X Financial

Hello and welcome to the ex-financial third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 2. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. 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 IR website at irxiaoyinggroup.com. On the call today from Financial, are Mr. Ken Lee, President, and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr. Lee 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 session. I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Legitimacy Reform Act of 1995. Such statements are based on management's current expectations and current market operating conditions and relate to events that involve known and 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, and achievements to defer materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, and 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 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.

Hello, everyone. We are pleased with our operational and financial results in the third quarter. The known facilitation amount reached the high end of our previous guidance. Asset quality steadily improved, and both top-line and bottom-line saw sequential growth. Against the macro headwinds, such as economic slowdown and consumption softness amid the COVID-19 resurgence, Our performance further demonstrated our healthy fundamentals, effective strategic positioning, proven strategy, and strong execution capability. During the third quarter, our total loan amount facilitated and originated reached about RMB 20 billion, an increase of 31% year-over-year and 17% quarter-over-quarter. we continued to improve our asset quality with prudent risk management. On a sequential basis, the delinquency rate for all outstanding loan past due for 31 to 60 days decreased from 0.93% to 0.77% as of the end of September. In addition, we further expanded our premium borrower base. Our number of active borrowers increased to 1.4 million in the third quarter a new record in the company's history. This expanding premium borrower base has underpinned our quality growth during challenging times and laid a solid foundation for our future development. Moving ahead, we will continue to enhance our risk management and borrow acquisition efforts. We believe China's consumer and micro and small business financing markets still have great potential and we are confident of delivering sustainable growth in the long term. During recent months, we continued to execute our share repurchase program initiated earlier this year. This share repurchase program is aligned with our commitment to enhancing shareholder value and reflects the Board's confidence in the company's long-term prospects. Our Board further increased our share repurchase program to $30 million, $30 million U.S. dollars. We believe that our business strategy and execution will continue to further enhance shareholder value in the long term. Now, I will turn the call to Frank, who will go through our financials.

Thank you, Ken. And hello, everyone. We are pleased to deliver a steady financial performance in the third quarter. The total net revenue increased by 9% quarter over quarter to RMB $895 million, while net income increased by 14%. quarter over quarter to RMB $212 million. We continue to deepen our collaboration with institution-funding partners to serve diverse personal financing needs and discipline cost control measures to improve operational efficiency. Despite micro-uncertainty ahead, we believe we are well positioned in the market with our trust friends. strong technology, and underlying earning strengths. We will strike a balance to drive long-term growth and increase shareholder value through sound capital allocation strategy. Now I would like to introduce some financial performance for the third quarter. Please note that all numbers stated are in RMB and rounded up. Total net revenue decreased by about 7% to RMB $895 million from R&B $964 million in the same period of 2021, partially 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 originated this quarter compared with the same period of 2021. Origination and servicing expenses increased by 12% to RMB 540 million from RMB 484 million in the same period of 2021, primarily due to the following factors. One, an increase in commission fees resulting from the increase in the total loan amount facilitated and originated this quarter. Second, an increase in interest expenses as a result of increase in payable to the institution-funded partners. The partial offset by a decrease in insurance fee paid to the insurance company. Provision for the loans receivable was IRB 70 million compared with IRB 10 million in the same period of 2021, primarily due to an increase in loans receivable held by the company as a result of increase in the total loan amount of facilities and originate this quarter compared with the same period of 2021, partially offset by a decrease in the average estimate default rate compared with the same period of 2021. Income from operation was RMB 300 million compared with RMB 411 million in the same period of 2021. Net income was RMB 212 million compared with RMB $267 million in the same period of 2021. Non-GAAP adjust net income was RMB $231 million compared with RMB $277 million in the same period of 2021. For further financial information, please refer to the earnings release on our website. Regarding our share repurchase plan, on September 30, 2022, We announced that our board authorized an increase in our share repurchase program to $20 million from U.S. $15 million, effective through September 2023. Today, we had purchased an average of about 218,000 ADFs and approximately 38 million Class A ordinary shares for a total consideration of the U.S. $18 million. On November 16, 2022, we announced that our board had authorized to further increase the Shared Purchase Program to U.S. $30 million. The Shared Repurchase Program will remain in effect through September 2023. Now for our business outlook. We expect total loan amount facilitated and originated for the fourth quarter of 2022 to be between RMB 19.5 billion and RMB 21 billion. For the full year of 2022, we expect the total loan amount facilitated and originated to be between RMB 71.5 billion and RMB 73 million. This forecast reflects our current and preliminary views, which are subject to change. Now, this concludes our prepared remarks, and we would like to open the call 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Brad Hines with Equinox Capital. Please go ahead.

