes continue to grow, should we expect further increases in the delinquency rate? And I have a second question.

Kent Li, President

Can we get this first question first and then you can ask the next one?

Unidentified Analyst, Analyst

Of course.

Kent Li, President

Thank you. I think you mentioned several questions in your comments. So let's get to them one by one. The first one is how we view the current environment. I think our company never tries to grow our portfolio for the sake of growth. So we're always trying to manage our portfolio based on our assessment of the future environment. That being said, I think right now, based on our historic trend and our analysis, the overall environment is still good for portfolio growth. That is why we are still focused on growth at this moment. Another point is that since the second half of last year, we have been investing a lot in acquiring new customers. As these customers mature in our portfolio, we can offer them better lines and better products. Therefore, they stay with us longer. That is also the best foundation for our growth. In terms of the delinquency rate, the reason that you see an uptick from the lower level that we achieved somewhat last year is that, I would say, that probably was the bottom of our delinquency rate. Even with this uptick, I think our delinquency rate with regard to our portfolio is still very healthy. So we are not particularly concerned about that. Going forward, we do expect that our delinquency rate will still have some uptick, but those upticks will be more than offset by our overall scale. That basically means that our profit will not be impacted by the delinquency.

Frank Fuya Zheng, Chief Financial Officer

Let me add a few words regarding the delinquency rate. The risk profile situation from last quarter to Q1 is stable. The number is a little bit skewed. If you take another look at our Q1 income statement under the operation expense cost and expenses, the first one is origination and services, basically operational expenses. The second one is marketing and customer acquisition. The third one is general and administration costs. So that's generally costs. But if you look at all the provisions, you'll find that all the Q1 provision is about RMB60 million less than last quarter. Among this RMB60 million, almost RMB57 million relates to our own insurance business. The last quarter, our guarantee company did more business, so they had more risk costs. Taking out the RMB57 million, the operational costs related to risk were less in Q1 compared with Q4. Overall, the conclusion is the risk situation remains basically the same—not much better, not much worse. That’s the thing. We expect some upticks due to the new regulatory developments coming in October, but we will prepare for the situation. We haven't planned aside from that the risk situation changing much. That's why we continue to invest heavily in customer acquisition as well. Thank you.

Unidentified Analyst, Analyst

Thank you for the detailed answer. My second question is about the repurchase. You haven't repurchased any shares in the first quarter, but you have approved another share repurchase program. Just wondering if you repurchased any during the April market volatility? Should we expect you to continue the aggressive stock buybacks as you did last year? Thank you.

Frank Fuya Zheng, Chief Financial Officer

Yes. Because in Q1, there's no open window, so we usually do the buyback during the open window from the old shareholders. Right now, with the incoming open window, we are pretty much sure that the remaining almost $60 million will be used up in the upcoming open window, and we will very likely to begin buybacks during the non-window period as well. Therefore, we have this newly authorized $100 million to cover that. I hope I answered your question.

Unidentified Analyst, Analyst

Yes, certainly. Thank you very much, and thank you again for the wonderful quarter.

Operator, Operator

The next question comes from Alex Ye with UBS. Please go ahead.

Alex Ye, Analyst

Hi, good evening. Thanks for taking my question. This is Alex from UBS. I have two questions, if I may. The first one is regarding your loan growth guidance for the next quarter. It seems that you're still going to see solid growth. What’s driving the growth behind? How do you see the underlying application of credit demand in the last couple of months in April or May? Have you seen any softening trend given the macro conditions? The second question is a little bit about your funding supply. Given the recent regulatory announcement since April, have you heard any feedback from your funding partners regarding their attitudes towards loan pricing, which is growing above 24%? Do you see anything we need to adjust in our current practices to ensure better compliance? Thank you.

Kent Li, President

Okay. I’ll first answer the question about the growth. As I mentioned in the last Investor that our growth has always been based on our assessment for the upcoming risk environment. At this moment, I think our portfolio growth has always been about acquiring new customers, bringing them on board, and subsequently integrating them into better products, which typically entail lower fees and higher lines. Our growth strategy has been firmly based on this approach. In terms of April, May, and June, our growth path remains the same. Regarding our institutional funding partners, we are currently having close discussions about the impending changes. As of now, we expect alterations, and we plan to make necessary adjustments. However, we believe confidently that we will be fully compliant with the new regulations before the October 1 deadline. Overall, we are not particularly concerned about it. That said, any new regulations will usually introduce mild industry shocks. We do expect some disruptions, yet we believe our company is well-positioned to absorb these challenges. Therefore, our growth prospects remain unaffected, regardless of the provisions we present to the investors.

Frank Fuya Zheng, Chief Financial Officer

Hi, Alex, first of all, welcome to our earnings call. To address your question, we have effectively taken advantage of the favorable risk environment since the second half of last year. Our run rate by the end of last year was already quite high, and you saw that we spent aggressively on customer acquisition in Q1. We intend to keep the same acquisition pace in the second quarter. Based on our existing forecast for Q2 this year, we are on track for over 30% gross volume growth. However, we do not plan to increase this forecast any time soon due to uncertainties about the potential regulatory impacts in Q3. Therefore, while we are confident in achieving at least 30% volume growth for this year, we are somewhat cautious about projecting for Q4, which remains uncertain right now. Regarding preparations for new regulatory impacts, we've engaged in discussions with our partners and regulatory authorities, and we are equipped to swiftly accommodate any new policies with our technology. Beyond that, like everyone else in the industry, we do not have a precise view of what is forthcoming. Thank you.

Alex Ye, Analyst

Understood. Thank you very much.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Victoria Yu, IR Representative

Thank you, everyone, for joining us today. If you have additional questions, please reach out to our Investor Relations team directly. We appreciate your interest and look forward to speaking with you again soon. Operator, back to you. Thank you.

Operator, Operator

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