CNFinance Q3 2021 Earnings Report

CNFinance EPS Results

• Actual EPS: $2.50
• Consensus EPS: $0.30
• Beat/Miss: Beat by +$2.20
• One Year Ago EPS: $1.00

CNFinance Revenue Results

• Actual Revenue: $38.96 million
• Expected Revenue: $42.28 million
• Beat/Miss: Missed by -$3.32 million
• YoY Revenue Growth: N/A

CNFinance Announcement Details

• Quarter: Q3 2021
• Date: 11/22/2021
• Time: Before Market Opens
• Conference Call Date: Tuesday, November 23, 2021
• Conference Call Time: 8:00AM ET

CNFinance (NYSE:CNF) Holdings Limited (NYSE: CNF) is a China-based holding company specializing in internet-based financial services for consumers and small- and medium-sized enterprises (SMEs). Through its subsidiaries, CNFinance develops and operates an online marketplace that connects individual and corporate borrowers with institutional and private capital providers. The company’s platform leverages technology to streamline the loan application process, enabling efficient access to credit in a traditionally underserved segment of the Chinese financial market.

The company’s core offerings include unsecured consumer loans, SME working capital financing, supply chain financing solutions and wealth management products. CNFinance employs proprietary credit assessment tools and data‐driven risk models to underwrite loans, monitor portfolio performance and manage credit exposure. Its digital infrastructure supports seamless borrower onboarding, real-time fund disbursement and automated repayment tracking, catering to both first-time borrowers and established small businesses.

Founded in 2014 and headquartered in Beijing, CNFinance completed its initial public offering on the New York Stock Exchange under the ticker symbol CNF. Since launching its flagship platform, the company has expanded service coverage across multiple provinces in mainland China, targeting major urban centers as well as regional markets. CNFinance’s leadership team combines expertise in financial services, technology development and regulatory compliance to navigate the evolving landscape of China’s online lending industry.

CNFinance Q3 2021 Earnings Call Transcript

Key Takeaways

• Third quarter growth: Loans facilitated reached RMB3.1 billion with revenue of RMB450 million and net income of RMB90 million, pushing outstanding loans above RMB10 billion.
• Partnership expansion: Strengthened ties with trust companies and launched collaborations with Everbright and Huaxia banks while introducing senior sales partners to enhance credit quality and post‐loan management.
• Funding pressure: Stricter regulations on trust products have driven up funding costs and kept the company highly dependent on trust funding despite efforts not to raise loan rates.
• Balance sheet distortion: Holding subordinated units in trust plans inflates asset figures and obscures the company’s asset‐light business model, weighing on its market valuation.
• Asset‐light transformation: Plans include deepening bank and trust cooperation, bringing in investors to assume subordinated units, and disposing of legacy loans in Q4 to improve capital efficiency and mitigate real estate risks.

Presentation

[Operator]

Please note this is being recorded. I'll now turn the conference over to Matthew Lou. Please go ahead.

[Matthew Lou, Investor Relations Manager at CNFinance]

Good morning, evening, and welcome to the CNFinance Third Quarter 2021 Financial Results Conference Call. In today's call, our CEO, Mr. Jai, will walk us through the operating results, followed by the financial results from our Vice President of Capital Market Department, Ms. Li. After that, we will have a Q&A section. Before we start, I would like to remind you that this conference call contains forward-looking statements within the realm of Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intent, plan, believe, estimate, target, going forward, outlook, and similar statements.

[Matthew Lou, Investor Relations Manager at CNFinance]

Such statements are based upon management's current expectations and current market and operating conditions, and relate to 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, or 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. Now, please welcome our CEO, Mr. Jai.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Thank you, operator, and thank you everyone for joining us in this conference call. On today's call, we will introduce the company's financial and operational results of the third quarter of 2021, followed by a Q&A section.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

In this quarter, the loan scale under the collaboration model continued to grow at a high speed. The loans facilitated during the quarter was CNY 3.1 billion, with the revenue and net income coming in at CNY 460 million and CNY 90 million respectively. As of September 30, 2021, the outstanding loan principal under the collaboration model remained over CNY 10 billion, which well exceeded our goal. We were able to finish with such results due to the following reasons.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

