CNFinance Holdings Limited

Good day and welcome to the CN Finance Holdings Limited second quarter and first half of 2023 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 touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Matthew Liu, IR Manager. Please go ahead.

Matthew Liu Thank you, Kate. Good morning and evening, and welcome to the CN Finance second quarter and first half of 2023 Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Qian Jun, 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 session. 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, intends, plans, believe, 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 this and other risks, uncertainties, or factors is included in the company's filings with the U.S. 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 Mr. Qian Jun.

Thank you for your precious time to listen to this phone call. At this phone call, we will introduce to you the financial situation of Fanghua Financial in the second quarter of 2023 and the upper half of the financial situation. Then, we will introduce

Thank you for taking the time to join this conference call. We will discuss Save and Finance second quarter and first half of 2023 operating and financial results, and followed by a Q&A session.

In the second quarter of 2023 and the first half of the year, the company's various important indicators achieved the same growth. In the second quarter of 2023, The company has made a total of 45 billion RMB, which is a 45% increase. The interest income is 4.3 billion RMB, which is a 5% increase. The net profit is about 44 million RMB, which is a 142% increase. In the first half of 2023, the total amount of the company's interest was 8 billion RMB, which is a 43% increase. The interest income is 8.5 billion RMB, During the second quarter and first half of 2023, the company achieved year-over-year growth,

in major performance indicators. In the second quarter of 2023, the total loan origination volume was 4.5 billion RMB, representing a year-on-year increase of 45%. Total interest income was 430 million RMB, representing a year-on-year increase of 5%. Net income came in at 44 million RMB, representing a year-on-year increase of 142%. In the first half of 2023, total loans originated was 8 billion RMB, representing a year-on-year increase of 43%. Total interest income was 885 million RMB, representing a year-on-year increase of 7%. Denied income was 93 million RMB, representing a year-on-year growth of 52%. In the first half of 2023, we focused on achieving high-quality development and accomplished the following tasks.

First, continue to promote the development of the banking model. Since the introduction of the banking model, banking products, with its high-quality customers and low financing costs, have gradually gained recognition from the market and partners. First,

we continued to promote commercial bank partnership. Since the launch of commercial bank partnership model, it has gradually gained recognition of the market and our partners, given its competitive price and high-quality borrower base. After deepening the cooperation with private banks in the second half of 2022, the commercial bank partnership started to scale and has become an important part of the company's business and source of income. In the first half of 2023, we originated loans of $3 billion under the commercial bank partnership, accounting for 40% of the overall loan origination volume, and the associated net revenue was 50 million RMB.

Second, we continued to reduce capital costs and realized a short-term breakthrough in investment scale. Combined with the current market situation, the company continues to negotiate with the funders to reduce the cost of funds, optimize the financing structure, and achieve positive progress. The company continues to promote the special asset fund project. Until the end of the second quarter of 2023, the special asset fund's annual financing has reached 700 million yuan. The special asset fund project provides sustainable and stable funds for the rebate of bad loans from partners.

Second, we continued to reduce funding costs and achieved a breakthrough in the scale of funds raised to support sales partners who are obliged to repurchase delinquent loans. Under the current market condition, the company continued to maintain dialogue with funding partners on lowering the cost and optimizing the financing structure and made positive progress. As of the end of the second quarter of 2023, the accumulated amount of funding raised to support sale partners' default repurchase was 700 million RMB, which has helped to ease their liquidity pressure and has provided strong support to further expand their business.

This year, by analyzing the history and expectations of borrowers, and introducing the wind control model of excellent commercial banks, we have optimized the credit assessment of borrowers. At the same time, through comprehensive promotion of the headboard rating system, we have enhanced the assessment methods for the value of collateral. As of June 30, 2023, the company's loan estimate is about 45%.

Sir, we continued to refine our credit decisioning mechanism. Since the beginning of the year, we have optimized our borrower assessment. We analyzed influential factors of historical defaulted borrowers and started trial run of a risk control model procured from a well-established commercial bank. At the same time, We have strengthened the evaluation of collector value by applying the property rating system. As of June 30th of 2023, the delinquency rate of loans originated by the company was approximately 15%, down from 18% as of the end of 2022.

