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Edited Transcript of XYF.N earnings conference call or presentation 21-Nov-19 1:00pm GMT

Q3 2019 X Financial Earnings Call

Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of X Financial earnings conference call or presentation Thursday, November 21, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Zhang

X Financial - IR

* Jie Zhang

X Financial - CFO

* Shaoyong Cheng

X Financial - President & Director

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Conference Call Participants

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* John Cai

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Hello, and welcome to the X Financial Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jennifer Zhang, Investor Relations. Please go ahead.

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Jennifer Zhang, X Financial - IR [2]

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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.xiaoyinggroup.com. On the call today from X Financial are Mr. Simon Cheng, President; and Mr. Kevin Zhang, Chief Financial Officer. Mr. Cheng will give a brief overview of the company's business operations and highlights followed by Mr. Zhang, who will go through the financials and the guidance. 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 Litigation Reform Act of 1995. Such statements are based on the 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 the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this 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. Simon Cheng. Mr. Cheng, please go ahead.

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Shaoyong Cheng, X Financial - President & Director [3]

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Hello, everyone. We're pleased to report a good quarter with strong financial and operational performance. In particularly, I would like to highlight the following significant progress we have made across our business. Personally, we believe that controlling the credit risk at origination is critical. Over the past 6 months, we have tightened our credit policies and have shifted our customer segment to higher-quality segment to prepare for difficult regulatory and economic environment. Delinquencies of our portfolio have decreased. This helped us to achieve a more stable business and reduced loan defaults in the longer time.

Secondly, we're very pleased to report that institutional spending accounted for 35.7% of the loan facilitated through our platform in the third quarter, increasing from 26.7% in the previous quarter.

Particularly, the portion of funding from institutions increased to 52.4% of the total loan facilitated in October 2019. We expect institutional investors to fund almost all our new loan originations from the beginning of next year as our P2P platform are gradually to phase out. We have been actively negotiating with our funding partners, including CITIC Trust, Kunlun Bank, Blue Ocean Bank, Huishang Bank, Yantai Bank and others to further lower our funding costs and provide the best facilities to our customer.

Lastly, it is very encouraging to see our revolving loan product, Yaoqianhua, previously known as Xiaoying Wallet, growing very rapidly. Transacting volume for Yaoqianhua jumped significantly to RMB 1.4 billion this quarter from RMB 971 million last quarter.

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The outstanding loan balance increased to RMB 949 million as of September 30, 2019, from RMB 578 million as of June 30, 2019.

The number of transactions for Yaoqianhua in the third quarter of 2019 increased to 3.8 million from 2.9 million in the second quarter. The number of active users of Yaoqianhua was around 330,000, representing an increase from 220,000 as of June 30, its a 50% increase. We believe that the number of Yaoqianhua users will keep rapidly growing. The business will gradually account for a large percentage of revenue as the revolving product has a longer customer lifetime and offers multiple types of cross-sell opportunity.

Furthermore, for the user of Yaoqianhua, we're able to offer more diversified service to enhance the user experience. We're gradually -- we're planning to gradually transition from a pure financial service provider to a comprehensive service provider.

Overall, as our customer segment will be shifted to higher-quality customers, more and more our income will come from comprehensive service fees such as the merchant fee, membership fee, et cetera, in addition to loan facilitation fee. At the same time, there will be lower delinquencies down the road and lower funding costs.

In conclusion, we're very confident in our future growth prospect and our capabilities to create long-term value for our investors and the shareholders. As the industry is under consolidation, there will be fewer players to continuously provide the user-friendly and convenient personal financial service to the borrowers in China. China's consumer finance market is huge and growing. Interest rate and the funding cost is in the declining trend. We believe there is a enormous potential for our business to grow at this consolidation period.

I will turn the call to Kevin, who will go through our financials.

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Jie Zhang, X Financial - CFO [4]

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Thank you, Simon. Yes, we finished the quarter with solid operational and financial results. Total loan facilitation amount was about CNY 10.7 billion for the quarter, showing a significant increase year-over-year. While net revenue came in at CNY 867 million, which also increased on a year-over-year basis. We are glad to see the number of active borrowers increase significantly to 840,000 in this quarter, which demonstrates continued strong demand from the market. The delinquency rate for all outstanding loans that are past due for 31 to 90 days and the 91 to 180 days as of September 30, 2019, were 2.95% and 4.5%, respectively, compared with 3.1% and 4.99%, respectively, as of June 30, 2019. We believe this reflects the improving quality of our loans. We will continue to strengthen our risk control capability and provide the best loan service to our customers.

In addition, we're pleased to see the proportion of the institutional funding and revenue contribution from the loan assistance business model continuing to grow. As of September 30, 2019, the credit line provided by our institutional partners was around CNY 38 billion and has since been expanded to CNY 48 billion by the end of October 2019.

