X Financial

and welcome to the ex-financial third quarter 2020 earnings 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 Chen Yuwen. Please go ahead.

Thank you, operators. Hello, everyone, and thank you for joining us today. The company's results are released earlier today and are available on the company's IR website at ir.xiaoyinggu.com. On the call today from X Financial are Mr. Simon Chen, President, and Mr. Brad Fuya Zheng, Ministry Financial Officer. Mr. Chen will give a brief overview of the company's business operations and highlights, followed by Mr. Zheng, who will go through the financials. They are all available to answer your questions during the Q&A section. I remind you that this call may contain follow-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1935. Such statements are based on 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 statement. Further information regarding this and other risks, uncertainties, and 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 statement as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Simon Chen. Mr. Chen, please go ahead.

Hello, everyone. Despite the impact from COVID-19 and the tightened regulatory environment in China, we believe encouraging operational and financial results in third quarter. Thank you to the solid recovery in loan solicitation amount of shelling card loan. Our total loan solicitation amount included by 30.4% quote over quarter to RMB 8 billion and 27 million. We continue to adhere to our prudent risk management approach. The delinquency rates for all outstanding loans that are plus due for 31 to 90 days and 91 to 100 days, as of September 30, 2020, decreased further to 2.13% and 4.62% respectively, compared to 3.53% and 9.44% respectively as of June 30th. 2020. As the pandemic continues to ease and the macroeconomic environment recovers gradually in China, our credit risk profile continues to improve. Based on the solid progress we have made on the operational front, we improved both our top and bottom lines. Our total net revenue increased by 40.3% both over quarter and the net loss contributable to exponential shareholders narrowed to RMB 113 million from RMB 343.7 million in the previous quarter. demonstrating our strong capability to navigate in an uncertain regulatory environment and a challenging economy. In August 2020, the Supreme People's Court of PRC lowered the ceiling of the private lending interest rate protected by law. We believe this new policy is currently only applicable to private lending, which mainly refers to loans paid to individuals or companies by private organizations or individuals instead of financial institutions. The regulation does put pressure on the whole lending sector, but it's not directly applicable to our business at this moment, as we are a financial institution regulated by local financial regulatory authority. Recently, the Chinese government also planned to impose tighter regulations on small loans offered online by microloan companies. The regulators have started thinking public opinion on entering measures for the administration of online small lending business. The new ruling will significantly affect fundamentals of online small lending industry with requirements on borrowing limit, spend leverage, prohibition of multiple multi-regional lending and other measures. It is expected that the new regulation will be finalized by the end of this year. Due to the low visibility caused by the regulatory uncertainties, it is difficult for companies in this sector to precisely evaluate its impact on the business at this moment. But they will need to adjust the strategy. and bring substantial changes to their operations over a transitional period of one to three years to comply with the new policy. Despite all the challenges ahead, we will continue to expand and improve our offerings to cater the growing demand for personal financing in China. We are on the track to apply for an online micro-credit license and will keep a close watch on the evolving market dynamics and regulatory environment. We have experienced reforms and navigated difficult periods before and emerged stronger as key players in this industry. We are confident that we are capable of making strategic adjustments in a timely way to fit into the new business environment. During the third quarter, we continued to expand our cooperation with financial institutions. In the third quarter, we successfully achieved 100% institutional funding for the new loan facilitated through our platform. 97.4% in the previous quarter. Both the total available credit lines and the number of financial institutions' partners have continued to expand. Our risk management capability and proven record have been fully recognized by our financial institutional partners. Our exits from the P2P business have progressed in an orderly manner. The outstanding loan balance of P2P business continued to decrease from RMB 1.6 billion as of June 30, 2020 to RMB 0.4 billion as of September 30, 2020, and further decreased to RMB 0.3 billion as of October 31, 2020. Protecting the interests of our investors It's always our top priority, and I believe it helps us minimize regulatory risk and establish a solid foundation of trust and integrity in the personal finance sector. During the third quarter, our number of active borrowers continued to grow to 692,997, representing an increase of 10.8% from 625,777 to 707 in the previous quarter, mainly due to an increase in the numbers of active borrowers of shell-in credit loans. This is further acknowledgement of high value and quality of loan products we offer to borrowers. As borrowers, the traction and growth momentum we gain as the market continues to gradually recover. Overall, we will continue to strengthen our cooperation under the agency's with financial institutions and keep diversifying our institutional funding sources. With China's steady economic reforms and implementation of favorable policies to support domestic consumption, we are confident in our execution capability to create long-term value for our investors and shareholders. Now I will turn the call to Frank, who will go through our financials.

