CNFinance Holdings Limited

Good day and welcome to the CN Finance Fourth Quarter and Fiscal Year 2021 Unaudited 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 a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Matthew Liu. Please go ahead.

Matthew Liu Thank you. Good morning and evening, and welcome to the CN Finance fourth quarter and fiscal year of 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 acting CFO, 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 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 real, expect, anticipate, future, intent, plans, beliefs, estimates, targets, 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 that 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, underlined. Now, please welcome our CEO, Mr. Gaibi. Thanks. Thank you everyone for joining us in this conference call. On today's call, we will introduce the company and operational results in the fourth quarter and the fiscal year of 2021. And then me and my colleagues will answer your questions.

In this quarter, the company's real estate volume has continued to grow rapidly, with a total of 3.1 billion yuan in real estate. The total amount of real estate in the whole year has reached 1.28 billion yuan, which is 15% and 45% higher than the same period last year. This is a confirmation of the market's recognition of the company's products and models. The company has achieved a sales revenue of 4.5 billion yuan and 17.8 billion yuan in sales in the fourth quarter of the year. Considering the fluctuation of the public relations environment and the double impact of the recession, the company has reached a pre-pandemic position in the fourth quarter of the year and has raised a lot of money. The whole year, the company has achieved a success rate of 65 million yuan, which is very good. Our loan facilitation business maintained fast growth in the fourth quarter. We facilitated loans of RMB 3.1 billion during the quarter and RMB 12.8 billion for the year.

representing a year-on-year growth of 15% and 45%, respectively. Such results were another proof of how the market has recognized our product and business model. The revenue for the fourth quarter and the fiscal year was $450 million and $1980 million, respectively. Heading by the fluctuation of the economy and local outbreak of COVID-19, we disposed of a bulk of the liquid loans in the fourth quarter, and were more conservative in evaluating potential losses. Yet, we were still able to record a net income of $65 million for the year and deliver operational results that exceeded our estimations at the beginning of the year. Now, I am going to review our work during 2021, introduce the challenges we may face in 2022, as well as our business plans.

In 2021, the company's business has been affected to a certain extent by the external environment. First of all, our main partner, Xintuo, has been under pressure due to the drop in the market price. There has been a lot of tension since then. Second, the government has made strict restrictions on the demand for real estate. In 2021, the impact of external environment on our business persists to varying degrees. First, we experienced funding pressures as our major funding partners

the trust companies were under tightened regulations. Second, the government imposed strict regulations on the demand side of housing markets, including introducing restrictive measures on housing mortgages and purchasing houses, and the implementation of government guidance plans. Such regulations have posted downward pressure on the housing markets. And third, our business operation was interrupted by local outbreak of COVID-19 during the year.

Under such environment, the company focused on business expansion and risk control. Our main work in 2021 was as follows. First, we worked on expanding funding sources to ensure funding supply. Other than the current funding model, we also worked with trust company partners to establish new funding models that are within the scope of regulation

but not constrained by the keep of non-standard trust products. Our partnership with National Trust was one of the examples. Since the third quarter, we have partnered with the National Trust and facilitated loans of over $700 million, and we expect the loan scale under such funding model to grow continuously.

The company has expanded its cooperation with banks since the third quarter of 2021, especially expanding its cooperation with the South China Sea Bank, and landing a joint project with Guangda Bank and Huaxia Bank. According to our budget, the loan in the bank model for 2022 will be an important part of the company's overall loan service.

Since the third quarter, we have different collaborations with commercial banks. We expanded the scale of our partnership with Blue Ocean Bank and also finalized terms with Everbright Bank and Huaxia Bank. Based on our estimation, loans under the bank lending model will cut a relatively large share in the overall outstanding loan by the end of 2022.

Our negotiations with insurance companies have also entered into the final stage. As of

The deal with Sinosafe Insurance has been signed, and we are close to finalizing the terms with PICC. We believe the partnership with insurance companies will be very helpful for a potential ABS product of our own.

Thank you very much. In the fourth quarter, the company hired a professional assessor to assess assets and carry out a full market price. In the end, the original model market loan amounted to nearly 1 billion yuan according to the public value. The average discount of this model loan amounted to three or five times, which is the main reason why the company lost money in the fourth quarter. Currently, the original model market loan is expected to be completed in the first two quarters of 2022.