First, the market demand for home equity loan remained strong. In the third quarter, China's economic growth maintained stable. The growth was driven by the fact that the MSEs, which scattered across the nation, was able to deliver fruitful operations. We have built a national network consisting of 60 branches in 40 cities and over 2,000 sales partners across China. With this network, we're able to establish a wide market coverage and serve MSE owners' financing needs in a timely manner. We were able to fulfill our responsibility as the last-mile courier to build a network of an inclusive financial system in China by servicing another 5,000 MSE owners in the third quarter.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Second, as the leader in the industry, we have established strong relationships with our trust company partners. Our loan products and operation capabilities are highly recognized by our trust partners. As a result, they strive to supply us with sufficient funding even with stricter regulatory guidelines. Other than that, we also managed to deepen our cooperation with commercial banks. It is worth pointing out that not only did we increase our collaboration scale with the Blue Ocean Bank, we also finalized our terms to start a new collaboration with Everbright Bank and Huaxia Bank.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Last but not least, since the collaboration model earned its recognition in the market, we are now in the driver's seat to select sales partners. We have started to introduce the concept of senior sales partners since the beginning of the year. Senior sales partners are usually experienced local loan facilitators with excellent operational history. CNFinance provides them with training programs on a regular basis to help them understand our products and risk control mechanisms. By doing that, we are also able to acquire customers more efficiently and improve the overall quality of the customers. At the same time, we minimized our risk exposure as senior sales partners are more capable to fulfill their post-loan obligations. The improvement of post-loan management was reflected by a decrease in our provisions for credit losses under the collaboration model.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Through the hard-won results aside, we also noticed some challenges that may interfere with our future growth, including.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English content]

[Matthew Lou, Investor Relations Manager at CNFinance]

First, funding pressure. We have been reaching out to cooperate with various types of funding suppliers, yet we are still highly dependent on trust funding at this moment. Since the beginning of 2021, the regulation on trust companies loan products was tightened. Although our funding demand was satisfied, the funding cost was in fact increased. We wanted to be responsible to the society and our customers. We decided not to further raise the interest rate of our loan products. As I reported in the last conference call, the government would not loosen the regulation for the rest of 2021. Our experience told us that our earlier judgment was correct.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Second, under the collaboration model, sales partners bear the risks. However, due to the business structure agreed upon with the trust companies, we are the holder of subordinated units in the trust plan. As a result, we have to carry the assets on our financial statements. We seem like a company with heavy assets whose revenue is generated from interest spread. The balance sheet cannot represent our asset-light business model. This has caused the concern of potential funding partners and is hurting our valuation in the capital market.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Third, with the liquidity of certain Chinese real estate developers in crisis and considering the upcoming real estate tax, our management made an estimation that the Chinese property market is likely to fluctuate in the future. As the holder of the subordinated units, our asset quality is likely to be negatively affected when such fluctuation interrupts the efficiency of NPL disposal.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

In response to those challenges, we will continue to promote the asset-light transformation to better serve MSE owners and improve shareholders' return. The key tasks we will complete are as follow.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

First, we will continue to extend our cooperation with existing trust partners. It is even more critical than ever now to look for innovative ways of collaboration given the regulation shows no sign to loosen up in the near future. We have taken a few proactive steps in this quarter. For example, our partnership with National Trust was within the scope of regulation, but not constrained by the cap on non-standard trust products. We will remain exploratory to similar types of cooperation in the future. Another goal of ours is to expand our collaboration with commercial banks. Our plan is to make the loan under the bank lending model cut a relatively large share in the overall outstanding loan by next year.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content}

[Matthew Lou, Investor Relations Manager at CNFinance]

Second, we will start dialogue with investors who understand our business and have the intention to participate, and our trust company partners. Our goal is to finalize a deal with the terms that allow such investors to take CNF's current role as the holder of the subordinated units of the trust plans. Upon the finalization of such negotiations, our role as the loan service provider and the mezzanine-level investor will be clear, allowing us to focus on building an asset-light loan platform with the prospect and capability to expand with quick turnover.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Third, to promote the company's strategic transformation to an asset-light platform, we plan to dispose of certain legacy loans under the traditional model in the fourth quarter. We believe the advantages are threefold. First, this will improve our financial performance and help the company to broaden funding sources and improve its valuation in the capital market. Second, the company's compliance risk will be reduced. Third, when the legacy loans are disposed, we will be well positioned when price of the property market fluctuates. We have obtained quotations from several potential buyers. We will conduct evaluations and endeavor to sell such loans at fair market prices.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

