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Edited Transcript of XYF.N earnings conference call or presentation 21-May-19 12:00pm GMT

Q1 2019 X Financial Earnings Call

May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of X Financial earnings conference call or presentation Tuesday, May 21, 2019 at 12:00:00pm 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

* Yue Tang

X Financial - Founder, CEO & Chairman

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Conference Call Participants

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* John Cai

Morgan Stanley, Research Division - Research Associate

* Kevin Leung

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Presentation

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Operator [1]

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Good day and welcome to the X Financial First Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Jennifer Zhang. 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. Justin Tang, Founder, Chairman and CEO; Mr. Simon Cheng, President; and Mr. Kevin Zhang, Chief Financial Officer. Mr. Tang and 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 guidance. They are all available to answer your questions during the QA 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 company's control, which may cause company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

It is now my pleasure to introduce Mr. Justin Tang. Mr. Tang, please go ahead.

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Yue Tang, X Financial - Founder, CEO & Chairman [3]

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Hello, everyone. I'm pleased to report a solid start to the year with a total RMB 9.6 billion in loans facilitated during the quarter, RMB 776 million in net revenues, and a non-GAAP net income attributable to X Financial shareholders increasing 39.4% year-over-year to RMB 255.8 million.

In 2019, we will focus on 2 new products, Xiaoying Wallet and Xiaoying Online Mall. Xiaoying Wallet is our revolving credit product, which enable user to use the whole consumption service both online and offline with merchants. It is quite similar to our credit card. And Xiaoying Wallet, we have a pretty good start in our first quarter in 2019. We generated around CNY 200 million in transaction revenues and around 648,000 transactions during the first quarter. We also launched our Xiaoying Online Mall platform, which allows individuals to purchase merchandise online through loan installments. And this is also performing pretty well. These 2 products will help us to attract less loan dependent users and will help us increase quality of our borrowers over the long term. So these are the 2 very important products for us in 2019.

We also made solid progress during the quarter to strengthen our reputation in the market and improving our ability to attract more institutional investors. As of April 30, we actually secured over CNY 10 billion in credit line approval from financial institutions to serve loans -- to serve to the loans facilitated in our platform. We will continue to develop deeper relations with institutional investors to fortify our position in the market as the leading fintech player in China.

Now I will turn over the call to Simon Cheng, our President.

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Shaoyong Cheng, X Financial - President & Director [4]

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Thank you, Justin. Hello, everyone.

Our compliant operations and a risk management infrastructure are allowing us to increasingly benefit from the market consolidation and the enormous opportunities present in China's personal financial industry. We will continue to work closely with relevant regulatory authorities to ensure we are fully compliant with all the new regulations. We are very happy to see the quality of the loans facilitated on our platform improve, which reflects our strong risk management capability and a continued investment in risk control infrastructure. We expand our funding channels and strengthened our funding cost. We remain confident in our strategy and the solid foundation we have built in the past to drive sustainable future growth. We will continue to grow our market share and strengthen our position as the leading fintech player in China going forward.

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

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Jie Zhang, X Financial - CFO [5]

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Thank you, Simon, and hello, everyone. We have achieved solid operational and financial results in the first quarter of 2019. Our total loan facilitation amount in the first quarter of 2019 were CNY 9.6 billion, representing an increase of 10.8% from CNY 8.7 billion in the same period of 2018 and an increase of 1.6% from CNY 9.5 billion in the fourth quarter of 2018. We are also redrawing the operating efficiency and profitability by approximately 40% year-over-year increase in non-GAAP net income, and our non-GAAP net income margin remained at a prior high level of 33%. Our balance sheet is very solid. And by the end of March 31, 2019, we have around CNY 1.55 billion of cash on hand.

Now let me give a brief introduction for the financial results for the first quarter. In the interest of time, I will not go through every detailed line. Please refer to our earnings release for further details. Our net revenues in the first quarter of 2019 is above CNY 776 million, and our revenue tax rate is up by 8.1%, which is 1% lower than that of the same period in 2018. The change of tax rate is mainly due to the increase of our -- the insurance premium and guaranteed fee and partially offset by the lower operating costs. However, our income before income tax in the first quarter of 2019 increased by 25% to CNY 259 million from CNY 207 million in the same period of 2018. The increase of income is the main effect to our strong execution of cost control, which fully absorbed the impact of the lower revenue tax rate. In the first quarter of 2019, the operating costs and expenses as a percentage of loan volume is about 5.2%, which is 1% lower than that in Q1 2018.

Income tax expense in the first quarter of 2019 decreased by around 24% to CNY 49 million from CNY 65 million in the same period of 2018, primarily because the corporate income tax rate applicable to 3 major subsidiaries of companies would adjust down to 15% as these subsidiaries are qualified as a high-tech enterprise after the second quarter of 2018. GAAP net income (sic) [non-GAAP net income] in the first quarter of financial -- were CNY 256 million, an increase of about 40% with a year-over-year basis.

