CNFinance Holdings Limited

Good day, and welcome to the CN Finance report for the fourth quarter and fiscal year of 2020 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Jane Jan. Please go ahead.

Good morning and good evening, and welcome to CN Finance fourth quarter and fiscal year 2020 financial results conference call. In today's call, our CEO, Mr. Zhai, will walk us through the operating results, followed by the financial results from our CFO, Mr. Li. After that, we will have a Q&A session. Before we start, I'd like to remind you that this conference call contains follow-looking statements within the meaning of Section 21E of the Securities and Change Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as view, expects, anticipates, future, intends, plans, beliefs, estimates, targets, going forward, outlook, and similar statements. Such statements are based upon management's current expectation and current markets 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 following statements. Further information regarding this and other risks, uncertainties, or factors is included in a 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. Zhai.

Thank you, host. At the same time, I would like to thank everyone for taking the precious time to attend this telephone meeting. At this telephone meeting, we will introduce the company's fourth quarter of 2020 and the financial situation of the whole year. Overall, this year, the COVID-19 pandemic has brought huge challenges to the company's business. We would like to report on the business operation.

business development, and financial results in the fourth quarter and fiscal year of 2020. During the year, the outbreak of COVID-19 presented both challenges and opportunities to our business. However, CN Finance was able to maintain operation and continue to create value to our shareholders while ensuring the health and safety of our employees, partners, and clients. Later, we will answer your questions.

In the fourth quarter of 2020, our total loan amount was 270 million yuan, which rose by 35% compared to the same period last year. This quarter's annual income was 4.2 million yuan, and the net profit was 1.05 million yuan. In 2020, the annual loan amount was 8.8 billion yuan, which rose by 40% compared to the same period last year. The annual income During the fourth quarter, we facilitated loans and mounted RMB 2.7 billion, representing an increase of 35% from the same period of 2019.

The revenue and net income were RMB 420 million and RMB 105 million, respectively, during the quarter. For the fiscal year of 2020, we facilitated loans amounting to RMB 8.8 billion, representing an increase of 40% as compared to 2019. We recorded revenue of RMB 1.84 billion and a net income of RMB 115 million. These results are strong proof of the effectiveness and efficiency of the collaboration model, and they also further increase our confidence in growing this model in the future. 2020 was a special year. It was the second year of our transformation to the collaboration model. Since 2019, we have started a smooth transition from the old model to the current collaboration model. In 2020, we refined the collaboration model which proves its capability to overcome obstacles brought up by the changing environment of business.

In the beginning of 2020, we experienced a hundred-year-old COVID-19 outbreak. Due to the impact of the shutdown of the factory, our production was almost completely stopped in February and March. The first quarter of the loan rate also rose sharply.

At the beginning of 2020, COVID-19 spread throughout China and later the entire global. China's national production and business operation during February and March was halted. As a result, we hardly facilitated any loans during that two months. Our delinquency ratio also increased drastically in the first quarter. At that moment, we endured the pressure. We were also fortunate to benefit from the advantages of our collaboration model implemented in 2019.

We were also fortunate to benefit from the advantages of our collaboration model implemented in 2019. Under the pressure, we quickly responded and initiated communications with sales partners as well as trust company partners to develop action plans

we implemented modifications to improve product terms, loan approval process, and post-loan management, all in an effort to provide financing services to meet MSC owners' most urgent needs.

After a whole year of adjustment into the collaboration model in 2019, we were able to cut down fixed costs drastically. The collaboration model also made us resilient when facing unexpected difficulties.

since we share profits and bear risks with our sales partners. We were able to keep a 100% recovery rate when we experienced the rise of delinquency and NPLs.

Since the second half of the year, the government has called on the financial industry to make a reasonable exception to the actual economy. As the Supreme Court announced the limit on the highest interest rate, the entire private sector has been affected. Although we are cooperating with a credit-free credit company, it is not just a range of adjustment. But we are committed to actively communicating with credit partners and credit company partners. All parties will soon reach a consensus and join forces with the market to make actual actions to support the government in order to reduce the decision of small and medium-sized enterprises' financing costs. The company's full-line products have been adjusted according to the highest new rules and standards.

In the second half of 2020, the government ordered the financial institutions to lower financing costs to the economy. Subsequently, our industry took another hit from the new order of the Supreme People's Court on interest rates. As we collaborate with licensed trust companies, we are not subject to this new court order. However, we proactively communicate with our funding partners and sales partners. and reduce the interest rate of our loan products to follow the court order.

这一决策也让我们感到了压力与庆幸。 This decision presents us with both challenges and opportunities. 最直接的压力就是贷款利率的降低,导致贷款收入下降,不良资产处置难度加大。 The reduced interest rate impacted our interest income. It also created problems in disposing NPLs. In response to these issues,

We started negotiations with 12 company partners and sales partners in order to assure profit margins for all three parties and we still apply to the court's order.

