Earnings Call Transcript - XYF Q3 2021

Operator, Operator

Hello, and welcome to the X Financial Third Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Tanya Wen. Please go ahead.

Tanya Wen, IR Representative

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 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 the company's current expectations and the current market and operating conditions and relate to events that involve known and 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 this 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 other obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Kan Li, President

Thank you. Hello, everyone. We are very pleased with our strategic execution in the third quarter. Both our loan facilitation amount and the net income were in line with our guidance. The total loan facilitation amount hit a new high for the second straight quarter. At the same time, the increase in our net income has demonstrated our ability to enhance profitability, boost operational efficiency, and reduce costs. During the third quarter, we further adjusted our pricing structure to comply with the 24% internal rate of return, IRR, regulatory cap. We believe this is the government's initiative to support the real economy and stimulate healthy growth for SMEs and private consumption. The proportion of our loan facilitation amount subject to the 24% IRR cap improved to approximately 30% of our total loan facilitation amount in September. And we expect it to grow to between 40% and 50% by the end of this year. Beyond the regulatory compliance requirements, we believe that this initiative can help us attract more quality borrowers as the demand for personal financing solutions increases. During the quarter, our total loan facilitation amount reached RMB 50.1 billion, an increase of 87.9% year-over-year and 17.5% quarter-over-quarter. This was mainly driven by the strong growth in the loan facilitation amount of Xiaoying Card Loan, which increased 120.3% year-over-year and 17.5% quarter-over-quarter. As of September 30, 2021, the total outstanding loan balance of Xiaoying Card Loan reached RMB 24.4 billion, an increase of 19.9% compared with the previous quarter. In the fourth quarter, there will be a moderate decline in our loan volume due to our institutional funding partners' year-end outstanding loan balance requirements. We continued our efforts to improve our risk management capabilities. As of September 30, 2021, the delinquency rate for all outstanding notes that are past due for 31 to 60 days was 0.96%, compared with 0.77% as of June 30, 2021, and 1.06% as of September 30, 2020. Despite the quarter-over-quarter fluctuations, our asset quality is still within its best historical range in our operating history. According to a new regulation, loan facilitation platforms are restricted from submitting credit assessment-related personal data directly to financial institutions, and such data transfer must be conducted through a licensed credit agency. In response, we have been working closely with Baihang Credit, the second largest licensed individual credit bureau in China, in addition to the credit bureau of the People's Bank of China, PBOC, to execute a plan to comply with the new regulation. We have noticed that 14 large companies on the regulator's top list for the rectification are either working on a plan or waiting for approval. We are getting ready and will fully comply with the new regulation. We expect minimal changes to our daily operational activities and cost structure. During the quarter, we continued our efforts to diversify our service offerings. Our microcredit business officially commenced operation in the third quarter. We also made solid progress in our services to micro and small businesses and self-employed individuals, which are important target groups for our future growth. We have certain favorable loan policies for this group and are adjusting and testing our systems to speed up the qualification and validation process. We believe we are on track towards our goals and all these efforts are bearing fruit and helping us to drive long-term sustainable growth in a fiercely competitive and strongly regulatory industry. 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 delivered another set of robust financial results for the third quarter, in line with our expectations. Total net revenue increased 72.3% year-over-year to RMB 964.4 million. Our bottom line also shows strong growth with non-GAAP adjusted net income of RMB 277 million compared with a non-GAAP adjusted net loss of RMB 111.7 million in the same period of last year. Moving ahead, we will identify and acquire more high-quality borrowers to adapt to our strategy in response to the 25 IRR cap, improve asset quality by leveraging our evolving data-driven and technology-empowered credit analysis capabilities. We will also deepen cooperation with our institutional funding partners to better serve borrowers' needs. Our proven track record demonstrates that we are capable of navigating through regulatory and macroeconomic challenges. We believe we are well positioned to capture opportunities ahead, bringing more valuable returns to our shareholders. Now I would like to brief some financial performance for the third quarter. Please note that all numbers stated are in RMB. Total net revenue in the third quarter of 2021 increased by 72.3% to RMB 964.4 million from RMB 559.8 million in the same period of 2020, primarily due to an increase in the total loan facilitation amount of Xiaoying Card Loan this quarter compared with the same period of 2020. Origination and servicing expenses in the third quarter of 2021 decreased by about 13.8% to RMB 483.8 million from RMB 561.2 million in the same period of 2020, primarily due to the decline in collection expenses resulting from the decrease in delinquency rates and a decrease in interest expenses related to the decline in the average loan balances held by the company, partially offset by the increase in commission fees resulting from the increased total loan facilitation amount this quarter compared with the same period of 2020. Provision for the accounts receivable and the contract assets in the third quarter was RMB 15.2 million compared with RMB 24.3 million in the same period of 2020, primarily due to a decrease in the average estimated default rate compared with the same period of 2020, and partially offset by an increase in accounts receivable from facilitation services as a result of increase in total loan facilitation amount in the third quarter of 2021. Provision for the loans receivable in the third quarter of 2021 was RMB 10.2 million compared with RMB 58.1 million in the same period of 2020, primarily due to a decrease in the average SME default rate compared with the same period of 2020. Income from operations in the third quarter of 2021 was RMB 410.6 million compared with the loss from the operation of RMB 101.4 million in the same period of 2020. Net income attributable to X Financial shareholders in the third quarter of 2021 was RMB 279.9 million compared with net loss attributed to X Financial shareholders of RMB 113 million in the same period. Non-GAAP adjusted net income attributable to X Financial shareholders in the third quarter of 2021 was RMB 277 million compared with non-GAAP adjusted net loss attributed to X Financial shareholders of RMB 111.7 million in the same period of 2020. Cash and cash equivalents was RMB 971.8 million as of September 30, 2021, compared with RMB 1.1839 billion as of June 30, 2021. Now for our business outlook. We expect total loan facilitation amount for the fourth quarter of 2021 to be between RMB 12 billion and RMB 13.2 billion, which makes total loan facilitation amount for 2021 to be between RMB 50.8 billion and RMB 52 billion. We expect non-GAAP adjusted net income attributable to X Financial shareholders for the fourth quarter of 2021 to be no less than RMB 240 million, which makes non-GAAP adjusted net income attributable to X Financial shareholders for 2021 to be no less than RMB 971 million. This forecast reflects our current and preliminary views, which are subject to changes. Now this concludes our prepared remarks, and we would like to open the call for questions. Operator, please?

