CNFinance Holdings Limited

Good day and welcome to the CN Finance second quarter and first half of 2021 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Jen Jay. Please go ahead.

Good morning and good evening, and welcome to CS Finance second 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 Vice President of Capital Market Department, Ms. Lee. 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 21 of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Dedication Reform Act of 1995. This forward-looking statement can be identified by terminology such as real, exact, anticipated, future, intents, plans, beliefs, estimates, targets, going forward, outlooks, and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve loan or loan risk, 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 the company's filing with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any following statements as a result of new information, future events, or otherwise. is as required under law. Now, please welcome our CEO, Mr. Zhai.

Thank you, Operator.

and thank you everyone for joining us in the conference call. On today's call, we will introduce the company's financial and operational results of the second quarter at the first half of 2021, followed by a Q&A section.

The company's loan amount has again achieved rapid growth in the first quarter. This quarter, 4,050,000 yuan has been significantly increased

following a good first quarter, the loan facilitation volume increased again in second quarter. After adding another RMB 3.8 billion of originating LOC in the second quarter, the total loan facilitation reached RMB 6.6 billion in the first half of 2021, representing an increase of 100% and 113% respectively to the same period of last year. The net income in the second quarter and the first half of the year was RMB 55 million and RMB 150 million respectively. Both increased significantly, comparing to a net profit of RMB 25 million and a net loss of RMB 40.5 million in the same period last year. 公司在第二季度以及上半年能够起的较为令人满意的经营成果, We not only deliver solid operational results in the second quarter, but also in the first six months of 2021. The loan facilitation volume even reached a new high since the inception of collaboration model. The reasons of our success are threefold.

One, The market demand of the real estate industry is huge. In the second quarter, China's 7.9% TPP index, followed by more than 80 million small and medium-sized enterprises at the lowest level, also showed their vitality. The demand for financing continued to rise. Due to the spread of small and medium-sized enterprises in the region, and the small and medium-sized enterprises are small in size, the cash flow of self-managed enterprises is unstable. The huge demand for home equity loans in the second quarter

As China's GDP grew 7.9%, the vital business operations of over 80 million grassroots micro and small enterprises in China led to a huge demand for working capital. However, MSEs in China are usually scattered with small scale and stable cash flow. These characters of MSEs made them difficult to meet the loan approval criteria at banks. Their demand for working capital cannot be satisfied by traditional financial institutions. In this market environment, we call ourselves the last might courier to build a network of an inclusive financial system in China. In the past two years, we have ordered loan services to over 40,000 MSCs in China. 另一方面,自去年下半年以来,

On the other hand, home equity loan is still one of the best interest-bearing assets in the market. As we witnessed the sufficient increase of property price in major cities since the second half of 2020, Secondly, we have established more than 60 service networks in 40 cities across the country, with more than 2,000 partners from all over the country. This makes us more in-depth and sensitive to the financial needs of small and medium-sized enterprises. After the pandemic, they can quickly seize the opportunity. In the first half of 2021, the company's share of 66.6 billion yuan increased by 118% from last year's 30.5 billion yuan.

Since the inception of collaboration model, we have built a national worldwide consistent of 50 branches and 40 cities by collaborating with over 2,000 sales partners across China. With this network, we are able to establish a wide market coverage and serve MSE owners financing needs in a timely manner. In the first half of 2021, we facilitated loans with a total amount of RMB 6.66 billion, representing a year-on-year growth of 118% from RMB 3.05 billion. The company's growth is back on a fast track.

Third, after two years of hammering and growing, the partner service platform model has been The collaboration model has been well recognized by the market as we kept refining the operation in the past two years.

To secure our partners' loyalty to our platform, we have been optimizing our service providers' buy.

First, we have been consistently adding talent to our professional management team. We also offer training programs for our staff partners to help their team members

gain deep understanding of the products and risk control criteria of the trust company partners, so that they could serve MSC owners efficiently.