But at the same time, we believe that with the country's proposed use of total and structural currency policy tools to support technological innovation, the development of the physical economy and small and medium-sized enterprises, China's general financial industry will continue to be in the strategic opportunity period. Under this great background, in order to welcome the challenge and seize the opportunity, we will continue to adhere to the theme of high-quality development, the relationship between unity, scale, quality, and harmony,

Currently, there are still uncertainties associated with China's economy, and the downward trend of the real estate market has not been reversed. However, we believe that with China proposing to give full play to the role of both aggregate and structural monetary policy tools and to vigorously support scientific and technological innovations, the real economy, as well as the development of SMEs, China's inclusive financial assistance will continue to be in a period of strategic opportunity. Against this backdrop, in order to overcome the challenges and seize the opportunities, we will continue to pursue high-quality development by coordinating growth of scale, asset quality, and ensuring compliance

Our plans include First, we will focus on growth. In order to reach a wider range of borrowers, we will continue to improve our product mix.

launch differentiated products with low interest rates, and leverage technology to empower sales.

Second, we will continue to bring business to the core area of the first line and new line cities. We will also surround good people, good things, and good partners, strengthen the management of partners and the level of DLW. We will continue to reduce the expectation rate of loans,

Second, we will refine credit decisioning mechanism and optimize asset quality. We will continue to shift our business to core areas in first-tier and new first-tier cities. In credit decisioning process, we will thoroughly evaluate the quality of borrower, collector, and the sales partners introduced such borrower. We will better manage sales partners and evaluate collateral to reduce the delinquency rate and continue to help sales partners release pressure.

Third, continue to increase investment in technology and strengthen the technology. Currently, we are developing a set of large data models. We hope to combine the wind control model of an excellent commercial bank and our own more than 20 years of industry data accumulation, so that the large data model can strengthen our Third, we will continue to invest in science and technology to empower our business.

We're developing a big data model to enhance our capability to evaluate borrowers. We're working on making the risk control model procured more suitable to our business using historical loan data we have accumulated in the past two decades. Our developers have completed the preliminary research and are working on developing the system. At the same time, We're also looking for opportunities to collaborate with or invest in other fintech companies whose advantages could be synergistic with our business.

Fourth,

We will strengthen compliance inspections and audits to further minimize compliance risk by means of routine inspections, case audits, and compliance training.

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

who will walk you through our second quarter and first half financial results.

