X Financial

And welcome to the ex-financial fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. If 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 and then one on your telephone keypad. 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 victoria you please go ahead okay 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.xiaoyingroup.com. On the call today from ex-financial are Mr. Ken Lee, President, and Mr. Frank Hu-Ya 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 cover provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the management's current expectations and the current market and operating conditions and relate to events that are involving known and unknown risks, uncertainties, and other factors. All of these were 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 these and other uncertainties 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. It is now my pleasure to introduce Mr. Ken Lee. Mr. Lee, please go ahead.

Hello, everyone. We are very pleased to enter the year with another solid quarter. The non-facilitation amount in the fourth quarter of 2022 exceeded our guidance, and our total net revenue grew rapidly, increasing on both an annual and quarterly basis. Despite the very challenging environment in the midst of the COVID-19 resurgence throughout the year, we achieved a 42% increase in the non-facilitation amount in 2022 and maintained our asset quality at historically high levels. This further demonstrates the resilience of our business model, especially during the challenging times, and confirms that we are on the right track for sustainable growth thanks to strong execution by our team and continuous optimization of our risk control system. In Q4, our total loan amount facilitated and originated reached approximately RMB 22 billion of 66% year-over-year and 9% quarter-over-quarter, bringing our total loan amount for the full year to approximately RMB 74 billion. Our premium borrower base remains stable, and we continue to improve asset quality by leveraging our data-driven and technology-powered risk control system. Our delinquency rate for all outstanding owns past due for 31 to 60 days decreased to 1.02% as of the end of December 2022, from 1.48% a year ago. We have continued to strengthen collaborations with our institutional funding partners and with our credit line provided by them since Q4. We see further opportunities to optimize our funding costs and improve operation efficiency. With the end of the strict COVID control policy and the reopening of China in December last year, the country's focus has shifted back to stimulating economic growth. We believe that domestic consumption will play an important role in driving China's economy growth this year and so far in Q1. We have seen a recovery in consumer sentiment. In addition, small and medium-sized enterprises are expected to receive more support from the government to derive their business recovery and further growth. All of these factors will benefit the overall personal finance market in China, where our business is rooted. On the regulatory side, according to the central bank, Ant Group and 13 other platforms companies have basically completed business with liquidification under the government's guidance and supervision. And the regulators will continue to promote the healthy development of the platform economy. While we believe that the overall regulatory environment will be broadly stable this year, we will closely monitor and adapt quickly to any policy changes. and ensure compliance in our operations. In conclusion, we are cautiously optimistic about the outlook for this year and expect continued rapid growth in our loan facilitation amount and expansion in both our top and bottom lines. Now, I will turn the call to Frank, who will go through our financials.

Thank you, Kent, and hello, everyone. We were pleased to resume year-over-year top line growth in Q4. Total net revenue was INB $956 million, up 16% year-over-year, and 7% quarter-over-quarter. We have also significantly improved our bottom line on both annual and quarterly basis. Net income for the quarter was INB $275 million, up 89% year-over-year, and 30% quarter-over-quarter, despite micro-haven in 2022. we remained confident in our perspective and continued our efforts to reward our shareholders. Through our Expanded Shareholder Repurchase Program, we purchased a total of approximately 267,000 ADS and 46 million Class A ordinary shares in 2022, which will be accrued to the earning per share in 2023, as certain shares will be canceled or hold as treasury shares during the year. In 2023, we will continue to execute our share repurchase program, which will further enhance shareholders' value. With a sizable regulatory environment and a gradual post-pandemic economic recovery, we expect revenue growth to accelerate and earnings to improve in line with top-line growth. Looking ahead, we remain committed to returning value to our shareholders while maintaining sustainable business growth with healthy fundamentals, a proven strategy, and strong execution capabilities. Now I would like to brief some financial performance for the first quarter. Please note that all numbers stated here are in RMB and rounded up. Total net revenue increased by 60% to RMB $966 million from RMB $823 million in the same period of 2021, primarily due to an increase in the total loan amount of facility and originating this quarter compared with the same period of 2021. Origination and servicing expenses increased by 53% to RMB $89 million from RMB $386 million in the same period of 2021, primarily due to an increase in commission fees resulting from an increase in total loan amount of facilities and originate this quarter compared with the same period of 2021. Provision for loan receivables was RMB $75 million compared with RMB $40 million in the same period of 2021. primarily due to an increase in loans receivable held by the company as a result of the increase in total loan amount the facility originated this quarter compared with the same period of 2021. Income from the operations was RMB 274 million compared with RMB 312 million in the same period of 2021. Net income was RMB 275 million compared with RMB 146 million in the same period of 2021. Non-GAAP adjusted net income was RMB 278 million compared with RMB 183 million in the same period of 2021. For further financial information, please refer to the earnings released on our website. Regarding our shared repurchase plan. In November 2022, we announced our board to increase our share repurchase program to US $30 million from US $20 million, effectively through September 2023. In Q3, we repurchased an aggregate of approximately 49,000 ABS and 18 million Class A ordinary shares. for a total consideration of approximately U.S. agency. Now for our business outlook. For Q1 this year, we expect the total loan amount facilitated and originated to be between RMB 23.8 billion to RMB 24.8 billion. Now, this concludes our compare remarks, and we would like to open the court 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then 2. And at this time, we will pause for a moment to assemble our roster. And our first question today will come from Boyd Hines of Equinox Capital. Please go ahead.

