X Financial

Hello and welcome to the ex-financial first quarter 2023 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 touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. And I'd 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's IR website at ir.sharing.group. On the call today from Ex-Financial Officer Ken Lee, President, and Mr. Sam Tsui-A-Chun, Chief Financial Officer. Mr. Lee will give a brief overview of the company's business operations and highlights, followed by Mr. James, 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 Private Securities Litigation Reform Act of 1995. 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 companies' actual results, performance, or achievements to differ materially from those in follow-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 statement as a result of new information, future events, or other ones, except as required in the law. It is now my pleasure to introduce Mr. Ken Lee. Mr. Lee, please go ahead.

Hello, everyone. We are very pleased to be off a good start in 2023. We delivered a solid operational and financial performance in the first quarter. The known facilitation amount was in line with our guidance range, and the net revenue grew steadily both year over year and quarter over quarter. We also saw decent improvement in our bottom line. We have seen signs of economic recovery in China, with increased consumer spending and better-than-expected GDP growth in Q1. However, as stated by the National Bureau of Statistics, inadequate domestic demand remains prominent and the Foundation for Economic Recovery is not started yet. We saw increased competition in the personal finance industry with challenges in borrower acquisition. Against this backdrop, our first quarter performance is very encouraging and impressive thanks to our strong business resilience and execution. In Q1, our total loan amount facilitated and originated reached RMB 24 billion, increased by 58% year-over-year and 11% quarter-over-quarter. Despite the intense competition, we continue to grow our premium borrower base. During the quarter, the number of active borrowers grew by 71% to more than 1.5 million. In addition, our asset quality remained stable sequentially and improved significantly year-over-year. Our de-intensity rate for all outstanding non-PAS2 for 31 to 60 days decreased to 1.05% as of the end of March 2023, from 1.31% a year ago. We do not expect our risk performance to fluctuate significantly for the remainder of the year. In addition, with sufficient credit lines in place, We continue to negotiate the funding costs with our institutional funding partners and expect to see a positive impact in the near future. During the recent May Golden Week holiday, Chinese tourist spending has reached pre-pandemic levels for the first time, according to government figures. Although the economic recovery is still in its early stages and there are concerns about the sustainability of the growth, We remain cautiously optimistic about the steady business growth this year as the government releases various measures to stimulate domestic demand and accelerate economic growth. Meanwhile, we are keeping our close eye on the regulatory side and have been consistently cooperating with the government on the industry-wide rectification work previously scheduled to be completed by June 2022. No further guidance has been released by the Chinese government, but we do not rule out the possibility that new interpretations or updated implementation details of the rectification work will be released, which could have an impact on the industry and our business. Now, I will turn the call to Frank, who will go through our financials.

Thank you, Ken, and hello, everyone. We were pleased to deliver solid financial performance in the first quarter. our total net revenue was RMB 1,005 million, increased by 13% year-over-year and 5% quarter-over-quarter. Our net income for basic ADS increased significantly to RMB 5.94 from RMB 2.52 in the same period of last year, reflecting our strong profitability and the impact of our ongoing share buyback program to enhance shareholder value. Going forward, We will continue to diversify our channels to reach more borrowers by maintaining our strategy of profitable growth with credit risk management at its core. We expect to deliver steady quarterly improvements in both our top and bottom lines throughout the year to create more value for our shareholders. We are taking steps to be able to pay dividends in the future. I would like to read some financial performance for Q1. Please note that all numbers stated are in RMB and Roundup. Total net revenue increased by 13% to RMB $1,005 million from RMB $888 million in the same period of 2022, primarily due to an increase in total loan amount facility and originated this quarter compared with the same period of 2022. Origination and the service expense increased by 36% to RMB 634 million from RMB 400 million, 64 million in the same period of 2022, primarily due to the following factors. One, an increase in commission fee resulting from the increase in total loan amount of facility and originate this quarter compared with the same period of 2022. Second, an increase in interest expenses as a result of increase in payable to institution funding partners and investors. And third, partially offset by a decrease in insurance fee paid to the insurance company. Provision for loan receivable was IMB 20 million compared with IMB 34 million in the same period of 2022, primarily due to a decrease in the average estimated default rate compared with the same period of 2022, and a partial offset by an increase in loans receivable held by the company as a result of the increase in total loan amount facilitated and originated this quarter compared with the same period of 2022. Income from operation was RMB 304 million compared with RMB 314 million in the same period of 2022. Net income was RMB 284 million compared with RMB 140 million in the same period of 2022. Non-GAAP adjusted net income was RMB 307 million compared with RMB 54 million in the same period of 2022. For further financial information, please refer to the early release on our RR website. Now for our business outlook. For Q2 this year, we expect the total loan amount facilitated and originated to be between R&D 25 million and R&D 26 billion. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Matthew Larson from Fincata, please go ahead.

