Q1 2023 X Financial Earnings Call
Participants
Fuya Zheng; CFO; X Financial
Kan Li; President, Chief Risk Officer & Director; X Financial
Unidentified Company Representative
Unidentified Analyst
Presentation
Operator
Hello, and welcome to the X Financial First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the Conference over to [Victoria Yu]. Please go ahead.
Unidentified Company Representative
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. On the call today from X Financial are Mr. Kan Li, President; and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr. Li will give a brief overview of the company's business operations and highlights followed by Mr. Zheng, who will go through the financials. They are all available to answer your questions during the Q&A session.
I remind you that this call may contain forward-looking statements under the safe 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 uncertain -- are beyond the 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. Kan Li. Mr. Li, Please go ahead.
Kan Li
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 loan 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 a better-than-expected GDP growth in Q1. However, as stated by the National Bureau of Statistics, the American domestic demand remains prominent and our foundation for economic recovery is not solid 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 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 delinquency rates for all outstanding loans past due 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 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 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 a 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 2023. To date, 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 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.
Fuya Zheng
Thank you, Kan, and hello, everyone. We were pleased to deliver solid financial performance in the first quarter. Total net revenue was RMB 1.005 billion, increased by 13% year-over-year and 5% quarter-over-quarter. Our net income per basic ADS improved significantly to RMB 5.94 from RMB 2.52 in the same period 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 our -- reach more borrowers while 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. Now I would like to brief some financial performance for Q1. Please note that all numbers stated are in RMB and rounded up. Total net revenue increased by 13% to RMB 1.005 billion from RMB 888 million in the same period of 2022, primarily due to an increase in total loan amount facilitated and originated this quarter compared with the same period of 2022.
Origination and service expense increased by 36% to RMB 634 million from RMB 464 in the same period of 2022, primarily due to the following factors: one, an increase in commission fees resulting from the increase in total loan amount facilitated and originated this quarter compared with the same period of 2022. Second, an increase in interest expenses as a result of increase in payable to institutional funding partners and investors. And third, partially offset by a decrease in insurance fee paid to the insurance company. Provision for loan receivable was RMB 20 million compared with RMB 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 partially offset by 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 operations 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 154 million in the same period of 2022. For further financial information, please refer the earnings release on our IR website. Now for our business outlook. For Q2 this year, we expect a total loan amount facilitated and originated to be between RMB 25 billion and RMB 26 billion. Now this concludes our prepared remarks, and we would like to open the call to questions. Operator, please.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from [Matthew Larson from Finkeda].
Unidentified Analyst
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 Fintech company would trade at any place else. I mean if I were to annualize your earnings for the first quarter, you're trading at less than 1x earnings. You're trading at cash value and a fraction of book value. How many ADS are outstanding, by the way. I see there is 294 million shares fully diluted. What's the conversion into ADS? Can you answer that technical question for me first, please?
Fuya Zheng
It's 1 ADS equal about 6 share of Class A share. So that's the conversion ratio. And we -- our -- yes. We have about outstanding about 22 million ADS outstanding, I think that's total 22 million.
Unidentified Analyst
22 million ADS outstanding, and the float is?
Fuya Zheng
Yes, yes. Yes, 46 million equivalent total, but tradable -- has been converted to ADS is only about 22 million.
Unidentified Analyst
So that's what's available on the float, but is if there is 294 million shares divided by 6, yes, yes that's 40-some odd. So the float is only 22 million shares. And -- okay, just a couple of questions. I mean the valuation, this stock should be $10 at least, and that's it would be -- because you make -- if you're going to grow your revenues, and 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 will hold, because it did that about a month ago, it traded 1 million shares and came right back down. But 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?
Fuya Zheng
Because the first quarter, there's no open window for that. And we only -- so far, we only get a buyback through open window and actually for the whole buyback, which was about 20 million so far. Most of it is by through Class A share, which do not affect our flow much. We -- 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 buybacks -- mass majority is a buyback through Class A share, which we try to avoid have a less impact on the float, which also is not big as I stated before.
Unidentified Analyst
Sure. But 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 the -- of the A shares the valuation just -- it 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 were exactly the same, but they were all underwritten by Morgan Stanley, FINV, for example, QFIN just reported, even YRD okay, companies that initially were peer-to-peer lenders and have migrated to lenders using capital-light models and things like that. But the frustration is there's a lot -- every day, there's some small cap companies that are domiciled either in China or Hong Kong, that go up 5 or 10 fold on no news. And it would be great if one of them I own worked. So let me ask you this. You all should -- could be putting on more information. I mean, you've been using AI as far as I'm concerned for years or some variation of artificial intelligence. You use an algorithm to make immediate credit assessments from all the people who have the -- your app on the phone, and 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 -- I mean, just look at the stocks in the United States that are involved in United artificial intelligence, NVIDIA, for example, 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, you have -- it's a fraction of where it was when it came public, but you performed extraordinarily well, so you might want to rethink your public relations, your news releases because you should be -- I mean you didn't even mention on the news release, 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 that your float isn't big here, if you guys bought 1 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 piece. There's no analyst that follows the company, and there's a -- few people even know about it. What can you tell me about other efforts to get your stock price higher?