Hi. Good evening, and thank you for taking my questions. The first couple of questions I have is about the current state of regulation. Can you just tell us what is your view of how do the regulators look at the Capital Light business model? I'm specifically concerned about their view of your risk taking. It seems that that was a concern that they had. How much and, you know, how many of the loans that you have on your book are you considered to be at risk with? And just in general, you know, how do you feel about the state of regulation right now in the country?

Okay, I'll take that question. This is Kent. Thanks for your question. It's really difficult for me to tell what the regulators think in their heads, I guess. But in terms of our business model, I think one thing about our business model is that we've been in the market for several years already, and in terms of the competition, in terms of the quality, and our brand has been recognized by our institutional funding partners. No matter what the regulator is thinking about the whole industry, the cooperation between us and our partners has been fairly smooth. So that is a very good thing for our business growth. In terms of our portfolio risk, because if you look at our portfolio closely, that our average loan amount per client is really small. So one client's risk doesn't really factor into our overall portfolio risk. And I think that is one of the most important in our risk and portfolio risk. So the management has been fairly confident in terms of our risk management skills. So we are not particularly concerned about how the external shock will bring negative effect on our portfolio. And that being said, as a known business, that our number one focus has always been risk management. So we have been investing a lot in terms of human capital, in terms of other resources in order for us to improve our risk management.

This is Frank. I'll add on a few words. Regarding to your question, I think that it's not a direct answer for that. But we can infer some, you know, for what regulators have been doing to answer your question. First of all, I think from regulators' perspective, they were like so-called for consumer loan, they were like the bank, whoever provided money, you know, for the loan. directly responsible for their stuff. So that's the whole thing for the last year or so. So we in China are kind of classed as not a pure financial institution. We're kind of a financial institution. Take an example like Nfinance. You know, because Jack Ma had a big mouth attack in Proudhon, and, you know, they stopped, you know, Ant Financial to go IPO the day before, a few days ago, because of that speech. But, you know, nobody ever talked about Ant Financial, their portfolio, which is much, much bigger at a time, like over like a $2 trillion portfolio at a time, you know. They never talk about you have a, you know, portfolio risk issue. But what they talk about is you do the financial, you know, do the loan business under the sky of a technology company, which is not allowed. So you have to have license to do that business. Second of all, they set up a threshold that if you do join the loan, you have to put up the capital, your own money, at least 30%. So that's why for the last few years, the MN Financial, their business size has been dramatically shrink because even MN Financial cannot put that much big capital to finance or facilitate this size of a loan. So that's what the thinking is. You know, that's some area, aspect that we're going to emphasize. You have to have license to do loan business. Nothing to do with your portfolio, okay? Second of all, you have to do the joint loan. You should, even you have a capability, you know, manage your loan as big as a few trillion dollars, with very low manageable risk, but still whatever job you do is not that important. The important is the loan should be issued by the banks and the financial system with license and provide the money for it. That's the best answer for you. A similar thing goes for everybody else.

Thank you both. That's very helpful. So as far as you know, ex-financial is fully compliant as it stands right now in your interpretation of it. And I assume you're in reasonably close contact with those regulators at this point. Is that fair to say?

Yeah, it's fair.

Okay. And in terms of the loan ceiling of 24%, How is the company progressing towards meeting that goal? And how much of the current loans on your book are above 24%?