Good evening, everybody. Thanks for taking my call. Great quarter. I mean, you guys just do it every quarter, year in, year out. And what is frustrating as a long-term shareholder for me is that your valuation really makes no sense relative to what a a fintech company would trade at anyplace else. I mean, if I were to annualize your earnings for the first quarter, you're trading at less than one times earnings. You're trading at cash value and a fraction of book value. How many ADS are outstanding, by the way? I see there's 294 million shares fully diluted. What's the conversion into ADS? Can you answer that technical question for me first, please?

It's one ADS equal about a sixth share of a class A share. So, you know, that's the conversion ratio. And we have about outstanding, about 22 million ADS outstanding. I think that's total 22 million.

22 million ADS outstanding, and the float is... Yeah, yeah, yeah.

Well, 46 million equivalent total, but, you know, tradable has been converted to ADS is only about 22 million.

So that's what's available on the float. But if there's 294 million shares divided by six, yeah, yeah, it's 40 some odd. So the float's only 22 million shares. A couple of questions. The valuation, this stock should be $10 at least. If you're going to grow your revenues top and bottom line every quarter for the rest of the year, you're looking at $4 a share in earnings potential. The stock, which is up a little bit this morning in heavy volume, who knows if it'll hold because it did that about a month ago. It traded a million shares and came right back down. But, you know, this has just been stuck in a narrow range. I know you're buying back some shares, which, by the way, was there a reason you didn't buy back any in the first quarter?

Because in the first quarter, there's no open window for that. And we only, so far, we only, you know, did a buyback through open window, and actually for the whole buyback, which was worth about $20 million so far, most of it is by through Class A share, which did not affect our flow much. Our ADS for the total last year, we only bought like, I don't know, maybe over 200,000 shares. That's about it. So all the All the buyback, you know, massive majority is buyback through class A shares, which we try to avoid, you know, have less impact on the flow, which our flow is not big as I stated before.

Sure. But, you know, for a U.S. investor, I can't buy the A shares, okay? It's only the ADS. And even though you've reduced your share count of the A shares... The valuation just doesn't make sense. Now, there are some other companies that are in your similar space, which I'll give you the symbols. You know where they are. I'm not saying they're exactly the same, but they were all underwritten by Morgan Stanley. FINV, for example, QFIN just reported, even YRD. Companies that initially were peer-to-peer lenders and have migrated to... you know, lenders using, uh, capital light models and things like that. Um, but, uh, the, the frustration is there's, there's a lot on every day. There's some small cap companies that are domiciled either in China or Hong Kong that go up five or 10 fold on no news. And, um, and it would be great if, if one of them, I own worked. Um, so, uh, let me ask you this, uh, You all could be putting out more information. I mean, you've been using AI, as far as I'm concerned, for years. There's some variation of artificial intelligence. You use an algorithm to make immediate credit assessments from all the people who have your app on the phone. And, you know, they tap in, from what I understand, how much they want to borrow, kind of like a credit card, and you make an assessment based on their credit history, their zip code, whatever it is. But it's not a human making that decision on these small loans. So why don't you put out some news saying that, you know, I mean, just look at the stocks in the United States that are involved in artificial intelligence, NVIDIA, for example, you know. as I'm sure you're familiar with that company, it's just such a high-growth thing. You all could be putting out more news because I assume you want your stock higher. Why not? I mean, it's a fraction of where it was when it came public, but you performed extraordinarily well. So you might want to rethink that. you know, your public relations, your news releases, because you should be, I mean, you didn't even mention on the news release, you know, what price to book you're trading at. I couldn't figure that out. That's why I was asking how many shares are outstanding. So is there, besides a share buyback, which frankly, even though your float isn't big here, if you guys bought a million shares just out of the market here, it would at least put a bid in the market for U.S. investors to benefit from it because the small float isn't helping. I guess I'm frustrated because your stock should be several times where it's at, but it kind of falls between the cracks because there's no analyst that follows the company, and there's few people who even know about it. What can you tell me about other efforts to get your stock price higher?

Let me try to ask you a question. First of all, I completely agree with you. Our stock is severely undervalued. And not just our stock, and our peer stocks, all undervalued to a large extent. See, our PB right now is $0.22 on the dollar. I have more cash than my market cap. You know, I ordered by KPMG. For sure, I did not do anything, you know, financing. I have a 22.4 million RMB cash deposit in the bank in order to support my business. So you just, you know, not including the cash on my balance sheet. So you just figure, you know, how much we undervalue. But our tier, whatever the name you mentioned, you see they all book, they all value below the book value, you know, like, you know, somebody a little bit better than me. So we will, you know, take your advice. We'll do some marketing roadshow. And you see, you know, right now we are, so there's a regulatory, you know, deadline on June 30th. So let's get that passed so we have a, So in some sense, first, our survivability is not in question. But the prospect, the future of our industry, the future is definitely in doubt. That's why I believe we have this kind of valuation. We will take the advice, we'll do some PR stuff, stuff you just mentioned, starting second half of this year. But the additional buyback, which we did last year, which we reduced our total share by 16%, which is a lot, but still did not help much in terms of the stock price. I don't know how to answer that, but I think whoever else did a buyback also did not work that well either. So I'm not alone in that category also. But we will definitely, one thing I will tell you is we will, starting this year, we will pay, definitely we will pay dividends our shares for our shareholder value. And the relative will be higher compared with other industry and so forth and so on. And we will consistently do that for the next few years. That's our board attention and so forth and so on. Let's see how that will work out.

All right, and there's usually not many people on this conference call, so I'm going to take a little more time. You talk about the regulatory response, which is due in June. You know, since your companies have come public, they've been under regulatory review or scrutiny by the government. I mean, again, there was a lot of peer-to-peer lending companies, and that was – you know, a business model that was pretty much outlawed and, um, you know, for various reasons, uh, there was some bad actors. Okay. We, we go through the same thing in our country, uh, you know, where financial, you know, uh, a loose financial structure can lead to, um, you know, disappointment among consumers. Um, but, uh, you discussed that the survivability of your industry might even be at risk. I mean, it seems to me you all provide an important service to consumers in the PRC. You're allowing them credit. You're doing so in a very business-like fashion by capital light type of structures where you're syndicating the loans through a bunch of banks. You're just providing the the credit check, the credit review, and the customers, and the banks may loan the money for the most part. And that's good for the economy because, from what I understand, there's an interest to grow the consumer-based economy versus export-based economy in the PRC. So why would your industry be even... you know, at risk of survivability if you're providing a service. I mean, credit makes the world go round. You know, it greases the wheels of commerce.

Yes, yes. I understand what you mean. I think I can answer that question. I think our industry has been going through very troubles for the last few years and all the, you know, most of bad actors have been playing, you know, like, you know, so-called P2P appear, you know, being claimed by company. I think that, I think all everyone, including government, will agree on this, the survival of this industry is much, much healthy and much, you know, you know, you know, comply everything, in every respect, comply with government rule and regulation on both on both, you know, most on the Chinese side, also on the U.S. side also. But that definitely is true. But the issue is government, you know, for the last few years, you know, government always, you know, tried to strongly promote a small business owner, a small business. That's for sure. They are supporting for the, you know, companies to provide a loan. But the only thing that's not very clear is that They seem to provide very low interest loans from mostly state-owned banks. But our business model mainly is based on risk factor, and we now make a ton of money. our interest spread, our business is compatible with big banks, probably a little bit higher, wider than them, but we also take more risk. So that's why I think that we try to earn a little bit more in terms of interest spread. I think it's fully justified. But that is not, probably that's the fundamental reason to not totally be endorsed by the government or regulatory. That question has still made it very clear or very clear for everyone. That is why, you know, because relatively speaking, the people we charge is still very high. If you see, you know, so-called loan provided to the small business individual owner, whatever form of government, they only charge about maybe 4%, 7% or something in that range. But once again, I think that is not based on risk factor. And if you're taking the risk factor, those loans, I think most of it will be bad, to be frank. I think I don't know how that economically workable. But we do different model. Our model is not, once again, not fully endorsed by the authorities. That's why. I see.

I mean, well, you have unsecured loans. All right. If you're having discussions with them, I can tell you what credit cards, which would be similar to, you know, how you loan money on an unsecured basis. Credit cards in the United States, Bank of America card, Citibank, American Express, they're 23% or 4%, all right? And they've got to be paid back every month, or you've got to pay the 23% or 4%. If I were to get a collateralized loan, you know, a secured loan from a bank, like a mortgage, it would be 6%. So... As you said, it's a different model. If I have a small business and I have cash flow, I can borrow against my receivables, right? But if I just want to borrow money on an unsecured basis when I go to a restaurant or want to buy a laptop and I use a credit card, it's 22% or 3% or 4%. So your rates are not out of line by any means because credit cards, you still have to have a credit history to even get one. And if you haven't in the past paid it back, you can't even get a credit card. So So you're right. Your business model is different than when banks are loaning small businesses who they can loan against secured revenues. So in any case, I wish you the best. I'd love to see your stock could be 10 times higher, for Pete's sake. If you make $4 a share, why wouldn't it be trading at $10? you know, $25, okay, by any measure, because that's a financial institution that's shown your track record of keeping loan losses down to like 1%, I think you're at. You know, that's very, very good credit assessment. All right, so whatever business model you have, whatever algorithm you have for assessing who to loan to and who not to, is extremely good. So, all right, well, thank you for the time. Put out more news, please. And if you're using AI or some sort of artificial intelligence computation to make your loans, make that known that you're a technology company, okay, as much as a finance company. You use technology and you use it very effectively.

Thank you. Thank you for your question.

I'll let somebody else, if they're on the phone, call in. Thank you.

Thank you. Again, if you have a question, please press star, then one. And our next question comes from Boyd Hines from Equinox Capital. Please go ahead.

Hi. Thank you for taking my questions. I also wanted to focus on Because I think that's the primary issue here that's held back the valuation of the stock. In the discussions that you had with the regulators, what have been the primary concerns that they have with your business model?

We don't have much dialogue with the regulator regarding the business model. And regulatory, you know, sometimes just the only issue they care right now for the last year or so is customer complaints. And so we are just the best, that's their KPI, the number one KPI. So we do our best to address those issues. In the other area, we comply voluntarily. We never have a discussion with the regulator regarding our business model. I don't think that's their concern. Obviously, it's not their concern.

Let me take this question. I think Frank has been very clear. It's not that we have a huge barrier between us and Europe. I think one of the key issues here is that the Chinese government has made it very clear that if you are doing the financial activities, then you need to be licensed. But in terms of licensing us, should we get a license or should we just be some other company who should not be doing any financial activities? I think the regulator is balancing this one question and they haven't made it very clear. I think this uncertainty has been kind of hanging over there. We don't have any answers for that question. I think this is a key issue for the fintech companies in China because our business is actually financial activities.

Yes, we are engaged in financial activities as a facilitator, as a syndicator, whatever you call it. But the question is, you know, according to philosophy of government, all financial activities should be licensed. And whether they will issue a license for a company like us, you know, maybe not. So that probably is the key question.

Yeah, I think everybody's having – I think they're having a hard time understanding whether you should be regulated as a bank or not.