Fuya Zheng
Let me try to answer your question. And first of all, I completely agree with you. Our stock is severely undervalued. And not just our stock and our payer stocks, all undervalued in -- to a large extent. See like our [PBS], right, right now is $0.22 on the dollar. I have more cash than my market cap, I audit by KPMG, for sure, I do not do anything funny thing, I have RMB 22.4 million cash deposits in the bank in order to support my business. So it's just not including the cash on my balance sheet. So you just figure how much we are undervalued. But our peer, whatever the name you have mentioned, you see they all book -- they all value below the book value, right, so like somewhat a little bit better than me.
So we will take your advise. We'll do some marketing roadshow. And you see right now, we are -- so the regulatory deadline on June 30. So let's get that pass. So we have a -- so in some sense, we are -- we get first we are -- our survivability is not in question. But the prospect -- the future of our industry, future definitely in doubt, that's why I believe -- that's why we have this kind of valuation. We will take your advise. We will do some PR stuff and stuff you just mentioned starting second half of this year. But in additional the buyback which we did last year, which would reduce our -- the total share accounted by 16%, which is a lot, but still do not much -- did not help much improve the stock price, I don't know how to answer that, but I think whoever else did the buyback also did not work it out 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'll pay dividends, our company -- our shares -- for our shareholder value and relative will be higher compared with other industry and so forth and so on. So that's -- and we will consistently do that for the next few years. That's our intention. That's our board attention and so far so on. Let's see how that will work out.
Unidentified Analyst
All right. And there's usually not many people in this conference call so I'm going to take a little more time. You talked about the regulatory response, which is due in June. 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 a business model that was pretty much outlawed. And for various reasons, there was some bad actors, okay? We go through the same thing in our country, where financial -- a loose financial structure can lead to disappointment among consumers. But you discussed that the survivability of your industry might even be at risk. I mean it seems to be you also 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 -- you're providing 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 at risk of survivability if you're providing a service, I mean credit makes the world go round. It greases the wheels of commerce.
Fuya Zheng
Yes, yes. I understand what you mean. I think I can answer that question. I think our industry has been going through a very [troublesome] for the last few years. And all the -- most of bad actors has been playing so-called P2P peer it's being claimed by company. I think all -- everyone, including government will agree on this the survival of this industry is much, much healthy and much comply everything in -- in every respect comply with government [new] regulation on both -- most Chinese also other (inaudible) on U.S. also, but that definitely is true. But the issue is government for the last 2 years, government always try to strongly promote a small business owner, a small business. That's for sure. And they are supporting for the companies who provide a loan. But the only thing that's not very clear is they seem like to provide very low interest loan from mostly state owned banks but our business model mainly is based on risk factor, and we now make a ton of money.
We -- our interest spread -- we are -- our business is compatible with big banks, but probably a little bit higher, wider than them, but we also take more risk out. So that's why I think that we target a little bit more in terms of interest spread, I think, is fully justified. But that is not -- probably that's the fundamental reason is not totally being endorsed by the government or regulatory that question has -- still has made very clear or -- very clear for everyone. That is why -- because we relatively speak to the people we charge still is very, very high. Just if you see the so-called loan provided to the small business, individual owner with any kind of government, they only charge about maybe 4%, 7% something in that range. But once again, I think that is not based on risk factor. And if you ask me you're taking the risk factor those loan, I think is -- most of them will be bad. To be frank, I think I don't know how that's economically workable, but we do different model. Our model is not -- once again, not fully endorsed by the authorities that's why it's not -- yes.
Unidentified Analyst
Yes. Well, you have unsecured loans, if you're having discussions with them, I can tell you what credit cards -- which would be similar to 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 24%, all right? And they got to be paid back every month or you got to pay the 23% or 24%. If I were to get a collateralized loan, a secured loan from a bank like a mortgage it would be 6%. So we just there is a -- 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 23% or 24%. So your rates are not out of line by any means because credit cards, you still have to have a credit history and -- to even get one. And if you haven't in the past, paid it back, you can't even get a credit card. 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 -- I mean your stock could be 10x higher for Pete's sake. If you make $4 a share, why wouldn't it be trading at $25, okay, by any measure, because that's -- a financial institution has shown your track record of keeping loan losses down to like 1% I think you're at. 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.