We rather not disclose that kind of information, but we have been making great progress in this area for the last year or so. but we are, you know, that's also the fact that we are not 100% within 24%, you know, percent yet. And I don't think, once again, the loan rate as a current structure is not defined by us. As long as the banks or whoever provide the money for the loan, that, you know, they have a right to issue that kind of loan, we are just to facilitate that. Strictly speaking, we are not legally determined that kind of a loan rate. As long as a financial institution with a license to issue those loans, they are regulated, it's okay with that, that's okay with us. I think that that's the best way I can answer your question.

Okay. Now, it appears that the country is returning to a more normalized period of economic activity. So can you just remind us, you've given guidance for loan facilitation in the first quarter, and that's sequentially above the fourth quarter. Generally speaking, is the first quarter, in terms of seasonal impacts, is that a period of lower loan facilitation volume for you in terms of Q2, Q3, Q4?

In terms of the volume that we normally will see, the first half of the year has the higher volume. If you look at our 2022, that we actually continue to grow from Q1 all the way to Q4. And I think this year, again, that we are talking about the expectations forecast, which I'm not 100% confident, but we do expect that this year is likely to follow last year's trend. So we should be able to see quarterly growth in our facilitated amount.

Okay, great. Your tax rate was slightly elevated in 2022. It appears that it began to normalize a little bit in the fourth quarter. Can you provide us with an outlook on what you think your tax rate is gonna be in 2023?

2023, the tax rate, effect tax rate will be lower. The reason is the Chinese tax you actually pay will eventually reflect on what you see in the US. But there's a time lag, about six months, because Chinese have a different collection cycle and so on. In terms of the number you see right now, which is applied to 25%, But as we more, because all our operation, all our entity, operational entity are based in China. So as those entity get more favorable treatment into the effect tax rate, US effect tax rate will also will follow the downward trend. I can't give you, because it's a little bit harder to project a forecast for that, but the overall trend is going down for this year, for 2023.

I think there was some kind of change in the valuation allowance, and that impacted the reported tax rate that you show on your income statement.

Oh, okay.

Fair to say that it's going to be about 20% to 25% this year instead of what it was last year.

I think, you know, once again, I think effect tax rate for 2023 will be somewhere between 15% to 20%. And the line you see, I think, you know, hold on a second. If you see the You see the income tax expenses for 2023. If you tune in our last 2021 Q4, there's a special item called tax item, which is a tax allowance. which is about 103. For some reason, the reason how we experienced last year, so we couldn't use that deferred tax benefits, so that would be add to the last year. So actually last year, 2021, the extra tax rate should be that number, minus 103 million, okay? That is.

Okay. So it appears that that specific issue will not be there, not be present in 2023. Is that correct? That change in valuation allowance?

Yes. If you see the, if you check the vertex line, On the balance sheet, you will find that the number dramatically comes down for it. That's corresponding to the balance and the income standard is corresponding to items.

Great. Okay. Last question, and then I'll drop back in queue for others to ask. You've done a very commendable job on your aggressive share repurchase, and I just wanted to say that I appreciate that. um i'm just curious you do you still have how much do you have left remaining on that share repurchase plan about nine million about nine million so far we use about for the 30 million we use about like a little bit over 21 million so we have a nine million left about a little bit less than that okay and it sounds like there was kind of an unusual situation you had a co-founder uh that wanted uh to receive cash for his shares um yes do you is that yes um a possib i mean do you still have others uh large domestic shareholders who are looking to sell um or do you think that you might be able to repurchase more of the the ads as part of your purchase plan uh

Yeah, the second largest shareholder, he sold his, you know, so ordinary shares. He never even converted to ADS. He sold his ordinary shares back to us in Q3 last year. And I think we don't want to, you know, expect a reason for that. But, you know, if you check, he is also the individual shareholder of the largest, you know, the private-owned banks in Shenzhen also. That may be the reason, but I'm not sure also. But to answer your question, based on the current volume we have right now on a daily basis, we don't think we can buy a lot of shares back. Even last year, from the public market, we haven't bought much back because of the very low volume, almost no volume on our company trading volume. So we will have one month or two months to set up the firm entity in Hong Kong to make that operational. That will take a little bit more than six months. We hope we can finish that change and that will make the entity to receive the dividend distribution from Chinese entity to that entity qualify maybe in end of April or May. We hope we on next earning call in May, sometime in middle of May, we will issue a dividend for the first time, if I remember correctly. So we will just still want to return the value to shareholders, but we probably have to more rely on dividend instead of a share buyback starting this year. Definitely we will keep enough money for the operation purpose first.

