CNFinance Holdings Limited

Good morning, and welcome to the CN Finance Third Quarter 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 will now extend the conference order to Matthew Liu. Please go ahead.

Good morning, evening, and welcome to the CN Finance Third Quarter 2021 Financial Results Conference Call. In today's call, our CEO, Mr. Guy, will walk us through the operating results, followed by the financial results from our Vice President of Capital Market Department, Ms. Li. 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 manual Section 21E of the Securities Exchange Act of 1934 as amended and as defined in U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as real, expect, anticipate, future, intent, plan, believe, estimate, 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 filing 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, thank you for taking the time to listen to this phone call. At this phone call, we are going to introduce the operation of the company in the third quarter of 2021. Then I will answer your questions.

Thank you, operator, and thank you everyone for joining us in this conference call. On today's call, we will introduce the company's financial and operational results of the third quarter of 2021. Followed by Q&A section. In this quarter, the loan scale under the collaboration model continues to grow at a high speed. The loan facilitated during the quarter was RMB $3.1 billion, with the revenue and net income tending at RMB $460 million and $90 million respectively. As of September 30th, 2021, the outstanding loan principle under the collaboration model remained over RMB 10 billion, which well exceeded our goal. We were able to finish with such results due to the following reasons.

First of all, the market demand for real estate is still huge. In this quarter, with China's stable economy, the small and medium-sized enterprises all over the country First, the market demand for home equity loans remained strong.

In the third quarter, China's economic growth maintained stable. The growth was driven by the fact that the MSEs which scattered across the nation were able to deliver fruitful operations. We have built a national network consisting of 60 branches in 40 cities and over 2,000 sales partners across China. With this network, we're able to establish a wide market coverage and serve MSE owners' financing needs in a timely manner. We were able to fulfill our responsibility as the last mile courier to build a network of an inclusive financial system in China by servicing another 5,000 MSD owners in the third quarter.

Second, as the leader in the industry,

we have established strong relationship with our trust company partners. Our loan products and operation capabilities are highly recognized by our trust partners. As a result, they strive to supply us with sufficient funding, even with stricter regulatory guidelines. Other than that, we also managed to deepen our cooperation with commercial banks. It is worth pointing out that not only did we increase our collaboration scale with the Blue Ocean Bank, we also finalized our term to start a new collaboration with Everbright Bank and Huaxia Bank. 最后,随着合伙人模式越来越被市场认可,公司在宣显合伙人方面也掌握越来越多的主动权。

Since 2021, the company has deliberately developed high-quality partners. These partners are usually famous local loan entrepreneurs. They have rich business experience and strong strength. In addition to their own advantages, the company insists on providing training services to their team, deepening its understanding of the products and control standards of credit companies. The result is that not only do the goods and services become more efficient, but the customer quality is also improved. Last but not least, since the collaboration model earned its recognition in the market, we are now in the driver's seat to select sales partners. We have started to introduce the concept of senior sales partners since the beginning of the year

Senior sales partners are usually experienced local loan facilitators with excellent operation history. CNX provides them with training programs on a regular basis to help them understand our products and risk control mechanisms. By doing that, we're also able to acquire customers more efficiently and improve the overall quality of the customers. At the same time, we minimize our risk exposure and senior sales partners are more capable to fulfill their post-loan obligations. The improvement of post-loan management was reflected by a decrease in our provisions for credit losses under the collaboration model.

To the hard-won results aside,

we also noticed some challenges that may interfere with our future growth, including... First, the pressure of capital supply.

Although we have been actively cooperating with different funds, it is undeniable that we still have a high dependence on Syntho. Over the past year, the supervision has been suppressing the financing product scale of Syntho. Although the company's funding needs have been met, the funding costs have been rising. At the same time, the company has made a lot of social responsibility considerations and has not greatly improved the interest of loan products. Last quarter, when we talked about this issue, I introduced it to everyone. We judge that this funding supply pressure will continue throughout the second half of 2021, and the fact also proves our judgment.