Second, we optimize the data processing and storage of our online system to make it more efficient and visible to users. We hope to serve MSD owners in time and cut our old costs at the same time.

The drastic increase in loan origination volume was the proof to the capacity and efficiency of our loan process system. Based on our internal assessments, our current system is capable to support an annual capability of RMB 30 to 50 billion in the loan origination volume.

We delivered strong results in the past two quarters. But at the same time, we also noticed some challenges to our future growth, including... ...and capital supply pressure. Funding pressure.

We are highly dependent on trust companies as funding partners. Since the beginning of 2021, the regulation on trust companies' loan products were tightened. As a result, trust companies reduced our funding quota. We also suffer from a subsequent rise of financing costs. We do not expect this regulation to loosen up in the rest of 2021, and therefore, Our long alternation will possibly be affected.

Second, the price of real estate and the fluctuation of liquidity. Due to the repeated outbreak of the COVID-19 pandemic in many parts of China and the government's strict control over the real estate market in China, the price of real estate and liquidity may fluctuate. We have noticed that since 2021, the Chinese government has shown its unprecedented determination to control the price of real estate. We have noted the uncertainties of property price and liquidity due to the government policies in controlling property prices and impacts from the COVID-19 pandemic.

In 2021, the government actively initiated measures to control property price, including announcing suggested prices to second-hand property in multiple cities, as well as tightened mortgages to slow down property transactions. The management believes that such uncertainties will negatively affect the loan origination volume and NPL disposal.

Third, the current bond partner model. In essence, it is the partner who takes the risk of assets. But due to the arrangement of the transaction structure and the legal form, the company as an after-sales investor is reflected in the trust plan, resulting in the risk of assets still reflected in the financial report. The business model of the company is still a position model of heavy assets, unable to reflect the service model assets of green assets. Due to the high responsibility of the company's assets, the company's further development of the fund

Under the collaboration model, sales partners bear risks. However, due to the business structure agreed upon with the trust companies, we are the holder of subordinate units in the trust plan. As a result, we have to consolidate the assets on our financial statements. We seem like a company with heavy assets where our revenue is generated from interest spreads. The balance sheet cannot represent our true business model, which is in fact an asset-light load alteration platform. In the meantime, the look of the balance sheet is also constant when we reach out to new farming partners. 为了应对变化的市场环境,不断扩大公司业务规模,以便更好地服务于广大小规企业组。

In order to consistently grow our business and serve MSG owners in the changing markets, we plan to further refine the current platform model and introduce a new asset line service platform.

by taking the following measures.

Transferring all assets and risk to any investor with preferences in high risk and high return asset backed by property.

Our company will focus on online and offline loan automation and post-loan management service.

The company has reached a cooperation agreement with several top banks, including Guangda Bank, Nanhai Bank and Huaxia Bank, and is actively promoting the launch of the ABS process. We believe that a broader funding channel will help us to design more diversified loan products and provide more financing options for small and medium-sized enterprises of different levels.

Collaborating with different types of funding partners to serve MSC owners with different credit ratings. Other than strengthening our collaboration with trust companies, we have so actively reached out to various financial institutions. We hope by introducing more diversified loan products, MSCs could enjoy the benefits of more affordable loans. We have signed collaboration agreement with commercial banks, including Everprice Bank, Blue Ocean Bank, and Huaxia Bank, with a possibility to issue ABS. We believe that creating a broadened financial channel will help us bring diversification of our loan products and offer more choices to MSC owners. 第三,公司将会继续提升

to serve small and medium-sized enterprises. First of all, we will continue to expand the national layout of more than 60 branch institutions in 40 cities to achieve a more comprehensive coverage of small and medium-sized enterprises. Not only that, we will also pay more attention to the technology construction of the company, while improving the basic capabilities of the online loan management system data, reduce the overall control process, reduce the number of companies operating, and improve the efficiency of service to small and medium-sized enterprises.