In the process of our transformation, we will keep frequent and constructive dialogue with regulators at all levels and proactively consult our auditor regarding the accounting treatment to ensure we stay compliant in all aspects all the time during our upgrade.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

As an ancient Chinese saying warns, all our good efforts, but we should ensure that the cause achieves fruition. We believe this also applies to our business operations. We have experienced ups and downs but never lost our dedication. We have made unwavering efforts to follow the government's call of developing an inclusive financial system. We hope to finish our transformation in the near future and carry forward our mission to make finance more human. Our pursuit to service MSE owners will remain unchanged. By leveraging our advantage gained from years of dedicated work, we will continue to provide MSE owners with affordable, accessible and efficient financial services.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

With that, I would like to hand the call over to Ms. Jing Li from the Capital Market Department, who will walk you through the third quarter financials.

[Jing Li, VP of Capital Market Department at CNFinance]

Thanks, Mr. Zhai, and thanks again to everyone joining us today. I will walk you through our third-quarter financials. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage changes I'm going to give will be on that basis. Also, unless otherwise stated, all numbers I'm going to give will be in RMB. The total outstanding loan principal was RMB 11.1 billion as of September 13, 2021, compared to RMB 9.7 billion as of December 31, 2020. While the total loan origination volume remained stable at RMB 3.1 billion in the third quarter of 2021, compared with the same period of 2020.

[Jing Li, VP of Capital Market Department at CNFinance]

Interest and financial service fees on loans decreased by 3.7% to CNY 465 million for the first quarter of 2021 from CNY 473 million, primarily due to the combined effect of A, the increase in the balance of average daily outstanding loan principal. B, the lower interest rate on loans facilitated in the effort to comply with the rules and regulations. Interest and fees expenses increased by 18.8% to CNY 219 million for the third quarter of 2021, compared to CNY 184 million. Primarily due to the increase in principal of other borrowings, as well as the funding costs from trust companies. Collaboration costs for sales partners decreased to CNY 102 million for the third quarter of 2021 from CNY 113 million.

[Jing Li, VP of Capital Market Department at CNFinance]

Primarily due to the fact that the company cut down the rate of incentive paid to sales partner in response to the overall lower interest rate on loans. Provision for credit losses increased by 4.8% to CNY 33 million for the third quarter of 2021 from CNY 31 million. The increase was mainly attributed to the combined effect of A, the increase in outstanding loan principal of non-delinquency loans and loans delinquent within 90 days, which result in the increase in collectively assessed allowance. B, the company revised recoveries in the third quarter after writing down the loans that are 81-118 days past due to the net realized value. Total operating expense decreased 21% to CNY 93 million for the third quarter of 2021, compared with CNY 180 million in the last year.

[Jing Li, VP of Capital Market Department at CNFinance]

Income tax expense decreased by 73% to CNY 7 million for the third quarter of 2021 from CNY 25 million, primarily due to the decrease in the amount of taxable income. Net income decreased by 62% to nineteen million for the third quarter of 2021 from CNY 50 million. As of September 13, 2021 and December 31, 2020, the company have cash equivalent and restricted cash of CNY 2.2 billion and CNY 2 billion, including CNY 1.4 billion and CNY 1 billion from structured funds respectively, which could only be used to grant new loan and activities. The actual delinquency rate for loans originated by the company decreased to 20.4% as of September 13, 2021, from 22.6% as of December 31, 2020.

[Jing Li, VP of Capital Market Department at CNFinance]

The actual NPL rate for loans originated by the company decreased to 7.5% as of September 13, 2021 from the 11.7% as of December 31, 2020. With that, we'd like to open up the call for Q&A. Operator, please.

[Operator]

We will now begin the Q&A session. To ask a question, you may press star then one on your telephone key. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press stars then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from William Gregozeski with Greenridge Global. You may go ahead.

[William Gregozeski, Analyst at Greenridge Global]

Hi. A couple of questions. When you're talking about disposing of the legacy loans, are you talking about the loans prior to the current structure with the sales partners, or are you talking about getting rid of everything that you have a subordinated interest in to really clean up the balance sheet?