First, funding pressure. We have been reaching out to cooperate with various types of funding suppliers, yet we are still highly dependent on trust fundings at this moment. Since the beginning of 2021, the regulation on trust companies' loan products was tightened. Although our funding demand was satisfied, the funding cost was in fact increased. We wanted to be responsible to the society and our customers. We decided not to further raise the interest rate of our loan products. As I reported in the last conference call, the government would not loosen the regulation for the rest of 2021. Our experience told us that our earlier judgment was correct.

But due to the arrangement of the transaction results and the law, the company is still reflected in the trust plan as a behind-the-scenes investor, causing the risk assets to still be reflected in the company's financial report. The business model of the company is still the interest rate model of heavy assets, unable to reflect the service model of green assets with strong operations. This is not conducive to the company's development of funding.

Second, under the collaboration model, sales partners bear the risks. However, due to the business structure agreed upon with the trust companies, we are the holder of subordinated units in the trust plan. As a result, we have to carry the assets on our financial statements. We seem like a company with heavy assets whose revenue is generated from interest brands. The balance sheet cannot represent our asset-led business model. This has caused the concern of potential funding partners and is hurting our valuation in the capital market.

China's real estate market is likely to fluctuate in the future. Under the current trading structure, the company is still a lagging holder, bearing certain risks. The fluctuation of real estate is likely to affect the company's asset quality and bad loans, causing certain damage to the company's asset quality. Secondly,

With the liquidity of certain Chinese real estate developers in crisis and considering the upcoming real estate tax, our management made an estimation that the Chinese property market is likely to fluctuate in the future. As the holder of the subordinated units, our asset quality is likely to be negatively affected when such fluctuation interrupts the efficiency of NPL disposals.

In response to those challenges, we will continue to promote the SLI transformation to better serve MSA owners.

and improve shareholder's return. The key tasks we will complete are as follow.

First, maintain the relationship with existing trust partners. In the face of the current large decline in the amount of trust financing, we need to explore a new way of cooperation. In this quarter, we have made some intentional attempts First,

we will continue to extend our cooperation with existing trust partners. It is even more critical than ever now to look for innovative ways of collaboration, given the regulation shows no sign to loosen up in the near future. We have taken a few proactive steps in this quarter. For example, Our partnership with National Trust was within the scope of regulation, but not constrained by the cape of non-standard trust products. We will remain explorative to similar types of cooperation in the future. Another goal of ours is to expand our collaboration with commercial banks. Our plan is to make the loan under the bank lending model cut a relatively large share in the overall outstanding loan by next year.

Second, communicate closely with risk investors who can recognize the company's risk assets and trust partners to promote the landing of risk investors to fully take over the risk asset model. After the model is landed, the company will clearly play the role of a loan service provider and a fixed investor, creating a large-scale, high-value,

Second, we will start dialogue with investors who understand our business and have the intention to participate, and our trust company partners. Our goal is to finalize a deal with the terms that allow such investors to take CNF's current role as the holder of the subordinated units of the trust plans. Upon the finalization of such negotiations, our role as the loan service provider and the mezzanine level investor will be clear, allowing us to focus on building an asset-light loan platform with the prospect and capability to expand with quick turnover.

Thirdly, Third, to promote the company's strategic transformation

to an asset-led platform. We plan to dispose of certain legacy loans under the traditional model in the fourth quarter. We believe the advantages are threefold. First, this will improve our financial performance and help the company to broaden funding sources and improve its valuation in the capital market. Second, the company's compliance risk will be reduced. And third, When the legacy loans are disposed, they will be well-positioned when price of the property market fluctuates. We have obtained quotations from several potential buyers. We will conduct evaluation and endeavor to sell such loans at fair market prices.

When we open a few workplaces, the company will maintain communication with relevant supervision departments through various channels.

In the process of our transformation, we will keep frequent and constructive dialogue with regulators at all levels and proactively consult our auditor regarding the accounting treatment to ensure we stay compliant in all aspects The full time during our upgrade.

As an ancient Chinese saying goes, all are good efforts, but we should ensure that the cost achieves fruition. We believe this also applies to our business operations. We have experienced

ups and downs, but never lost our dedication. We have made a revering effort to follow the government's call of developing an inclusive financial system. We hope to finish our transformation in the near future and carry forward our mission of make finance more human. Our pursuit to service MSC owners will remain unchanged. By leveraging our advantage gained from years of dedicated work, We will continue to provide MSG owners with affordable, accessible, and efficient financial services.