We will continue to improve our service to MSC owners. First, we will further expand our service network nationwide. The current network has 50 branches scattered across 40 cities, penetrating into markets and discovering the financing needs of MSC owners. Other than that, we will prioritize technology development to improve the loan measurement system capability in storing data, and to increase the efficiency in the overall process to satisfying the financial needs of MSD owners, also with the goal to reduce the operating cost of our company.

In the future, we will actively respond to the call of the country to develop general To achieve our mission of make finance more human and follow the government's policy,

of developing an inclusive finance system. We will leverage our advantage gained from years of dedicated work in the industry and build a service platform that is asset-wise turnover high and scale large. We will proactively work with funding partners to push out diversified loan products, consistently provide MSD owners with affordable, accessible, and efficient financial services.

Finally, we announced today that CFO Lin Ning will leave the company in November. Here, I would like to thank Mr. Lin for his years of hard work. Mr. Lin has been a CFO of Shanghai Financial since 2010. In the past 11 years, he has made a significant contribution to the development of the service provider in China. At last, today, we announced our CFO Mr. Li Ning

would step down from CFO position in November. I want to take the time to thank Mr. Li's years of hard work. Mr. Li has served as a company CFO since 2010. In the past 11 years, he made significant contribution in leading CN Finance to become a leading home equity loan service provider in China and put dedicated work in transformation from a privately held company into an NYSE listed company. On behalf of all of us here in CN Finance, I would like to thank Mr. Li Ning for his leadership, dedication, and professionalism. I wish him best of luck with his future endeavors. We have already commenced the search for a new CFO.

Now, I will hand over the floor to our Capital Market Department, Ms. Li Jing, and she will introduce the company

2021年第二季度以及上半年的财务状况。 With that, I would like to hand the call over to Ms. Zhai Li, the Vice President of the Capital Market Department, who will walk you through the second quarter and the first half financials.