Total interest and fee expenses decreased by 3% to $182 million, compared to $187 million, primarily due to lower finding costs from trust companies. Net interest and fee income was $250 million, representing an increase of 12% from $223 million. net revenue under the commercial bank partnership model, representing face charge to commercial banks, including introducing borrowers, initial credit assessment, facilitating loans from the banks to the borrower, and providing technical assistance to the borrower and the bank. Net of face pay to third-party insurance companies and commissions paid to self-channels. was $29 million, as compared to $0.7 million. The company has been collaborating with commercial banks since 2021, and such collaborations grow and scale in the second half of 2022. The outstanding loan principal under the commercial bank partnership was $4.5 billion as of June 30, 2023, as compared to $0.3 billion as of June 30, 2022. Collaboration cost for sales partners was $83 million as compared to $77 million, primarily due to the increase of loans recommended by sales partners under the commercial bank partnership. Net increase in fees income after collaboration cost was $196 million, representing an increase of 33% from $147 million. Provision for credit losses. Representing provision for credit losses under the trust lending model and the expected credit losses of guarantee under the commercial bank partnership model in relation to certain financial guarantee arrangements, the company entered into with a third-party guarantor who provides guarantee surveys to commercial bank partners decreased by 26% to $51 million from $68 million, primarily due to the decrease in outstanding loan principles of delinquent loans resulting from our constantly improving credit risk control mechanism. Real-life gains on scales of investment net, representing real-life gains from the sales of investment securities was $12 million, as compared to $8 million. The increase was primarily due to effective fund management. Other gains net decreased by 97% to $0.8 million from $30 million, primarily due to the decrease of credit risk mitigation positions profited by the sales partners as a result of our refined management of sales partners. Total operating expenses increased by 8% to $99 million, compared with $91 million. Employee compensation and benefits were $61 million, as compared to $49 million, primarily attributed to an increase in the performance-based bonuses as a result of an increase in loan organization volume during the second quarter of 2023. Other expenses increased by 26% to $36 million from $29 million, primarily due to the increase in fee paid to local channels for introducing sales partners to the company. Net income increased by 142% to $44 million from $18 million for the first half of 2023. Total interest and fees income increased by 7% to $885 million from $827 million. Interest and financing service base on loans increased by 5% to $807 million from $766 million. FarmAway attributes to the increase of average daily outstanding loan principles in the first half of 2023 as compared to the same period of 2022. Interest income charge to sales partners increased by 18% to $66 million from $56 million, primarily due to the fact that the company allowed more sales partners to repurchase the default loans in installments to help sales partners ease their pressure on cash flow in the first half of 2023. Total interest and fees expenses decreased by 6% to $366 million from $388 million, primarily due to lower finding costs from trust companies in the first half of 2023. Net interest and fees income was $580 million representing an increase of 80% from $439 million. Net revenue under the commercial bank partnership model was $50 million as compared to $0.9 million. Collaboration costs for sales partners increased by 6% to $166 million from $156 million in the same period of 2022. formally due to the increase of loans recommended by self-partners under the commercial bank partnership. Provision for credit losses increased by 136% to $130 million from $55 million. The increase was the combined effect of the increase in expected credit losses of guarantee under the commercial bank partnership model as the organization volume grow and scale rapidly in the first half of 2023 and a reversal of allowance in the first quarter of 2022 due to the fact that the company disposed the remaining loans under the traditional facilitation model to third parties and the allowance of such loans was reserved. Net losses on sales of loans was $4 million as compared to $42 million in the same period of 2022. The net losses in the first half of 2022 was primarily attributed to the fact that the company dispelled the remaining loans under the traditional facilitation model, which were all facilitated prior to 2019 to third parties in box during the first quarter of 2022. Other gains neted. decreased by 65% to $17 million from $48 million in the same period of 2022, primarily due to the decrease of credit risk mitigation position forfeited by the self-partners as a result of our refined management on self-partners. Total operating expenses increased by 5% to $100 million and 79 million compared with 171 million in the same period of 2022. Employee compensation and benefits increased by 4% to 95 from 92 million in the same period in 2022. Other expenses increased by 14% to 60 million from 53 million primarily due to the increase in fees paid to local channels for introducing sales partners to the company. Net income increased by 52% to $93 million, from $61 million in the same period of 2022. As of June 30, 2023, the company had cash and cash equivalents and restricted cash of $1.9 billion. compared with $1.8 billion as of December 31, 2022, including $1.3 billion and $1.2 billion from structured funds as of June 30, 2023 and December 31, 2022, respectively, which could only be used to grant new loans and activities. The delinquency ratio excluding loans held for sales for loans organized by the company decreased from 18.3% as of December 31, 2022 to 15.2% as of June 30, 2023. The MCL ratio excluding loans held for sale for loans organized by the company increased from 1.1% as of December 31, 2022 to 1.4% as of June 30, 2023. Now we would like to start the Q&A section. I'll read it, please.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. The first question is from William Gregorzewski of Green Ridge Global. Please go ahead.

Hi. I was hoping you could kind of provide an update on the demand you're seeing from the SME clients in terms of the number of SMEs trying to take out loans, the size, the type, whether it's the trust or the commercial. And how does that compare to last year?

And what is the difference between the trust model and the bank model? And what is the difference between these numbers compared to last year?