Hi, can you discuss your outlook for the take rate and just any kind of discussion about how the interest rates have been trending since Q3?

Regarding our take rate, because as our business is still in the process to meet the demand regarding the products all should be below 24%, it's not a hot target, but it's a soft target. We are somewhere the take rate for the different products between 2% to 3% all the way to like 8% to 9%. So for different products, for different takeout. We do not give overall takeout rate for us.

Right. So my question is really, do you think that interest rates that you can charge borrowers Has that sort of stabilized, or is it still continuing to go down? What kind of competitive pressures, regulatory pressures, are you continuing to see?

The pressure from each rate is mainly from the regulatory pressure. We expect the rate will continue to go down to be stabilized sometime in the middle of next year. That's the best answer I can give you right now.

Okay. And how are you able to continue to generate such strong loan demand? You spend relatively very little on sales and marketing. How are you finding customers that fit your risk model?

Actually, this year we spend more on sales and marketing compared with the same period of last year. And the I think that mainly, you know, the demand for our products, the demand of the potential market is very, very large. And we only, I mean, for the order player, put it together, we still have a very small percentage of those demand. And one factor, you know, maybe the benefit to us is Ma Yi Group. is regulated very, you know, from capital requirement perspective, it's being, you know, being regulated very strongly by the regulator for the last year or so. So their volume has shrunk a lot. So everybody else, every other players in the market all got some, you know, got some share from them. But overall market, I believe, still quite stabilized, never shrink much.

And are you continuing to target more individuals as opposed to SME?

Well, I think most of our customer is individuals, even though I'm not quite sure, you know, somewhere between maybe 10 to 20% among them are small business owner or small business owner. But we don't have an exact figure. We never have a poll on those figures, but we guess between 10% to 20% belong to their small business owner also.

One other question about your share buyback. What is the shares outstanding for your Class A shares? as of the end of the quarter? So not the weighted average, but what is the actual share count as of September 30?

Okay, I think the share, maybe I'm, you know, I have maybe like a November 13 number, but that number is maybe a little, but not quite, you know, big difference from, you know, what do you want to know. So we have a Class A share at about 193, 429,088 class A shares. And we have 97,600,000 class B shares. In aggregated, we brought back about 38,088,855 common class A shares, equivalent. Because some of them, among them, about 21,000 is ADS. One ADS is counted for about six ordinary shares. A Class A share and Class B share is the same thing, but it's up to loading power.

Right. And how many of those, so the 38 million, was that repurchased entirely in the quarter?

In the quarter, I think the quarter we did about 218,178 shares of ADS and 28,201,772 ordinary class A shares, and actually we already did in, you know, as another $9 million, almost $10 million in October.

Okay, so it's interesting how you're executing the buyback. It seems that you're not able to do it in the open market here in the U.S. because the trading volume is very low.

Yes, the volume indeed is very low, and we are under the rule like 10B5 and 10B18, so we only can by, you know, like, you know, only like below 25% of growth and, you know, on daily basis. Also, we could not get any, you know, get anybody higher than that. So, among 280,000 shares, only about 86 million is bought from open market during the open window. Another $132,000 share, ADS, is brought back from one of the employees who has ADS. Also during the open window. The ordinary shares also get in open window. The 9 million, we signed a contract with them in open window because they took them some time to set up an OC account to receive U.S. dollars. So until like October, we pay out the money.

Yes, I hope you will continue to repurchase stock at these levels. You're obviously trading well below book value. Your price earnings multiple are very, very low.

Yeah, we, you know, we expanded our purchase program, which is demonstrate our intention to continue to do the buyback. But, you know, I think, you know, based on current volume, we still expect very low volume will be brought back from open market unless the situation changes. But we still have a few, one or two individuals willing to sell they come across Asia back to us directly. So you will see the next quarter, we will see more. But not as big as the number we just already did. But we are small. Those numbers, I calculated, we already brought back total over 11% all the Class A and Class B share equivalent back from the market. And we continue to do that. We may have another few percentage points to do that. After that, I think we all situation will be depending on the market volume. And for the next year, I think we will use combination of the stock buyback and dividend payout to return the shareholder value.

