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Edited Transcript of 5871.TW earnings conference call or presentation 13-Aug-19 11:00am GMT

Q2 2019 Chailease Holding Company Ltd Earnings Call

Taipei Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Chailease Holding Company Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Sharon Fan

Chailease Holding Company Limited - SVP of IR

* Vic Wang

Chailease Holding Company Limited - Manager of IR

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Conference Call Participants

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* Gurpreet Singh Sahi

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Sam Wong

Citigroup Inc, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Chailease Second Quarter 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. For your information, a webcast replay will be available within an hour after the conference call is finished.

Now I would now like to turn the call over to Vic Wang, Senior Manager of Investor Relations. Please go ahead.

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Vic Wang, Chailease Holding Company Limited - Manager of IR [2]

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Hi. Good evening, everyone. This is Vic. I would like to welcome you to Chailease Holdings Second Quarter 2019 Earnings Conference Call.

With me this evening is Ms. Sharon Fan, Head of IR, and she will open to your questions in Q&A period. I will walk you through this quarter earnings presentation, which is available for download on our corporate website under the IR section.

As a reminder, please refer to the disclaimer regarding forward-looking statement at the front of the presentation.

The agenda we are going to cover for today on Slide 3 includes management highlights, second quarter 2019 consolidated performance review, followed by the segment review for our Taiwan, China and ASEAN operation.

Without further ado, I would like to start the presentation from Slide 4. Highlights for overview of our second quarter 2019 operation results. First, the summary table here shows the loan portfolio growth for the second quarter. On a year-over-year basis, Taiwan, China and ASEAN loan portfolio grew 11%, 29% and 32%, respectively. Taiwan grew 23%, if we include the solar net asset to make a growth comparable.

On a consolidated level, we achieved 19% year-over-year loan portfolio increase, but for the first 2 quarter portfolio growth, Taiwan decreased 1%, China increased 12%, ASEAN increased 17% and 6% growth on a consolidated basis. Taiwan grew 9% if the solar net asset is included.

This quarter, China continued the business momentum from prior quarter, while ASEAN resumed the loan portfolio growth as Thailand picked up the loan growth from last year, while Vietnam and Malaysia remained major growth driver for ASEAN. We expect Taiwan, China and ASEAN loan portfolio growth could outperform the original target, which is 10%, 20% and 20%, respectively, for this year.

Second, in the following segment review section, you will see the bottom line growth for Taiwan and China is slower than the loan portfolio growth but the fee income recognition change mentioned last quarter results conference call, we expect consolidated revenue and net profit will grow slower than the portfolio this year, but the impact of fee income recognition change will be gradually minimized next year.

Third, the asset quality for Taiwan and China maintained as the new delinquent amount both decreased from prior quarter. I will discuss in quite a detail in the following slides.

Next slide, Slide 5. This update for our fee income recognition. The table here shows the percentage of fee income recognized for the first quarter and for the first half of 2019. At first quarter 2019, Taiwan and China recognized 80% and 36% of fee income. And for the first half of 2019, this ratio increased to 83% and 45%. Toward year-end, the impact of unrealized proportion will be gradually reduced and minimized.

In the following fee income slide, both Taiwan and China will only show realized fee income for 2019 to make it comparable sequentially.

Let's move to the next section, second quarter 2019 performance review. Moving on to Slide 7. Consolidated loan portfolio reached TWD 392 billion at second quarter end 2019 with 19% year-over-year growth and 6% year-to-date increase as China and ASEAN continue with the growth driver for the quarter.

Next slide, Slide 8, shows you the trend of consolidated average, the loan yield and cost of funds for the past 3 years. As you can see, we maintained relatively stable interest spread as loan yield and cost of funds gradually increased. We will discuss the change of each operation region in the next section.

Next slide, Slide 9. This page shows you the change of consolidated fee income. Starting from this year, we require to amortize our fee income over the contract period. In this slide, we only show realized the fee income for 2019. On a quarter-over-quarter comparison, consolidated fee income continued to grow, reflects the continued business momentum.

Next slide, Slide 10. On the left-hand side, the consolidated revenue for the first 6 months of 2019 reached TWD 27.5 billion, representing 13% growth compared to the same period last year. The slower consolidated revenue growth compared to portfolio growth was mostly driven by decreased fee income due to fee recognition change.

On the right-hand side, second quarter consolidated revenue was TWD 14.6 billion, increased 13% from the previous quarter as China revenue increased 19% for the quarter.

Moving to Slide 11. On the left-hand side, the consolidated net profit for the first 6 months of 2019 totaled TWD 7.6 billion and earnings per share was TWD 5.74. The better net profit growth was mainly driven by top line growth, more tax rebate in China and tax benefit recognized in U.S. operation for the period.

On the right-hand side, second quarter consolidated net profit was up 13% as tax rebate of RMB 30 -- RMB 63 million for China was booked this quarter compared to RMB 40 million tax rebate last quarter.

Turning to Slide 12. This slide shows you the -- our loan portfolio mix and profit contribution in terms of operation region. On the left-hand side, we can see Taiwan business still accounts for 52% of group total loan portfolio, China is about 33% and ASEAN slightly increased to 15% for second quarter 2019.

On the right-hand side, Taiwan profit contribution accounts for 46% and China accounts for 45%. ASEAN contributes 4% to the consolidated net profit.

Moving on to Slide 13. The chart on the left-hand side, cost-to-income ratio maintained efficient at 32% for the first 6 months 2019 even we continue to hire new employees and open new branches. The chart on the right-hand side, asset-to-equity increased to 6.6x for the quarter plus the AGM approved the cash dividend payout for 2018 in May.

Slide 14. The consolidated ROA on the annualized basis was 3.8% for the first 6 months of 2019, maintained a same level as 2018. The consolidated ROE on the right-hand side was slightly higher at 24% compared to 23% in prior quarter.

Next slide, Slide 15. The consolidated delinquency ratio, on the left-hand side, at second quarter end was maintained at 2.8% with Taiwan increased and China decreased this quarter. Later in the presentation, I will talk about each region in more detail.

Moving on to the right-hand side, allowance-to-loan portfolio ratio slightly decreased to 2.7% as China decreased this quarter.

Moving on to the segment review, let's look at our operations, region by region. On Slide 17, our Taiwan loan portfolio reached TWD 184 billion in the second quarter in 2019, representing 11% year-over-year increase. And year-to-date was down 1%. If we include a solar net asset, loan portfolio growth for year-over-year increased 23% and year-to-date increase was 9%. A disbursement for Solar business, used car financing and lending in micro enterprises continued the business momentum for the quarter.

Next slide, Slide 18. This page presents trend of our Taiwan loan yield and funding costs. We maintained steady interest spread in a narrow range of 6.6% to 6.9% for the past 3 years.

Turning to Slide 19. This slide shows you the change of our Taiwan fee income. In this slide to make it comparable for 2019 first quarter and second quarter, we only show the realized fee income. Business momentum maintained for the quarter.

Moving on to Slide 20. Revenue for our Taiwan operation for the first 6 months of 2019 reached TWD 12.1 billion, representing 16% year-over-year growth. The slower revenue growth compared to portfolio growth was mainly driven by less fee income were recognized for this year.

For the quarter-over-quarter comparison on the right-hand side, second quarter revenue was TWD 6.3 billion and grew 8% quarter-over-quarter.

Turning to next slide, Slide 21. Taiwan's profit for the first 6 months of 2019 grew by 8% compared to the same period last year. Slower bottom line growth represents the recognition of depreciation of solar energy equipment starting from this year.

The second quarter Taiwan net profit was about TWD 1.9 billion, which grew by 9% quarter-over-quarter driven by top line growth.

On Slide 22. On the left-hand side, Taiwan delinquency ratio in second quarter was up 0.1 percentage point to 3.1%, mainly driven by fewer write-offs for the quarter.

If you look at the new delinquent amount this quarter, it decreased from the prior quarter.

On the right-hand side, recovery from delinquency and write-off both decreased for the quarter.

Next slide, Slide 23. Allowance to loan portfolio for Taiwan maintained at 2.2% in this quarter.

[Let's start] China operation on Slide 24. China total loan and receivable reached TWD 127.7 billion in second quarter in 2019, which grew by 29% year-over-year and 12% year-to-date increase. This quarter, China continued the business momentum from prior quarter which increased the new disbursement. We expect China loan portfolio growth will outperform our guidance which is 20% this year.

Turning to Slide 25. This page shows the loan yield and cost of fund trend for our China operation. We continued to maintain the stable spread for the quarter.

Next slide, Slide 26. This slide shows you the trend of fee income in China. For 2019, we only shows the realized fee income to make it comparable.

In addition, the increase of realized fee income in second quarter 2019, reflecting better business momentum as well as gradually increased realized proportion of fee income from the prior quarter. The portion of unrealized fee income expect to gradually minimize and reduce.

Next slide, Slide 27. China revenue for first 6 months of 2019 totaled TWD 12.2 billion increased 6% as less fee income and sales revenue were booked this year. The sequential increase of top line growth on the right-hand side was driven by increase of trade finance business and fee income for the quarter.

Let's look at China revenue breakdown on Slide 28. Trade finance revenue totaled TWD 4.3 billion in the first 6 months of 2019, which was down 13% year-over-year but increased 35% quarter-over-quarter.

Moving on to Slide 29. China for the first 6 months of 2019, net profit reached TWD 3.6 billion, increased by 12%, mainly driven by less expected credit loss booked and more tax rebate for the period.

On the right-hand side, China second quarter net profit was up 20% sequentially reflect the topline growth and more tax rebate was booked for the quarter.

Turning to next slide, Slide 30. On the left-hand side, China delinquency ratio in second quarter continued to decrease to 2.0% from 2.1% in prior quarter, mostly driven by higher portfolio growth and less new delinquent amount this quarter.

On the right-hand side, write-off amount reduced for the quarter compared to the prior 2 quarters. We expect delinquency ratio stable for the coming quarter.

Next slide, Slide 31. China's allowance-to-portfolio ratio for the second quarter was down 0.3 percentage points to 3.1% mainly due to better loan portfolio growth for the quarter. We expect this ratio will slightly decrease as we continue to maintain healthy asset quality.

Moving to ASEAN on Slide 32. The total loan and receivable at second quarter end 2019 reached TWD 57.2 billion, up 32% year-over-year and 17% year-to-date growth, which [exceeds] our guidance. Vietnam and Malaysia operation continued to deliver higher loan portfolio growth this quarter.

Let's turn to next slide, Slide 33. The left-hand side, ASEAN revenue for second quarter totaled TWD 3 billion grew 42% compared to the same period last year. The better top line growth was driven by more sales revenue booked for Vietnam this year.

On the right-hand side, ASEAN second quarter revenue was up 13% sequentially.

Moving to the last slide, Slide 34. ASEAN's first 6 months of 2019, net profit reached TWD 575 million increased by 10%. On the right-hand side, ASEAN's second quarter net profit was also up 8% sequentially driven by the top line growth.

And this also bring us to the end of my presentation for today, and thank you for your time. Now I'd like to turn the call to operator to open the line to questions.

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Questions and Answers

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Operator [1]

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Thank you. We will now begin our question-and-answer session. (Operator Instructions) The first question is from Sam Wong with Citi.

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Sam Wong, Citigroup Inc, Research Division - Research Analyst [2]

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Vic and Sharon, I have 2 questions if I may. I noticed that the spread in China actually widened by 11 bps but if we simply calculate it by the loan yields -- by the overall cost of funds, what actually drove the spread widening? And my second question is on asset quality improvement. As the trade war will escalate, do you see any downside risk in terms of asset quality? How much lower can the China allowance ratio go from the current level of 3.1%?

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [3]

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Okay. So the spread you calculated is for -- compared to previous quarter or?

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Sam Wong, Citigroup Inc, Research Division - Research Analyst [4]

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Q-on-Q. Great, yes.

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [5]

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Okay. So actually, this -- we still consider this is within the reasonable range, because as we communicate several many times, this is more just calculated back with the actual interest expense for the quarter and actual interest revenue for the quarter. So from our pricing and overall funding cost. Actually, it didn't have significant change actually. So yes, we still want to maintain a stable spread to our goal. So we think this won't continue. We don't think this is widen of the spread.

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Sam Wong, Citigroup Inc, Research Division - Research Analyst [6]

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So do you not think this is a sort of a tailwind from better -- more kind of like liquidity even in Mainland China?

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [7]

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But when we consider -- only under one condition is that if this is a continual trend, we don't just look at 1 quarter. Yes. Okay. So if we can see this continual trend for 2 or 3 quarters, then probably we can confirm. And we will have adjustment of our pricing strategy.

And for your second question about allowance because -- yes, at this stage, actually, we are a little bit overprovisioned if -- using our provision policy as we want to cover like 2x of estimated loss, but I think we still need longer time to monitor our China asset quality, whether it can be like a stable going forward at this 2% or 2-point-something percent.

So just like Vic mentioned, if we continue to see this China delinquency ratio maintained at this 2% or 2.1% or 2.2% level continuously for the following quarters, I think this provision allowance ratio will continue to adjust down. We don't need to set aside so much provision.

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Operator [8]

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(Operator Instructions) And the next question is from Gurpreet Sahi with Goldman Sachs.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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This is Gurpreet. Question to follow up on the spreads. If you see your loan need in China for the last 2 years, it's been going up. And that has helped the spread at the group level because cost of funds has not gone up. So wouldn't you call this something structural has happened and that means that now you can be operating at the top end of your guidance at the group level for the spread?

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [10]

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I think in terms of our pricing strategy actually, we didn't change our price like too often. And last year, remember, because of the liquidity tightening quite obvious for the first half last year. So actually, we do like raise our price in -- I remember, in May of 2018. So -- and then but we only raised the price for the new deal, new business deal. So -- and this will gradually lie better into this yield line as we present here. So you can see the pricing is a little bit uptrend. That's the reason why.

And fortunately, the liquidity tightening situation got eased for the second -- starting from the second half last year. So actually, our funding cost didn't like go -- went up that much.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Okay. Is there any plan to raise the pricing further in China?

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [12]

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So far, we didn't have this kind of plan. And because we didn't see any significant change for our funding cost to like increase.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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Okay. And then on asset quality in China, can you remind us what is the kind of recovery rate that you're getting in China?

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [14]

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China, I think our recovery rate in terms of recover from the delinquency amount, right now, already improved to like more than 50%.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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Okay. So technically, you could be losing on this 2% delinquent amount around 1% and the allowance is 3%? So unless recovery rate worsens or delinquency improves, you seem to be more than sufficiently covered in China. So you don't provide more allowance as we have seen allowance TWD 1 million amount has remained constant. And as you grow the portfolio, you'll use the allowance ratio. Is that the right way to think about it?

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Sharon Fan, Chailease Holding Company Limited - SVP of IR [16]

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Correct. Just this kind of adjustment will be very gradual profit.

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Operator [17]

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(Operator Instructions) There are currently no questions. Thank you.

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Vic Wang, Chailease Holding Company Limited - Manager of IR [18]

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Operator, we can end the call, please.

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Operator [19]

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Thank you for your participation in Chailease conference call. You may now disconnect. Okay. Bye.