We are pleased to have seen gradual recovery during the third quarter, thanks to the overall improving market conditions and our continuous efforts to enhance the top-line growth and reduce the cost across various parts of our business. We continue to strengthen our risk management capabilities and focus on expanding the quality of our borrow base. The improvement in our quality risk profile has brought a significant decrease of RMB 56.3 million in the bed debt provisions for account receivable and loans receivable in the third quarter when compared with the previous quarter. Together with other cost control measures, we successfully narrowed net loss for the quarter. So far into the fourth quarter, we are seeing more positive signs on the borrowed side. As of October 31st, 2020, the delinquency rates for all outstanding loans that are passed to for the 31 to 90 days and the 91 day to 180 days further dropped to 1.94% and 3.84% respectively. and outstanding performance showing a high effectiveness of our risk and control model and the improvements in the quality of our borrowers. In addition, our efforts to expand and deepen our cooperation with the financial institutional partners continue to bear fruit. The total number of financial institutions which we cooperate with continue to increase during the third quarter. And at the same time, we also managed to reduce the overall funding cost in this quarter. We will continue to engage with more financial institutions to further optimize our cost structure. And in the meantime, we continue to diversify our partnerships with third-party financial guarantee companies. In conclusion, we will continue to closely monitor regulations and market conditions, ensure we will adapt quickly in response to any potential impact on our business due to change in the microenvironment. In addition, we will continue to provide more active loan products further improve the credit quality of borrowers and explore additional cooperation opportunities with the financial institution to capture untapped goals in the personal finance industry. Now, I would like to brief some financial performance for the third quarter 2020. Total net revenue decreased by 34.5%. to IMB 559.8 million, about the U.S. 82.5 million, from IMB 854.3 million in the same period of 2019, primarily due to a decline in the total loan facilitation amount in this quarter when compared with the same period of 2019. Origination and servicing expense increased by 19.9% to RMB $561.2 million, about US$82.7 million, from RMB $468.2 million in the same period of 2019, primarily due to the following factors. An increase in collection expenses resulting from a more active policy taken to address the impact of COVID-19. And two, an increase in interest expenses related to the financing income. Provision for accounts receivable and the contracts and assets decreased by 71.2% to RMB 24.3 million. around US$3.6 million from RMB$84.7 million in the same period of 2019, primarily due to the combined effect of a decrease in account receivable and the contrary asset and a decrease in the estimated default rate. Position for the loan receivable was RMB$58.1 million, about 8.6 million U.S., compared with RMB 3.9 million in the same period of 2019, primarily due to increasing loan receivable from credit loans and the revolving loan. Net loss attributable to the ex-financial shareholders was RMB 113 million, RMB about 16.6 million U.S., compared with net income attributable ex-financial shareholders of RMB 169.6 million in the same period of 2019. Finally, business outlook. Given the ongoing regulatory changes, all marketplaces are taking more prudent risk management approach. And the company is in the process of reassessing its institutional cooperators. Based on the company preliminary assessments, the deposit paid to its institutional cooperators are subject to the impairment risk. Consequently, the company is unable to reasonably determine a near-term outlook. for its business. Now, this concludes our prepared remarks, and we would like to open the call to questions. Operator, please.

Thank you. 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 your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star then 1. Again, that is star then 1 to ask a question. Showing no further questions at this time, this concludes our question and answer session. I would like to turn the conference back over to Tanya Wen for any closing remarks.

Thank you, everyone, for joining us on a court date. If you haven't got the chance to raise your questions, we are pleased to answer them through follow-up contact. We look forward to speaking with you again in the near future. Thank you.

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