Thanks, Mr. Zhai, and thanks again to everyone joining us today. I will walk you through our second quarter and first half of 2021 financials. We believe our year-over-year comparison is the best way to review our performance. Unless otherwise it stays, all percentage changes I'm going to give will be on that basis. Also, unless otherwise it stays, all number I'm going to give will be in RMB. We will go through the figures for the second quarter of 2021 first, and followed by that for the first half. As of June 13, 2021, total outstanding loan principal increased to $11.6 billion compared to $9.7 billion RMB as of December 31, 2020. Total loan origination volume was $3.8 billion, increased 103% from $1.9 billion in the same period of 2020. Interest in financial service-free loans was $449 million, a slight decrease of 0.2%, primarily due to the combined effect of A, increase of average daily outstanding loan principal, and B, lower interest rates on loans facilitated to comply with the rules and regulations issued by relevant PRC regulation authorities. Interest expense was $195 million, compared to $187 million, partly due to the increase in the principles of borrowing from the trust companies. Collaboration cost for sales partners increased to $107 million for the second quarter of 2021, compared to $104 million in the second quarter of 2020, partly due to the high outstanding loan balance was originated under the new corporation model. Coercions for the credit losses was 15 million, a decrease of 74% from 57 million in RMB in the same period of 2020. The decrease was mainly attributable to the combined results, A, the increase in outstanding loan principal under the collaboration model that was guaranteed by credit risk mitigation position, put up by the sales partner, and B, lower probabilities deferred under the current expected credit loss model, which takes into account a more positive outlook for the Chinese economy in the second quarter of 2021 as compared to that in the same time of 2020 under the impact of COVID-19 pandemic. And C, the company received recovery in the quarter after charged down loans that are 180 days past due to net realizable value. Total operating expenses were $87 million, a decrease of 34%, compared with $114 million in the same period of last year. Income tax expense was $8 million, a decrease of 46% from the R&D $16 million in the same period of 2020. This is primarily due to the decrease in the amount of capital income. And net income was $65 million in this quarter, an increase of 159% from $35 million in the same period of 2020. Now we are moving on to our financials to the first half of 2021. Total loan origination volume was $6.7 billion, compared to $3.1 billion in the same period of last year. Interest and financing service fees on loans was $871 million, a decrease of 7%, probably due to the combined effect of A, increase of average daily outstanding loan principal, and B, lower interest rate of loans facilitated in an effort to comply with the rules and regulations issued by relevant CRC regulation authorities. Interest expense was $351 million compared to $318 million in the same period of 2020, probably due to the decrease in principles of borrowings under guarantee and repurchase. Collaboration costs for sales partners increased to $205 million for the first half of 2001, compared to $198 million in the same year of 2020, hardly attributable to the increased loan balance under the collaboration model. The provision for credit losses was a recovery of $3 million, while there was the provision $277 million in the same period of 2020. This is primarily due to the result of one, the increase in outstanding loan principal under the collaboration model that was guaranteed by the credit risk mitigation position put up by the sales partner. And B, lower probability of default under the current expected credit loss model, which takes into account more positive outlook for the Chinese economy in this year. As compared with that in last year, the same period under the impact of COVID-19 pandemic. And C, company received recovery in the first half of 2021. After change down the loans that are 118 days past due to next to net realizable value. Total operating expenses were $182 million, a decrease of 16%, compared to $215 million in the same period of last year. Income tax expenses were $138 million, an increase from $1 million in the same period of 2020. partly due to the fact that we record an income before income tax expense for the first half of 2021 as compared to a loss before income tax expenses for the same period of 2020. Net income was $151 million compared to a loss of RMB $41 million in the same period of 2020. As of June 13, 2021, the company has cash and cash equivalent of $1.6 billion, compared with $2 billion as of December 31, 2020. The actual delinquency rate for loan origination by the company decreased to 18.9% as of June 13, 2021, from 32.6% as of December 31, 2013. The actual MPL rate for loan origination by the company decreased to 8.6 as of June 13, 2021, from 11.7 as of December 31, 2020. With that, we would now like to open up the court for Q&A. Operator, please begin.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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. And our first question will come from William of Green Ridge Global. Please go ahead.

Hi, congratulations on the big loan origination volume number. Are you seeing a continuation or do you expect to see a continuation in that number or growth? And, you know, also, do you have the availability of funds to support that level of demand?

Hi, Bill. Could you repeat your first question again? We kind of had a bad connection just now.

Yeah, I just said you had huge loan origination volume growth. Do you see that continuing? Is that demand going to continue? And do you have the access to the capital to support that demand?

Okay. Okay. I will take your questions. Like CEO just mentioned in his remarks, As China's economy grows by a high speed, we continually see the huge demand from the MSC owners for capital.

We have built a complete sales network before this, and our system can also quickly respond to the needs of small and medium-sized enterprises.

And we had a very established sales network, and our system is capable to support our loan facilitation.

So like the CEO just mentioned in his presentation,

remarks too. Our system is capable to support the annually loan facilitation of 30 to 50 billion RMB. We believe the huge demand from the MSC owners will continue and carry through. And our CEO has something to supplement.

This year so far we have seen huge demand for capital from MSC owners and we think this will carry through to the remaining of the year. And the main challenge to us right now is that we are highly dependent on the trust companies to support our capital, our fundings.

but they are facing tightened regulations so that our quota was kind of brought down by the trust companies.

And we have taken many measures to...

to reduce the effect of a tightened trust company fund, but we will see that to be of our assistant not until Q4, the fourth quarter, or the first quarter in 2022. So that's my answer to your question.

Okay. You mentioned signing up the commercial banks which seems like a great, you know, a great thing for you guys in the platform and getting that access to capital from that channel. How much availability do you have? I mean, are these trials or is it a good amount of capital you're going to have and what's the rate on that?

