Q1 2023 X Financial Earnings Call
Speaker 2: Hello and welcome to the Ex Financial first quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star then one on your touch tone phone. To withdraw from the question queue, please press star then two.
Speaker 2: Please note, this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.
Speaker 3: 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 AR website at AR.com. On the call today from exponential officer Ken Lee, President and Mr. Sam Tia, Chief Financial Officer.
Speaker 3: Mr. Lee will give a brief overview of the company's business operations and highlights, followed by Mr. Jain, 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 Public Relations of Private Security Mitigation Reform Act.
Speaker 3: on searching are beyond public control, which may cost companies actual results, performance, or achievements to defer materially from those in the following statements.
Speaker 3: Further information regarding these and other risks, uncertainties, and factors is included in the company's findings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward looking statement as a result of new information, future events or odd ones.
Speaker 3: except as required and allowed. It is now my pleasure to introduce Mr. Ken Li. Please feel free to go ahead.
Speaker 4: Thank you.
Speaker 5: We are very pleased to be out for a good start in 2020-2023. We delivered a solid operational and financial performance in the first quarter. The known facilitation amount was in line with our guidance range, and the net revenue grew steadily both year over year and quarter over quarter.
Speaker 5: We also saw a decent improvement in our bottom line. 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, the global economy is not a
Speaker 5: The American domestic demand remains prominent and the foundation for economic recovery is not a thought ever yet.
Speaker 5: We saw an increase in competition in the personal financial industry with challenges in borrower acquisition.
Speaker 5: Against this back wall, our first quarter performance is very encouraging and impressive. Thanks for our strong business resilience and execution.
Speaker 5: In Q1, our total number of facilities and originated rich RMB24 buildings increased by 58% year-over-year and 11% quarter-over-quarter. Despite intense competition, we continue to grow our premium borrower base.
Speaker 5: During the quarter, the number of active borrowers grew by 71% to more than 1.5 million.
Speaker 5: In addition, our asset quality will maintain the stable sequentially and improve the significance of the year-over-year. Our demand series for all outstanding non-passed goods for 31 to 60 days equates to 1.05% as of the end of March 2003 from 1.31% a year ago.
Speaker 5: We do not expect our risk performance to fluctuate significantly for the remainder of the year.
Speaker 5: 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.
Speaker 5: During the recent May Golden Week holiday, Chinese tourist spending has reached pre-pandemic levels for the first time according to government figures.
Speaker 5: Although economic recovery is still in its early stages and there are concerns about the sustainability of the growth, we remain cautiously optimistic about the steady presence growth this year as the government releases various measures to stimulate domestic demand and the federal economic growth.
Speaker 5: Meanwhile, we are keeping a close eye on the regulatory side and have been consistently cooperating with the government on the industry-wide electrification work previously scheduled to be completed by dual-country conditions.
Speaker 5: To date, no further guidance has been released about the Chinese government, but we do not know the possibility that new interpretations or updated implementation details of the requisition will be reduced.
Speaker 5: which could have an impact on the industry and our business.
Speaker 5: Now I will turn the call to Frank, who will go through our connection.
Speaker 5: Thank you, Ken, and hello, everyone. We were pleased to deliver solid financial performance in the first quarter. Total net revenue with RMB $1,005 million increased by 13% year-over-year and 5% quarter-over-quarter. Our net income for basic ADS improved significantly to RMB will expand toaney
Speaker 5: 5.94 from RMB 2.52 in the same period last year, reflecting our strong profitability and impact our ongoing shared buyback program to enhance shareholder value.
Speaker 5: Going forward, we will continue to diversify our channels to reach more borrowers by maintaining our strategy of our profitable growth with credit risk management at its core.
Speaker 5: 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.
Speaker 5: Now, I would like to read some financial performance for Q1.
Speaker 5: Please note that all numbers stated.
Speaker 5: in IMB and Round-up.
Speaker 6: Thank you. Good night.
Speaker 5: Total net revenue increased by 13% to RMB, 1,005 million from RMB, 888 million in the central of 2022.
