X Financial Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 25, 2023

There are 6 speakers on the call.

Operator

Hello, and welcome to the X Financial First Quarter 2023 Earnings Conference Call. All participants will be in 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.

Operator

Please go ahead.

Speaker 1

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 el.xuoyindao group. On the call today from X Financial are Mr. Ken Li, President and Mr.

Speaker 1

Fan Cuiazheng, 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 and A session.

Speaker 1

I remind you that this call may contain forward looking statements under the Safe Harbor provisions of 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 and other factors, all of which are difficult to predict and many of which uncertainties are beyond the company's control, which may cause company's actual results, performance or achievements to differ materially from those in 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.

Speaker 1

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. Kang Li, Mr. Ken Lee, please go ahead.

Speaker 2

Hello, everyone. We are very pleased to be off a good start in 2023. We delivered solid operational and financial performance in the Q1. The loan facilitation amount was in line with our guidance range and the net revenue grew steadily both year over year and quarter over quarter. We also saw a decent improvement in our bottom line.

Speaker 2

We have seen signs of economic recovery in China with increased consumer spending and better than expected GDP growth in Q1. However, as stated by the National Bureau of Statistics, inadequate domestic demand remains prominent and the foundation for economic causes is not started yet. We saw increased competition in the personal finance industry with challenges in borrower acquisition. Against this backlog, our Q1 performance is very encouraging and impressive, thanks to our strong business resilience and execution. In Q1, our total loan amount facilitated and originated reached RMB24 1,000,000,000 increased by 58% year over year and 11% quarter over quarter.

Speaker 2

Despite the intense competition, we continue to grow our premium borrower base. During the quarter, the number of active borrowers grew by 71% to more than 1,500,000. In addition, our asset quality remained stable sequentially and improved significantly year over year. Our delinquency rate for all outstanding loan assets due for 31 to 60 days equates to 1.05% as of the end of March 2023 from 1.31% a year ago. We do not expect our risk performance to fluctuate significantly for the remainder of the year.

Speaker 2

In addition, with sufficient credit lines in place, we continue to negotiate funding costs with our institutional funding partners and expect to see a positive impact in the near future. During the recent May Golden Week holiday, Chinese tourist spending has reached pre pandemic levels for the first time according to government figures. Although economic recovery still in its early stages and there are concerns about the sustainability of the growth, we remain cautiously optimistic about the steady business growth this year as the government revisits various measures to stimulate domestic demand and accelerate economic growth. Meanwhile, we are keeping a close eye on the regulatory side and have been consistently cooperating with the government on the industry wide rectification work previously scheduled to be completed by June 2023. To date, no further guidance has been released by the Chinese government, but we do not view on the possibility that new interpretations or updated implementation details of the rectification work will be released, which could have an impact on the industry and our business.

Speaker 2

Now, I will turn the call to Frank, who will go through our financials.

Speaker 3

Thank you, Ken, and hello, everyone. We were pleased to deliver solid financial performance in the Q1. Total net revenue was RMB105 1,000,000 increased by 13% year over year and 5% quarter over quarter. Our net income for basic ADS improved significantly to RMB5.94 from RMB2.52 in the same period last year, reflecting our strong profitability and impact our ongoing share buyback program to enhance shareholder value. Going forward, we will continue to diversify our channels to reach more borrowers while maintaining our strategy of profitable growth with credit risk management at this core.

Speaker 3

We expect to deliver steady quarterly improvements in both our top and bottom lines throughout the year to create more value for our shareholders. We are taking steps to be able to pay dividends in the future. Now, I would like to brief some financial performance for the Q1. Please note that all numbers stated are in RMB and Roundup. Total net revenue increased by 13% to RMB 1000 and 5,000,000 from RMB888 1,000,000 in the same period of 2022, primarily due to an increase in total loan amount facilities and originated this quarter compared with the same period of 2022.

Speaker 3

Origination and service expense increased by 36% to RMB634 1,000,000 from RMB464 1,000,000 in the same period of 2022, primarily due to the following factors. 1, an increase in commission fees resulting from the increase in total loan amount of facility and originated this quarter compared with the same period of 2022. Second, an increase in interest expenses as a result of the increase in payable to institution funding partners and investors and third, partially offset by a decrease in insurance fee paid to the insurance company. Provision for loan receivable was RMB20 1,000,000 compared with RMB34 1,000,000 in the same period of 2022, primarily due to a decrease in the average estimate before rate compared with the same period of 2022 and partially offset by an increase in loans receivable held by the company as a result of the increase in total loan amount of facility and originated this quarter compared with the same period of 2022. Income from operations was RMB 304,000,000 compared with RMB 314,000,000 in the same period of 2022.