That sounds great. Can you, are you able to... Most likely in the second half of the year.

Most likely, the dividend payout most likely will be happening in the second half of next year. Because, you know, it took about one year to set up a mechanism to get RMB converted into the U.S. dollar, you know, with like a with like a 5% of tax on those dividend payouts to the Hong Kong. Because China has a currency control mechanism where China until now don't have a free conversion for the RMPN US dollar or other currency. China doesn't have a capital control at a place. So if you want to do that kind of thing you need to have some mechanism to set up. We are doing that. We expect to be that next year to be finished, you know, in the first half of next year. And the money we use right now is all we use our current, you know, U.S. dollar, you know, we got through IPO.

Right. How are you feeling about next fiscal year? Do you still, you've obviously dealt with a lot of headwinds, regulatory, economic, in fiscal year 22. Some of those appear to be lifting going forward. So I would presume that, and you've still been able to grow your loan originations even in the face of that. How are you feeling about what the potential growth could be for fiscal year, for next year?

For the next year, I think we still have a great uncertainty regarding next year. I think that's why you never heard anybody, even as an interviewer, any player give you any concrete forecast for the next year. I think the biggest uncertainty is still regulatory stuff. But the general feeling is after finishing the 2020 20th Party Congress, you know, the leadership, you know, be set up. And overall, all the industries all expect, you know, there will be no more, you know, calling in, you know, the measure, additional, you know, measure to be issued. And we will, all the industry regarding to the regulatory will be focused on implementation for the current, you know, all the stuff they've been issued before. So we will, you know, fortunately for us, we are not in the first tier to be passed those rules, and we will definitely follow up, like Ma Yi and whatever, you know, hope they will give us some example. But once again, we are cautiously optimistic for the next year, but no guarantee.

Okay, last question and then I'll drop off. In terms of your stock and the listing here in the U.S., I think one of the big concerns that investors have is that you could be delisted for various reasons. What assurance can you give investors that you're going to be able to you know, find some way to help remove that risk of delisting? I mean, would you consider taking the company private if it came to that?

We don't have an intention to delisting, and we don't have a plan to do second listing in Hong Kong because we couldn't do second listing in Hong Kong because our market size is just not big enough. So that's not an option for us. But we are very pleased to know, you know, the examiner from PCAOB, they wrap up their early work in Hong Kong earlier, about two weeks. I think within the next two months, I think ACC will have some kind of a... with Chinese finance minister. I think that those will, to large extent, will resolve the issue regarding potential risk, Chinese list company in the U.S. to be delist because of U.S. law. To be honest with you, delisting is mainly a concern from U.S. side, not from Chinese side. If that issue to be resolved, which means all the auditing firms in China, their working paper will be subject to examination by the PCAOB in the future. I think most companies, maybe except a few state-owned companies, There are maybe exceptions, but all the private companies listed in the U.S. will be continued to be listed in the U.S. That's the best I can tell you.

Okay. Best of luck to you for next year. Thank you.

The next question comes from Matthew Larson with Fincadia. Please go ahead.

Okay, thanks for taking my call. The previous caller covered a lot of ground and so probably answered a number of my questions. But let me ask you all this. On the share buyback, you did little if any in the ADS because $212,000 times roughly $2 is... you know, $400,000 or $500,000. I think that's what you had said you had done last quarter. So the transactions have been done in the Class A or B shares, which reduces your outstanding and increases your earnings nicely. So that's a positive, but I guess we won't see a bid in the market here for the ADS because it's not very liquid. But Why do you think your company trades one times its earnings? It's the entire capitalization you earn, and you've also got a cash balance that is almost equal to the entire market cap. There's another company... I'll just mention it. It's a year and die, which trades at one fifth of its cash. They have no debt and it trades at less than one times earnings. And, you know, levels that make no sense, you know, at all, because, you know, trading below the cash on the balance sheet, particularly if you're growing the way you are. So my question is, why do you think that's the case? And to add to that, what do fintechs, lending platforms like you have, what sort of multiple do they trade at, say, in Shenzhen or Shanghai or even Hong Kong? So as a comparison, we could see how U.S. investors are unwilling to pay up versus if you were to somehow get relisted or to go private and sell to somebody else. There must be a frustration on your part that the company is priced as low as it is.