First of all, we are no longer negotiating with commercial banks. There are currently three commercial banks. So we have already signed collaboration agreements with three commercial banks. One is China's Guangda Bank. So one being the Everbright Bank. One is China's Huaxia Bank. One being the Huaxia Bank. And a small bank called Nanhai Bank. And there's a smaller one comparing to the last two mentioned, the Blue Ocean Bank.

But the cooperation of commercial banks for me is to expand our coverage

The main advantage that brought up by collaborating with commercial banks is that we can cover MSC owners with different credit ratings. So the agreement deal is signed. Right now, we are just trying to see if we are compatible in our collaborations and trying to see how the system is going. So, yeah, that's my answer to your question.

Okay, so there hasn't been any large-scale lending from the banks yet. It's just more in a test run?

Yes, you're correct.

Okay. And last question is, on previous calls, you've talked about Class A, Class B, and Class C loan products. You were going to roll out with different rate structures. Can you provide an update on those?

In the previous call, you mentioned that we would go to different levels of loan applicants. We would divide them into A, B, C, and three types. Can you introduce more about this situation?

First of all, we introduce different funds, including commercial banks, to expand the scope of our customer service. In the past, we mainly used trust funds to expand the scope, mainly focusing on B and C customers. In fact, B and C customers do not mean their risk. China has not yet established a

So that's our initial ambition. When we said we are trying to collaborate with commercial banks, is that we want to cover customers with different ratings, with different credit ratings. So when we were slowly collaborating with trust companies, the customer we could cover was mainly in our internal you know, in our internal classification, the type B and type C customers. But based on our past experiences, we don't really see that they have too high a risk. So by collaborating with the commercial banks, we are trying to cover the so-called type A customers. But however, we are not sure at this moment if they are really going to be... be of higher quality than the customers we are serving now. Because right now in China, the credit system, credit rating system isn't fully established. So we really have, we are not really fully sure of whether the type A customers are going to be better customers than BNC customers. 目前我们想建立起一个在客户端的利息率从10%到18% So what we're hoping right now is that we could offer loan products with annual interest rates from 10% to 18% so that we can cover more customers, more borrowers. That's my answer to your question.

Okay, perfect. Thank you guys very much.

Thank you. Thank you for your question.

Once again, if you would like to ask a question, please press star, then 1. The next question comes from Neil Gagnon of Gagnon Securities. Please go ahead.

Yes. Good afternoon. Can you give us your review on this quarter? How did it live up to your expectations? And what base does it set for your expectations for the second half? Thank you.

First of all, we are seeing sufficient huge demand for the whole year.

Based on our internal record, the application every month is well over RMB 2 billion.

However, we could only facilitate around RMB 1 billion every month. 也就是说还有50%的我们都无法满足。 So there is a 50% gap in between the demand and supply. And since last year, we have seen a consistent increase of property price in China. The increase was even over 30% in some major cities in China. 那么这两个因素呢,所以我们对下半年的需求呢,我们不是太担心。 So those two factors lead us to believe that there is going to be huge demand in the remaining of the year, in the second half of the year. 我们比较关注的是两条。 But there are two considerations. 第一呢,就是我们的资金要能供应得上。 First of all is to secure access to enough funding.

And the second thing is that starting from this June, we have seen a tightened regulations on the property price as well. 所以我们比较谨慎的对待一些涨幅比较高的城市的贷款需求。 So we tend to be more conservative when doing businesses in those cities where the property price is considered to be too high. 但是不管怎么说,我们觉得今年完成我们年初制定的余额在100亿以上的目标,我们是

But after all, we are still very confident to reach our set goal from the beginning of the year to reach RMB 10 billion in outstanding loan principle by the end of the year. Actually, we have already reached that goal at the end of the second quarter. So we are working on refining our business At this moment, that's our priority. Thank you. Thank you for your question.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Ms. Jen Jay for any closing remarks.

This will conclude the conference call today. If you have any further questions, please reach us at

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