We're determined to operate in compliance with related laws and regulations and are actively making a transition to a model of combination of loan assistance and a direct loan under certain license. What's more, the loan products we facilitated that were covered by ZhongAn Insurance have decreased to 77% in the third quarter of 2019. We will continue to reduce our insurance coverage rate to lower our customers' borrowing cost and develop alternative ways to provide a guarantee for certain loan products.

Going into next year, we will continue the transformation across our business to ensure it is fully compliant with regulations, reduce costs and improve efficiency and create more value for our customers and shareholders.

Now I'd like to brief some financial performance. Net revenues in the third quarter of 2019 increased by 4.5% to CNY 867 million from CNY 829 million in the same period of 2018, primarily due to a increase in transaction volume of Xiaoying Credit Loan and Yaoqianhua this quarter when compared within period of 2018.

Organization and servicing expenses in the third quarter of 2019 increased to CNY 456 million from CNY 284 million in the same period of 2018, primarily due to the following factors: an increase in collection expense for the cumulative effect of the growing business; and the second, continuous investments in customer acquisition, especially for the recently launched revolving credit product, Yaoqianhua.

The sales and the marketing expense in the third quarter of 2019 decreased by 43% to CNY 26 million from CNY 45 million in the same period of 2018, primarily due to a reduction in promotional and advertisement expenses since we are running off spending in the P2P model. The non-GAAP net income in the third quarter of 2019 decreased to CNY 170 million, which is mainly resulting from our continuous investments in customer acquisition. We believe that such a involved investment would benefit us in the long run, both for the high-cost customer and the longer user life cycle.

Now turning to guidance. We expect that the total loan facilitation for the fourth quarter of 2019 to be around CNY 8 billion to CNY 9 billion. This amount is excluding the volume of consumption, the segment of the Yaoqianhua, which would not generate revenue. So that the guidance would be a better indicator for our financials. This forecast reflects the company's current and preliminary views, which are subject to change.

Now this concludes our prepared remarks, and I would like to open the call to questions. Operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from John Cai of Morgan Stanley.

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John Cai, Morgan Stanley, Research Division - Research Associate [2]

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I have 3 questions. I guess the first one is about our risk performance. I think our reported delinquency range declined on a sequential basis due to the tightening of the credit policy previously. So how do we think of the current sector risk? Meaning that do you see it's an -- it's a time that -- because we have already controlled the previous existing rates, is it time for us to take more risk now? How is the environment -- risk environment that the management is seeing? And so any attachments on the current risk environment? And how does that empower growth? That's the first one.

The second one is, we would like to know more about our product segment. So we see that you provide more details about the term loan and the revolving loan in this quarter. So just wonder now if the management can share about the economics of the term loan versus the revolving loan? And I think there's changes, actually it should be a positive changes on the take rate for this quarter. So if the management can comment about the take rate changes, that would be helpful as well.

And the third question is a bit technical on the revenue side. I see that the loan facilitation income from the intermediary model pick up for these 2 quarters. I'm not sure why is that. Because my understanding is that most of the facilitation fee should be under the direct model. Yes, that is my question.

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Shaoyong Cheng, X Financial - President & Director [3]

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Thank you, John. This is Simon. I'll answer the first question regarding the credit quality and Kevin can answer the last 2 regarding the financials. We have tightened our credit policies. And more importantly, actually, we shift our customer segment to high-quality segment. So down the road, we will see our delinquency keep going down. And this is one of the segment change or in addition to our prudent credit control policies. The financials, Kevin can answer.

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Jie Zhang, X Financial - CFO [4]

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Okay. Let me -- John, thank you for your questions.

First, about our product mix for the segment, I would like to say, at this moment, the term loan wallet is still our dominant key product and which will contribute more than 95% of the total revenue and our profit. And then you may see, when we're talking about the loan volume, at the third quarter, they are about CNY 1.4 -- CNY 1.4 billion of the transaction volume will have come from Yaoqianhua, the revolving credit product, that's about 10% of the total transaction volume.

But at this time, we ask you to investing in this revolving credit loans. So actually, the revenue contribution and the profit contribution for our recycled products will be (inaudible) by magnitude. And when we're talking about the take rate, the general take rate for -- of our term loan will be very similar to the total take rate. That means they'll be around 10%. And we -- and as the Yaoqianhua, the recycled product, it's currently at about 13%, take rate as our term loans.

And actually our take rate remains stable in the last quarter, as you may see -- and our total pricing remain unchanged, and our operating costs and our delinquency rates are relatively stable. So the sort of take rate will be -- is very similar with -- to that in the Q2.

But I would like to draw your attention that, as previously mentioned by Simon, we're targeting high-quality customers and we're also changing our pricing mechanism. But instead of pure financial service income, we're now receiving a comprehensive sales income by directing our user base into our membership systems from November.