Yes. No, I appreciate all the efforts that you're doing. Look, I mean, the valuation here is truly incredible, just based upon what you have been able to do. But you're not the only one in this. There are two or three others, U.S.-listed Chinese fintechs that are about the same size. You're all trading at multiples that do not reflect, I think, what your business has been capable of doing. The challenge is how do you attract international investors? How do you attract people of size willing to invest in your company? Because you don't have an institutional base of shareholders right now. That's your challenge. Yes. So, I mean, how do you think? you can expand that investor base?

As the regulatory environment has stabilized this year, I probably will be starting doing a real show in the second half of this year. Definitely will do next year, but we will start to do a real show maybe end of the, starting second half of this year. That's something we will try to do. But I think in terms of valuation, as you point out, it's an industrial issue. It's not like it can be addressed by one company alone. So we will do what we can do and try our best. I hope for the best luck.

Well, good luck to you on the year ahead. Thank you. I appreciate all your efforts. Thank you. Thank you. Thank you very much.

And again, if you would like to ask a question, please press star, send one. Our next question will come from Mason Bourne of AWH Capital. Please go ahead.

Hi, guys. Nice to see the company executing well. I guess I just wanted to dovetail off the last guy. It sounds like you're planning to do a dividend, and some of your peers have done that. How do you think about that as far as the potential size of it? Would it be a quarterly dividend that would be variable depending on earnings, or what is your outlook for that?

It's a little premature for me to answer at this time because of We haven't go through the, you know, border approval, something like that. But most likely we will do like a one-time dividend once a year, you know, one-time, one-year stuff, something like that.

Okay. And then I guess on valuation, I've got your stock somewhere under two times earnings and about 0.3 times book. And I hear what you're saying about the volume that's That's an issue that we face just in the stock on the ADS. But could you do a tender where you could come to the market with a price and say, you know, show confidence, you think your stock's undervalued, and maybe you get some people that offer up a million or two million ADS, something like that, or maybe even more, just if you put a price out in the market and say, this is what we're willing to buy back at.

Yes, I think as I answered your last time regarding this same question, I'm a little bit not familiar with this mechanism in terms of how to achieve that. And also, as I just pointed out, I don't think even we did that, probably not going to jump our share price. To be a little bit frank, I think to jump the price into whatever timeframe is not the first priority for our guys. Our guys' priority is to run the business the best we could, and we will do whatever we should do, including trying to shareholder value. you know, we will fall into place in due time.

Yeah, I get that. I just, I guess a tender can kind of serve the purpose where you get people that are looking to arbitrage the stock. So it doesn't necessarily have to be a huge bid, but if you're looking, you know, substantially above the current price, but you know, just if it's a one or 2% spread, you can get people that kind of bring volume into the stock even without necessarily you know, running it up. I get that you try to buy back at the most accretive levels, but it just seems like maybe it's something potentially worth exploring, in my opinion.

Yes, yes. I definitely put it in the consideration. As I said before, let me move my money in terms of IMB into the U.S., turn it into the U.S. dollar first. then with the money in hand, we can talk about it. Why not? Maybe we'll try to do that one time or not. But you know my view on that. I don't think that one deal will solve the valuation issue. I think the valuation issue is not our company specifically. Actually, it's the industry. But that definitely maybe will improve. from PV over 0.2% to maybe 0.6% or 0.5%. If we can do that, if we can achieve that, why not? So we put that out into consideration. Once again, let me focus on converting the IMV into the U.S. dollar first, which will be down. You see the news. There's a big mutual firm based in the U.S., they have a little bit of trouble moving their own money, about $5 million, $6 million, to overseas. They're actually in their own account, and they make big news out of that because you move money out, even if it's your own money, it's not an easy thing. China has a capital control issue. So let me do that first. When I have money in the Hong Kong bank, we will consider, okay?

Okay. On the Hong Kong piece, last thing for me, is there anything about a separate listing there, or this is still just kind of more in trying to move currency?

Just move currency. As we cover our market cap, we are a little bit far from the Hong Kong listing requirement, so that's probably not going to be an issue anytime soon.

Okay, that's all from me.

Thank you. Thank you.

And at this time, we will conclude the question and answer session. I would like to turn the conference back over to Victoria Yu 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 the follow-up contacts. We look forward to speaking with you again in the near future. Thank you.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.