Second, we disposed of a bulk of legacy loans under the traditional facilitation model. We started our model transformation in 2019 and stopped facilitating loans under the traditional model. Following the transformation, As the current loans under the traditional model being serviced in full gradually, part of the traditional model are now delinquent. This has been negatively affecting the company's financial performance, our negotiations with potential funding partners, as well as our valuation in the capital market. In the third quarter, citing the fluctuation in the housing market, The management evaluated the relative expense of holding and disposing of those legacy loans and made the decision to dispose them. In the fourth quarter, we hired a professional appraisal firm and compared quotations from a few AMCs and made a bulk sale of loans with the book value of $1 billion and an average discount of 65%. The sale of such legacy loans was the main drive of the losses in the fourth quarter. We plan to sell the remaining legacy loans of $300 million in the first half of 2022.

Third, in 2021, we strengthened the risk management of partners. In terms of the size and past records of partners, we made critical adjustments to the repurchase policy. At the same time, considering the actual business status of the partners, we increased the number of bad loans in the partner model.

Third, we were more prudent in assessing the risks related to sales partners. We consolidated the business scale and operating records of each sales partner and adjusted the repurchase policy to better suit them. We have also taken a more conservative approach in evaluating the potential credit losses under the collaboration model.

In 2022, the economic fluctuations and local outbreak of COVID-19 are likely to continue.

We will focus on promoting the collaboration model to its 2.0 version, as we believe this will lay a strong foundation for our future growth. Our work plans are as follows.

First, we will open up a close cooperation with the third-party risk investment institutions. Our goal is that the next new loan assets will be directly used by the third-party risk investment institutions as a rear-end investor. Currently, all cooperation efforts are in full swing. We will also accelerate the cooperation of land and insurance companies.

First of all, we will cooperate with venture investors. Our goal is to bring in third-party investors to subscribe to the subordinated units of new loan facilitated. Such plans were sent to our trust company partners and have already entered the stage of admission. We are also working closely with insurance companies to finalize the terms.

We are also working closely with insurance companies to finalize the terms. Second, we will diversify our loan products to cover more customers.

We will continue to facilitate the current Class B trust products and expand our partnership with commercial banks. Going forward, our product combination will consist of four differentiated products. from Plus B to Plus A Plus, to suit the needs of followers with different risk preferences and reduce our funding costs.

Third, we will optimize the digitalization and automation of the platform. We will optimize the automation and automation of the platform. We will optimize the automation and automation of the platform. We will optimize the automation and automation of the platform. Third, we will adopt digital and smart technologies in our platform.

We will refine the automatic evaluation and approval of loan applications by increasing the capacity of data storage and the efficiency of data analysis. We expect to better manage our process and make it more efficient. We also expect to better coordinate the loan applications we receive and the fundings we obtain. We will also continue to maintain and upgrade the sales partner service platform to make it more useful to users.

Fourth, the company will continue to maintain exchanges with relevant general departments.

We will keep communicating with regulators at all levels and make sure our operation and business models are in full compliance.

2021 is a key year for the transformation of the company's business. In recent years, the company has still felt the pain of transformation, but it has also achieved a lot of achievements. Through a more and more perfect partner system and more and more efficient management methods, the company has always been a small enterprise group all over the country. and provide high-efficiency financial services for the economy. We also believe that the company's career is meaningful. As I have said many times, the company represents an important part of the Chinese general financial system. In 2022, with the continuous improvement of the platform model and the continuous expansion of the company, The year of 2021 was very important in our history. We faced many challenges and scored many achievements.

In 2021, our service system was refined. Our management was more efficient. We stayed true to our mission of providing affordable, accessible, and efficient financial services to MSD owners. And we are now more confident in the meaning of our work. As I have introduced on many occasions, CNF and many other enterprises like us have formed an important part in China's inclusive financial system. In 2022, we will keep refining our model and growing our business. We will shoulder more responsibilities to provide MIT owners with financing services that are more convenient and with solid decont.

Now, I would like to hand the call over to Ms. J. Lee.

the acting CFO of the company. And she will walk you through the fourth quarter and fiscal year of 2021 financials. Thank you.