I'll take that question. I think it's really difficult to determine what is the right price for the stock. Someone asked us before, And my answer has always been, well, this is really not the question that I'm trying to answer. I think this is a question that you as an investor probably have a better answer than we as the management of the company. Even though it's difficult to determine the real price, but I think that we all agree that our valuation is certainly much, much lower than what it should be. So in that sense, we still hope that some people will take an interest in us and buying our stocks. That being said, I think right now the FinTech valuation has been extremely, extremely low. And you asked us what is a comparable company to us in terms of either A-sharing in mainland China or Hong Kong market. And I can tell you that there is no FinTech valuation stocks in Asia, so there's absolutely no comparison. There are some, the so-called fintech company, but I'm really not paying attention. As a management of the company, we don't really pay too much attention to our stocks. Our goal has always been trying to deliver stable growth in terms of both scale and profit for our company, and that has always been our goal. No matter what is the price of our stock, we are always trying to achieve that goal. In terms of what is the right evaluation model for our company, I think many people can see that we continue to deliver very stable growth, very stable profit, but the concern has always been, number one, will the supervision the supervisory committee will allow our company to survive or whatever that is. And I think that's always been the number one. And the second one, of course, is due to the so-called conflict between China and the U.S., there has always been some uncertainty with regard to how long that our company can be listed in the market. I think that both you and the previous caller have been asking the same question, right? Because of these two huge uncertainties, I don't think that you will see high valuation, not even fair valuation for the fintech company. My prediction can be that as long as these two uncertainties exist, that we won't see a very high valuation or even fair valuation for our company.

Let me add some more color for your question. I think that your observation is correct, which means not just our stock, but all the peers in our space, all the so-called fintech companies in China, all the buyers have been on strike for some time now. The reason, the biggest reason I think I could come up with, the first one is legal risk. Legal risk is, you see, something like some educational company in China being devastated Like one day, you want the day before you illegally could be operate. The second day, you're out of business. By those kind of risks, without any warning, definitely could be applied to anyone. Our FinTech industry, because we charge maybe... you know, the market that we focus on is the supply market. So it's not politically correct or favorable in China. I believe you understand that. The second one is I think, you know, say likely all the buyers, all the purchase in the U.S. is, you know, be spooked, to say the least, because I know that all the institutional, they have a legal responsibility to responsible managers' client money. And for investors, something could be out of the business or be legally out of business in one day. It's just something cannot be accepted. That kind of risk is not something you can calculate. I think that's the big legal risk is the biggest reason. The other reason is, you know, the phenomena is like that. It's not just we are traded below or below the cash. It's even, you know, nobody seems like losing money. And the only, you know, reasonable conclusion is all the management in the tech, fintech company in China will manage the company very irresponsible way. They not just, not gonna increase shareholder value, and they will be squandered all the money they already have. Otherwise, how can you price those stuff at just such ridiculous way? But I think at the time, I think the PCAOB have ability and can examine the auditing of the firm operating in China. We maybe will alleviate those kinds of concerns over the time. Also, I think is maybe a certain sense, I think, for the US investor. They probably will like to see the regulatory situation to be stabilized somewhat before doing any meaningful investment. For us, I think we are just take this advantage and do all we can to manage the company the best we know how and do the more back-to-back and that kind of stuff. I think that over the long run, maybe what we do right now will be correct. Thank you.

Thanks for that answer. I have one, I guess one more question. You've touched a couple of times about the threat of regulatory change that could eliminate your business model. So that was one of the risks. What would be the incentive of authorities in the PRC to eliminate a model that is presumably helping with consumption, getting money to people who need it to consume, and you're doing it effectively at a rate that isn't, frankly, much different than here in the United States if somebody has credit cards, which are very common. But why... What incentive for the authorities is there to do away with an industry that increases consumption and it's something that people rely on to manage their own cash flow needs, whether it's to buy PCs for school or whatever the case might be? So why would that be a risk?

Sorry, we can't comment on what the government thinks, but we work closely with them. So if there's any way that both the government and us can reach a good result, I think that will be great for us and for our industry.

All right. And then I guess finally, how come there are no fintech companies that trade in Shenzhen or Shanghai. There's four or five that trade here in the United States. There was more, but some of them weren't managed very well. You know, I'm thinking, well, you know the ones I'm referring to, Alexa FinTech or 360 Digital. but why, how come none are trading over there in the PRC?