Yes, yes, yes.

I mean, you seem to be doing a fantastic job at managing the credit risk, and I think that's also – at least the regulators in the U.S. would be concerned about would be issues like do you have – a lot of undisclosed risk that's not on your balance sheet. I think that's what some of the other competitors in the FinTech space are beginning to address, which is they're actually making more of the loans themselves. They're going back to a capital heavy model, which is where they're actually holding the loans on their balance sheet. They're not just facilitating the loans where you've got corporate or institutional partners that you have that are actually making the loans, and they're just taking the information that you're giving them about the borrower. And you're basically, that's what your model is based on, facilitating those loans. People just don't know how to treat you. They're worried that you're helping to provide information without potentially any you know, risk that you should be showing on your balance sheet. I think that's probably the key issue here is, you know, and how would you address that? Would you, I mean, you have, you do a lot of work with third-party guarantors. Have you analyzed their financials? Because, you know, and I know you do back-to-back guarantees. So you are, in effect, taking on the risk. but is it shown on your balance sheet? I think that's probably the key issue here.

Well, in terms of business model, we don't show that in our balance sheet. I think that's true. But on the other hand, if you just take a very crude leverage count, right, so we're managing around $40 billion, sorry, $40 billion RMB non-business, and our net capital is around... $6 billion. So if we take that very rough ratio, it's about 1 to 6 or 1 to 7, which in terms of the risk that we can handle, I think that the room over there is quite high. So what I will be looking at when we compare across the industry, and I normally have to take a look at that ratio. And another thing is that, just as Frank mentioned, we have about 2.7 billion RMB that is deposited in different institutions. And that is another buffer that we can use to offset any crazy risk that is coming out. But in terms of our overall business, we are very that we generate various sales tax flow. So our company itself does not need to take that much of a risk for our business. And another thing that you just mentioned that in terms of moving the balance from the, let's say, banks or other financial institutions to our own balance sheet, that this is another dilemma that I cannot solve because our company cannot directly issue loan, right? other than the micro loan company that we own. And that micro loan is under very, very heavy supervision, so we can't really offer a lot of loans to that company. So some of the solution actually does not apply to our business here.

I mean, could you potentially partner or sell yourself to... know a larger financial institution that already has the proper licensing i mean there's i mean there's got to be a way for you to recognize the value that you've created here because the market clearly doesn't care i think that's that's probably not not likely but as you say just you know uh you know uh since our model is not you know recognized by

government through a license or through other kind of means. So there's no big institution in China will acquire us that kind of business because in terms of the cultural, in terms of the compatibility, you know, between our business and their business, I don't think they are, you know, the big financial guy in China will likely, you know, quite an evaluation desirable for you guys. I think that's highly unlikely.

Okay. Just one last housekeeping question about the tax rate. Do you expect that rate to be consistent with what you reported in the first quarter going forward?

I think I answered that question before. I think because most of our entities in China, we operate in China, the tax rate is about 15%. So we actually charge the U.S. tax rate at about 25%. that is being, you know, there's a way to be reconciled over the time. So I think once again, our effect tax rate will be below 25% on going forward base and it will be stabilized.

Okay. And in terms of that date of June 30th, is that kind of like once you get past that date and there's no, you know, I mean, Are you in the clear after June 30th, or is there still going to be ongoing theories of regulatory issues? I don't know.

I don't know. You know what I mean? We are not even including that 13 plus 1, which is un-financial. they are being marked to be regulated and first to ratification. We're not even marked, but no one ever mentioned that 14 others, we are others. And all the work, I think the government is pretty much focused on the end financial alone. And financials, as far as I know from the news, as everybody, they are basically finished. Then other 13, what they will do to comply fully, I think they will be, I don't know, maybe just pass the magic day, June 30, maybe. But we hope they all pass. If they all pass, maybe I'll pass along. I don't know. You asked me. I'm not in the position to answer that kind of question.

Okay, thank you very much for answering my questions and good luck to you. Thanks. Thank you very much.

There are no more questions in the queue. 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 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 our 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.