Speaker 5: primarily due to an increase in total loan amount facilities and originally this quarter compared with the same period of
Speaker 5: 2022.
Speaker 5: Origination and service expense increased by 36% to RMB 634 million from RMB 400 million 64 million in the same period of...
Speaker 5: 2022, primarily due to the following factors.
Speaker 5: One, an increase in commission fees resulting from the increase in total loan amount of facility and the origin of this quarter compared with the same period of 2022. Secondly, an increase in interest expenses as a result of increase in payable to institution funding baking stopped and assets basically.
Speaker 5: a decrease in the average estimate defray rate compared with the same period of 2022 and a partial offset by an increase in loss of receivable health by the company as a result of the increase in total low amount of facility and origin.
Speaker 5: this quarter compared with the same period of 2022.
Speaker 5: Income from operation was RMB $304 million compared with RMB $14 million in the same period of 2022. Net income was RMB $284 million compared with RMB $14 million in the same period of 2022.
Speaker 5: non-GAAP adjusted net income with RMB $307 million compared with RMB $154 million in the same period of 2022. For further financial information, please look for the earnings reviews on our R.R. website.
Speaker 5: Now for our business outlook. For Q2 this year, we expect a total long amount of facilities and originates to be between RMB 25 million and RMB 26 million.
Speaker 5: Now, this concludes our prepared remarks and we would like to open the call to questions. Operator, please.
Speaker 2: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.
Speaker 2: If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. At this time, we'll pause momentarily to assemble our roster.
Speaker 2: Our first question comes from Matthew Larson from Fincata. Please go ahead.
Speaker 7: Good evening everybody. Thanks for taking my call.
Speaker 7: Great quarter, I mean you guys just do it every quarter, year in year out.
Speaker 7: and what is frustrating as a long-term shareholder.
for me is that your evaluation really makes no sense.
relative to what a fin check company would trade at.
any place else. I mean if I were to annualize your earnings for the first quarter you're trading at less than one times earnings.
You're trading at cash value and a fraction of book value. How many ADS are outstanding by the way? I see this 294 million shares fully diluted.
What's the conversion into ADS? Can you answer that technical question for me first please?
It's 180 is equal about six share of a plus eight share. So, you know, that's the conversion ratio. And then we our.
Yes, we have about outstanding, about 22 million ADS outstanding. I think that's total 22 million.
22 million ADS outstanding and the float is... Yes, yes, yes. Well, 46 million equivalent total, but tradeable has been converted to ADS. It's only about 22 million.
So that's what's available in the float but if there's 294 million shares divided by six, yeah, that's 40 some odd. So the float's only 22 million shares. And okay, just a couple of questions. I mean the valuation, this stock should be 10 bucks at least and that's it would be...
Who knows if it will hold because it did that about a month ago. We traded a million shares and came right back down.
You know, 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 first quarter?
Because of the first part, there is no open window for that. And we only, so far we only, you know, did a buyback through open window. And actually for the whole buyback, which was about 20 million so far,
Most of it is through Class A share, which did not affect our flow much. Our ADF for the total last year, we only bought over 200,000 shares. That's about it.
So all the buybacks, you know, massive majorities is buybacks to class A shares, which we try to avoid, you know, have a lot of impact on the flow, which is not big as I stated before. Sure, but you know for a US investor, I can't buy the A shares.
space which I'll give you the symbols you know where they are but I'm not saying they were 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
you know, lenders using capital light models and things like that. But the frustration is there's a lot, everyday there's some small cap companies that are domiciled either in China or Hong Kong.
that go up five or ten fold on no news and it would be great if one of them I own worked. So let me ask you this, you all could be putting out more information. I mean you've been using AI as far as I'm concerned for years.
know 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, you know, I mean just look at the stocks in the United States that are involved in artificial intelligence, Nvidia for example, you know, as I'm sure you're familiar with that company.
It's just such a high growth thing.
You you all could be putting out more news because I assume you you you want your stock higher Why not I mean you it's it's a fraction of where it was when it came public But you performed extraordinarily well so you might want to rethink
you know your public relations, your news releases because you should be, I mean you didn't even mention on the news release you know what what price to book you're trading at. 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 a million shares just out of the market here, it would at least put a bid in the market for US investors to benefit from it. Because
The small float isn't helping.
