Earnings Call: Q2 2021

Aug 23, 2021

Earnings release

Please note this event is being recorded. I would now like to turn the conference over to Ms. Junjie. Please go ahead. Good morning and good evening, and welcome to the CN Finance Second Quarter 2021 Third Financial Results Conference Call. In today's call, our CEO, Mr. Zhai, will walk us through the operating results followed by the financial results from our Vice President of Capital Markets Department, Ms. Li. After that, we will have a Q and A session. Before we start, I would like to remind you that this conference call contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U. S. Private Securities Litigation Reform Act of 1995. These forward looking statements can be identified by terminology such as will, expects, anticipate, future, plans, plans, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve long 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 following statements. Further information regarding this and other risks, uncertainties or 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. Now, please welcome our CEO, Mr. Thank you, operator, and thank you everyone for joining us in the conference call. On today's call, we will introduce company's financial and operational results of the second quarter and the first half of twenty twenty one followed by a Q and A section. Following a good first quarter, the loan facilitation volume increased again in 2nd quarter. After adding another RMB3.8 billion of originating loans in the 2nd quarter. The total loan facilitation reached RMB6.6 billion in the first half of twenty twenty one, representing an increase of 100% and 113% respectively through the same period of last year. The net income in the second quarter and the first half of the year was 55,000,000 and RMB150,000,000 respectively. Both increased significantly comparing to a net profit of RMB25 1,000,000 at a net loss of RMB 1,000,000 in the same period last year. We not only delivered solid operational results in the Q2, but also in the 1st 6 months of 2021. The loan facilitation volume even reached a new high since the inception of collaboration model. The reasons of our success are threefold. The huge demand for home equity loans in the Q2 as China's GDP grew 7.9%, the vital business operations of over RMB80 1,000,000 micro and small enterprises in China led to a huge demand for working capital. However, MSCs in China are usually scattered with small scale and a stable cash flow. These characters of MSEs made them difficult to meet the loan approval criteria at banks. Their demand for working capital cannot be satisfied by traditional financial institutions. In this market environment, we call ourselves the last mile courier to build a network of an inclusive financial system in China. In the past 2 years, we have ordered loan services to over 40,000 MSCs in China. On the other hand, home equity loan is still one of the best interest bearing assets in the market as we witnessed the transition increase of property price in major cities since the second half of twenty twenty. Since the inception of collaboration model, we have built a national worldwide consistent of 50 branches and 40 cities. By collaborating with over 2,000 self partners across China. With this network, we are able to establish a wide market coverage and serve MSE owners financing needs in a timely manner. In the first half of twenty twenty one, we facilitated loans with a total amount of RMB6.66 billion, representing a year on year growth of 118% from RMB3.05 billion. The company's growth is back on a fast track. The collaboration model has been well recognized by the market as we kept refining the operation in the past 2 years. To secure sales partners' loyalty to our platform, we have been optimizing our service providers by First, we have been consistently adding talent to our professional management team. We also offer training programs for our sales partners to help their team members gain deep understanding of the product and risk control criteria of the trust company partners, so that they could serve MSP owners efficiently. 2nd, we optimized the data processing and storage of our online system to make it more efficient and visible to users. We hope to serve MSC owners in time and cut our all costs at the same time. The drastic increase in loan origination volume was approved to the capacity and efficiency of our loan process system. Based on our internal assessment, our current system is capable to support an annual capability of RMB30 1,000,000,000 to RMB50 1,000,000,000 in the loan origination We delivered strong results in the past two quarters, but at the same time, we also noticed some challenges to our future growth, including Funding pressure. We are highly dependent on trust companies as funding partners. Since the beginning of 2021, regulation on trust companies' loan products was tightened. As a result, trust companies reduced our funding quarter. We also suffered from a subsequent rise of financing costs. We do not expect this regulation to loosen up in the rest of 2021. And therefore