现在,我将把时间交给我们的资深市场部李静女士,并由她为您介绍公司2021年第三季度的财务状况。 With that, I would like to hand the call over to Ms. Jay Lee from the Capital Market Department, who will walk you through the third quarter financials.

Thanks, Mr. Jai, and thanks again to everyone joining us today. I will vote you for our third quarter financials. We believe 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 numbers I'm going to give will be in RMB. The total outstanding loan principal was $11.1 billion as of September 13, 2021, compared to $9.7 billion as of December 31, 2020, while the total loan origination volume remained stable at $3.1 billion in the third quarter of 2021, compared with the same period of 2020. Interest and financial service fees on loans decreased by 3.7% to $455 million for the first quarter of 2021 from $473 million, primarily due to the combined effect of A, the increase in the balance of average daily outstanding loan principles, and B, the lower interest rate on loans facilitated in the effort to comply with the rules and regulations. Interest and fees expenses increased by $18.8 to $219 million for the third quarter of 2021, compared to $184 million, primarily due to the increase in principles of other borrowings, as well as the funding costs from trust companies. Collaboration costs for sales partners decreased to $102 million for the third quarter of 2021, from $130 million, partly due to the fact that the company cut down the rate of incentive paid to sales partner in response to the overall lower interest rate on loans. Provision for credit loss is increased by 4.8% to $33 million for the third quarter of 2021 from $31 million. The increase was mainly attributed to the combined effect of A, the increase in outstanding loan principle of non-delinquency loans and loans delinquent within 19 states, which result in the increase in collectively accessible allowance, and B, the commonly revised recoveries in the third quarter after changing down the loan that are 118 states past due to the net realized value. Total operating expense decreased to 21% to $193 million for the first quarter of 2021 compared with $118 million in the last year. Income tax expenses decreased by 73% to $7 million for the third quarter of 2021 from $25 million primarily due to the decrease in the amount of taxable income. Net income decreased by 62% to $19 million for the first quarter of 2021 from $15 million. As of September 13, 2021 and December 31, 2020, the company has cash, cash equivalents, and restricted cash of $2 billion and $2 billion, including $1.4 billion and $1 billion from structured funds respectively, which could only be used to grant new loans and activities. The actual delinquency rate for loans originated by the company decreased to 20.4% as of September 13, 2021, from 32.6% as of December 31, 2020. The actual MPL rate for loan originated by the company decreased to 7.5% as of September 13, 2021, from the 11.7 as of December 31, 2020. With that, we would like to open up the call for Q&A. Operator, please.

We will now begin the Q&A session. To ask a question, you may press star then one on your telephone key. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from William Gregoski with Green Ridge Global. You may go ahead.

Hi, a couple of questions. When you're talking about disposing of the legacy loans, are you talking about the loans prior to the current structure with the sales partners, or are you talking about getting rid of everything that you have a subordinated interest in to really clean up the balance sheet?

Thank you for the question. 首先我們現在處理的還只是合夥人模式之前的老的模式的這些存量的資產。 So when we say legacy loans, we are referring to those loans that was facilitated before the model transformation, which is under the traditional model pre-hour to the sales partners model. 这一批资产的总量,包括它的正常和不正常的,其实金额已经不大了,只有五亿九左右的这个水平。 So the carrying value of such loans, we are talking about the current loans and the loans that are delinquent or non-performing, is around 590 million RMB right now at this moment. 通过这种一次性的处置,我们希望公司能够尽快的升级为一个新资产的强运营的 不承担风险的这样一个运营公司。 So by disposing of such loans, we are hoping to accelerate our transformation into an satellite platform which focuses on operations and bears minimum risks.

So in many years of our development,

especially when we are transformed to the sales partners model, which is the collaboration model. There have been and there still are many third-party investors who understands our product and is interested in participating by investing to us. So we have been in touch with them, and we have reached a couple of consensus. We hope to address the deal in the coming quarter, which is the fourth quarter of 2021. So to sum up, just by doing another upgrade in our model, we are hoping to create, to build a platform that is S-Elect, which focuses on servicing and operations. And we are also hoping to improve our financial performance on on the financial statement. Thank you.

