Hello, welcome to the X Financial third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results were released early today and are available on the company IR website at ir.xiaoyinggroup.com. On the call today from financial are Mr. Ken Li, President, and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr. Li will give a brief overview of the company's business option, 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 the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and current market operating conditions and relate to events that involve known and 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, and achievements to differ materially from those in the forward-looking statement. 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. Ken Li. Mr. Li, please go ahead.
Hello, everyone. We are pleased with our operational and financial results in the third quarter. The loan facilitation amount reached the high end of our previous guidance. Asset quality steadily improved, and both top line and bottom line saw sequential growth. Against the macro headwinds such as economic slowdown and consumption softness amid the COVID-19 resurgence, our performance further demonstrate our healthy fundamentals, effective strategic positioning, proven strategy and strong execution capability. During the third quarter, our total loan amount facilitated and originated reached about RMB 20 billion, an increase of 31% year-over-year, and 17% quarter-over-quarter. We continued to improve our asset quality with prudent risk management.
On a sequential basis, the delinquency rate for all outstanding loans past due for 31-60 days decreased from 0.93%- 0.77% as of the end of September. In addition, we further expanded our premium borrower base. Our number of active borrowers increased to 1.4 million in the third quarter, a new record in the company's history. This expanding premium borrower base has underpinned our quality growth during challenging times and laid a solid foundation for our future development. Moving ahead, we will continue to enhance our risk management and borrower acquisition efforts. We believe China's consumer and micro and small business financing market still have great potential, and we are confident of delivering sustainable growth in the long term. During recent months, we continued to execute our share repurchase program initiated earlier this year.
This share repurchase program is aligned with our commitment to enhancing shareholder value and reflects the board's confidence in the company's long-term prospects. Our board further increased our share repurchase program to $30 million . We believe that our business strategy and execution will continue to further enhance shareholder value in the long term. Now, I will turn the call to Frank, who will go through our financials.
Thank you, Ken, and hello, everyone. We are pleased to deliver a steady financial performance in the third quarter. The total net revenue increased by 9% quarter-over-quarter to RMB 895 million, while net income increased by 14% quarter-over-quarter to RMB 212 million. We continue to deepen our collaboration with institutional funding partners to serve diverse personal financing needs and discipline cost control measures to improve operational efficiency. Despite macro uncertainties ahead, we believe we are well positioned in the market with our trusted brand, strong technology, and underlying earnings strength. We will strike a balance to drive long-term growth and increase shareholder value through sound capital allocation strategy. Now, I would like to present some financial performance for the third quarter.
Please note that all numbers stated are in CNY and are rounded up. Total net revenue decreased by about 7% to CNY 895 million from CNY 964 million in the same period of 2021, partially due to a decrease in average total borrowing costs of the borrowers, and also partially offset by an increase in the total loan amount facilitated and originated this quarter compared with the same period of 2021. Origination and servicing expenses increased by 12% to CNY 540 million from CNY 484 million in the same period of 2021, primarily due to the following factors. One, an increase in commission fees resulting from the increase in the total loan amount facilitated and originated this quarter. Second, an increase in interest expenses as a result of increase in payable to the institutional funding partners.
The third, partially offset by a decrease in insurance fees paid to the insurance company. Provision for the loans receivable was CNY 70 million compared with CNY 10 million in the same period of 2021, primarily due to an increase in loans receivable held by the company as a result of increase in the total loan amount facilitated and originated this quarter compared with the same period of 2021. Partially offset by a decrease in the average estimate default rate compared with the same period of 2021. Income from operation was CNY 300 million compared with CNY 411 million in the same period of 2021. Net income was CNY 212 million compared with CNY 267 million in the same period of 2021.
Non-GAAP adjusted net income was RMB 231 million compared with RMB 277 million in the same period of 2021. For further financial information, please refer to the earning release on our website. Regarding our share repurchase plan, on September 30, 2022, we announced that our board authorized an increase in our share repurchase program to $20 million from $50 million, effective through September 2023. To date, we have purchased an average of about 218,000 ADS and approximately 38 million Class A ordinary shares for a total consideration of $18 million. On November 16, 2022, we announced that our board had authorized to further increase the share purchase program to $30 million. The share repurchase program will remain effect through September 2023. Now for our business outlook.