First of all, after adjusting the product interest rate, although the company and the loan partner, the credit company, have increased their profits, but the company found that the interest rate was too high for the client market. Even the adjusted profit margin became lower for all parties. The increasing demand for our long products helped boost

the original volume in third and fourth quarter of the year. The loan alternation volume doubled in the second half of the year as compared to the first half and was 57% higher than the same period in 2019. In 2021, we believe that the interest rate on our products will gradually recover to a higher rate but still compliant to the regulations.

In November,

the government wrote our regulations to limit the scale of non-standard products issued by the trust companies. In order to satisfy the massive demand of prospective borrowers, we proactively started collaboration with new financial institutions such as Hunan Trust and Lanhai Bank. These new collaborations not only provide us sufficient funds, but also strengthen the trust between the sales partners and our platform with sufficient funding. Our financing service continues to meet the most urgent needs of the MSC owners.

In 2020, Songguan completed 88% of its return in various challenges, which is close to 4% of last year's growth. The platform model and products are also widely recognized by the market. The number of new members of the partners

During 2020, we have overcome many challenges and facilitated loans amounting RMB $88 billion, representing 40% increase from the year before. Our collaboration model and new loan products were also approved by the market. Also, in 2020, The number of contracted sales partners grew to 1,700 from 1,300, representing an increase of 31%. From our experience in 2020, collaboration model has proved its efficiency and effectiveness. CNF is more confident to further build our business under this model.

Report on the work of government in 2021 has addressed on continuity in providing financial solutions to MSCs.

And this decision is exactly what CNF has been dedicated to. In 2021, in order to better service our customers and sales partners and reach our set goal of exceeding RMB 10 billion in outstanding loans under collaboration model, we will invest more on technology and focus on refining our operation. Our plans are...

The company's design plan is based on the true situation of the client. It is managed by small and medium-sized corporate clients. It is not a financial institution that matches different risk categories. The company's plan is based on the stable existing credit products. The average price for C-level clients is 20% to 22% of single credit products.

First, we will roll out diversified products. Based on the borrower's credit reports, we will match them with financial institutions with different risk preferences. Other than our current trust loan products, We plan to introduce new trust loan products with interest rate ranging from 20% to 22% for Class C customers, implying they have poorer credits compared with Class A and B applicants. We also plan to cooperate with large banks to design loan products with interest rate of no more than 10% for Class A customers.

Second, we will provide tailor-made terms with our sales partners.

based on the volume and quality of assets they introduce to our business. These new adjustments will incentivize them to achieve even higher efficiencies in our model. CNF also expects to capture a bigger market share in our industry.

Third, we will refine the platform operation. We will empower our business through technology, including a smarter and faster approval procedure, data integration,

process visualization, and other technological means in order to provide timely service in every business process. We will also improve the service quality and efficiency of the document signing and the post-loan management. We believe that after struggling through the challenging 2020, the company will continue to improve itself and seize every opportunity to create a higher value for shareholders in 2021. 现在我将把时间交给我们的CFO李宁先生。 Now, I'd like to hand the call over to our CFO, Mr. Li Ning, who will walk you through the financial results of fourth quarter and fiscal year of 2020. Thank you.

