CNFinance Holdings Limited

CN Finance First Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. If 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 that this event is being recorded. I'd like to turn the conference over to Mr. Matthew Liu. Please go ahead.

Good morning and evening and welcome to the CN Finance First Quarter 2021 Financial Results Conference Call. In today's call, our CEO, Mr. Jai, will walk us through the operating results followed by the financial results from our CFO, Mr. Li. And after that, we will have a Q&A section. Before we start, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange 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 will, expects, anticipates, future, intents, plans, believes, estimates, target, going forward, outlook, and similar statements. Such statements are based upon management's current expectations and current market and operating conditions. and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or factors is included in the company's filings with the US 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 otherwise, except as required under law. Now, please welcome our CEO, Mr. Jai. Sorry, our CEO is a little blurry. We're trying to reach him. We're still trying to reach our CEO, Mr. Zhai. Mr. Li will walk us through the financial part first, followed by the operational results from Mr. Zhai. Please welcome our CFO, Mr. Li Ning. Okay.

Thank you, everyone, for joining us today. I will first walk you through our first quarter of 2021 financials. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage changes I'm going to give will be on that basis. Also, unless otherwise stated, all numbers I'm going to give will be in RMB. First, total loan origination volume was $2,841.8 million during the first quarter of 2021, among which 7% was first lien and 63% was second lien. Total outstanding loan principal was $10.3 billion as of March 21, 2021, with $8.7 billion under collaboration model and $1.6 billion under the traditional facilitation model. Interest and financing service fees on loans decreased by 13.7% to $422 million from $489.2 million, primarily due to lower interest rates on loans facilitated in an effort to comply with the rules and regulations issued by relevant PRC regulatory authorities, including the decisions of 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 22.2% to 156.3 million compared to 200.9 million, primarily due to the lower average interest rate of the borrowings and the agreement to repurchase and other borrowings in the first quarter of 2021. Collaboration costs for sales partners representing sales incentives paid to sales partners increased by 4% to 98.1 million compared to 94.3 million attributable to the increased loan balance under the collaboration model. Provision for credit losses decreased by 93.8% to 13.7 million from 220.7 million. The decrease was mainly attributed to the combined effect of the first, the increase in outstanding loan principle under the collaboration model that was guaranteed by the credit risk mitigation positions put up by the sales partners. And the second, lower probability of default under the current expected credit loss model which takes into account the outlook of a more positive economic growth of China in the first quarter of 2021 as compared to that of the same period of 2020 under the impact of COVID-19 pandemic. Net gains on sales of loans increased by 35.2% to $40.3 million from $29.8 million, primarily attributable to the increase of MPLs transferred to third-party purchasers and the repurchase by sales partners. Total operating expenses decreased by 6.3% to $94.2 million compared to $100.5 million. Other expenses increased by 50% to $29.7 million from $19.8 million, primarily due to the recovery of COVID-19 pandemic, which led to the increase of promotion and advertising expenses and the expenses associated with business trips of the employees. Income tax expenses was $29.2 million compared to income tax benefits of $16.5 million, primarily due to the fact that we recorded an income before income tax expenses for the first quarter of 2021 as compared to a lose before income tax expenses for the same period of 2020. Net income was 85.6 million compared to the net loses of 65.7 million in prior years. As of March 31st, 2021, The company had cash, cash equivalent, and restricted cash of $2.2 billion, including $1.3 billion from structured funds, which could only be used to grant new loans and activities. The actual delinquency rate for loans originated by the company was 21.3% as of March 31, 2021. 16.5%. The actual NPL rate for loans originated by the company was 10.9% as of March 31st, 2021. Under the commission model, the actual NPL rate was 6%. Okay, that's for my part.

And now please welcome our CEO, Mr. Jai Bing, to introduce your operational results for the first quarter of 2021. Mr. Jai, you can start. Mr. Jai? Sorry, it will be a couple of minutes. Our CEO is having a bad connection.

Okay. Go ahead, please.

Okay. Please go ahead, James.

Thank you, operator, and thank you, everyone, for joining us in the conference call. On today's call, I will be introducing the company's operational results of Q1 2021, and then I will take your questions with our CFO. I was sorry I had a bad connection just now. I will be elaborating our operational results now.

Okay. We were able to record solid results for Q1 2021.

and achieved a loan origination volume beyond our expectations. We originated loans of 2.8 billion RMB representing an increase of 143% from 1.2 billion RMB from the same period of last year. Our revenue provision for credit losses and net income during the quarter was 425 million, 14 million and 86 million RMB respectively. The recovery of national economy and the efficiency of our collaboration model were the main drivers for our growth. Please let me elaborate with details.

