X Financial

Hello, and welcome to the ex-financial third quarter 2021 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 touch-tone phone. 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 Tanya Nguyen. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on the company's IR website at ir.xiaoyingduo.com. On the call today from exponential are Mr. Ken Lee, president, and Mr. Frank Fuyazhan, chief financial officer. Mr. Lee will give a brief overview of the company's business operations and highlights. followed by Mr. Chen, who will go through the financials. They are all available to answer your questions during the Q&A session. I remind you that this call may contain forward-looking statements under the safe harbor provisions of the private security litigation reform act of 1995. Such statements are based on the company's current expectations and the 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 forelooking statement. Further information regarding this and other aggressive uncertainties and factors is included in the company's filing with the U.S. Secretariat and Insurance Commission. The company does not take any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Ken Lee. Mr. Lee, please go ahead.

Thank you. Hello, everyone. We are very pleased with our strategic execution in the third quarter. Both our known solicitation amount and net income were in line with our guidance. The total loan facilitation amount hit a new high for the second straight quarter. At the same time, the increase in our net income has demonstrated our ability to enhance profitability, boost operation efficiency, and reduce costs. During the third quarter, we further adjusted our pricing structure to comply with the 24% internal rate of return, IRR, regulatory cap. We believe this is the government's initiative to support the real economy and stimulate healthy growth for SMEs and private consumption. The proportion of our non-facilitation amounts subject to the 24% IRR cap improved to approximately 30% of our total non-facilitation amount in September, and we expect it to grow to between 40% and 50% by the end of this year. Beyond the regulatory compliance requirements, We believe that this initiative can help us attract more quality borrowers as the demand for personal financing solutions increases. During the quarter, our total non-facilitation amount reached RMB 50.1 billion, an increase of 87.9% year-over-year and 17.5% quarter-over-quarter. This was mainly driven by the strong growth in the loan facilitation amount of show-in car loan, which increased 120.3% year-over-year and 17.5% quarter-over-quarter. As of September 30, 2021, the total outstanding loan balance of show-in car loan reached RMB 24.4 billion, an increase of 19.9% compared with the previous quarter. In the fourth quarter, there will be a moderate decline in our loan volume due to our institutional funding partners' year-end outstanding loan balance requirements. We continued our effort to improve our risk management capabilities. As of September 30, 2021, the diminishing rate for all outstanding loans that are past due for 31 to 60 days was 0.1%. compared with 0.77% as of June 30, 2021, and 1.06% as of September 30, 2020. Despite the quote-over-quote fluctuation, our answer quality is still within its best start-up range in our operating history. According to a new regulation, loan facilitation platforms are restricted from submitting credit assessment-related personal data directly to financial institutions. And such data transfer must be conducted through a licensed credit agency. In response, we have been working closely with the Baihan Credit, the second largest licensed individual credit bureau in China, in addition to the credit bureau of the People's Bank of China, PBOC, to execute a plan to comply with the new regulation. We have noticed that 14 large companies on the regulator's top list for the are either working on a plan or waiting for approval. We are getting ready and will fully comply with the new regulation. We expect minimal changes to our daily operation activities and cost structure. During the quarter, we continue our efforts to diversify our service offerings. Our microcredit business officially commenced operation in the third quarter. We also made a solid progress in our services to micro and small business and self-employed individuals, which are important target groups for our future goals. We have certain favorable known policies for this group and are adjusting and testing our systems to speed up the qualification and validation process. We believe we are on track towards our goals, and all these efforts are bearing fruit and helping us to drive long-term sustainable goals in a fiercely competitive and strong regulatory industry. Now I will turn the call to Frank, who will go through our financials.