our loan origination will possibly be affected. We have noticed the uncertainties of property price and liquidity due to the government policies in controlling property prices and impacts from the COVID-nineteen pandemic. In 2021, the government actively initiated measures to control property price, including announcing suggested prices to secondhand property in multiple cities as well as tightened mortgages to slow down property transactions. The management believes that such uncertainties will negatively affect the loan origination volume and NPL disposal. Under the collaboration model, sales partners bear risks. However, due to the business structure agreed upon with the trust companies, We are the holder of subordinate units in the trust plan. As a result, we have to consolidate the assets on our financial statements. We seem like a company with heavy assets where our revenue is generated from interest spread. The balance sheet cannot represent our true business model, which is in fact an asset light loan alteration platform. In the meantime, the work of the balance sheet is also constrained when we reach out to new forming partners. In order to consistently grow our business and serve MSC owners in the changing market, We plan to further refine the current platform model and introduce a new asset light service platform by taking the following measures. Transferring all assets and risks to any investor with preferences in high risk and high return asset backed by property. Our company will focus on online and offline loan origination and post loan management service. Collaborating with different types of funding partners to serve MFC owners with different credit ratings. Other than strengthening our collaboration with trust companies, we have proactively reached out to various financial institutions. We hope by introducing more diversified loan products, MSCs could enjoy the benefits of more affordable loans. We have signed collaboration agreement with commercial banks including Everprice Bank, Blue Ocean Bank and Huaxia Bank with a possibility to issue ABS. We believe that creating a broader financial channel will help us bring diversification of our loan products and offer more choices to MSE owners. We will continue to improve our service to MSP owners. First, we will further expand our service network national wide. The current network has 50 branches covered across 40 cities penetrating into markets and discovering the financing needs of MSE owners. Other than that, we will prioritize technology development to improve the loan measurement system capability in storing data and to increase efficiency in overall process to satisfying the financial needs of MSC owners, also with the goal to reduce operating costs of our company. To achieve our mission of make finance more human and follow the government's policy of developing an inclusive finance system, we will leverage our advantage gained years of dedicated work in the industry and build a service platform that is asset light, turnover high and scale large. We will proactively work with funding partners to push our diversified loan products consistently to buy MSE owners with affordable, accessible and efficient financial services. And last today, we announced our CFO, Mr. Li Ning, who stepped down from CFO position in November. I want to take the time to thank Mr. Li's years of hard work. Mr. Li has served as our company's CFO since 2010. In the past 11 years, he made significant contribution in leading finance Xian Finance to become a leading home equity loan service provider in China and put dedicated work in transformation from a privately held company into NYSE listed company. On behalf all of us here in CN Finance, I would like to thank Mr. Li Ning for his leadership, dedication and professionalism. I wish him best of luck with his future endeavors. We have already commenced the search for new CFO. With that, I would like to hand the call over to Ms. Jay Li, the Vice President of the Capital Markets Department, who will walk you through the Q2 and the first half financials. Thanks, Mr. Zai, and thanks again to everyone joining us today. I will walk you through our Q2 and first half of twenty twenty one financials. We believe our year over year comparison is the best way to review our performance unless otherwise it states all percentage changes I'm going to give will be on that basis. Also, unless otherwise it states all number I'm going to give will be in RMB. We will go through the figures for the Q2 of 2021 first and followed by that for the first half. As of June 13, 2021, total outstanding loan principal increased to RMB11.6 billion, compared to RMB9.7 billion as of December 31, 2030. Total loan origination volume was RMB3.8 billion, increased 103 percent from RMB1.9 billion in the same period of 2020. Interest and financial service fee on loans was RMB449 1,000,000, a slight decrease of 0.2%, primarily due to the combined effect of increased average lending loan principal. And b, lower interest rates on loans facilitated comply with the rules and regulations issued by relevant PRC