Next, I will give an update of -- about the diversion of our credit hedge model. We've made significant progress in diversifying our credit hedging model deployed for our loan products and convinced our investor with different models. The proportion of loan products guaranteed by ZhongAn decreased to 82% in the first quarter from 90% in 2018 and 95% in 2017. Diversifying our product structure allows us to better serve worthy investor as we reduce our reliance on a single insurance provider.

With that, I would like to further to give a brief guidance that in the Q2 of 2019. Our total loan facilitation volume will be approximate to that of Q1 2019.

Second, 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) Our first question today will come 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 just 3 questions. The first one is on the product. Can you share some more details on the product mix for the first quarter '19? I mean, how much portions is to the car loan? How much is for the -- maybe the loans to the other online platforms? And also, I noticed that ticket size is -- declined sequentially in the first quarter as well. Just wonder what's the reasons behind that? And that's the first question for the product side. The second question is on the cash. I noticed that we have a very strong Q-on-Q increase in cash. Just wonder what's driving that? And the third question is on the risks and asset quality. What are the latest trends we are seeing and how does that impact our growth outlook? Because I noticed that in April, our institution funding has already accounted for 25% versus 10% in the first quarter. And are we ramping up the facilitations on a month-on-month basis?

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Yue Tang, X Financial - Founder, CEO & Chairman [3]

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Okay. Kevin, could you answer the first 2 questions? And then Simon, you answer the third question please.

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Shaoyong Cheng, X Financial - President & Director [4]

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Hello? Okay. Yes. Yes. Okay. Kevin, go ahead.

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Jie Zhang, X Financial - CFO [5]

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Yes. I will give just the quick -- just the product mix. Among the CNY 9.6 billion of loan volume, car loan, which is still our main products, and that's about CNY 7 billion. And it's about 10% increase compared to that in Q4 2018. And besides that, we also have a CNY 1.5 billion of loan facilitation service to other platforms. That's about CNY 200 million decrease compared to Q4 2018, and that's about our major product mix. That means car loan and loan facilitations to other platforms are still our core product, and I would still like to draw your attention that we have around CNY 200 million of loan facilitations of our Xiaoying Wallet products. And that means, such volume in Q4 2018 is only about CNY 77 million. But that will be our -- the major product mix for the product.

And with regard to our ticket size, in Q1, we have tremendous volumes of Xiaoying Wallet. That means that the Xiaoying Wallet has a -- the ticket size for Xiaoying Wallet is only about CNY 300, and that decreased our average ticket size. But when I go back to our car loans, our car loan average ticket size is about CNY 12,000, actually CNY 12,010, 25% increase compared to that in Q4 2018. In Q4 2018, our average ticket size for car loan is about CNY 9,500, okay. Clearly, this -- I hope that this would be helpful to your first and second question.

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

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Right. Yes. Yes. Basically, the ticket size increase, just to follow up on Kevin's question, the ticket size increase is primarily due to the mix change. We have Xiaoying Wallet, which is a very small ticket in consumption transaction, and also in addition to that, our preferred loan actually, which has a higher ticket size. The volume of that, it keeps dropping. So that's for the question 2. For question 3, the credit quality actually, we -- during the Q1 2019, we see our credit quality actually improved. It improved quite stable. So this is the current situation.

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Yue Tang, X Financial - Founder, CEO & Chairman [7]

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Kevin, could you answer the increase in cash in the first quarter?

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Jie Zhang, X Financial - CFO [8]

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Yes, yes. We now have our CNY 1.55 billion of cash on hand, and the increase are actually consists of: First, our general operating cash flow in; and second, actually, we -- at the end of March 31, 2019, our loan held-for-sale decreased by around CNY 480 million. That means because we are in the first quarter, we have more -- FY '20 on hand, we actually release lots of the loans held-for-sales from our balance sheet. Actually, it's a collection of the loan held-for-sale. That's why our operating cash flow generally increased about CNY 500 million.

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Operator [9]

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(Operator Instructions) The next question will come from Kevin Leung of Deutsche Bank.

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Kevin Leung, [10]

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I have 2 questions actually. First one is about P2P trial registration. Want to know if management has any feel on the trial registration going forward and if that has any impact on our business? And the second one is about institutional funding. Can we get the funding costs of such channel? And how many partners are you currently cooperating with?

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Yue Tang, X Financial - Founder, CEO & Chairman [11]

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Sure. Thanks, Kevin. Yes, for P2P registration, it seems it's moving ahead slowly. So over the last couple of months, there have been discussion we're going to move to some kind of trial. So I feel -- I mean, the key city obviously still is the Beijing, Shenzhen, Shanghai and then (inaudible) to move into trial. But I think at this moment, I think there's still -- the issue is still kind of aiming at division of duty between the central government regulator and the local regulators. I think the central government issued a guideline, but local regulator need to take the responsibility. So again, I'd say it still is moving ahead. But exactly when do we expect the first company will receive actual registration, I think this remains unclear. I think internally, government still also have some different opinion at this moment. This doesn't really have any -- have much influence on our operating business. Obviously, starting from Q4 last year, we already have a cap on our online loan facilitation platform, but this is in line with our strategy to move our funding source more towards institution in any case. So at this moment, after combining between our platform's individual investor and the institutional funding, we have to have sufficient more funding than we could supply the quality assets. So again, I will say the progress of registration does not have any impact in our business.

In terms of institutional funding, actually, I would say in Q1 where we start to see funding costs actually come down quite a bit. So initially when we started pushing the institutional funding, we -- not like in Q4 last year, a lot of funding would come in at around 9.5%, even 10%, which is the higher than at that time our platform funding costs, around 8%-plus. Recently, we started seeing the institutional funding more come down to anywhere between -- around 8.5% or less than 9% level. But we're very strong. We see very strong institutional funding demand. Like we mentioned, as of April 30, we have the written approval of credit line from financial institution already over CNY 10 billion, and we have much more on the way. And typical credit line is anywhere between CNY 500 million to CNY 2 billion for each financial institution. So you're basically seeing we have around approximately 10 financial institutions at this -- the relevant ones, 10, at this moment, and we are seeing many more coming.

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Operator [12]

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The next question is a follow-up from John Cai of Morgan Stanley.

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John Cai, Morgan Stanley, Research Division - Research Associate [13]

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So then I want to follow up on the growth. So basically, given the stabilizing asset quality and the institutional funding, so do we see any potential to ramp up the growth, in particular the balance and loan outstanding balance, do we expect that to have sequential growth from this level? And then the second questions is on the -- as in the new focus of -- on the Xiaoying Wallet and the Online Mall. So just wonder do we expect any financial impacts in terms of the costs here? Because I'm not sure if we offer the interest-free period and for the ordered product and do we need to subsidize the funding partners? If we have that and for the Online Mall, do we have more details on the products we offer on the -- do we offer discounts to them? So basically, what will be the cost for us to launch the product?

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Yue Tang, X Financial - Founder, CEO & Chairman [14]

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Sure. Yes. And so thanks, John. Yes, the first question is in terms of loan balance growth. In first quarter 2019, we actually see our loan balance remain stable or even decline a little bit. One of the key reason is the -- basically, there is the -- almost the discontinuation of our preferred loan. So over the last couple of years, preferred loan was one of our key product, and a lot of this served for the small and medium enterprises. And that segment over the last year, the risk was higher than our expected. So we literally discontinued that product line, except only serve for some of the higher-quality repeated borrower. So that basically drives to our no growth in our loan balance. Going forward, again, at this moment, I don't want to give very aggressive expectation of the loan volume growth, again, because although the macroeconomic environment -- we still want to be relatively conservative on the credit quality. So actually, if you look at in Q1, our approval rate for our credit card-related loan actually came down from the Q4 last year. It came down quite a bit. So again, at this moment, I will say if you look at last year, we had about a total of CNY 36 billion in loan facilitation. This year, I think we will see some growth, but I don't want to project aggressive growth in our loan volume or loan balance at this moment, yes.

And your second question is to our 2 new products, Xiaoying Wallet and Xiaoying Online Mall. Like I mentioned, one of the key reason we start these 2 products is traditionally, our borrower, they tend to be more heavily loan-dependent or loan-dependent customers. And this customer tends to be -- have relatively lower credit quality. And also, the loan typical tends to our more low-frequency product. So it's harder to build, I would say, a closer relationship with our users. So this year, we introduced this more consumption-focused Wallet and Online Mall. So this is target #1, it's more consumption-oriented customer. Second is more high-frequency users help us to build a closer relationship with them. For our Wallet product, our standard product, we do have a 7-day grace -- basic grace period, no interest grace period, always we need to subsidize. But I think that itself is included in the revolving credit model. So at the end of the day, the interest to carry balance will be able to pay for that in any way. I think that what we will invest on really is customer acquisition. So we will need to spend some money to acquire the customer that are early on for both the Wallet customer as well as the online shopping mall customer. But this customer tends to have longer lifetime -- lifespan than the average loan customer and will also have arguably longer lifetime customer value than loan customer. But in the beginning, we do need to make some investment, which we believe it is very strategic important investment that we need to make. Then also you mentioned subsidized. I don't think that -- again, if you look at our company's culture, we are -- we tend -- typically, we try to build a very competent product. We -- historically and now, we really used too much subsidized product to attract the customer. So even for this, we will start investing in the sales and marketing to acquire good quality customer. But our tendency is that we don't want to use overaggressive subsidized policy to attract lower-quality customer coming mainly for the subsidy.

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John Cai, Morgan Stanley, Research Division - Research Associate [15]

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So a quick follow-up on the Online Mall. What products are we offering now like 3C or others? And also, what's the -- so if I -- so do we make a positive margin on the GMV sold on a sale?

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Yue Tang, X Financial - Founder, CEO & Chairman [16]

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Yes. Sure. Yes, right now, obviously, for this type of Online Mall, the best-selling product for male customer, it is the 3C. And for female customer, it is the cosmetics like lipsticks, facial cover, et cetera. So ours is no different. We do make a positive gross margin on merchandise sales, yes.

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Operator [17]

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(Operator Instructions) Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Jennifer Zhang for any closing remarks.

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Jennifer Zhang, X Financial - IR [18]

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Thank you, operator. 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 [19]

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