Thank you, Mr. Chai, and thanks again to everyone for joining us today. I will walk you through our fourth quarter of 2021 financials followed by that of fiscal year of 2021. We believe year-over-year comparisons 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. In the fourth quarter of 2021, total loan automation volume was $3 billion during the fourth quarter of 2021. representing an increase of 15% from $2.7 billion. Interest and financing service fees on loans increased by 7% to $448 million, as compared to RMB $417 million, primarily due to the increase in the balance of average daily outstanding loan principal. Total interest and fees expense increased by 29% to 250 million as compared to 159 million. Primary due to the increase in the principle of other borrowings as well as the funding costs from trust companies. Collaboration costs for sales partners representing sales incentives paid to sales partners increased to 120 million as compared to 104 million, flattened primarily due to the increase in average daily outstanding loan principal under collaboration model as compared to the same period of 2020. Salvation for credit losses recorded a reversal of 308 million as compared to a reversal of R&B 31 million, primarily due to the combined effect of First, higher laws given defaults, LGD, under the current effective credit laws, CECL model, which takes into account the company's historical data of actual laws in the past few years. And second, the fact that the company transferred loans under traditional presentation model to third parties in bulk during the fourth quarter of 2021, and the allowance of such loans was reversed. Net losses on sales of loans were $459 million, compared with a net gain of $44 million. Primary, a triple to the fact that the company transferred loans under traditional participation model to third parties in bulk during the fourth quarter of 2021. Such loans were all facilitated prior to 2019. and the majority of them were long past due and therefore sold at a large discount. Total operating expenses decreased by 8% to $150 million, compared with $150 million. Income tax expense was $15 million, as compared to an income tax expense of $24 million. So I may read you to the fact that the company recorded a loss before income tax for the fourth quarter of 2021. Such loss was due to the loss associated with the sales of loans under traditional presentation model in bulk during the fourth quarter of 2021. Net loss was 105 million as compared to a net income of 105 million. Now let's move on to the financials of 2021 as a whole. Total loan alternation volume was $13 billion, representing an increase of 46% from $9 billion. Interest and financing project fees or loans decreased by 3% to $1,770 million, compared to R&D $1,829 million. primarily due to the lower interest rates on loans facilitated in an effort to comply with rules and regulations issued by relevant PRC regulators, including the decision 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 fee expense increased by 5% to $776 million, as compared to $731 million, primarily due to the increase in the principles of other borrowings, as well as the funding costs from trust companies. Collaboration costs for trust partners increased to $4,026 million, as compared to RMB $415 million. primary due to the increase in average daily outstanding loan principal under the collaboration model as compared to the same period of 2020. Provision for credit losses record a reversal of $279 million as compared to RMB $217.8 million, mainly due to the combined effect of first the fact that company transfer loans under traditional facilitation models to third parties in bulk during the fourth quarter of 2021 and the allowance of such loans was reversed. Second, the higher loss-driven defaults under the current expected credit loss model, which takes into account the company's historical data of actual loss in the past few years, possibly of offset by the lower probability of deferred under the current expected credit loss model, which takes into account the outlook of the more positive economic growth of China in the fiscal year of 2021, as compared to that of the same period of 2020, under the impacts of the COVID-19 pandemic. Our exchange worth $15 million compared to $20 million When a loan defaults and the sales partner chooses to repurchase such loans in instruments, the company will charge a certain percentage of the loan as the found possession fee. The increase in other gains for fiscal year of 2021 was mainly due to the fact that there was a larger number of cases where delinquency loans were repurchased by sales partners in instruments. which led to an increase in fund processing fees received by the company. Total operating expenses decreased by 15% to $381 million, as compared to $449 million. Income tax expense decreased by 40% to 29 million as compared to 48 million, primarily due to increase in the amount of taxable income. Net income decreased by 43% to 65 million as compared to RMB 115 million. Total outstanding loan principal was 10 billion as of December 31, 2021, as compared to 10 billion. as of December 31, 2020. As of December 31, 2021, the company held cash and cash equivalents of $2.2 billion, compared with $2 billion as of December 31, 2020, including $1.5 billion in RMB from structured funds. which could only be used to grant new loans and activities. The actual delinquency rate for loans originated by the company increased to 24.1% as of December 31st from 22.6%. Under the collaboration model, the actual delinquency rate for the first land loan increased to 29.1% as of December 31, 2021, from 18%. And the actual delinquency rate for second land loans increased to 19.5% as of December 31, 2021, as compared to 15.6%. The actual NPL rate for loans by the company decreased to 9.4%, As of December 31, 2021, from 11.7%. Under the collaboration model, the actual MPL rate for the first land loan increased to 12.5%. As of December 31, 2021, from 6.7%. The actual NPL rate for second land loss increased to 6% as of December 31, 2021, from 4.6%. With that, we would like to open up to the Q&A session. Operator, please begin.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using the speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Once again, ladies and gentlemen, that's star then one if you have a question. And today's first question comes from William Gregorzewski with Greenridge Capital. Please go ahead.