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 who even know about it. What can you tell me about other efforts to get your stock price higher? Let me try to ask you a question. First of all, I have some questions.
on the dollar. I have more cash than my market cap. I ordered it by KPMG.
For sure I did not do anything, you know, funny thing. I have a 20.
2.4 million RMB 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 out how much we undervalue. But our peers, whatever the name you mentioned, you see they all book, they all value.
below the focal value, like somebody, but a little bit better than me. So we will take your advice, we'll do some marketing roadshow, and you'll see right now we are, so there's a regulatory deadline on June 30th, so let's get that passed.
definitely in doubt, that's why I believe, that's why we have this kind of evaluation. We will take you device, we'll do some PR stuff, and stuff you just mentioned, starting second half of this year. But that's a...
But the additional buyback which we did last year, which we reduced our total share account by 16%, which is a lot, but still did not help much until the stock price.
You know, I don't know how to answer that, but I think, you know, whoever else did the buyback also did not work that well either. So I'm not alone in that category also. But we will definitely, one thing I will tell you is we will, starting this year, we will take a...
definitely will pay dividends on our company, our shares, our shareholder value. And the relative will be higher compared with, you know, compared with other industry and so forth and so on. So that's, and we will consistently do that for the next few years. That's our tension, that's our work.
and so forth. Let's see how that will work out.
All right, 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...
or scrutiny by the government. I mean, again, there was a lot of peer-to-peer lending companies and that was, you know, a business model that was pretty much outlawed and, you know, for various reasons. There was some bad actors, okay? We go through the same thing in our country.
where a loose financial structure can lead to...
you know, disappointment among consumers. But, you discussed that the survivability of your industry might even be a risk. I mean, it seems to me you all provide an important service to consumers in the PRC. You're allowing them credit. You're doing so in a...
in a very business-like fashion by capital-light type of structures where you're you know you're syndicating the loans through a bunch of banks. You're just you know providing the the credit check, the credit you know 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 and the PRC. So why would your industry be even...
you know at risk of survivability if you're providing a service I mean credit makes
the world go round. You know it greases the wheels of commerce.
Yes, yes, I understand what you mean. I think I can answer that question. I think our industry has been very suspicious for the last few years....
that actor has been claimed, so-called P2P, you know, been claimed by the company. I think all everyone, including government, will agree that the survival of this industry is much, much healthier and much, you know, you know.
you know, comply everything in every respect, comply with government regulation on both, on both, you know, most Chinese also are on the record, on the US also. But that definitely is true. But the issue is,
So, for the last two years, the government always tried to strongly promote a small business owner, small business, that's for sure. They are supporting for the companies to provide a loan, but the only thing that's not very clear is that they...
seem like a very low interest loan from mostly state-owned banks. But our business model mainly is based on risk factors. And we now make a ton of money.
Our interest 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, you know, out. So that's why I think that we try a little bit more.
or regulatory. That question still has made it very clear for everyone. That is why, because we relatively speak to the people we charge still is a little high. If you will see the case is made in part by parish debit, and private credit it is primarily for you. So I just need to know what this is for,
so-called loan provided to the small business individual owner, whatever form of government, they only talked about, you know, maybe...
4%, 7% in that range. But once again, I think that is not based on risk factors. And if you're taking the risk factor, for example, I think
most of it will be bad, to be frank. I don't know how that economically workable, but we do different models. Our model is not fully endorsed by the authorities. That's what I mean.
Well, you have unsecured loans. 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 AmeriCard, Citibank, American Express.
They're 23 or 4 percent. All right, and they got to be paid back every month or you got to pay that's 23 or 4 percent. If I were to get a collateralized loan...
you know, a secured loan from a bank like a mortgage.
it would be 6%. So, you know, as you said, it's a different model. 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 you know in the past paid it back you can't even get a credit card so
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.