We expect total loan amount facilitated and originated for the fourth quarter of 2022 to be between RMB 19.5 billion and RMB 21 billion. For the full year of 2022, we expect total loan amount facilitated and originated to be between RMB 71.5 billion and RMB 73 billion. This forecast reflects our current and preliminary views, which are subject to change. This concludes our prepared remarks, and we would like to open the call to questions. Operator, please.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Brad Hines with Equinox Capital. Please go ahead.
Hi. Can you discuss your outlook for the take rate and just any kind of discussion about how the interest rates have been trending since Q3?
Regarding our take rate, because as our business still, you know, in the process to meet the demand to regarding the, you know, the product all should be below 24%, that, you know, it's not hard target, but it's a soft target. We are somewhere the take rate for the different products between 2%-3% all the way to like 8%-9%. For different products, for different takeout. We do not give a overall takeout rate, you know, for us.
Right. My question is really, do you think that interest rates that you can charge borrowers, has that sort of stabilized? Is it or is it still continuing to go down? What kind of competitive pressures, regulatory pressures are you continuing to see?
The pressure from interest rate is mainly from the regulatory pressure. We expect the rate will continue to go down, to be stabilized in some time in the middle of next year. That's the best answer I can give you right now.
Okay. How are you able to continue to generate such strong loan demand? You spend relatively very little on sales and marketing. How are you finding customers that fit your risk model?
Well, actually, this year we spend more on sales and marketing compared with the same period last year. I think mainly, you know, the demand for our products, the demand of the potential market is very, very large. We only, I mean, for all the players put it together, we still have a very small percentage of those demand. One factor, you know, maybe as a benefit to us is that Ant is regulated very, you know, from capital requirement perspective, it's, you know, being regulated very strongly by the regulator for the last year or so. Their volume shrink a lot.
Every other players in the market all got some, you know, share from them. Overall market, I believe still quite stabilized. Never shrink much.
Mm-hmm. Are you continuing to target more individuals as opposed to SME?
Well, I think most of our customer is individuals. Even though I'm not quite sure, you know, somewhere between maybe 10%-20% among them are small business owner or small business. Yeah. We don't have an exact figure. We never have a poll on those figures. We guess it's between 10%-20% they are small business owner also.
Mm-hmm. Mm-hmm. One other question about your share buyback. What is the shares outstanding for your Class A shares as of the end of the quarter? Not the weighted average, but what is the actual share count as of September 30?
Okay. Uh, I think, uh, I think, uh, the share maybe, um, you know, uh, I have a maybe like a No-November 13 number. Uh, but that number is maybe a little, but not quite, m- you know, big difference from, you know, what do you want to know. So we have a Class A share. It's about 193,429,088 Class A share. And we have 97,600,000 , uh, Class B share. Uh, we in aggregate, we bought back about 38,088,855 co- you know, common Class A share equivalent. Because some of the, some of them, among them, about, uh, 21,201,000 ADS . Uh, one ADS is counted for about six ordinary shares.
The Class A share, Class B share is the same thing, but except the voting power.
Right. And how many of those. So that re, the 38 million, was that repurchased entirely in the quarter?
Uh, uh, in the quarter, I think, uh, I think the quarter we did about, uh, 218,178 share of ADS. And 28,201,772 , uh, ordinary Class A share. And actually, we already did in, you know, it's, uh, you know, as, you know, it's 900 , another 9 million, almost 10 million did in October.
Okay. It's interesting how you're executing the buyback. It seems that you're not able to do it in the open market here in the U.S.
Uh.
The trading volume is very low.
Yes. The volume indeed is very low, and we are under the rule like 10b-5 and 10b-18, so we only can buy, you know, like, you know, only like below 25% flow, you know, on daily basis. Also, we cannot get anybody higher than that. Among 280,000 share, only about 86 million is bought from open market during the open window. Another 132,000 share ADS is bought back from one of the employee who have ADS.
Yes.
