X Financial Q4 2023 Earnings Call Transcript

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March 27, 2024

There are 7 speakers on the call.

Operator

Hello, and welcome to the X Financial 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. 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 irdoxiaoindao Group. On the call today from X Financial are Mr. Ken Li, President and Mr.

Speaker 1

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 and A session.

Speaker 1

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 like 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, factors is included in the company's filing with the U. S. Securities and Exchange Commission.

Speaker 1

The company does not undertake any obligation to update any forward looking statement as a result of new information, future events or otherwise, except as required and allowed. It is now my pleasure to introduce Mr. Kent Li. Mr. Li, please go ahead.

Speaker 2

Hello, everyone. We are pleased to conclude the year with solid operational and financial results, emphasizing our commitment to a sustained growth. In 2023, we facilitated and originated 43% more loans 2022 and delivered a notable year over year growth in both revenue and project. Total net revenue increased 35% on an annual basis, while income from operations increased 33% and net income improved by 46%. However, as we enter the second half of twenty twenty three, particularly in the Q4, we experienced increased risk levels in asset quality.

Speaker 2

While we strengthened our risk control and implemented various measures to managing delinquency rates, we also made a strategic decision to proactively reduce loan volumes in the Q4, prioritizing profitability over share volume growth. During the Q4 of 2023, our total loan amount facilitated and originated was RMB26 1,000,000,000, a 20% year over year increase by an 11% quarter over quarter decline. Delinquency rates for non past due were 31 to 30 to 60 days and 91 to 180 days were 1.57% and 3.12%, respectively, at the end of the quarter, compared with 1.02% and 1.93%, respectively, a year ago. Our team remains vigilant in monitoring asset dynamics and has taken further steps to mitigate risk by reducing our exposure to higher risk areas and adjusting our business approach to ensure sustainable profitability. We aim for continued gradual improvement over the course of 2024 and these measures have begun to have a positive impact on our risk indicators.

Speaker 2

For fiscal year 2024, our strategic approach will remain consistent and somewhat conservative, aligned with current market conditions in China. We believe the regulatory environment has become stable and the government is committed to promoting economic recovery. However, we recognize that challenges and uncertainties exist as the country undergoes a transformative shift in its economic growth model away from the rapid expansion of the past, and structural adjustments are imperative. All of this has far reaching impacts on various sectors, including our target market. Despite these challenges, we remain committed to executing our strategy and prioritizing profitable growth.

Speaker 2

Our commitment to delivering value to shareholders is unwavering and we intend to pay dividends and when probability and smooth operations allow. This overall approach reflects our decision to navigate in the evolving economic landscape, while ensuring the sustainable success of our business and returning value to our shareholders. Now, I will turn the call to Frank, who will go through our financials.

Speaker 3

Thank you, Ken, and hello, everyone. We are pleased to deliver solid financial results in 2023. Total net revenue increased by 35% year over year to RMB4.8 billion and the net income rose by 46% to approximately RMB1.2 billion In response to heightened asset quality risk in the Q4, we proactively reduced loan volumes to satisfy profitability, resulting a 15% sequential decline in total net revenue for the quarter. We recognized RMB26 1,000,000 and RMB46 1,000,000 of impairment losses on long term investments related to our indirect investment in New Up Bank of Liaoning in 20222023, respectively, mainly due to depreciation in the market devaluation of Chinese banking sector. However, the banking loan portfolio and operation remain healthy, and we believe it continues to be a good investment for us.

Speaker 3

Looking ahead, we will not pursue Q loan volume growth at expense of the profitability, which is always our strategic focus to ensure long term growth and returns to the shareholders. We will continue to strengthen our risk management system to improve asset quality and balance our revenue and profitability growth. Now I would like to read some financial performance for Q4. Please note that all numbers stated are in RMB and rounded up. Total net revenue increased by 25 percent to RMB1193 million from RMB956 1,000,000 in the same period of 2022, primarily due to an increase in the total loan amount of facilities and originated this quarter compared with the same period of 2022.