That's very, very good credit assessment. All right, so whatever business model you have, what are algorithm?
you have for assessing who to loan to and who not to is extremely good. Alright, well thank you for the time. Put out more news please. and if you're using AI or some sort of artificial intelligence
of 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.
Thank you. Thank you for your question. All right. Very well. I'll let somebody else if they're on the phone call in. Thank you.
Thank you.
Again, if you have a question, please press star, then 1.
And our next question comes from Boyd Hines from Equinox Capital. Please go ahead.
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. In the discussions that you had with the regulators,
What have been the primary concerns that they have with your business model?
We don't have much regulatory dialogue with the regulator regarding the business model. And the regulatory, you know, sometimes just the only issue they care right now for the last year, is customer complaints.
So we are just the best, that's their KPI, the number one KPI. So we do our best to address those issues. And in other areas we comply voluntarily. So be frank, we never have a...
discussion with the regulator regarding our business model. I don't think that's their concern. Our business model is not their concern. Let me take this question. I think Frank has been meeting very clearly. If not, then we have a huge barrier between us and the world.
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 company who should not be doing any financial activities? I think the regulator is damaging this one question and they haven't made it very clear. I think this answer indeed.
has been kind of hanging over there. We don't have any answers for that question. And I think this is a key issue for the FIMTEC company in China because our business actually is a financial activity.
Yes, we are engaged in financial activities as a facilitator, as a syndicator, whatever you call it. So the question is, how do you get involved in financial activities?
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.
Yeah, I think everybody's having, I think they're having a hard time understanding whether you should be regulated as a bank or not.
Yes, yes, yes. And I mean, you seem to be doing a fantastic job at managing the credit risk. And I think that's also, at least if the regulators in the U.S. would be concerned about, the issues like, you know, do you have
a lot of undisclosed risk that's not on your balance sheet. I think that's what some of the other
competitors in the fintech space are beginning to address, which is, you know, 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. 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 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.
you're helping to provide information without potentially any you know risk that you should be showing on your balance sheet. I think that's probably the key issue here is
you know, and how would you address that? Would you, I mean, you have, you do a lot of work with third-party guarantors.
have you analyzed their financials? Because, and I know you do back to back guarantee.
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.
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 contract, so we're managing around 40 billion dollars.
40 billion RMB long distance and our total net capital is around $6 billion. So if we take that very raw...
I think that the room over there is quite high. So what I will be looking at is when we compare across industry, I normally have to take a look at that ratio. And another thing is that just as I mentioned, we have about 2.7 billion.
we are very, we generate various types of flow. So our company itself does not need to take that much of a risk for our business. And another thing that you just mentioned 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 known, right, other than the micro known company that we own. I would rather micronones on the very
very heavy supervision so we can't really offer lots of notes to that company. So some of the solution actually does not apply to our business here.
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.
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.
I think that's probably not likely, but as you say, since our model is not recognized by anyone, it is.
government to a license or to 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.
Okay, just one last housekeeping question about the tax rate. Do you expect that rate to be consistent with what you reported in the first quarter going forward?
I think I answered that question before. I think because most entities, our entity in China, we operate in China, its tax rate is about 15%. So we actually charge the US tax rate as about 25%.
So that is being, you know, there's a way to be reconciled over time. So I think once again, our effect tax rate will be below 25% on going forward base and it will be stabilized.
Okay. And in terms of that, that date of June 30, is that kind of like, once you get past that date, and there's no, you know, I mean, are you are you in the clear after June 30? Or is there still going to be, you know,
ongoing theories of regulatory issues. I don't know. I don't know. You know what I mean? We are not even including that 13 plus 1, which is end financial, and they are being marked to be regulated at first.
and to ratification. We're not even marked, but no one ever mentioned that 14, you know.
others, we are others. And all the work, I think the government, I think is pretty much focused on the end financial alone. And financials, as far as I know, from the news, everybody, they are basically finished. Then other 13, what they will do to comply fully, I think it will supposed vote and it's straight. I digress. Thank you very much. Thank you very much.
Okay, thank you very much for answering my questions and good luck to you. Thanks.
Thank you very much. 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. 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 in the next session.
The.