Speaker 3

Net income was RMB284 1,000,000 compared with RMB140 1,000,000 in the same period of 2022. Non GAAP adjusted net income was RMB307 1,000,000 compared with RMB 100 and 54,000,000 in the same period of 2022. For further financial information, please refer the earnings release on our IR website. Now for our business outlook. For Q2 this year, we expect the total loan amount facilitated and originated to be between RMB25 1,000,000 and RMB26 1,000,000,000.

Speaker 3

Now this concludes our prepared remarks and we would like to open the call for questions. Operator, please.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Matthew Larson from Finketa. Please go ahead.

Speaker 4

Good evening, everybody. Thanks for taking my call. Great quarter. I mean, you guys just do it every quarter, year in, year out. And what is frustrating as a long term shareholder for me is that your valuation really makes no sense relative to what a FinTech company would trade at any place else.

Speaker 4

I mean, if I were to annualize your earnings for the Q1, you're trading at less than 1x earnings. You're trading at cash value and a fraction of book value. How many ADS are outstanding by the way? I see there's 294,000,000 shares fully diluted. What's the conversion into ADS?

Speaker 4

Can you answer that technical question for me first please?

Speaker 3

It's 1 ADS equal about 6 share or Class 8 share. So that's the conversion ratio. And our yes, we have about outstanding about 22,000,000 ADS outstanding. I think that's total 22,000,000.

Speaker 4

22,000,000 ADS outstanding and the float is

Speaker 3

Yes, yes, yes. For $46,000,000 equivalent total, but tradable has been converted to ADS is only about 22,000,000.

Speaker 4

So that's what's available on the float, but if there's 290 4,000,000 shares divided by 6, yes, yes, it's 40 some odd. So the float's only 20,000,000 shares. And okay, just a couple of questions. I mean, the valuation of this stock should be $10 at least, and that's it would be because if you make if you're going to grow your revenues and top and bottom line every quarter for the rest of the year, you're still looking at $4 a share in earnings potential. The stock, which is up a little bit this morning in heavy volume, who knows if it will hold.

Speaker 4

Did that about a month ago. It traded 1,000,000 shares and came right back down. But this has just been stuck in a narrow range. I know you're buying back some shares, which by the way, was there a reason you didn't buy back any in the Q1?

Speaker 3

Because in the Q1 there is no open window for that and we only so far we only did a buyback through Open Window and actually for the whole buyback which was about $20,000,000 so far, most of it is by through Class A share, which do not affect our flow much. Our ADS for the total last year, we only bought like, I don't know, maybe over 200,000 shares, that's about it. So all the buybacks, massive majority is buyback through Class A share, which we try to avoid, have a less impact on the flow, which our flow is not big as I stated before.

Speaker 4

Sure. But for a U. S. Investor, I can't buy the A shares, okay? It's only the ADS.

Speaker 4

And even though you've reduced your share count of the A shares, the valuation just is it just doesn't make sense. Now there's some other companies that are in your similar space, which I'll give you the symbols, you know where they are. I'm not saying they're exactly the same, but they were all underwritten by Morgan Stanley. FINV, for example, QFIN just reported, even YRD, okay, companies that initially were peer to peer lenders and have migrated to lenders using capital light models and things like that. But the frustration is there's a lot every day there's some small cap companies that are domiciled either in China or Hong Kong that go up 5 or 10 fold on no news.

Speaker 4

And it would be great if one of them I own worked. So, let me ask you this. You all should could be putting on more information. I mean, you've been using AI as far as I'm concerned for years or some variation of artificial intelligence. You use an algorithm to make immediate credit assessments from all the people who have your app on the phone.