Operator, Operator

The first question is from Boyd Heinz of Equinox Capital.

Unidentified Analyst, Analyst

I have 3 questions I'd like to start out with. Could you just discuss and give us a little bit more color about why your institutional funding partners are reducing their loan balance requirements at the year-end? And then talk about your cost of capital in the quarter. And then lastly, please address capital allocation and how you're thinking about share buybacks, and perhaps at management purchases of company stock?

Kan Li, President

Okay. I think usually for the volume, comparing Q1 with Q3, it's about flat or a little bit down. That's the normal pattern for the past few years, except for last year. Last year was one exception when costs still grew. So, in general, we are just back to the normal pattern regarding Q3 and Q4 volume. For our funding partners working with us, they have some requirements. Most of them are doing fine, having finished their KPI quarters or whatever. So, they just have some balance requirements. Deeply, I don't know. Compared with our peers, they probably follow the same pattern. The pattern is that Q4 volume will be equal to or less than Q3. I think the cost of capital—you mean the selling cost of the funds from our funding partners—is around 8% to 9%, which is a little bit higher than our peers, about 1.5% higher than that. Moving forward, starting with this quarter, we're beginning to work with the 24% cap. Over time, as we accumulate about at least six months down the road, we can discuss our customer risk profile with our funding partners. We believe we will have a lower funding cost starting from the middle of next year, perhaps going down by around 1%. Regarding our shareholder stock buyback or dividend policy, we did incur losses last year. This year, we have earned some money and accumulated some capital. I know almost all our peers have implemented share buyback plans and dividend policies. We will definitely consider doing that, maybe sometime next year. But I must be frank; such buyback plans and dividends, at least for now, may not help the valuation very much. However, for our stock, it is quite a different story, as it’s priced almost as if we will go bankrupt in a few years' time. The market may know something we don’t know. It is quite frustrating for us, but we do not necessarily believe that these policies will change that dramatically or very quickly. Regardless, we will consider implementing something next year.

Unidentified Analyst, Analyst

Okay. Can you address or just discuss any kind of high-level outlook for fiscal year ‘22? It sounds like you’re expecting continued growth in your loan originations, but anything you could sort of say to talk about what you think about next fiscal year, that would be helpful.

Kan Li, President

2021 is a great year for our industry. It’s true that over the last few years, many regulations have come down. We think that next year, from a regulatory front, it will remain relatively stable. However, we still have actions to take, such as working with the 24% requirement, and establishing new relationships with our funding partners. But very high level, we believe next year will be okay, and we should see continued growth, though it may not be as phenomenal as this year. I think all players will have more clarity and insight regarding next year as they reach Q4.

Operator, Operator

There are no more questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tanya Wen for closing remarks.

Tanya Wen, IR Representative

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

Operator, Operator

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