Thanks, Mr. Dai, and thanks again to everyone for joining us today. I will walk you through for our first quarter of 2020 financials, followed by that of fiscal year of 2020. Weekly 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 INB. Total outstanding loan principal was $9.7 billion as of December 31, 2020, as compared to $11.3 billion as of December 31, 2019. Total loan origination volume was $2.7 billion during the first quarter of 2020, representing an increase of 35% from $2 billion. Interest and financing service fees on loans decreased by 29.5 percent to $470.1 million for the first quarter of 2020, as compared to $591.8 million, primarily due to the combined effect of the first, the decrease in the balance of average daily outstanding loan principal, and the second, The lower interest rate on loans facilitated in an effort to comply with recent rules and regulations issued by the relevant PIC regulatory authorities, including the decisions of the Supreme People's Court to amend the provisions of several issues concerning the application of law in the trial of private lending cases issued in August 2020. Interest and fees expenses decreased by 32.7% to $159.3 million for the first quarter of 2020, as compared to $236.8 million, primarily due to the decrease in the principal of the borrowings and the agreement to repurchase and other borrowings. Collaboration costs for sales partners. Representing sales incentives paid to sales partners increased to $104.4 million for the first quarter of 2020, as compared to $75.8 million, primarily due to the increase in average daily outstanding loan principal under the calculation model since December 2018. Provision for credit losses decreased by 171.6% and recorded a reversal of $28.5 million for the first quarter of 2020, as compared to the provision of $39.8 million for the same period of 2019. The decrease was mainly attributed to the combined effect of the first, the decrease in loan balance, and the second, the increase in outstanding loan principal under the calculation model. that was guaranteed by credit risk mitigation position put up by the sales partners. And third, the current expected credit loss model adopted since 2020 took into account the containment of COVID-19 pandemic, which led to the positive overlook of economy growth in China as compared to the same period of 2019. Total operating expenses decreased by 31% to $112.6 million for the first quarter of 2020 compared with $163.1 million. Income tax expenses increased by 4.8% to $24.2 million for the first quarter of 2020 as compared to $23.1 million, primarily due to the increase in taxable income for the first quarter of 2020. Net income increased by 72.6% to $105.3 million for the first quarter of 2020, as compared to $61 million. Now, let's move on the financials of 2020 as a whole. Total loan origination volume was $8.8 billion during the fiscal year of 2020, representing an increase of 39.7% from $6.3 billion in 2019. Interest and financing service fees on loans decreased by 38.1% to $1,828.7 million for the fiscal year of 2020, as compared to $2,953.5 million for the same period of 2019, primarily due to the combined effect of the first, the decrease in the balance of average daily outstanding loan principal, and the second, the lower interest rate on loans facilitated in an effort to comply with recent rules and regulations issued by relevant TRC regulatory authorities including the decisions on the Supreme People's Court to amend the provisions on several issues concerning the application of law in the trial of private lending cases issued in August 2020. Interest and fees expenses decreased by 44.2% to $731.3 million for the fiscal year of 2020, as compared to $1,309.8 million for the same period of 2019, primarily due to the decrease in the principle of the borings and the agreement to repurchase and other borings. Collaboration costs for sales partners representing sales incentives paid to sales partners increased to $415.1 million for the fiscal year of 2020 as compared to $174 million for the same period of 2019, primarily due to the increase in average daily outstanding loan principal under the collaboration model as compared to the same period of 2019. Provision for credit losses decreased by 22.8% to $280 million for the fiscal year of 2020 as compared to $300 62.8 million for the same period of 2019. The decrease was mainly attributable to the combined effect of the first, the decrease in loan balance. The second, the increase in outstanding loan principle under the collaboration model that was guaranteed by credit risk mitigation position put up by the sales partners. And the third, the current expected credit loss model adopted since 2020 took into account the overlook of the economy growth in China impacted by the COVID-19 pandemic. Total operating expenses decreased by 16.1% to 445.3 million for the fiscal year of 2020, as compared to 531 million for the same period of 2019. Income tax expenses decreased by 74.4% to $47.8 million for the fiscal year of 2020 as compared to $186.4 million for the same period of 2019, primarily due to the decrease in the amount of taxable income. Net income decreased by 78.5% to $114.9 million for the fiscal year of 2020 as compared to $534.6 million for the same period of 2019. As of December 31, 2020, the company held cash and the cash equivalent of $2 billion compared with $1.7 billion as of December 31, 2019. The aggregate delinquency rate for loans originated by the company, which is calculated by dividing the total balance of outstanding loan principal for which any installment payment is due for one or more days as of a particular date by the aggregate total amount of loans we originated in 2014 increased from 5.4% as of December 31, 2019, to 5.7%. as of December 31st, 2020. The actual delinquency rate for loans originated by the company increased from 17.1% as of December 31st, 2019, to 32.6% as of December 31st, 2020. With that, I would like to open the Q&A session. Please go on.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from . Please go ahead.

Hi, guys. A couple of questions. You mentioned the new products for Class A, B, and C applicants. Do you have an estimate of kind of what kind of split each of those three categories are going to make going forward?

You just mentioned that different new products will be launched for A, B, and C customers. In your opinion, what will the structure of these three products be like? What is the ratio? Let me answer. Let me answer briefly. What is our current product?

Our current product is...

The products we have right now are more similar to those so-called Class B products.

In the foreseeable future, say 2021, I think...

The current products are still going to be our main products. As we still cooperate with trust companies to roll out the product for Class C customers, I think that's going to be easier to roll out, and we're hoping to roll that out in the second quarter of 2021. 但是这个C类产品,也就是说大概是20利率左右的产品, 因为我们现在的合作方式还是跟合伙人的一个合作, 所以这个里面还有一个合作合伙人的配合, 也就是合伙人的意愿。 他是不是选择这种产品? Also, since those products for Class C customers I mentioned before also involve the problems with cooperating with sales partners, we will have to say if the sales partners are willing to accept those kind of new products.