Speaker 4

And they tap in from what I understand how much they want to borrow kind of like a credit card and you make an assessment based on their credit history, their zip code, whatever it is, but it's not a human making that decision on these small loans. So why don't you put out some news saying that, I mean, just look at the stocks in the United States that are involved in artificial intelligence, NVIDIA, for example, as I'm sure you're familiar with that company, It's just such a high growth thing. You all could be putting out more news because I assume you want your stock higher, why not? I mean, it's a fraction of where it was when it came public, but you performed extraordinarily well. So, you might want to rethink your public relations, your news releases because you should be I mean, you didn't even mention on the news release what price to book you're trading at?

Speaker 4

I couldn't figure that out. That's why I was asking how many shares are outstanding. So is there besides a share buyback, which frankly, even though your float isn't big here, if you guys bought 1,000,000 shares just out of the market here, it would at least put a bid in the market for U. S. Investors to benefit from it because the small float isn't helping.

Speaker 4

I guess I'm frustrated because your stock should be several times where it's at, but it kind of falls between the cracks because there's no analyst that follows the company and there's few people even know about it. What can you tell me about other efforts to get your stock price higher?

Speaker 3

Let me try to ask you a question. First of all, I completely agree with you, our stock is severely undervalued. And not just our stock and our peer stocks all undervalued to large extent. See like our PBs right now is $0.22 on the dollar. I have more cash than my market cap.

Speaker 3

I ordered it by KPMG. For sure, I did not do anything financially. I have a RMB2.4 million cash deposit in the bank in order to support my business. So, you just not including the cash on my balance sheet. So you just figure how much we undervalue.

Speaker 3

But our tier, whatever the name you mentioned, you see they all book they all value below the book value like somebody little bit better than me. So we will take your advice, we'll do some marketing roadshow and you see right now we are so there is a regulatory deadline on June 30. So let's get that passed. So we have a so, in some sense, we are legit first. We are now our survivability is not in question.

Speaker 3

But the prospect the future of our industry, future definitely in doubt, that's why I believe that's why we have this kind of valuation. We will take you the rides, we'll do some PR stuff and stuff you just mentioned starting second half of this year. But the additional buyback which we did last year and which we would use to reduce our total share count by 16%, which is a lot, but still do not much do not sell for much in terms of the stock price. I don't know how to answer that, but I think whoever else did buyback also did not work that well either. So I'm not alone in that category also.

Speaker 3

But we will definitely what you see I will tell you is we will starting this year we will pay definitely we will pay dividends on our company, our shareholder value and relative will be higher compared with other industry and so far so on. So that's we will consistently do that for the next few years. That's our attention, that's our Board attention and so far, so on. Let's see how that will work out.

Speaker 4

All right. And there's usually not many people on this conference call, so I'm going to take a little more time. You talk about the regulatory response, which is due in June. Since your companies have come public, they've been under regulatory review or scrutiny by the government. I mean, again, there was a lot of peer to peer lending companies and that was a business model that was pretty much outlawed and for various reasons, there was some bad actors, okay.

Speaker 4

We go through the same thing in our country where financial loose financial structure can lead to disappointment among consumers. But you discussed that the survivability of your industry might even be at risk. I mean, it seems to be you all provide an important service to consumers in the PRC. You're allowing them credit. You are doing so in a very business like fashion by capital light type of structures where you're syndicating the loans through a bunch of banks.

Speaker 4

You're just providing the credit check, the credit review and the customers and the banks may loan the money for the most part. And that's good for the economy because from what I understand, there's an interest to grow the consumer based economy versus export based economy in the PRC. So why would your industry be even at risk of survivability if you're providing a service. I mean credit makes the world go round. It greases the wheels of commerce.

Speaker 3

Yes, yes. I understand what you mean. I think I can answer that question. I think our industry has been going through very tumultuous for the last few years and all the most of that actors has been playing, so called P2P peer, it's been playing by company. I think everyone, including government will agree and the survival of this industry is much healthy and much in every respect, compared with government regulation on both most Chinese also on regulatory front on U.

Speaker 3

S. Side also. But that definitely is true. But the issue is government for the last 2 years, government always tried to strongly promote a small business owner, small business, that's for sure. They are supporting for the company to provide a loan.

Speaker 3

But the only thing is not very clear is they seem like to provide very low interest loan from mostly state owned bankers. But our business model mainly is based on risk factor and we not make a ton of money. Our interest spread in the spread we are our business is comparable with big banks, but probably a little bit higher, wider than them. But we also take more risk. So that's why I think that we charge a little bit a little bit a little bit more in terms of interest spread, I think it is fully justified.