Speaker 3

Origination and the servicing expenses increased by 28% to RMB755 1,000,000 from RMB589 1,000,000 in the same period of 2022, primarily due to the increase in the commission fees and the collection expenses, resulting from the increase in total loan amount facilitated and originated this quarter compared with the same period of 2022. Provisions for loans receivable was RMB99 1,000,000 compared with RMB75 1,000,000 in the same period of 2022, primarily due to an increase both in loan receivables held by the company as a result of increase in total loan amount of facilities originated this quarter and in the estimated defer rate compared with the same period of 2022. Income from operations was RMB254 1,000,000 compared with RMB274 1,000,000 in the same period of 2022. Net income was RMB189 million compared with RMB275 million in the same period of $1,000,000 in the same period of 2022. Non GAAP adjusted net income was RMB231 1,000,000 compared with RMB278 1,000,000 in the same period of 2022.

Speaker 3

For further financial information, please refer to the earnings on our IR website. Regarding our share repurchase plan, in Q4, we repurchased approximately 36 1,000 ADS for a total consideration of USD143,000. Since the beginning of 2023, we had purchased an aggregate approximately 838,000 ADS for a total consideration of US3.5 million dollars We have approximately US5.5 million dollars remaining for the potential repurchase under our current plan. With respect to our dividend, our Board has approved a final annual dividend policy. Under this policy, the determination to declare and pay such semi annual dividends and amount of dividends in any particular half year will be made at the discretion of the Board and will be based upon the company operations and earnings, cash flow, financial condition and other relevant factors that the Board may deem appropriate.

Speaker 3

Within to the semi annual dividend policy, the Board has approved the declaration and the payment of semi annual dividend, US0.17 dollars per annum in the second half of twenty twenty three. Now, our business outlook. For Q1 this year, we expect the total loan amount facilitated and originated to be between RMB21 1,000,000,000 and RMB22.5 billion. This concludes our prepared remarks, and we would like to open the call to questions. Operator, please.

Operator

We will now begin the question and answer session. The first question today comes from Boyd Hynes with Equinox Capital. Please go ahead.

Speaker 4

Hi. I'd like to spend a few minutes talking about some of the recent changes in regulation. I'm wondering how some of those changes will affect you as a smaller consumer financing company? Thanks.

Speaker 2

Can I ask you exactly which regulation that you are referring to?

Speaker 4

Yes. There are 2 that I'm speaking of. 1 is the requirement for a minimum registered capital of $1,000,000,000 or $139,000,000 and the other regulation is to have a major investor hold a stake of at least 50%. I'm just wondering how the company is going to be able to comply with those two regulations?

Speaker 3

Okay. I think I'll take that question because I

Speaker 2

Okay. Okay.

Speaker 3

Yes. I can take this question first and because I received Mr. Boy's email and that one. First of all, we are not consumer financing company in China. We are so called fintech company.

Speaker 3

So that particular regulation is not directly applied to us, actually applied to the consumer financing company. Those kind of companies usually owned by major banks. They are mainly exclusively focused on issuing a consumer loan. As you see the article, they haven't come out to the detail in terms of the timeline how to implement this. Mainly is because the $1,000,000,000 capital requirement mostly or they already met already meet that requirement.

Speaker 3

But the mainly is that about half of maybe over 10 consumer financing company do not haven't met the largest shareholder up to at least up to 50% ownership. That second requirement haven't met. But once again, they haven't not come up with a detail in terms of when they have to apply the second requirement, meaning as you did the article you sent to me, we are a fintech company. So we are basically doing is mainly is acquire the borrower mainly through online or offline method. And forward those consumer, we also get some risk profile sent to the those potential demand to the bank, also to the consumer institution also.

Speaker 3

So the banking also the consumer institution, they both provide us funding for so called the loan portfolio. But those loan portfolio is legally under there, but not belong to us. So we are not because we don't have a acceptor, we have a small our own capital, about $1,000,000,000 in a capital small loan company, we can directly issue the loan, but because of funding limitation, we mainly source of funding is from the banks and the financial institution. So that one is to not because of the Chinese monetary policy right now, it's very loose. And so we that requirement do not affect us in terms of the lending available our funding in that regard.

Speaker 3

So no effect at all. So we don't see that when have any effect on us anytime soon. Ken, you want to add on something?

Speaker 2

No, I think you got it.

Speaker 3

Okay.

Speaker 4

Thank you. I appreciate the detailed answer. That's all I have. Thanks.

Operator

The next question comes from Mason Born with AWH Capital. Please go ahead.

Speaker 5

Hi, thanks for the questions. I have 2. To start, could you talk about your growth outlook? And I know you gave guidance for Q1, but just how you're thinking about the opportunity to grow going forward given kind of the pullback in, I guess, your aggressiveness on growth given what's happening on the risk side of things? And then how that looks longer term, both, I guess, 'twenty four and beyond?

Speaker 2

Okay. I'll take this one. It's really difficult for me to give you a forecast 2024 and beyond. Let's talk about 2024. I think over Q1 and then looking forward, it looks to us that the environment has been becoming from worse from the past situation to a little bit better one.

Speaker 2

But we still feel that the so called better environment is not as good as the much better environment for the first half of twenty twenty three. So in terms of growth, I think we will gradually go into the growth mode, but the growth rate will be slower than that of the last year.

Speaker 5

Okay, thanks. And then the second one, if I look at your dividend policy, it's good to see that you're returning some of the capital to shareholders. But if I look at peers, some of them are returning substantially more as a percentage of net income is up to about 50% through buybacks and dividends combined or another competitor announced a large special dividend this week. I was wondering how you think about your balance sheet given where tangible book value is per share and if you could do more on the dividend side of things? Thanks.

Speaker 3

Yes. We actually yes, we do have beside a dividend payout, we are looking for other way to return the shareholder value. Right now, we have just issued the Q4 and the last year financial reports, and we will do 20 F by the end of next month. And in May, we will have for the Q1 financial reports, earnings call. After that, we are we definitely, this year, looking for the way to have a more way to return the shareholder value.

Speaker 3

Our situation is a little bit different compared with our peers because we are trading volume is very thin and almost now you know that. So we are regular open window period, we just cannot add much we are restricted by 25% of flow on a daily basis. So we are looking for more way to return shareholder value. That's all I can say at this moment.

Speaker 5

Thank you.

Operator

The next question comes from Matt Larson with Cinquedia Capital Markets. Please go ahead.

Speaker 6

Thanks for taking my questions. My question is just kind of follow-up the previous 2 people who have called in. Thanks for the dividend because it puts you on the map and is returning some capital to shareholders. What I'm asking is kind of abstract. Your company trades at a multiple, which one would never see in certainly United States and probably in not many parts of the world of slightly above 1 to 1.5 times earnings.

Speaker 6

The dividend will definitely draw in a few more investors. But in the past, when people have brought up the subject of maybe going private or finding a way to get your share price higher. The answer was that wasn't an option. And so I'm kind of wondering what is your plan? Some of your a couple of your competitors do trade at 4x earnings or so.

Speaker 6

They pay a similar dividend to what you are forecasting. So if you could get your multiple to a 4, that's at least a triple in your price and it gets you to a level where I think your primary shareholders would be happier from a financial point of view and also for any long term investor. Your stock has been in an uptrend, so which is contrary to what the stock indices out of the PRC have been in. So one can't complain over the last 6 or 8 months. But is there a game plan to get better awareness of your company and the fact that you've had pretty stable earnings and consistent earnings, so that more investors are aware of your stock.

Speaker 6

It's thinly traded, but that can work both ways. If social media and other sites here in the United States became more aware of a company trading at 1.3x earnings with significant cash on the balance sheet. It wouldn't take much to move the stock. Sorry, I'm rambling on here, but for investors to be frustrated with a stock trading 1 and change multiple, what game plan do you have? My suggestion is to get the word out there, and that would be more news releases and things like that.

Speaker 6

Sorry to take so long, but Anderson, what do you have

Speaker 3

to say? Yes. We are as you know, we are in kind of not that sexy industry. And also, we are definitely not among the leader of this industry like the leader is Ant Financial and not so far so far. You know what I mean.

Speaker 3

And in terms of whatever visibility for the sector and for the whole thing, you can contribute a lot of factors. We know it's very much interesting to talk about it. But the main thing I think everyone agree those factors not in our control, like the U. S. Relationship with China or something like that.

Speaker 3

So we believe, 6 example that we believe we should continue to what is the right, mainly run our business as best we could and return the correspondent, return our return to shareholder value. I think over time, it will play out. But definitely, I don't know when. And regarding the privatization, I would say once again, that it was kind of tricky because U. S.

Speaker 3

Investor consider privatization. It's basically, it's a value play. You have definitely have no obstacle to reshape and come back anytime you want to do this. But in China, it's different. If you don't believe me, just look at it.

Speaker 3

There's a big company, real estate company. They run the bigger in China, run the biggest mall, use the real estate company. They run on and run the biggest shopping mall in China, the Wang Jianlin, the Liaoning company. They used to live in Hong Kong. Then somehow in like 2015, 2016, they say the valuation is horrible.

Speaker 3

They go to privatization and they want to really split in domestic AA market, but they never got a commission and they never get a chance to come back to the Hong Kong market. We are in the somehow in the consumer sector also. Chinese, there's a rule on the book applied to definitely applied to us. So like anything, you have over 1,000,000 consumer, we have to get approval from the Chinese government in order to list overseas, especially in the U. S.

Speaker 3

Hong Kong is a little bit of gray area because technically, you can consider it as a China territory. So if you can if you delisting, you the real listing is not sure. That's all I want to say. It's what I say, because we are subject to government approval because we have more than 10,000,000 dollars the customer base. That's much more than that.

Speaker 3

So that is another something we can talk about and we can have someone who can give us kind of there's no insurance policy for that. So if we delisting, maybe we're never going to list again. So that's why everyone do not want to do that. It's kind of a listing status is kind of a privilege in China. In terms of the plan, I have I don't have a detailed plan, but I have a general plan.

Speaker 3

The first plan is get a stock over $5 So the institution investor can technically contact us. So if we have some period of time, say like more than half a year or so, our stock has mainly over $5 We will probably rethink our PR policy. We are maybe I will be more on the roadshow, other road, do whatever usually the stuff we do and hope for the best result. That's the general plan. I hope I can answer your question.

Speaker 6

All right. Yes, you did in a way. You're kind of trapped in your current listing because you can't go private because then you've got no other exit strategy. But I guess, I was looking for some sort of, I don't know, illumination of the game plan because your stock has been mired in a low multiple. You're not the only one there.

Speaker 6

I understand there's 1 or 2 FinTech companies that trade less than one times earnings in Hong Kong. So it's just a sector that people are concerned about regulation and things like that. But when you're trading your cash value, just coming from the capital markets here in the United States, we have options to handle that. I mean, like going private or merging. What would prevent you from selling to a partner who has like a bank or somebody that has a significantly higher multiple where it would be very accretive to them to buy a company of yours with your client base and your reach with all your millions of customers.

Speaker 6

But I'll leave that there just for you to consider. Thanks for your time.

Speaker 3

Thank you.

Operator

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 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.

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Key Takeaways

  • Strong 2023 financial growth: Total net revenue rose 35% YoY to RMB4.8 billion, income from operations grew 33%, and net income improved 46% to RMB1.2 billion, while originations climbed 43%.
  • Proactive risk controls: Elevated delinquencies in Q4 (30–60 days up to 1.57%, 91–180 days to 3.12%) prompted a deliberate 11% QoQ cut in loan volume to prioritize asset quality and profitability.
  • Prudent 2024 outlook: The company expects RMB21–22.5 billion in Q1 loan originations and will pursue conservative, profit-focused growth amid China’s evolving economic and regulatory landscape.
  • Shareholder returns strategy: In 2023 the company repurchased 838,000 ADS (US $3.5 million), retains US $5.5 million buyback capacity, and declared a US$0.17 per ADS semi-annual dividend under a new dividend policy.
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Earnings Conference Call
X Financial Q4 2023
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