Also during the open window, the auditor shares also did it in open window. The $9 million is we signed a contract with them in open window, but because they took them some time to set up a OC account to receive US dollar. Until, like, October, we pay out money.
Yes. I hope you will continue to repurchase stock at these levels. You're obviously trading well below book value. Your price-earnings multiples.
Uh.
Are very, very low.
Yeah, we, you know, we expand our purchase program, which is demonstrate our intention to continue to do the buyback. I think, you know, based on current volume, I would still expect to do through very low volume will be bought back from open market unless the situation change. We do have a few, one or two individual willing to sell their Class A share back to us directly. You will see the next quarter, we will see more, but not as big as, you know, the number we just already did.
Right.
Small. Still, those number I calculate we already bought back total over 11% all the Class A and Class B share equivalent back from the market. We continue to do that. We may have another few percentage points to do that. After that, I think we all situation will be depending on the market volume. For the next year, I think we will use combination of the stock buyback and dividend payout to return the shareholder value.
That sounds great. Are you able to?
Most likely in the second half of the year.
Uh-huh.
The dividend payout most likely will be happening in the second half next year. Because, you know, it takes about one year to set up a mechanism to get RMB converted into the U.S. dollar. You know, with like a 5% tax on those dividend payout to the Hong Kong. Because China, you know, has a currency control mechanism where Chinese until now don't have a free conversion for the RMB and U.S. dollar or other currency. You know, China have capital control at place.
If you wanna do that kind of thing, you need to have some mechanism to set up. We are doing that. We expect that mechanism to be finished, you know, in the first half of next year. The money we use right now is our current, you know, U.S. dollar, you know, we got through IPO.
How are you feeling about next fiscal year? You've obviously dealt with a lot of headwinds, regulatory, economic, in fiscal year 2022. Some of those appear to be lifting going forward. You've still been able to grow your loan originations, even in the face of that. How are you feeling about what the potential growth could be for next year?
For the next year, I think, still have a, you know, great uncertainty regarding next year. I think that's why you never heard anybody, even at end of year, any player give you any concrete forecast for the next year. I think the biggest uncertainty is still regulatory, you know, stuff. The general feeling is after finishing the 2020 Party Congress, you know, the leadership is, you know, be set up. Overall all the industries all expect, you know, there will be no more, you know, coming in, you know, the measure, additional, you know, measure to be issued.
All the industry regarding to the regulatory will be focused on implementation for the current, you know, all the stuff they've been issued before. We will, you know, fortunately for us is we are not, you know, in the first tier to be test those rule. We will definitely follow up, like Ant Group and wherever, you know, hope they will give us some example. Once again, we are cautiously optimistic for the next year, but no guarantee.
Okay. Last question, and then I'll drop off. In terms of your stock and the listing here in the U.S., I think one of the big concerns that investors have is that you could be delisted for various reasons. What assurance can you give investors that you're going to be able to, you know, find some way to help remove that risk of delisting? I mean, would you consider taking the company private if it came to that?
We don't have an intention to delisting, and we don't have a plan to do second listing in Hong Kong because we couldn't do second listing in Hong Kong because our market size just not big enough. That's not an option for us. We are very pleased to know, you know, the examiner from PCAOB, they wrap up their early work in Hong Kong earlier, about two weeks. I think within next two months, I think, S.E.C. will have some kind of a revaluation with Chinese Finance Minister.
I think that those will, to large extent, will resolve the issue regarding potential risk Chinese-listed company in the U.S. to be delisted because of U.S. law. To be honest with you, the delisting is mainly is a concern from U.S. side, not from Chinese side. If that issue to be resolved, which means our all the auditing firms in China, their working paper could be subject, will be subject and subject to examination by the PCAOB in the future. I think, you know, most company, maybe except a few state-owned company, you know, that may be exception. All the private company listed in U.S. will be continued to be delisted in the U.S.
That's the best I can tell you.
Okay. Best of luck to you for next year.
Thank you.
The next question comes from Matthew Larson with Fincadia. Please go ahead.