首先从外部因素看, 自去年三季度以来, 我国的疫情得到了非常好的控制。 各行各业迅速回到了正轨。 全国第一季度GDP同比增长18.3%, 环比增长0.6%, Firstly, since the second half of 2020,

China has effectively contained COVID-19 and productions have resumed nationwide. In Q1 2021, China's GDP grew 18.3% from Q1 2020 and 0.6% from Q4 2020. The rapid rebound of China's economy brings confidence in the future recovery of the world's economies. We are seeing that the Chinese MSC owners demand for capital surge as their business recovered from the pandemic.

Also in the quarter, we noticed that commercial banks revised their qualification standards for loan applications.

made it even more difficult for the MSC owners to meet. To seize this opportunity, our sales partners gathered across over 40 cities in China proactively reached out to the MSC owners and provided them with our affordable and accessible products in a timely manner.

Secondly,

The strong growth in loan origination volume was a proof of the efficiency of the collaboration model. Since 2019, we have kept refining the collaboration model and optimizing our terms with the sales partners. As a result, the outstanding loan principle under the collaboration model has reached 9 billion RMB, and we are confident that the scale will continue to grow in the future.

Ziwei. The increase in the amount of loan issuance is also inseparable from the long-standing support of our trust partners. We have maintained a long-term good cooperation relationship with our trust partners, and have established a mutual trust for many years. In the case of controlling and suppressing the non-standard asset value of the trust company, the company and its trust partners have a good negotiation to ensure the sufficient supply of company business funds at the time, so that we can meet the growth of customer loan demand.

In addition, our growth was also attributable to the long-standing support from our trust company partners. We have built long-term and mutually beneficial relationships with our trust company partners throughout the years. Even the trust companies have been reducing the total size of the non-standard trust products to comply with the regulations. We were still able to secure sufficient funding from our trust company partners to satisfy the growing needs of our customers in this quarter.

Thirdly, in order to accelerate the return of funds, the company has accelerated the payment of bad loans. In the partner mode, since the partner needs to be responsible for the loan recommended by him and provide a certain proportion of the risk relief fund, it effectively reduces the risk that the company actually takes. At the same time, the partner's return on the expected loan also enriches our payment methods for bad assets and increases the efficiency of the payment. Through the payment of expected assets,

Thirdly, in order to maintain healthy liquidity, we accelerated the dispose of delinquent loans. Under the collaboration model, the sales partners are obliged to guarantee the loans they sourced with the credit risk mitigation positions. As a result, CNF's risk exposure to losses became even lower. Moreover, we have designed mechanisms for the sales partners to buy back the respective defaulted loans. These options increase the efficiency in delinquent loan disposals under the collaboration model. During the first quarter, we had 440 million RMB recovered by disposing delinquent loans, representing an overall recovery rate of over 100%. As I mentioned earlier,

As discussed, we recorded outstanding results in this quarter

and we plan to carry out this momentum to tackle the challenges that may rise in the year of 2021. By reviewing our daily operations, we have prioritized the following tasks.

But this year, it is undeniable that the non-standard product scale of the credit company has been reduced. We will continue to strengthen our cooperation with them. But at the same time, in order to further ensure that we have enough funds, we will open up more funding channels. Currently, the company is actively promoting cooperation with large banks, in order to meet the high demand of small and medium-sized enterprises for funds, and to ensure that we achieve our goals for this year.

First, we will continue to expand funding sources. We are currently relying on trust company partners to provide majority of our funding. Although our needs were met during the quarter, the regulations are limiting non-standard trust products are bringing risks to match our growth demand for the year. We plan to strengthen our collaborations with our trust partners. Meanwhile, we are diversifying our funding sources to secure sufficient funds to support our rapid growth. At this moment, we are proactively meeting with commercial banks to enhance our funding sources. We hope the collaborations with the new funding partners will fulfill the working capital demands of the MSC owners in China and enable us to meet our set goal for 2021 in terms of loan origination.

At the same time, we have also made new discoveries in the way we collaborate with the funding parties. At the same time, we are actively adopting new approaches in collaborating with funding partners. We started direct cooperation with Blue Ocean Bank as a service provider.

We also set up a parallel structured trust plan with Zhonghai Trust. We will continue to explore different collaborating approaches in the future.

Second,

We will continue to improve the service and optimize management mechanism in the collaboration model. Our collaboration model has been widely recognized by the market. The loan origination volume has been going up in almost each quarter since inception. In order to achieve high retention rate of sales partners, we plan to refine our incentive plans and provide various terms to our sales partners. based on the volume and the quality of the assets they introduced. We will also invest in technology to provide sales partners with more specialized and custom-made services in every loan origination step.