Speaker 3

But that is not probably that's the fundamental reason is not totally be endorsed by the government or regulatory. That question has you have made very clear very clear for everyone. That is why that is because we relatively speak to the people we charge is still very high. If you see the so called loan provided to the small business individual owner, whatever farmer government, they only charge about maybe 4%, 7% or something in that range anyway. But once again, I think that is not based on risk factor.

Speaker 3

And if you ask, you're taking the risk factor, those loans, I think is most of it will be bad, be frank. I think I don't know how the economically workable, but we do different model. Our model is not once again not fully endorsed by the authorities. That's why. I see.

Speaker 4

I mean,

Speaker 3

yes.

Speaker 4

Well, you have unsecured loans, all right. If you're having discussions with them, I can tell you what credit cards, which would be similar to how you loan money on an unsecured basis. Credit cards in the United States, Bank of America card, Citibank, American Express, they are 23% or 4%, all right. And they got to be paid back every month or you got to pay the 23% or 4%. If I were to get a collateralized loan, loan, a secured loan from a bank like a mortgage, it would be 6%.

Speaker 4

So, it's just there's as you said, it's a different model of this. If I have a small business and I have cash flow, I can borrow against my receivables, right? But if I just want to borrow money on an unsecured basis when I go to a restaurant or want to buy a laptop and I use a credit card, it's 22% or 3% or 4%. So your rates are not out of line by any means, because credit cards, you still have to have a credit history and to even get one. And if you haven't in the past paid it back, you can't even get a credit card.

Speaker 4

So you're right, your business model is different than when banks are loaning small businesses who they can loan against secured revenues. So in any case, I wish you the best. I'd love to see your I mean, your stock could be 10 times higher for Pete's sake. If you make $4 a share, why wouldn't it be trading at $25 okay, by any measure? Because that's a financial institution has shown your track record of keeping loan losses down to like 1%, I think you're at, that's very, very good credit assessments, all right.

Speaker 4

So whatever business model you have, whatever algorithm you have for assessing who to loan to and who not to is extremely good. So, all right, well, thank you for the time. Put out more news, please. And if you're using AI or some sort of artificial intelligence computation to make your loans, Make that known that you're a technology company, okay, as much as a finance company. You use technology and you use it very effectively.

Speaker 3

Thank you. Thanks for your question. I'll let

Speaker 4

somebody else if they're on the phone call in. Thank you.

Speaker 3

Thank you.

Operator

And our next question comes from Boyd Hynes from Equinox Capital. Please go ahead.

Speaker 5

Hi. Thank you for taking my questions. I also wanted to focus on regulation because I think that's the primary issue here that's held back the valuation of the stock. And the discussions that you've had with the regulators, what have been the primary concerns that they have with your business model?

Speaker 3

We don't have much regulatory dialogue with the regulator regarding the business model. And regulatory, sometimes just the only issue they care right now for the last year. So it's a customer complaint. And so we address the best that's their KPI, the number one KPI. So we do our best to address those issues.

Speaker 3

And other than, we in other area, we comply voluntarily. So, we will never have a discussion with regulators regarding our business model. I don't think that's their concern. All business model is not their concern.

Speaker 2

Let me take this question. I think Frank has been very, very clear, if not that it will have a huge barrier between us and the regulators. I think one of the key issues here is that the Chinese government has made it very clear that if you are doing the financial activities, then you need to be licensed. But in terms of licensing us, should we get a license or should we just be some other companies who should not be doing any financial activities. I think the regulators are balancing this one question and they haven't made it very clear.

Speaker 2

And this and I think that this uncertainty has been kind of hanging over there. We don't have any questions we don't have any answers for that question. And this I think this is a key issue between for the FinTech Company in China, because that our business actually our business actually is financial activities.

Speaker 3

Yes. We are engaged in financial activities as a facilitator, as syndicator, whatever we call it. But the question is, according to philosophy of government, all financial activities should be licensed and whether they will issue a license for a company like us, maybe not. So that probably is the key question.

Speaker 5

Yes. I think everybody is having I think they're having a hard time understanding whether you should be regulated as a bank or not.

Speaker 3

Yes, yes, yes.