Okay, thanks for taking my call. The previous caller covered a lot of ground and so probably answered a number of my questions. Let me ask you all this. On the share buyback, you did little, if any, for in the ADS because 212,000 x roughly $2 is, you know, $400,000-$500,000. I think that's what you had said you had done last quarter. The transactions have been done in the Class A or B shares, which reduces your outstanding and increases your earnings, you know, nicely. That's a positive. I guess we won't see a bid in the market here for the ADS because it's not very liquid.
Why do you think your company trades at 1x its earnings, okay? Its entire capitalization you earn, and you also got a cash balance that, you know, is almost equal to the entire market cap. There's a, you know, another company, I'll just mention it. It's Yiren Digital, which trades at 1/5 of its cash. They have no debt, and it trades at less than 1x earnings. You know, levels that make no sense, you know, at all because, you know, trading below the cash on the balance sheet, particularly if you're growing the way you are. My question is, why do you think that's the case?
To add to that, what do fintechs, you know, lending platforms like you have, what sort of multiple do they trade at, say, in Shenzhen or Shanghai or even Hong Kong? As a comparison, we could see, you know, how U.S. investors are unwilling to pay up versus if you were to somehow get relisted or to go private and sell to somebody else. There must be a frustration on your part that the company is priced as low as it is.
No, I'll take that question. I think it's really difficult to determine, like, what is the right price for the stock, right? Someone asked us before, and my answer has always been, well, this is really not the question that I'm trying to answer. I think this is a question that you as an investor probably have a better answer than we as the management of the company. Even though it's difficult to determine the real price, I think that we all agree that our valuation is certainly much lower than what we should be. In that sense, we still hope that some people will take an interest in us and buying our stocks. That being said, I think that right now the fintech valuation has been extremely low.
You asked us what is a comparable company to us in terms of either Asia in Mainland China or Hong Kong market. I can tell you that there is no fintech stocks in Asia, so there absolutely, there's no comparison. There are some the so-called fintech company, but I'm really not pay attention. We as a management of the company, that we don't really pay too much attention our stocks. That our goal has always been trying to deliver stable growth in terms of both scale and profit for our company. That has always been our goal. No matter what is the price of our stock, that we are always trying to achieve that goal.
In terms of what is the right valuation model for our company, I think many people can see that we continue to deliver very stable growth, very stable profit. The concern has always been, Number 1, the supervisory committee will allow our company to survive or whatever that is. I think that's always been the Number 1. The second one, of course, is due to the so-called conflict between China and the U.S., that there has always been some uncertainty with regard to how long that our company can be listed in the market. I think that both you and the previous caller has been asking the same question, right?
Because of these two huge uncertainties, and I don't think that you will see not high valuation, not even, not even fair valuation for the Fintech company. So my prediction at all, um, can be that as long as this two uncertainty exists, that we won't s-see a very high valuation or even fair valuation for our company.
Uh, let me add some more color for your question. I think that your observation, uh, is correct, which means, uh, w-our, not just our stock, but our peer, you know, you know, other peers, you know, of, uh, in our space, all the so-called Fin-Fintech company in China, um, you know, all the buyers for some is h-have, have been on strike for some time now.
You know, the biggest reason I think I could come up with, the first one is legal risk. Legal risk is, you see, something like some educational company in China, you know, being devastated. Like one day, the day before, you legally could operate, the second day you are out of business. Those kind of risks, without any warning, definitely could be applied to anyone. Our fintech industry, the market that we focus on is the subprime market. It's not a politically correct or favorable in China. I believe you understand that.
The second one is, I think, you know, say lately, all the purchase in the U.S. is, you know, bespoke to say the least. Because I know the other institutions, they have a legal responsibility to responsibly manage client money. Therefore, investing in something could be out of business or be legally out of business in one day is just something could not be accepted. That kind of risk is not something you can calculate. I think legal risk is the biggest reason.
The other reason is, you know, the phenomena is like that. It's, you know, not just we are traded below, around or below the cash. It's even by the, you know, contract or whatever, nobody seem like losing money. The only, you know, reasonable conclusion is all the management in the fintech company in China will manage the company very irresponsible way. They not just not gonna increase shareholder value and they will be squander all the money they already have. