X Financial

And welcome to the exponential first quarter 2022 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 1 on a 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 Wen. 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.tellinggroup.com. On the call today from X Financial are Mr. Ken Lee, President, and Mr. Frank Friagin, 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 section. I remind you that this call may contain formulating statements under the safe harbor provisions of the Private Security Litigation Reform Act of 1995. Such statements are based on the manager'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 to react to results, performance, or achievements to differ materially from those in the forward-looking statements. For the information regarding this and other risks, 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 full blocking statement as a result of new information, future events, or other effects as required under the law. It is now my pleasure to introduce Mr. Ken Lee. Mr. Lee, please go ahead.

Hello, everyone. We are pleased to start 2022 with a solid performance for the first quarter, despite of multiple challenges from the resurgence of COVID-19 and the economic slowdown in China. The total loan amount facilitated and provided in the first quarter increased on both a yearly and quarterly basis. We also saw our asset quality remain stable during the quarter. However, given the uncertainties of the macroeconomic environment, we are cautious about the business outlook for the coming quarters. We will continue to closely monitor the market dynamics and stay vigilant to any inefficiencies and issues related to the pandemic in China. During the first quarter, our total loan amount facilitated and provided reached RMB 15 billion, up 40% year-over-year and 17% quarter-over-quarter, in line with our previous guidance. The delinquency rate for all outstanding loans that are past due for 31 to 60 days as of March 31st, 2022 decreased to 1.31% from 1.48% as of December 31st, 2021. We are pleased to see that our tightened risk control measures have successfully stabilized our asset quality amid the complex environment and especially during the recent COVID-19 resurgence and lockdown. In the meantime, we have been actively working with various partners to jointly explore new opportunities in the personal financing market. In the fourth quarter of 2021, we became an indirect minority shareholder of the New Up Bank of Liaoning. Since the second quarter of 2022, we have started to provide loan facilitation services to New Up Bank. Now, we are in active discussions with the Newark Bank to jointly design and develop products and programs that cater to the financing needs of small and micro business in line with the government call for support of the development of small and medium enterprises in China. We look forward to deepening our cooperation with Newark Bank by leveraging our extensive experience in the personal financing market and our capabilities in cutting-edge and tech-driven risk control and assessments. We believe helping licensed financial institutions to grow their business will benefit both parties in the long run. On the regulatory side, the Chinese government recently highlighted the importance of promoting the healthy development of the platform economy in China. We believe a more visible market with clear and standardized regulations will benefit all the market participants, including us. We're fully compliant with and supported the government's initiatives and policies to promote the long-term development of the industry. We have laid a strong foundation and are very confident of our expertise to capture growth opportunities amid a healthy regulatory environment. Recently, we were included in the list for the first year under the Holding Foreign Companies Accountable Act, which allows the U.S. regulator to delist companies if they fail to comply with American audit standards for three consecutive years. According to the Foreign Ministry of China, the Chinese securities regulator has regularly been in communicating with US regulators in this regard. Whether these companies will be delisted or not from the US stock exchange depends on the progress and results of the China-US quality supervision cooperation. We hope and look forward to the two governments reaching an agreement in the near future. In the meantime, We have been proactively exploring possible solutions to protect the interest of our shareholders and maintain our listing status on the New York Stock Exchange. Now, I will turn the call to Frank, who will go to our financials.

Thank you, Ken, and hello, everyone. We are pleased to see our top line increase 8% quarter over quarter, sequentially in the first quarter. As per the guide, guiding principles of the government, we are on track to further reduce the total borrowing cost of the borrowers in order to jointly promote and stimulate economic growth. We have been stepping up our efforts to acquire more high-quality borrowers and securing a large user basis for long-term sustainable growth. This strategy has put some pressure on our bottom line due to our increased user acquisition cost. But we believe that a solid foundation of the followers is critical to long-term development of our business. We will continue to strengthen our user acquisition while implementation disciplined cost control measures to deliver a balanced top line and bottom line growth. Now I would like to brief some financial performance for the first quarter. Please note that all numbers state in RMB and rounded up. Total net revenue decreased by 2% to RMB $888 million from RMB $906 million in the same period of 2021, primarily due to a decrease in average total borrowing cost of the borrowers and also partially offset by an increase in the total loan amount facilitated and provided this quarter compared with the same period of 2021. Origination and servicing expense decreased by 19% to RMB $465 million from RMB $573 million in the same period of 2021, primarily due to a decrease in insurance fee paid to the insurance company. General administration expenses increased by 7% to RMB $45 million from RMB $43 million in the same period of 2021, primarily due to an increase in consulting service fee expenses in the first quarter of 2022. Provision for accounts receivable under contract assets was RMB $26 million compared with RMB 17 million in the same period of 2021, primarily due to an increase in the account receivable from facilitation services as a result of increase in the total loan facilitation amount in the first quarter of 2022 compared with the same period of 2021. Provision for loans receivable was RMB 34 million compared with RMB 27 million in the same period of 2021, primarily due to an increase in the loan receivable held by the company as a result of increase in total loan amount facilitated and provided in the first quarter of 2022 compared with the same period of 2021. Income from operations was RMB 340 million compared with RMB 215 million in the same period of 2021. Net income was RMB 140 million compared with RMB 189 million in the same period of 2021. Non-GAAP-adjusted net income was RMB 154 million compared with RMB $212 million in the same period of 2021. For the further financial information, please refer to the earnings release at the company's RR website. Now for our business outlook. We expect total loan amount facilitated and provided for the second quarter of 2022 to be between RMB $15 billion and R&D $16 billion, and the range of incremental in total loan amount facilitated and provided for 2022 to be from 15% to 25%. This forecast reflects our current and preliminary views, which are subject to change. Now, this concludes our preparing remarks, and I would like to open the call to the 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 touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that's star then 1 if you have a question, and we will pause momentarily to assemble our roster. Today's first question comes from Boyd Hines with Equinox Capital. Please go ahead.

Hi. Thank you for taking my questions. I have three at the moment. What was your average interest rate in the quarter that you charged customers? The second question is on the tax rate. Why was it so high this quarter and in Q4, and what is your outlook for tax rate for the full fiscal year? And the last question is, can you provide us with any update on your share repurchase program? Thanks. Okay.

Regarding to your first question, we do not provide exactly the number regarding our rate that we charge for the borrower. But I will tell you, in the general trend, you know, it's going down. And we also can provide, you know, regarding the, like, you know, the 24% borrowing rate for the loan is about, in the first quarter of this year, is about between 40% to 50% range. So we are on track, you know, to have a majority of our business will be based on 24% rate on going forward. I think that process will all the way to end of this year. Regarding the tax rates, for the last quarter or this quarter, especially this quarter, we have one subsidiary you know, in China, it has, you know, so-called deferred assets. And the thing is that business is, that the business of the asset subsidiary is, you know, it would not be, you know, generate enough revenue in the future to offset those tax asset. So, for example, at this quarter, we have around about 90 million RMB in the line of that tax line. So, overall, our tax rate is relatively stable. A little bit over 20%, but below somewhere between 20% and 25%. It's over that. And for the first quarter of this, the tax amount is so high, it's because that special $90 million-something special charge. That's the second question. Regarding the share buyback program, you know, The company's share buyback program is still subject to the inside trading rule, specifically 10b-5, 10b-8. So we will start doing buyback starting this Friday. So in other words, we haven't had any buyback yet so far. so far up to this point, but because there's no buyback window allowed to us to do so, we will start buying back our shares starting this Friday.

Okay. Let me just follow up on the tax rate question. I'm trying to understand what you're implying. Is it Are you saying that the tax rate is going to drop going forward so that starting in second quarter it should be closer to that 20% to 25% statutory rate?

No, I try to say for the last quarter of last year and the first quarter of this year, the number on the tax line is abnormal in the sense, you know, because we have one subsidiary as, you know, all the way back, you know, like 2020, we have a we have some loss, so we have a tax credit available on that Chinese subsidiary, but normally you will earn the, if you have a future, you have income, you generate a profit, you can offset those tax credits in order to, so that means that subsidiary business will have a lower tax rate or zero tax rate for a foreseeable future in order to absorb those tax credits. But because something happened for that subsidiary, we do not have enough revenue to cover those costs. That's why, prudently, we took a charge of about $90 million in the first quarter of this one. So for the quarter of this year, this quarter of this year, that tax amount is abnormal and will be back to normal between 20% to 25% starting next quarter.

Great, thank you. My last question is really to the management team. Have you considered taking this company private?

No. And we understand, you know, our valuation is very low, and like PB is well below the 1%. And we are still, you know, and we are are still, you know, making money. We are not losing money. We are not in the, you know, except like, you know, like a special year, like 2020, because of COVID situation mainly in China. On the normal year, we are making money, right? So it's kind of unreasonable why we cannot, you know, make a reasonable valuation for the shareholder. But I believe, we believe that this normal situation, this depressed valuation level, mainly due to uncertain regular environment right now in China. As we give you the script in this quarter, if you pay attention to Chinese government news, you will see we feel at this moment we will, the Chinese government maybe will refrain to have a so-called arm-twisting regulatory measure for this industry. So we will, maybe we will have a normal, so-called normal, we will not stop, we will normal regulatory environment and, you know, in the future. It doesn't mean we will not have a new measure coming up. We will still, but those measures we will believe is normal stuff. It's like consumer protection, whatever, you know. You know, it's like every company, it's like, you know, like any country you will expect to have the same kind of regulation a regulation come from those area, but will not have like a earthquake event, you know, for something like for the last few years, you know, that kind of thing. So we believe those depressed valuation measure, like a PB or PE, will back to normal. Well, you know, we believe, we feel it will back to like, back to one, you know, maybe not reach the one, maybe, but definitely it's much, higher than, you know, like 0.23% PV rate right now. So we still, on the regulatory front, we think the thing will turn around. And we are still very, I believe, the business we are involved in contributes to the consumer in China. We are a contributor society, and for the long term, we will have a maybe have a big role for us to play. So maybe, so on regulatory front, which is we believe is the most biggest effect to affect, negative effect, not just our company, the whole sector, all appears the same thing. They will be back to normal, but we don't know how and when, but in terms of the trend, we believe it will be back to normal.

Right, well, most of your competitors have, initiated stock repurchase plans, they have followed through. They also pay a dividend, and some of them actually I've seen some of their top senior executives have purchased stock instead of selling stock. So if you believe that your shares are undervalued and they are not going to be delisted, I would urge you to aggressively do all of that.

All our management team, nobody, as far as I know, do not sell any shares. Certainly, I myself haven't sold any shares yet. But our company's biggest shareholder is Justin. Justin owns a very substantial share personally. It's more than like 30%. So I believe and I think with his means, he did some small purchase also. And if you compare with his... holding, you know, at the end of last year, which is a disclosure in 20F, he did buy some, you know, he did buy some shares as, you know, not big one, but small one. Yes, he did buy. So I think... I think for the shared buyback program, we will do the shared buyback. Every opportunity, every day available for us, we will do the buyback, and as we communicated before, In the due time, we will, you know, we will not exclusively in terms of the dividend thing. But let's see this share vaccine work first. Then, you know, maybe we'll have something else. But there's no promise for that.

I agree that share dividends don't make as much sense as share repurchases. But you could aggressively repurchase 10% to 15% of the company right now for very little.

If they allow us to do that, we will do that. As you see, we put out 15 million to doing that. Definitely, in terms of the current market cap, we is about 15%. But, you know, 10BA, they allow you only buy 25% of flow every day. So, you know, the flow right now is very slow. That's, you know, you know what I mean? So, we will buy everything available for us to buy. But we still have to follow the We still have to follow the rule. Thank you. I appreciate you answering my questions.

Thank you. Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Tanya Nguyen for closing remarks.

Okay. Thank you, everyone, for joining us on the call today. We look forward to speaking with you again in the near future. Thank you.

Thank you. And ladies and gentlemen, 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.