Speaker 5

And I mean, you seem to be doing a fantastic job at managing the credit risk. And I think that's also at least the regulators in the U. S. Would be concerned about would be issues like, do you have a lot of undisclosed risk that's not on your balance And I think that's what some of the other competitors in the FinTech space are beginning to address, which is they're actually making more of the loans themselves. They're going back to a capital heavy model, which is where they're actually holding the loans on their balance sheet.

Speaker 5

They're not just facilitating the loans where you've got corporate or institutional partners that you have that are actually making the loans and they're just taking the information that you're giving them about the borrower. And you're basically that's what your model is based on facilitating those loans. People just don't know how to treat you. They're worried that you're helping to provide information without potentially any risk that you should be showing on your balance sheet. I think that's probably the key issue here is and how would you address that?

Speaker 5

Would you I mean you have you do a lot of work with 3rd party guarantors. Have you analyzed their financials? Because and I know you do back to back guarantees. So you are in effect taking on the risk, but is it shown on your balance sheet? I think that's probably the key issue here.

Speaker 2

Well, in terms of business model, we don't show that in our balance sheet. I think that's true. But on the other hand, if you just take a very crude leverage comp, right, so we're managing around RMB40 1,000,000,000 sorry, RMB40 1,000,000,000 loan business and our total our net capital is around RMB60 1,000,000,000. So if we not RMB6 1,000,000,000. So if we take that very rough ratios, it's about 1:6 or 1:7, right, which in terms of the way that we can the risk that we can handle, I think that the room over there is quite high.

Speaker 2

So what I will be looking at is when we compare across the industry and I normally have to take a look at that ratio. And another thing is that just as Bryan mentioned that we have about RMB 2,700,000,000 that deposits in different institutions. And that is another buffer that we can offset any credit risk that is coming out. But in terms of our overall business that we are very that we generate very sales to cash flow. So our company, the sales does not need to take that much of a risk for our business.

Speaker 2

And another thing that you just mentioned is that in terms of moving the balance from the, let's say, banks or other financial institutions to our own balance sheet that this is another dilemma that I cannot solve because our company cannot directly issue loans, right, other than the micro loan company that we own. And that micro loans under very, very heavy supervision, so we can't really offer lots of loans through that company. So some of the solution actually does not apply to our business here.

Speaker 5

I mean, could you potentially partner or sell yourself to a larger financial institution that already has the proper licensing. I mean, there's got to be a way for you to recognize the value that you've created here, because the market clearly doesn't care.

Speaker 3

I think that's probably not likely. But as you say, since our model is not recognized by government through a license or through other kind of means. So, there's no big institution in China will acquire us that kind of business because in terms of the cultural, in terms of the compatibility between our business and their business, I don't think they are the big financial guy in China will likely quite at a valuation desirable for you guys. I think that's highly unlikely.

Speaker 5

Okay. Just one last housekeeping question about the tax rate. Do you expect that rate to be consistent with what you reported in the Q1 going forward?

Speaker 3

I think I answered that question before. I think because most of the entity in China, we operate in China, its tax rate is about 15%. So, we actually U. S. Tax rate is about 20 percent.

Speaker 3

Now, it's being there's a way to be reconciled over the time. So, I think, once again, our effective tax rate will be below 25% on going forward basis and will be stabilized.

Speaker 5

Okay. And in terms of that date of June 30, is that kind of like once you get past that date there's no I mean are you in the clear after June 30 or is there still going to be ongoing series of regulatory issues?

Speaker 3

I don't know. I don't know. You know what I mean? We are not in the even including that 13 plus 1, which is the end financial, as you know, they are being

Speaker 2

marked to

Speaker 3

be regulated and first to rectification. We're not even market, but no one ever mentioned that 14 others, we are others. And all the work I think the government I think is pretty much focused on the N Financial alone. And N Financial as far as I know from the news as everybody, they are basically finished. Then other 13, whether they will do to comply fully, I think they will be I don't know, maybe just past the Magic Day, June 30, maybe, but we hope they all pass.

Speaker 3

They all pass, we maybe have passed along, I don't know, you asked me, I'm not even in a position to answer the type of question.

Speaker 5

Okay. Thank you very much for answering my questions and good luck to you. Thanks.

Speaker 3

Thank you very much.

Operator

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Speaker 1

Okay. 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 our follow-up contacts. We look forward to speaking with you again in the near future. Thank you.

Operator

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

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Earnings Conference Call
X Financial Q1 2023
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