regulation authority. Interest expense was RMB195 1,000,000 compared to RMB 187 1,000,000 partly due to the increase in the principal of borrowing from the trust companies. Collaboration costs for sales partners increased to $107,000,000 for the Q2 of 2021 compared to $104,000,000 in the Q2 of 2020, primarily due to the high outstanding loan balance was originated under the new corporation model. Provisions for the credit losses was RMB15 1,000,000 a decrease of 74% from RMB57 1,000,000 in the same period of 2020. The decrease was mainly attributable to the combined effect of, a, the increase in outstanding loan principal under the commercial model that was guaranteed by credit risk mitigation position, put up by the sales partner and b, lower profitability deferred under the current expected credit loss model, which take into account a more positive outlook for the Chinese economy in the Q2 of 2031 as compared to that in the same time of 2020 under the impact of COVID-nineteen pandemic. And C, the company received recoveries in the quarter after touchdown loans that are 180 days up due to net realizable value. Total operating expenses were RMB87 1,000,000, a decrease of 34% compared with $114,000,000 in the same period of last year. Income tax expense was $8,000,000 a decrease of 46% from the RMB16 1,000,000 in the same period of 2020. This is primarily due to the decrease in the amount of cash flow income. And net income was $65,000,000 in this quarter, an increase of 159 percent from $25,000,000 in the same period of 2020. Now, we are moving on to our financials to the first half of twenty twenty one. Total loan origination volume was RMB6.7 billion compared to RMB3.1 billion in the same period of last year. Interest and financing service fees on loans was RMB871 1,000,000, a decrease of 7%, primarily due to the combined effect of A, increase of average daily outstanding loan principal and B, lower interest rate of loans facilitated in an effort to comply with the rules and regulations issued by relevant CRC Regulation Authority. Interest expenses was 351,000,000,000 dollars compared to $388,000,000 in the same period of 2020, probably due to the decrease in principles of borrowings under guarantee and repurchase. Collaboration costs for sales partners increased to $205,000,000 for the first half of 3031 compared to $198,000,000 in the same period of 3030, partly attributable to the increased loan balance under the collaboration model. The provision for credit losses was a recovery of $3,000,000 while there was a provision of $277,000,000 in the same period of 2020. This is primarily due to the result of 1, the increase in outstanding loan principal under the collaboration model that was guaranteed by the credit risk mitigation position put up by the sales partner and the lower probability of this work under the current expected credit loss model, which takes into account more positive outlook for the Chinese economics in this year as compared with that in last year, the same period under the impact of COVID-nineteen pandemic. And see, company received recovery in the first half of twenty twenty one after change down the loans that are 180 days plus due to net realizable value. Total operating expenses were $182,000,000 a decrease of 16% compared to $250,000,000 in the same period of last year. Income tax expenses were $38,000,000 an increase from $1,000,000 in the same period of 2020, primarily due to the fact that we recorded an income before income tax expense for the first half of twenty twenty one as compared to a loss before income tax expenses for the same period of 2020. Net income was RMB151 1,000,000 compared to a loss of RMB41 1,000,000 in the same period of 2020. As of June 13, 2021, the company had cash and cash equivalents of $1,600,000,000 compared with $2,000,000,000 as of December 31, 2030. The actual delinquency rate for loan origination by the company decreased to RMB18.9 as June 13, 2021 from 32.6% as of December 31, 2030. The actual NPL rate for loan origination by the company decreased to 8.6% as of June 13, 2021 from 11.7% as of December 31, 2020. With that, we would now like to open up the call for Q and A. Operator, please begin. We will now begin the question and answer session. And our first question will come from William Gregozeski of Greenridge Global. Please go ahead. Hi. Congratulations on the big loan origination volume number. Are you seeing a continuation or do you expect to see a continuation in that number or growth? And also, do you have the availability of funds to support that level of demand? Hi, Bill. Could you repeat your first question again? We kind of had a bad connection just now. Yes. I just said you had huge loan origination volume growth. Do you see that continuing? Is that demand going to continue? And do you have the access to the capital to support that demand? Okay. I will take your questions. Like CEO just mentioned in his remarks, as China's economy grows by a high speed, we continually to see the huge demand from the MSE owners for capital. And we had a very established sales network and our