Earnings Call Transcript - XYF Q3 2024

Operator, Operator

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 current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties or 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 law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Kan Li, President

Hello, everyone. We are pleased to report another strong quarter with loan volumes exceeding our forecast and a significant sequential improvement in asset quality. In the third quarter, we continued to promptly adjust loan volume based on risk levels. As asset quality improved, we further intensified our borrower acquisition efforts, which have yielded very positive results. Both the top and the bottom line continue to grow year-over-year. Non-GAAP adjusted net income reached a new record high. Specifically, on the operational front, our total loan amount facilitated and originated was down 4% year-on-year, but up 25% sequentially to RMB28 billion, above the high end of our guidance. Delinquency rates for all outstanding loans past due for 31 days to 60 days and 91 days to 180 days were 1.02% and 3.22%, respectively, at the end of the quarter, compared to 1.29% and 4.38% a quarter ago and 1.11% and 2.50% a year ago. We are pleased with this improvement in asset quality, and we'll continue to optimize our risk management system through advanced technology. In September this year, the Chinese government unveiled a comprehensive stimulus package aimed at improving liquidity, boosting the property market, stabilizing financial markets and stimulating consumption. We expect this will provide a meaningful boost to the macroeconomic recovery. As an integral part of the economy, the personal finance market we serve should benefit from this upturn. We have already observed positive signs in the market and are committed to adjusting loan volumes in line with risk levels. As a result of this favorable environment, we are raising our guidance and expect our monthly loan volume to exceed RMB10 billion in the fourth quarter, setting a new record.

Frank Fuya Zheng, CFO

Thank you, Kan, and hello, everyone. I'm pleased to report that our strategy of balancing business growth and profitability continued to pay off. Total net revenue was RMB1.6 billion, up 13% year-on-year and 15% sequentially. While non-GAAP adjusted net income reached a record high of RMB434 million, up 6% year-on-year and sequentially. As we continue to deliver strong profitability and execute on our proven strategy, we have full confidence in our future. We will continue to execute our semi-annual dividend policy and explore opportunities under our share repurchase program to return more value to our shareholders over the long term. Now I would like to brief some financial performance for Q3. Please note that all numbers stated are in RMB and rounded up. Total net revenue increased by 13% to RMB1,582 million, from RMB1,397 million in the same period of 2023, primarily due to growth in the various disaggregated revenue items compared with the same period of 2023. Origination and servicing expenses increased by 14% to RMB458 million from RMB403 million in the same period of 2023, primarily due to the increase in collection expenses, resulting from the cumulative effect of increased volume of the loans facilitated and originated in the previous quarters compared with the same period of 2023. Borrower acquisitions and marketing expenses increased by 21% to RMB507 million from RMB420 million in the same period of 2023, primarily due to intensified efforts in borrower acquisitions compared with the same period of 2023. Income from operations was RMB509 million compared with RMB435 million in the same period of 2023. Net income was RMB376 million compared with RMB347 million in the same period of 2023. Non-GAAP adjusted net income was RMB434 million compared with RMB375 million in the same period of 2023. For further financial information, please refer to the earnings release on our IR website. Regarding our share repurchase plan. In September 2024, we further extended the period of USD30 million share repurchase program until the end of March 2026. In Q3, we repurchased approximately 282,000 ADS for a total consideration of USD1.3 million. We have approximately USD4.1 million remaining for the potential repurchase under our current USD30 million share repurchase plan. Additionally, in May 2024, we announced a USD20 million share repurchase plan effective until November 30, 2025. Following a tender offer completed in July 2024 for approximately USD9.2 million and USD10.8 million remaining available under this plan. Together, these two share repurchase programs reflect our commitment to enhancing shareholder value. Now on our business outlook. For Q4 this year, we expect the total loan amount facilitated and originated to be between RMB30 billion and RMB31 billion. The total loan amount facilitated and originated for 2024 to be between RMB102.6 billion and RMB103.6 billion. This concludes our prepared remarks, and we'd like to open the call to questions.

Operator, Operator

The first question today comes from Ramsey Ballista with Blackbird Capital. Please go ahead.

Unidentified Analyst, Analyst

I was wondering if you can update us on the capital return program. And if there is a plan as to what it would be relative to the net income of the company? And as well, if you could update us on the regulatory landscape? Thank you.