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Thank you for the question. When we say legacy loans, we are referring to those loans that was facilitated before the model transformation, which is under the traditional model prior to the sales partners model. The carrying value of such loans, we are talking about the current loans and the loans that are delinquent or non-performing, is around CNY 590 million right now, at this moment. By disposing of such loans, we are hoping to accelerate our transformation into an asset-light platform which focuses on operations and bears minimum risks. To sum up, just by doing another upgrade in our model, we are hoping to build a platform that is select, which focuses on servicing and operations. We are also hoping to improve our financial performance on the financial statement.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Thank you.

[William Gregozeski, Analyst at Greenridge Global]

Okay. Thank you for that. Next question is: with regards to the availability of capital, has there been any change in what's available from trust companies to you guys, you know, since the last conference call? How much have you gotten from commercial banks so far to lend out?

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

To answer your first question, the regulatory pressure is still there. We don't see any signs of loosening up yet.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

It is worth noticing, though, our trust company partners strived, no matter how hard it was to supply us with very sufficient funds during the quarter.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

I was rather concerned by the end of the second quarter about our funding supplies in the coming, you know, third and fourth quarter. However, just as I mentioned, our trust company partners thought of every aspect and they strive to still supply us with sufficient funds during the third quarter.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

We experienced the rise of the financing costs in the quarter, though, due to such conditions.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

All in all, we don't expect the regulatory pressure to loosen, especially on the non-standard trust products. I think their capacity is still going to be very limited. However, from what we see in the third quarter, we are still the first priority of our trust company partners. They will first satisfy our funding needs. I think that's also a proof of our leading position in the industry as well as our strong brand recognition in the market.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

We could have just simply transferred the rise of our financing cost to the market, which will make things much easier. However, we felt like that's not the really responsible thing to do. We did raise the interest rate of our loan product a little bit, but not by much. We feel like by doing that, our revenue and net income in the near term will probably be a little bit lower than we estimate. In the long run, this is to our best.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

What brought us more confidence is that our trust company partners have promised to satisfy our needs and put it in priority one or two next year when there is enough funding supply.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

As for your second question about the funding from commercial banks. This year we are mainly negotiating the terms and finalizing them. Just as I introduced in my speech, I hope that the funding of the loan principal under the bank lending model will take a relatively large share by next year.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

I would also mention one thing that except for commercial banks and the current trust companies we have, we have already also made several constructive negotiations with insurance companies. Maybe in the near future, not only can we cooperate with trust companies and banks, the insurance companies will also be on our book.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Thank you.

[William Gregozeski, Analyst at Greenridge Global]

Okay, great. Last question and I appreciate all the detail you're providing in the answers. You touched on the property prices with the uncertainty with the developers. Do you think those, you know, fluctuations in property prices are gonna be nationwide or, you know, more geared towards kind of the smaller cities?

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Well, first of all, we have a strong faith and confidence in the Chinese government.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

We feel like there are still plenty of tools in the toolkit of the Chinese government to prevent systemic and regional risks.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

For the short term, there is a potential decline in the property price.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

If we look at the long run, we believe the Chinese government is capable to keep the property price in a stable range.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Let me address this again. The whole purpose of dispose of the legacy loans. The first reason is that to avoid the short-term fluctuation of the property price. The more important thing is that we don't want our business to be fluctuating if there is fluctuation in the, you know, property market and stuff. We just want to finish our transformation and focus on servicing and operations.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Matthew Lou, Investor Relations Manager at CNFinance]

Thank you.

[William Gregozeski, Analyst at Greenridge Global]

All right, thank you very much.

[Operator]

Again, if you have a question, please press star then one。

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

[Operator]

There are no further questions. This concludes our question and answer session. I'd like to turn the comments back over to Matthew Lou for any closing remarks.

[Matthew Lou, Investor Relations Manager at CNFinance]

Thank you again for joining us today. If you have any further questions, please feel free to contact us or log on to our website at ir.cashchina.cn. Thank you.

[Bin Zhai, Chairman and CEO at CNFinance]

[Non-English Content]

Participants

Executives

• Bin Zhai, Chairman and CEO
• Jing Li, VP of Capital Market Department
• Matthew Lou, Investor Relations Manager

Analysts

• William Gregozeski, Analyst at Greenridge Global