Okay. Thank you for that. And then next question is with regards to the availability of capital, has there been any change in what's available from trust companies to you guys since the last conference call? And then how much have you gotten from commercial banks so far to lend out?

The second question is, I would like to ask, since your last press conference, has there been any change in the amount of funds you have received? Also, I would like to ask, how much funds have you received from the commercial banks? Thank you.

First of all, in general, the government's supervision of the amount of funds

To answer your first question, the regulatory pressure is still there. We don't see any signs of loosening up yet.

They still have to find a way.

在有限的额度之内满足公司的资金需求。 It is worth noticing, though, our trust company partner strived, no matter how hard it was, to supply us with a very sufficient sum during the quarter. 第二季度末的时候,我是很担心我们第三季度的资金供应的, I was rather concerned by the end of the second quarter about our funding supplies in the coming third and fourth quarter. However, just as I mentioned, our trust company partners thought of every aspect and they strived to deal suppliers with sufficient funds during the third quarter.

We experienced the rise of the financing costs in the quarter, though, due to such

Conditions.

Conditions.

So all in all, we don't expect the regulatory pressure to lose, especially on the non-standard cross products. I think there's CAPE is still going to be very limited. However, from what we see in the third quarter, we are still the first priority of our trust company partners. They will first satisfy our funding needs. So I think that's also a proof of our leading position in the industry, as well as our strong brand recognition of the market.

Originally, the company could also adopt a way to increase the middle-range interest to transfer our cost-raising pressure. But the company felt that it could not adopt this relatively simple and rough way to transfer our cost. The company adopted some responsible methods, that is, we also improved a little, but did not completely transfer our cost-raising pressure to the market. 我们觉得短期来看可能会影响我们的利润,但是我相信长期一定是给公司有益的。 We could have just simply transferred the rise of our financing costs to the market, which will make things much easier. However, we felt like that's not the really responsible thing to do.

So we did with the interest rate of our loan product a little bit, but not by much. We feel like by doing that, our revenue and net income in the near term will probably be a little bit lower than we estimate. But in the long run, this is to our best. 目前我们看到科企的情况是什么呢?

And what brought us more confidence is that our trust company partners promised to satisfy our needs.

and put it in the priority or two in next year when there is enough money supplies.

As for the bank, this year is a year where the bridge agreement is in place. I believe that next year, our cooperation with the bank will increase to a certain extent.

As for your second question about the fundings from commercial banks, so this year we mainly was negotiating the term and finalizing them. So just as I introduced in my speech, I hope that the loans principle under the bank lending model will cut a relatively large share by next year.

So I would also mention one thing.

Except for commercial banks and the current trust companies, we also made several constructive negotiations with insurance companies. So maybe in the near future, not only can we cooperate with trust companies and banks, the insurance companies will also be on our book.

Thank you.

Thank you.

Okay, great, great. And last question, and I appreciate all the detail you're providing and the answers. You touched on the property prices with the uncertainty with the developers. Do you think those fluctuations in property prices are going to be nationwide or more geared toward kind of the smaller cities?

Well, first of all, we have a strong faith and confidence in the Chinese government. So we feel like there are still plenty of tools in the toolkit of the Chinese government to prevent systematical and regional risks. 短期來看,房價有可能會出現下跌。 So for the short term, there is a potential decline of the property price. But if we look at the long run, we believe the Chinese government is capable to keep the property price in a stable range.

So let me address this again. The whole purpose of dispose of the legacy loan

So the first reason is to avoid the short-term fluctuation of the property price. And the more important thing is that we don't want our business to be fluctuating if there is fluctuation in the property market and stuff. And again, we just want to finish our transformation and focus on servicing and operations.

Thank you. Thank you. All right, thank you very much.

Again, if you have a question, please press star then 1. There are no further questions. This concludes our question and answer session. I would like to turn the comments back over to Matthew Liu for any closing remarks.

Thank you again for joining us today. If you have any further questions, please feel free to contact us or log on to our website at ir.catchchina.cn. Thank you. Thank you. Thank you again for joining us.

That's from our CEO.

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