Thank you, Ken, and hello, everyone. We delivered another set of robust financial results for the third quarter, in line with our expectations. total net revenue increased 72.3% year-over-year to RMB 964.4 million. Our bottom line also saw strong growth with a non-GAAP adjusted net income of RMB 277 million compared with a non-GAAP adjusted net loss of RMB 111.7 million in the same period of last year. Moving ahead, we will identify and acquire more high-quality borrowers to adapt to our strategy in response to the 25 RR cap, improve asset quality by leveraging our involving data-driven and technology-empowered credit analysis capabilities. We will also deepen cooperation with our institutional funding partners to better serve borrowers' needs. Our proven track record demonstrates that we are capable of navigating through regulatory and microeconomic challenges. We believe we are well positioned to capture opportunities ahead, bring more valuable returns to our shareholders. Now, I would like to brief some financial performance for the third quarter. Please note that all numbers state are in RMB. Total net revenue in the third quarter of 2021 increased by 72.3% to RMB 964.4 million from RMB 559.8 million in the same period of 2020, primarily due to an increase in the total loan facilitation amount of showing car loan this quarter compared with the same period of 2020. Origination and servicing expenses in the third quarter of 2021 decreased by about 13.8% to RMB $483.8 million from RMB $561.2 million in the same period of 2020, primarily due to the decline in collection expenses. resulting from the decrease in delinquency rates and a decrease in interest expenses related to the decline in the average loan balances held by the company, partially offset by the increase in commission fees resulting from the increased total loan facilitation amount this quarter compared with the same period of 2020. Provision for the accounts receivable and the contract asset in the third quarter was RMB 15.2 million compared with RMB 24.3 million in the same period of 2020, primarily due to a decrease in the average F&B default rate compared with the same period of 2020. and partially offset by an increase in accounts receivable from facilitation services as a result of increase in total loan facilitation amount in the third quarter of 2021. Provision for the loans receivable in the third quarter of 2021 was IRB 10.2 million compared with IRB 58.1 million in the same period of 2020, primarily due to a decrease in the average estimate default rate compared with the same period of 2020. Income from operations in the third quarter of 2021 was RMB 410.6 million compared with the loss of the operation of RMB 101.4 million in the same period of 2020. Net income attributed to the ex-financial shareholders in the third quarter of 2021 was RMB 279.9 million compared with net loss attributed to ex-financial shareholders of RMB 113 million in the same period of 2020. Non-GAAP adjusted net income attributable to the ex-financial shareholders in the third quarter of 2021 was RMB 277 million compared with non-GAAP adjusted net loss attributed to ex-financial shareholders R&B 111.7 million in the same period of 2020. Cash and cash equivalents was R&B 971.8 million as of September 30, 2021, compared with R&B 1,183.8 million I'm sorry, $1,183.9 million as of June 30, 2021. Now for our business outlook. We expect total loan facilitation amount for the fourth quarter of 2021 to be between RMB $12 billion and RMB $13.2 billion, which makes total loan facilitation amount for the 2021 to be between $50.8 billion and RMB $52 billion. We expect non-GAAP adjusted net income attributable to ex-financial shareholders for the fourth quarter of 2021 to be no less than RMB $240 million, which makes non-GAAP adjusted net income attributable to ex-financial shareholders for 2021 to be no less than RMB $971 million. This forecast reflects our current and preliminary views, which are subject to changes. Now, this concludes our prepared remarks, and we would like to open the court to questions. Operator, 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 key. To withdraw your question, please press star, then 2. The first question is from Boyd Hines of Equinox Capital. Please go ahead.

Thank you. Good evening. I have three questions I'd like to start out with. Could you just discuss and give us a little bit more color about why the the your institutional funding partners are reducing their loan balance requirements at the year end and then talk about your cost of capital? in the quarter. And then lastly, please address capital allocation and how you're thinking about share buybacks and perhaps any management purchases of company stock. Thanks.

Okay. I think it's usually You know, for the volume for the first quarter is compared with the Q3, and usually it's about flat or a little bit down. That's the normal pattern for the past, you know, always for the past few years, except for the last year. Last year is one exception. Of course, they're still at growth. I think we are in general is, you know, just back to the normal pattern regarding to this, you know, Q3 and Q4 volume. For those, you know, founding partners working for us, they have some requirements. Most of it, they are all doing fine. You know, they are finished. I think they finished their KPI quarters or whatever. So they have, you know, you know, just, you know, just to have some balance requirement to have that. I, you know, for deep reason, I don't know that. So if you compare with our peers, they, even though they still, you know, in general probably get the same pattern, the pattern is which is the Q4 volume will be equal or less than Q3. That's what I see, okay? I think the cost of capital, I believe what you mean is the funding cost for our, you know, the fund we get from our funding partner. We are around about, you know, somewhere between 8% to 9%, which is a little bit higher than our peers, about, you know, 1.5% higher than that. And as we, you know, as we move on, you know, we are, you know, starting from like this, you know, basically start from three quarter of this year, we starting doing 24, you know, 24%, you know, that, you know, the loan. And over time, as we accumulated about at least six months down the road, we can, you know, Talk to our funding partner regarding our customer risk profile and so forth and so on. We believe we will have a lower funding cost sometime starting from the middle of next year. And we will have maybe around 1% going down from here from next year. you know, shareholder stock buyback or dividend policy, you know, we have some loss last year. So we are, this year, we earned some money, we accumulated some capital, and I know, you know, almost all our peers, they have, you know, have some buyback plan and share buyback plan or dividend policy in place. We definitely will consider do that maybe sometime next year. But I must be very frank with you, this kind of a buyback plan and dividend, at least for now, is not helping their valuation much. But for our stock, it's a totally quite different story. We are basically, it's a price that almost will be bankrupted in a few years' time, this kind of valuation. market maybe knows something we don't know. You know, it's quite frustrating for us, but we not necessarily, you know, believe, you know, so-called dividend policy or buyback plan will change that, you know, very quickly or in dramatic fashion. But as I say, we will still we will definitely consider to do that sometime next year.

Okay, thank you. Can you address or just discuss any kind of high-level outlook for fiscal year 22? You know, it sounds like you're expecting continued growth in your loan originations, but anything you could sort of say to talk about what you think about next fiscal year that would be helpful?

You know, 2021 is a great year for our industry. It's, you know, it's quite, you know, commercial, you know, for the last few years, you know, a lot of regulation coming down. We think, you know, next year from regulatory front, it will be a relatively still relatively calm. But we still have things to do, like, you know, using, like, a 24% requirement and so forth and so on. And also, you know, you need to have a connection with, you know, have a new relationship, you know, with your funding partner and so forth and so on. Next year, you know, very high level, we think next year will be okay, and will be okay. Still will have goals, but maybe not as fantastic as this year. You know, that's my feel. But I think all the players, you know, when they reach the Q4, they have more clarity and more class regarding the next year. Thank you.

Thank you.

Again, if you have a question, please press star, then 1. There are no more questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Tanya Wen for closing remarks.

Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we will be pleased to answer them through follow-up contacts. 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.