From the report of the entire social financing data in July, the overall loan demand of the current small and medium-sized enterprises has dropped. I have a set of data here. In July, the total social financing increased by 5,282 billion yuan. Compared to the same period last year, it decreased by 2,703 billion yuan. Among them, the RMB loan issued by the entire world economy increased by 364 billion yuan, but the same period also increased by 3892 billion yuan. In the second quarter of 2023 and the first half of the year, So based on the released

data and figures of July, we're seeing the overall loan demand of MSC owners to decrease. So I have a set of data for you here. So the new loans in July, China's new loans in July was 528 billion RMB, which has decreased 270 billion RMB as compared to the same period of last year. And among them, new loans issued to the real economy was $36 billion, which has decreased by $389 billion as compared to the same period of last year. As of thin finance, so in the second quarter and the first half of 2023, our number of transactions were 62, 69, and 11,812, respectively, which represents a year-on-year growth of 18% and 16%. And the loan origination volume was $4.5 billion and $8 billion in the second quarter and first half of 2023, respectively, which represents a year-on-year growth of 45% and 43%, Respectively. Okay, so as for the split from trust model and bank model, so in the second quarter of 2023, we originated 4,101 loan transactions under the trust lending model. And that number under the commercial bank partnership was 2,167. As for the first half of 2023, the number of transactions under trust lending model was 7,734. And that number under commercial bank partnership was 4,074. In the case of the market demand decline, we have the same growth as last year. So I think the reason why we achieved growth when the entire market is going on a downward trend, the reason was twofold. So first of all, In the same period of 2022, our business was under the negative influence of the pandemic control and prevention. So the business number is rather low.

Secondly, the scale of the whole process is not large enough. The overall market is relatively low. While we continue to strengthen the construction of sales and product power,

And I think the second reason of our growth is that we're still relatively small and our market share is relatively low. So with our continued efforts to build our sales to push out more products, we were able to achieve a growth when the entire market is on a downward trend in the first half of 2023.

As for the average ticket size,

So in the same period of 2022, our average ticket size was somewhere near 600,000. And it has increased in 2023 to around 700,000.

The main reason for the increase in the amount of single-seller loans is that from the fourth quarter of last year to the first half of this year, in order to ensure the safety and quantity of the entire loan asset, So I think the reason behind the increase of our ticket size was mainly due to that we have since the fourth quarter of 2022 to maintain the overall asset quality, we have made a decision to shift our business

to the core area of Tier 1 and new Tier 1 cities.

So we still believe, despite the overall downward trend and uncertainties,

associated with the China's real estate market. The assets in the core area of Tier 1 New Toronto City will still maintain its value and even gradually go up. Thank you.

Great. Thank you for all that. Are you guys, even with uncertainty of the economy, do you still think you'll see, you know, origination growth over the remainder of the year? 在当前经济不确定性的影响下,您觉得你们的放款量还是会继续增长的吗?

So first of all, we're still sticking to the target we made at the beginning of the year of reaching the long origination of 20 billion RMB. Secondly we will still insist on our high

In general, our development goals and requirements for investing $2 billion this year are relatively low in terms of the current overall market size. So as I've mentioned, our market share is still relatively low, even though given the 20 billion origination target.

Thank you.

Okay, thanks. And then last question is regarding the sales partners. The interest on the loans to the sales partners was down this quarter. Is that a sign of just less loans going into default or sales partners having more liquidity? And what's kind of the, you know, how active are the sales partners right now?

The second question is, in your report, the interest fees collected from the partners have actually decreased. Does this mean that the partners have just given up on the debt, and let the loans go, or is it that their overall liquidity situation has improved? How can we interpret this data? The change in this data should be evidence and foundation.

So we see this change as a positive indicator. So we believe that means there are less defaults

and which indicates that the overall asset quality is improving, which has caused less sales partners that have to repurchase the defaulted loan, and that has caused such number to decrease.

And also, in terms of the future development process, the lower the income, the better for the development of our entire business.

I think in the future, if this number keeps going down, it only means that our business is getting better. It means our sales partners are doing better, are performing well. Anything else?

That concludes the question and answer session. I would like to turn the conference back over to Matthew Liu for closing remarks.

Thank you. And thank you again for joining us today. If you have any other questions, please feel free to contact us at ir.cashchina.cn. Thank you.

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