Third, we will continue to invest in technology. We are aware

As the collaboration model keeps spending, deploying technology to optimize our loan approval efficiency and credit assessment ability and achieve detail-oriented management will be the key to our future development. We plan to invest more on technology to first upgrade the approval procedure with smart technologies and then achieve higher data integration and a more advanced process visualization From the customer perspective, we will improve the service quality and efficiency of document signing and post-loan management. In 2020, the company experienced many challenges but delivered solid results to the shareholders. We believe 2021 will be another year of challenges. We will devote ourselves to securing more funding sources and lowering the funding costs to seize the opportunity of increasing market demand and create higher value for our shareholders. That was the operational results by our Vice President of Capital Market Department on behalf of CEO, Mr. Zhai Bing. Now, we would like to open the Q&A section. Operator? Operator, we would like to open the Q&A section, please.

We'll now begin the question and answer session. Ask a question, press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before dialing. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question comes from William Gorgoski of Greenbrier Cotton Oil. Please go ahead.

Hey, guys. Great quarter. Can you disclose what the total number of transactions were in the quarter and what the duration of the loans are that you're seeing right now?

Mr. Li will take your question. During the first quarter, the total number of transactions was over 5,000, nearly 5,000.

Over 5,000. And the total loan origination volume was 2.8 billion RMB, just as we noticed. And it was a significant increase compared to the same quarter of last year.

And the average duration of the loans we facilitated during the quarter was a bit shorter than we expected, primarily due to the regulation changes last year, especially the

the limit on the APRs. So we are focusing on facilitating loans with a duration of one year during the quarter.

Okay. Okay. And then the interest expense you guys reported was quite a bit lower than what I was looking at. Can you give the average rate you guys were paying on your loans in the quarter?

Your interest expense is lower than I thought. Can you tell us how much your average financing cost is?

The interest expense mainly refers to the financing cost that we entrust to our partners. Our annual financing cost is about 8.5 to 9 per month.

So the interest expense mainly consists of the interest we pay to our trust partners. And if we are speaking of the 12-month duration, capital from the trust companies is around 5.5% to 9%. For capital that's duration is longer than a year is around 9.5% to 10%.

Okay. All right. And then with the forfeited sales partner position income that you reported, do you think it's fair to look at that and say that, you know, that shows how de-risked you guys are on these loans through your platform?

It was a little blurry. Could you repeat that question again?

Yeah, with how high the forfeited sales partner position income was in this quarter, is it fair to look at that and think that it shows how de-risked you guys are as a company for loans that go through your platform? Okay.

So if you look at a measure on our financial statements,

there is a provision for credit losses. And if you separate the collaboration model and the traditional facilitation model, you will see the provision for credit losses as a percentage of the revenue under the collaboration model was around 0.8% to 1%, which is way lower than that under the traditional facilitation model. So I think it is fair to say we are

Okay, and last question, do you have expectations you can provide for origination volume for all of 2021 and 2022? 您能不能提供一个大致的您的预期对于2021年整体的发放量以及2022年整体的发放量?

First of all, the year-over-year growth of long origination in the first quarter of 2021

Mainly because Q1 last year, China was under heavy effect of the pandemic, so there was a significant increase in this quarter, year over year.

But as compared to the fourth quarter of 2020, when we

during which we facilitated 2.7 billion RMB, and this quarter we recorded 2.8.

So considering that, if we don't see huge market fluctuations and we are able to securing

sufficient fund as we are doing now, I'm projecting $3 billion loan origination every quarter. And that's the bottom line.

Okay. Great. Thank you, guys.

Thank you. Again, if you need to ask a question, please press star then 1. Our next question comes from Rong Rong Zhang of KC Capital. Please go ahead.

Hello, Mr. Li. I noticed that in your balance sheet you have around $330 million of cash, and that number is actually higher than your market cap.

So is that number Could you elaborate that number on the balance sheet of cash?

So we had cash and cash equivalents if we present that in RMB price.

It's around 2.2 billion, and that's the number you said in dollar. So in my part of introducing the financial results of the quarter, I also had a part mainly introducing the cash and cash equivalent and restricted cash. So among that 2.2 billion RMB of cash, we had 1.3 billion actually was from structured funds, which could only be used to grant new loans. So yes, that's what consists in our balance of cash.

Thank you.

Thank you. At this time, we have no further questions. And I'd like to turn the call back over to management for closing remarks.

Thank you everyone again for joining us in this conference call. If you have any further questions, please feel free to reach us at ir.cashchina.cn. Thank you. Thank you everyone. Thank you.

Call is now concluded. Thank you for attending a presentation. You may now disconnect.