Fuya Zheng
Thank you for your question and thank you for recommending we will -- I will do that.
Unidentified Analyst
I'll let somebody else if they are on a phone, call in.
Fuya Zheng
Thank you.
Operator
(Operator Instructions) Our next question comes from [Boyd Heinz from Equinox Capital].
Unidentified Analyst
I also wanted to focus on regulation 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?
Fuya Zheng
We don't have much regulatory -- dialogue with regulator regarding the business model. And [regulatory] sometimes just only issue they care right now for the last 3 years. So it's a customer complaint. And so we are just the best -- that's their KPIs, the #1 KPI. So we do best to address those issues. And other than -- in other area, we are comply voluntarily. So we frankly will never have a discussion with the regulator regarding our business model. I don't think that's their concern. I obviously know it's not their concern.
Kan Li
Let me take this quickly. I think Frank has been made very, very clear. It's not that we have a huge barrier between us and the regulators. 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 have been doing any financial activities, I think the regulator is balancing this one question, and they haven't made it very clear and this -- and I think this uncertainty has been kind of hanging over there. We don't have any question -- we don't have any answers for that question. I mean this -- I think this is a key issue between -- for the Fintech company in China because that our business actually -- our business actually is financial activities.
Fuya Zheng
Yes. So we are engaged in financial activities as a facilitator as a syndicator, what you call it. But the question is according to philosophy of government, all financial activities should be licensed and whether they will issue a license for a company like us, maybe not. So that probably is the key question. Yes.
Unidentified Analyst
Yes. I think everybody is having -- I think they're having a hard time understanding whether you should be regulated as a bank or not yes. And I -- I mean, the 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 are -- do you have a lot of undisclosed risk that's not on your balance sheet. And 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 risk that you should be showing in your balance sheet. I think that's probably the key issue here is -- 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 -- 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.
Kan Li
Well, in terms our business model, we don't show that in our balance sheet. I think that's true. But on the other hand, we do just take a very crude leverage comes, right? So we're managing around $40 billion -- sorry, RMB 40 billion loan business, and our total -- our net capital is around 60 -- sorry, $6 billion so if we -- not 6, RMB 6 billion. So if you take that very rough ratio, it's about 1 to 6 or 1 to 7, right, which in terms of the way that we can -- the risk that we can handle, I think that the room over there is quite high. So what I will be looking at is when we compare across the industry that I normally have to take a look at that ratio. And another thing is that just as Frank mentioned, yes we have about RMB 2.7 billion that deposit in different institutions. And that is another buffer that we can use to offset any credit risk that is coming up.
But in terms of our overall business that we are very -- that originally [various sales tax is low]. So our company itself does not to need to take that much of our risk for our business. And the managing that you just mentioned there 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 companies have not directly issue known, 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.
Unidentified Analyst
I mean, could you potentially partner or sell yourself to a larger financial institution that already has the proper licensing. 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.
Fuya Zheng
I think that's probably not likely but as you say, since our model is not recognized by government through a license or through other kind of means. There's no big institution in China will acquire us that kind of business because in terms of the culture, in terms of compatibility between our business and their business, I don't think there are the big financial guy in China will likely -- quite at a valuation desirable for you guys. I think that's highly unlikely.
Unidentified Analyst
Okay. Just one last housekeeping question about the tax rate. Do you expect that rate to be consistent with what you have reported in the first quarter going forward?
Fuya Zheng
I think the -- I think I answered that question before. I think because most of the entity -- our entity in China, we operate in China, its tax rate is about 15% so we actually tax -- U.S. tax rate is about 20%. That is being -- there's a way to being reconciled over the time. So I think once again, our effective tax rate will be below 25% on going forward basis and it will be stabilized.
Unidentified Analyst
Okay. And in terms of that date of June 30, is that kind of like once you get past that date and there's no -- I mean, are you in the clear after June 30? Or is there still going to be ongoing series of regulatory issues?
Fuya Zheng
I don't know, I don't know. You know what I mean, we are not in the -- including that 13 plus 1, which is [N Financial] they are being marked to be regulated and first to ratification. We now even market but no one ever mentioned that 14 others, we are others. And all the work, I think the government I think is pretty much focused on the N Financial alone and N Financial see as far as I know from the news as everybody they are basically finished the other 13, what they will do to comply fully, I think they will be -- I don't know maybe just pass to United Stated June 30 really, but we hope they all pass, they all pass maybe a pass along, I don't know, you asked me, I'm not even in the position to answer that technical question.
Operator
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.
Unidentified Company Representative
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 context. We look forward to speaking with you again in the near future. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