system is capable to support our loan facilitations. So like I just like the CEO just mentioned in his remarks too, our system is capable to support the annually loan facilitation of RMB30 1,000,000,000 to RMB50 1,000,000,000. And we believe the huge demand from the MSE owners will continue and carry through. And our CEO has something to supplement. This year so far we have seen huge demand for capital from MSC owners and we think this will carry through to the remaining of the year. And the main challenge to us right now is that we are highly dependent on the trust companies to support our capital, our fundings. But they are facing tightened regulations so that our quota was kind of brought down by the trust companies. And we have taken many measures to reduce the effect of tightened trust company fund, but we will see that to be of our assistance not until Q4, the Q4 or the Q1 in 2022. So that's my answer to your question. Okay. And you mentioned signing up the commercial banks, which seems like a great thing for you guys in the platform and getting that access to capital from that channel. How much availability do you have? I mean, are these trials or is it a good amount of capital you're going to have and what's the rate on that? So we have already signed collaboration agreements with 3 commercial banks. So one being the Everbright Bank, one being the Huaxia Bank. And there is a smaller one comparing to the last two mentioned, the Blue Ocean Bank. The main advantage that brought up by collaborating with commercial banks is that we can cover MSE owners with different credit ratings. So the agreement deal is signed. Right now, we are just trying to see if we are compatible in our collaborations and trying to see how the system is going. So yes, that's my answer to your question. Okay. So there hasn't been any large scale lending from the banks yet. It's just more in a test run? Yes, you're correct. Okay. And last question is on previous calls, you've talked about Class A, Class B and Class C loan products you were going to roll out with different rate structures. Can you provide an update on those? So that's our initial ambition. When we said we are trying to collaborate with commercial banks is that we want to just cover customers with different credit ratings. So when we were solely collaborating with trust companies, the customer we could cover was mainly so internal classification, the Type B and Type C customers. But based on our past experiences, we don't really see that they have too high a risk. So by collaborating with the commercial banks, we are trying to cover the so called Type A customers. But however, we are not sure at this moment if they are really going to be of higher quality than the customers we are serving now, because right now in China, the credit system credit rating system isn't fully established. So we really have we are not really fully sure of whether the Type A customers are going to be by their customers than B and C customers. So what we're hoping right now is that we could offer loan products with interest with annual interest rates from 10% to 18%, so that we can cover more customers, more borrowers. That's my answer to your question. Okay, perfect. Thank you guys very much. Thank you. Thank you for your question. The next question comes from Neil Gagnon of Gagnon Securities. Please go ahead. Yes. Good afternoon. Can you give us your review on this quarter? How did it live up to your expectations? And what base does it set for your expectations for the second half? Thank you. First of all, we are seeing sufficient huge demand for the whole year. So based on our internal record, the application every month is well over RMB2 1,000,000,000. However, we could only facilitate around RMB1 1,000,000,000 every month. So there is a 50% gap in between the demand and supply. And since last year, we have seen consistently increase of property price in China. The increase was even over 30% in some major cities in China. So those two factors lead us to believe that there is going to be huge demand in the remaining of the year, in the second half of the year. But there are 2 considerations. First of all is to secure enough secure access to enough funding. And the second thing is that starting from this June, we have seen tightened regulations on the property price as well. So we tend to be more conservative when doing businesses in those cities where the property price is considered to be too high. But after all, we are still very confident to reach our set goal from the beginning of the year to reach RMB10 1,000,000,000 in outstanding loan principal by the end of the year. Actually, we have already reached that goal at the end of the Q2. So we are working on refining our business at this moment. That's our priority. Thank you. Thank you for your question. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Ms. Jen Jai for any closing remarks. This will conclude the conference call today. If you have any further questions, please reach us at iocanichina.com.cn. Thank you. The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.