Well, I guess that already answered your previous question, right?

Actually, okay, go ahead.

I'm sorry?

No, that's it. I think that your observation is very acute, and I think that's basically answered your previous question, right?

I mean, the only one that note, not that note, is Ant Financials had trouble coming, and it's a massive company, but there is expectations, I guess, that they will be listed at some point. But anyway, that's a different discussion. Very well. Thank you for your answers, and again, hope you continue to do what you're doing, which is returning money to shareholders. we're finally getting some sort of positive response as your stock is lifting along with many, you know, stocks listed in the form of ADS here. So thank you and I look forward to following your progress.

Thank you for your questions.

And we have a follow-up from Boyd Hines with Equinox Capital. Please go ahead.

Thanks for allowing the follow-up question. Just to follow on that discussion and conversation about how to increase interest in the stock here in the US, I don't know that you're followed by any analysts out there. So it's often very difficult for investors outside of China to even hear or learn about the company. And the other thing that you could do the management team could purchase shares here in ADS form and make some note of that publicly so that it's a reiteration of your confidence in the outlook of the company and in the company shares, which I think – You know, the delisting concern is and the risk is real because, as you've said, you are not large enough to relist in Hong Kong. So the concern that I have, as always, is that if you do lose your listing here in the U.S., I don't have any recourse as an investor in your company. So if you could somehow, you know, speak to those concerns, that would be great.

No, we could consider that.

Thank you. Yes, only when I'm going to cover us, like, you know, just right after IPO and, you know, because of the stock performance, I think most people, you know, know what's right to cover us. I think, you know, maybe in the second half of the next year after regulatory invited situation is more or less clear and I'll finish. we will initiate those efforts to recruit someone to cover us. Thanks for the suggestion.

Thank you. And we have a follow-up from Matthew Barson with Fincadia. Please go ahead.

Thanks for taking my call again. The threat of delisting... I had historically not dismissed but thought it was overrated for many companies because there have some that have just been delisted for other reasons historically here. Maybe they didn't get their auditing done in time, their 20 apps or something, and they went to the bulletin board or pink sheets. But they still traded, and many of them that I've owned went private. Not always at the premium I would have liked. But if your company is too small to be listed in Hong Kong, what would be the recourse? Taking it private would be the only thing because you would need to – Your majority shareholders, the founders of the company, would need some vehicle to manage. Or is the threat really that you're too small to list in Hong Kong? I mean, there must be many small companies in your other exchanges on the mainland that Or would you sell out to a larger entity that trades at 10 times earnings? I mean, you know, you're trading at one time, so you could sell out, if that was the only alternative, at many times your current value, and it would be accretive to any buyer. I mean, are these options you've considered? Because there's been many small companies that have gone private, generally by the founder at a premium because they went public 10 years ago at like $10, and now they're at $1. I mean, what a great transaction. You raise money at $10, and you buy yourself back a fraction of that, even though you've grown five or tenfold. So I guess if you could just address a little more about the risks of, delisting what recourse outside of going private is there?

Just one moment, please. We've lost the speaker location. I'll need to reconnect them. Just one moment, please. Thank you. Okay. Excuse me, this is the operator. I've reconnected the speaker location. Mr. Larson, you wanted to continue your question, or I think you'd finish your question?

Well, I don't know if they heard, did they hear the whole question? Yes, I did. Okay. No, no, no.

Thank you.

It was a long question.

I know, I know. You know... First of all, we believe the chances to be delisting is very small because we always manage our business and even manage our work very responsibly. We are not afraid of any auditing work or to be checked by anyone. So that chance, first of all, is very low. Our 100% effort, I think, is to continue what we do, and I think we will keep the listing in the U.S. And for the stock price, as far as I know, the listing required is about 15 million U.S. I fully believe We will not trade below that threshold because of the intrinsic value of our business, of our company. Once again, we do not believe the chance of delisting is not just not real. We are not doing that. Talk about what if contingency, if that, is just not our focus. Our focus is on running our business the best we know how. I don't believe that delisting is a very imminent issue for us for the next year or so. I just don't believe that, okay? That's the best way I can answer your question. Thank you.

Okay, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Okay, thank you. Thank you everyone for joining us on the call today. If you haven't got the 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.