Frank Fuya Zheng, CFO

Yes. We have a legitimate repurchase program with approximately $50 million still available. We are currently discussing this program with one or two major investors. If we find that the current program is insufficient, we will consider implementing a new repurchase plan. Comparing the two methods of returning capital, namely dividends and share repurchase, we strongly prefer the latter based on our current share price. However, we will maintain a regular semi-annual dividend payout. By the end of this year, I expect you will see a return that exceeds our usual percentage for capital return, although we do not provide specific percentage targets. Now, I will ask Kan to address the first question.

Kan Li, President

In terms of the regulatory environment, it is the management's view that the regulation has been fairly stable. Normally, the end of the year is not the time for the government to issue some new rules or regulations. So, at this moment, I would say the environment is fairly stable, and we do not expect any significant regulations in our industry. That being said, we have seen that the Chinese government has been fairly active in trying to stimulate the economy to push up the development rate. We think that will, in turn, benefit our industry as a whole, basically, as we are in this industry. So that's why we expect that our volume will continue to grow from this moment.

Operator, Operator

Next question comes from Mason Bourne with AWH Capital. Please go ahead.

Mason Bourne, Analyst

It's good to see the strong results, and I appreciate the return of capital. Frank, I think you started sort of alluding to it on the dividend, but I just wanted to follow up on that. I mean the stock is trading on this quarter's results if you annualize on 1.3 times earnings. You're paying out about 6.5% of your earnings per share as a dividend. It seems like that could be potentially significantly higher. I know you said you're not looking at setting a percentage of income. But if you look at your peers, they're paying somewhere in the low 20s as a percentage. So, it seems like you could pay a lot more and not affect your business. I was just kind of hoping that you would consider that. Do you have any thoughts on that?

Frank Fuya Zheng, CFO

This year, we initiated a public buyback and managed to repurchase just over 2 million ADS. While we definitely have more funds available for additional buybacks, we're facing some technical currency exchange challenges, though I don't see that as an excuse. We would like to increase our share repurchases. Recently, with stock prices rising from below $5 to nearly $7 since the end of September, we hope to see increased interest and more available shares for repurchase. Regarding our dividend yield, we plan to maintain it above the industry average, aiming for around 6%. Despite recent Fed rate cuts bringing our yield closer to 4.5%, we will adjust as necessary with stock price changes. Beyond that, we don't have many options to consider for the public buyback offering. Our focus remains on attractive dividend payouts and maximizing share buybacks to address valuation issues in the near term. We're not inclined to make future projections like some peers do, as our operations have been stable for the last few years without significant changes. We will continue to focus on our operations and circumstances in the Chinese market. I can only advise patience for our shareholders. Over the last two years, we've seen substantial stock appreciation. When I joined, the stock was around $2, and now it's nearly $7. We hope the stock price will ultimately reflect the company's true value, which we believe it will.

Mason Bourne, Analyst

I wanted to follow up on that. When you first introduced your dividend, it had a yield of about 10%, and now it's around 5%. However, some of your peers are trading at three, four, or five times earnings while you are just over one time earnings. If you can complete the buyback and you are trading at about a third of your tangible book value, that would be great. I realize there have been limits on buybacks in the past. Increasing the dividend could potentially help the share re-rating, leading to a 5% dividend yield from appreciation in share price. These are just some thoughts. I understand you are focused on returning capital, which has been a positive development in the past year. I’m not criticizing, just engaging in a discussion.

Frank Fuya Zheng, CFO

We face a significant challenge with our low volume. We hoped that the volume would increase in the last few months so we could conduct more buybacks during the open period, and that is something we are committed to doing. We will strive to maximize yield and share buyback efforts to address this low valuation issue quickly. However, we are hesitant to make predictions for next year because our operations have been running smoothly for the past two to three years without a major turnaround to discuss. Our focus will remain on our operations, particularly in relation to the current Chinese environment, and we will do our utmost in this regard. Once again, I can only advise patience. Over the last two years, our stock appreciation has been considerable, but there's still room for growth. When I joined the company, the stock was around $2, and now it's nearly $7. We are hopeful that the stock price will eventually reflect the true value of the company.

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.

Operator, Operator

Thank you, everyone, for joining us on the call today. If you haven't had the 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.

Operator, Operator

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