So sales of package of rights, which are composed of [conventional] rights and financial rights will be sold to our members. So later on -- so our revenue will be actual split to 2 part: one is from our pure future loan facilitation revenues. And then the remaining will be some of service income -- from branch and service income direct charged to our customers. And these comprehensive incomes are not combined with the loans, so there would be little change in the future.

So at the moment -- so we'll be have a different view about how other take rate change. That means in the Q4, the take rate will be lower, but we have some additional comprehensive service income. Yes. I hope that this changes up your questions.

And your third question is when you're talking about intermediary -- sorry, the revenue from the intermediary model. Yes. Actually, we -- in Q2 and Q3, when we had the loan -- under the loan occupancy models, actually, some of our funding partners, they -- we will have to transfer the debt right from -- sorry, we will first issue the loans via our partner micro loan companies and then transfer to those institutional funding partners. So under this model, we will have more intermediary level revenue. So that's why our revenue in the intermediary level increasing in Q2 and Q3.

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John Cai, Morgan Stanley, Research Division - Research Associate [5]

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That's helpful. So if I may follow up on the risk. So just want to get a sense of the management assessment of the current environment because we've heard that some players are doing the rising risk. And it's also this regulatory item on connections, big data analytics, et cetera. So what's the management assessment on the current risk level on a sector as a whole? So do we see that it's more risky now as compared to maybe a quarter ago? And how does the regulations impact the overall collection effort, recovery rates or delinquency rates? Yes, just any comments on that from the management would be very helpful.

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Shaoyong Cheng, X Financial - President & Director [6]

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Okay. Thank you, John. Actually, it's a very tough regulatory environment right now. There are a lot of changes recently. Overall, we believe that will actually lead to an industry consolidation and some players will leave the industry and it's a new environment. But for us, actually, we're prepared for this and as we -- as I said earlier, we're shifting our customer segment to high-quality segment, which means it has less issues with the recent regulatory development. And also this is a better quality segment, more resilient to the economic change. So this is our strategy.

And overall, we believe for certain segments there might be a deteriorating situation, but for the segment that we're talking right now, actually, it's still quite healthy. And for employment situation in China, it's quite stable and for consumer finance business for the higher-quality segment actually is still quite stable.

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Operator [7]

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(Operator Instructions) The next question comes from [Luvian Han] a private investor.

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Unidentified Participant, [8]

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My question is about the credit risk. We can see the risk items in P&L, like provisions for account -- provision for accounts receivable and contract assets and fair value items like fair value adjustment related to financial guarantee derivatives and fair value adjustment related to consolidated trust. We can see these items increased compared by Q2. But you mentioned that the delinquency ratio was improved compared with the Q2. So which slide showed the real credit risk?

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Jie Zhang, X Financial - CFO [9]

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Okay. Thank you, [Luvian] for your questions. Actually, and in generally, our credit performance are stable or otherwise, we will mentioned, has improved. But here, when we go through P&L, for example, you see some indicators might be confusing. For example, the provision for accounts receivable are increasing in Q3. We maintained some capital Q2. Actually, and that's more of our accounting and that means as of Q1, our credit performance are improved, but at that time, we're not assure whether this would be sustainable. So actually, we did not do a timely adjustment to focus those credit adjustment. So all of the impact were actually are adjusting in the Q2, when we're more sure that our improvement of our credit control picture actually exists. So that mean we have some -- so if we can combine those items for first half year, actually, you will see in that way, we'll be very similar to those presenting in Q3. I can give some more of account -- impact of account treatment when we do some period-end adjustments.

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Unidentified Participant, [10]

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So you meant that you -- the items in P&L show the future risks, yes?

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Jie Zhang, X Financial - CFO [11]

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No. The items show our current rate, but actual show -- when we're talking about -- so I would like to know if you are comparing those with our performance in the same period in 2018 or those with Q2 of 2019. I'm not sure how -- which items you are comparing with.

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Unidentified Participant, [12]

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Compare with 2019 Q2.

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Jie Zhang, X Financial - CFO [13]

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So then this year. Yes. As I have mentioned, for example, generally, our credit risk are improved and stable. But we're -- at the end of Q1, we actually see there are improvement but we did not do those adjustments on our P&L because we're not sure whether this improvement will be sustainable. So I -- then we're more prudent. And at the end of Q2, we see it's a very clear trend that our credit performance are more stable and are improving.

So actually, all those impacts are definitely in Q2. So that means you will see it's a very small amount for those accounts receivable provisions in Q2. But if you compare the amount of account receivable provision in Q3 with the average amount of Q1 and 2Q, that means the average amount of first half, that would be very similar as a percentage of volume.

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Operator [14]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Zhang for any closing remarks.

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Jennifer Zhang, X Financial - IR [15]

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Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we'll be pleased to answer them through follow-up contacts. We look forward to speaking with you again in the near future. Thank you.

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Operator [16]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.