Earnings Call Transcript - XYF Q2 2022

Operator, Operator

Hello and welcome to the X Financial Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Note, this event is being recorded. I would now like to turn the conference over to Tanya Wen. Please go ahead.

Tanya Wen, Moderator

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 management's measurements, current expectations, and current market and operating conditions and the related 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, except as required under the law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Kan Li, President

Hello, everyone. We are pleased with our performance in this past quarter, overcoming the great challenges posed by the significant economic slowdown and the escalation of COVID-19 containment measures in China. We continue to scale up our loan facilitation volume while improving asset quality quarter-over-quarter. Total loan facilitated during the past quarter maintained steady growth on both a yearly and quarterly basis, exceeding the high end of our forecast. Thanks to our effective risk management system and premium borrower base, we saw a meaningful decrease in the delinquency rate from the previous quarter. We have further demonstrated our business resilience and ability to navigate through challenging conditions. During the second quarter, our total loan amount facilitated reached RMB17 billion, representing an increase of 32% year-over-year and 11% quarter-over-quarter. The delinquency rates for all outstanding loans past due for 31 to 60 days as of June 30, 2022, decreased to 0.93% from 1.31% as of March 31, 2022. While the asset quality of the financial industry as a whole deteriorated during the quarter due to macro headwinds, we improved our asset quality as we continue to enhance our risk management system. We expect our asset quality to remain stable in the second half of the year. During the past quarter, we stepped up our efforts to acquire more high-quality borrowers. As a result, our number of active borrowers increased 22% on both a yearly and quarterly basis, reaching a high level of over RMB1 million in this quarter. We are pleased to see that our products and services have been well received by an extensive and growing user base. This is a testament to our commitment to reliability and has laid a solid foundation for our future growth. Looking ahead, we will continuously expand and deepen our cooperation with our institutional funding partners to jointly serve the diverse financial needs of small and micro businesses and consumers in China. On the regulatory side, the China Banking and Insurance Regulatory Commission issued a notice on strengthening the management of commercial banks' Internet loan business to improve the quality and efficiency of financial services on July 15, 2022. The new rules affirm the positive role of internet loans and further refine and clarify the requirements for internet loan management, extending the grace period for the rectification of internet loan operations through June 2023 from July 2022. This initiative aims to promote the stable and healthy development of the Internet loan business and is part of the government's stimulus strategy to revive the pandemic-affected economy by encouraging more credit to stimulate investment and consumption. This is conducive to the overall development of the financial industry, and the extended grace period also gives us more time to explore marketing opportunities under the new regulation, especially financial services for small and micro businesses. With the COVID-19 pandemic subsiding and the macro economy gradually rebounding, we are cautiously optimistic about our business in the second half of the year. With an increasingly accommodative environment, we expect to see steady sequential growth in upcoming quarters. 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. Although our top line saw a slight decrease on a quarterly basis as we continue to reduce the total borrowing cost for our borrowers in line with government guidance, we improved our bottom line from the previous quarter. Net income for the second quarter of 2022 improved to RMB186 million from RMB140 million in the previous quarter, and the non-GAAP adjusted net income for the second quarter of 2022 was RMB211 million, representing an increase of 37% quarter-over-quarter with a more stabilized micro-economy under a clear regulatory environment. We expect to see further improvement in our financial performance in the future. During the second quarter, we started to execute our share repurchase program. Going forward, we will continue to keep a close eye on market dynamics, regularly reevaluate how to best use our cash in order to maximize returns for our shareholders. Now, I would like to brief some financial performance for the second quarter. Please note that all numbers stated are in RMB and are rounded. Total net revenue decreased by 12% to RMB824 million from RMB932 million in the same period of 2021, primarily due to a decrease in the average total borrowing cost of borrowers, partially offset by an increase in the total loan amount facilitated this quarter compared with the same period in 2021. Origination and servicing expenses increased by 2% to RMB533 million from RMB521 million in the same period of 2021, primarily due to an increase in commission fees resulting from the increase in total loan amount facilitated this quarter, partially offset by a decrease in insurance fees paid to the insurance company. Provision for accounts receivable under contract assets was RMB26 million compared with RMB25 million in the same period of 2021, primarily due to an increase in accounts receivable from loan facilitation services as a result of the increase in the total loan facilitation this quarter compared with the same period in 2021. Provision for loans receivable was RMB32 million compared with a reversal of a provision for loans receivable of RMB1 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 amount facilitated this quarter compared with the same period in 2021. Income from operations was RMB194 million compared with RMB338 million in the same period of 2021. Net income was RMB186 million compared with RMB223 million in the same period of 2021. Non-GAAP adjusted net income was RMB211 million compared with RMB242 million in the same period of 2021. For further financial information, please refer to the earnings release on our website. Regarding our share purchase plan, on March 30, 2022, we announced that our Board approved a share repurchase plan under which the company may repurchase up to $50 million worth of its Class A ordinary shares in the form of ETFs until September 2023. As of the end of June 2022, we had repurchased an average of about 174,000 ETFs. Now, for our business outlook, we expect the total loan amount facilitated and provided for the third quarter of 2022 to be between RMB19 billion and RMB20 billion. For the full year of 2022, we expect an increase in the total loan amount facilitated and provided to be no less than 25%. This forecast reflects our current and preliminary views, which are subject to change. Now, this concludes our prepared remarks, and we would like to open the call for questions. Operator, please.

Operator, Operator

Thank you. We will now start the question-and-answer session. Our first question comes from Mason Bourne with AWH Capital. Please go ahead.

Mason Bourne, Analyst

Good evening. Thanks for taking the questions. I guess to start, given your commentary and outlook, it seems like you’re a little more positive about the regulatory backdrop. Could you talk about what's driving that?

Kan Li, President

Yeah, I'll take this one. I think it's probably more of our assessment of the current environment rather than the regulatory changes. As you know, because of the COVID-19 pandemic, there’s just a lot of demand for granting loans. Right now, we are in a very good position to take advantage of our premium clientele. In the second half of this year, we are going to benefit from our previous investments. That is why we can increase our scale.

Mason Bourne, Analyst

Okay. So it sounds like demand is strong. How about the funding side of things? Are you seeing maybe some easing of conditions that's allowed you to lower your funding rate?

Kan Li, President

We do see some lowering of funding rates. However, I think this is probably going to be temporary and short-term, but it should continue for the second half of the year. Our assessment is based on this forecast.

Mason Bourne, Analyst

Okay, thanks. And then lastly, I think your tangible book value is around RMB11.40 per share. What are your thoughts on the buyback? I know you did some in the quarter. But do you view this as an opportunity to attractively buybacks here at this discount?

Kan Li, President

That question I'm going to leave to our CFO, Frank.

Frank Fuya Zheng, Chief Financial Officer

Okay. As we stated, we bought about 174,000 shares. Because our shares trade very thinly, we maximized the order allowed under relevant rules for the buyback. We will continue to do that, and we will explore other ways to buy more shares if opportunities arise.

Mason Bourne, Analyst

Great, thanks.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tanya Wen for any closing remarks. Please go ahead.

Tanya Wen, Moderator

Thank you everyone for joining us on the call today. If you didn’t get a chance to raise your questions, we will be pleased to address them through our contacts. We look forward to speaking with you again in the near future. Thank you.

Operator, Operator

The conference is concluded. Thank you for attending today’s presentation. You may now disconnect.