所以这个产品来讲,到年底的话,我们认为还是以B类产品为主,C类产品作为一个补充,可能占的比重不会很大。

As long as we are concerning the 2021, I think we are still going to use the product for Class B customers as the main product and product for Class C customers as supplement. Not really going to push out any product for Class A customers in the near future as the 2021. A-Day is a new product. since the product for Class A customers is going to be a brand new product. 它们的客户群可能跟我们现有的客户群略有不同。 The target customer group is going to be a little different from what we are having right now. 对公司来说这是一个全新的产品。 So it's brand new to the company, it's going to be a new journey. 我们将在二季度与银行洽谈这个合作模式。 We are starting the negotiation process with the banks in the second quarter.

And with the hope to start to roll out the product for Class A customers in about half a year with scale.

As I mentioned earlier, because the target customer groups are different.

So we don't really think it's going to make up a large percentage of our products in 2021. It's more like to build a solid foundation for our future development.

That's my answer to your question.

Okay. All right. Great. Do you think the level of interest for the sales partners will increase with the, you mentioned a tiered offering. Do you think that will make the existing sales partners more active and possibly bring in new sales partners onto the platform?

My answer is simple, yes.

I will illustrate in the following aspects.

First, as I mentioned, as we are pushing out products to satisfy different classes of customers, it gives the sales partners more choices.

Second, as we are refining our platform,

I think we're going to be able to provide them with better services.

And as we are refining our services, I think it will be possible also to transform

say a customer from Class B to Class A. And I think that's going to expand our customer base as well. And I hope that answers your question.

Okay. And the last question is, it seems like the average loan size has been going up over the course of 2020. Do you think that will continue on into 2021?

We believe the average ticket size is going to be maintained in a rather steady level. 2019年虽然经历了疫情,但可能在中国的整体房价可能还是有略微的上升。 And in 2020, even though we've been through the COVID-19 pandemic, the overall property price in China was still rising a little bit, slightly. Because we're holding a very stringent CAPE of LTV to the 70% of the collateral value. As the market price of the property goes up, our average ticket size also goes up.

Besides, as the loans are facilitated scattered across the cities, each city may take a different percentage of our whole picture. Once that changes, it's going to influence

average LTV ratio as well. But just all in all, the LTV didn't really change that much. And so does the average ticket size.

Okay. All right. Thank you.

Thank you.

Again, if you have a question, please press star, then one. The next question is from Neil Gagnon from Gagnon Securities. Please go ahead.

Good evening, Steve. Thank you very much. First of all, let me congratulate you on getting through 2020. You did it very well, and all of your team is to be congratulated. My first question is management thinking about balancing growth and profitability, given that it seems as if you have almost unlimited opportunity if you want to go after. So what's the balance between how fast you want to grow and what kind of profitability you'd like to achieve?

We've been through the fluctuations in the market condition during the year. As I mentioned earlier, one of the fluctuations was the COVID-19 pandemic.

The second one is

We also experienced the Supreme People's Court's order to limit the cap of private lending. And the interest we charge our customers make up the main percentage of our revenues. And our profit margin is mainly made up by the interest difference between what we charge the customers and what we pay to the trust companies. And the sales partners mainly, their revenue is made up by the interest we charge our customers and the interest we charge them. So in the past year, first, the income of our prospective customers has dropped as compared to past years. 相应的,我们在今年适应市场的变化,我们与合伙人之间的结算价

However, to respond to the fluctuation of the market, we also adjusted our profit split with our sales partners.

For example, once the overall interest we can charge a customer drops, it's not only buried by us.

but rather by the joint party of us and the sales partners.

So the incentive we paid to the sales partners are usually not as sensitive as the

as what we charge from the borrowers. When there is a change, it's usually smaller.

经过这一轮的调整来说, 我们与合伙人之间的结算价应该相对的固定。 After a whole year of adjustment, I think the profit split we are having with our sales partners right now has reached a rather steady level. So based on that, I don't think to scale up is really conflict with remaining the profitability, but rather it's a linear correlation. So our main focus in the future is to get a more economic financing cost from the trust company partners. So I think that will be the main driver of our profitability. So if we can get the financing cost to be stable, our profit margin will stay rather stable as well. I hope that answers your question. Yes, it does. Thank you. That was a very good explanation.

If you achieve those kinds of levels, of course, there are no guarantees in life, but if you achieve them, what is the thinking about beginning to share some of the profitability with your shareholders in the form of a cash dividend?

That's always in our daily schedule of...

But we will also mutually consider our revenue, profitability, liquidity before we put that into the board meetings for discussion. Thank you.

Good. Thank you. That was a complete answer. I appreciate it. Thank you very much.

Thank you.

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 Jane Jian for any closing remarks.

That will be all for today. Thank you for joining us. If you have any further questions, please feel free to contact us at ir at capchina.cn. Thank you.

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