Hi. With regards to the commercial bank lending, can you disclose the amount you lent from commercial banks in the fourth quarter? And in regards to your target for the year end of this year, is that incremental to the trust lending or replacing that amount of trust lending?

Okay. I would like to ask about your loan problem in the banking mode. Can you explain to us how much the loan amount is in the banking mode in the fourth quarter of 2021? And how big do you think this scale will become in 2022? Secondly, do you think this banking loan mode is an addition to your current credit loan mode? Or do you think it will replace the current credit loan mode?

Thank you. We started the banking model at the beginning of last year. The reason is based on two points of view. On the first point, we are working with major financial companies. The financial companies are facing a situation where the entire industry is getting smaller. Thank you.

We actually started to negotiating with the commercial banks since the beginning of 2021. And the main reasons are twofold. First of all, our main funding providers, which are the first companies, were under tightened regulations. throughout the year, and we think we'd like to take one step ahead and expand our funding sources.

And our second thought was to just cover more customers with different risk preferences. As you know, the funding costs with the class companies are

Our high as comparing to commercial banks, and this has limited our ability to reduce our interest rate chart in our loan products, which has also limited our customer riches. 2021年应该是银行模式呢,这是我们在和银行在谈和初步落地的一个分析中。 And in 2021, we were mainly negotiating with the commercial banks and entering into the stage of admission. That's the main work in 2021. The overall loan facilitation under the back-lending model wasn't as high. Since 2002, since 2002,

Yes, in the first two months of 2022, we have maintained the facilitation under the back-lending model of over 10 million in each month. To answer your second question, we don't think the bank lending model is going to replace the current cost lending model.

We think in 2022, the partnership with trust companies will still meet up the majority of our loan facilitation.

Our most updated estimation is that

to make the loans under the bank lending model to up to 10% to 15% of the total outstanding loan principal by the end of 2022. That's the answer to your question. Thank you.

Okay, thanks. My next question is about the investment in technology and the platform you talked about on the call. How much are you looking to spend and is that investment going to change at all depending on how much you do on a on a share repurchase uh

So first of all, we have to admit that the investment in technology is only a very small proportion of our expenses at this moment. I think one of the reasons is that the development of the technology has dragged down the overall cost of the information technologies, no matter it's hardware or software.

I think what's very precious and of course expensive at this moment are the technological talents.

I think our plan is to cooperate with them in the future. So I don't expect this to take up a whole lot of our cash, and I don't think the repurchase program is going to interfere with our investment in technology. Thank you.

Okay, great. Last question is about the property market. Has the uncertainty with that affected your ability to assess borrow risk or facilitate loans? I know loans are obviously up, but is it impacting what you guys are able to do this year based on how the market is right now?

My last question is about the uncertainty of the real estate market. I would like to ask if the current market fluctuations have affected your customers or your risk assessment, or your interest or any impact on your business. First of all, you should notice that in the fourth quarter of last year, we were relatively pessimistic about the future of the real estate market. To answer your question, so starting from the fourth quarter of 2022, we have been rather conservative when it comes to the estimation of housing market in China.

So as I said,

As I have introduced, we disposed of certain legacy loans in bulk during the first quarter of 2021, and also took a more conservative approach, too, in the valuation of potential credit losses.

This is our goal to control the government and the government's stable economy. We are positive and confident in the government's ability and anticipation to stabilize the economy and further grow the economy.

So based on my estimation, I think the price of properties and houses will stop the downward turn and remain rather stable in 2022.

So based on my estimation, I think the price of properties and houses So in terms of loan applications and risk assessments and the evaluation of borrowers,

Our standards didn't really change a whole lot in this year. And one of our intentions is to roll out cheaper products to the high-quality borrowers whose collectibles are also with high quality.

So our main strategy is based on customer and

So as I introduced, one of our goals is to give very customized loan products to each customer depending on the condition of their collateral as well as their credit record. Thank you.

Okay, great. Thank you. Congratulations. Have a good quarter.

And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to management for any final remarks.

Thank you again. Thank you for joining us in today's conference call. If you have any further questions, please feel free to reach us at any time at ir.catchchina.ca. Thank you. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.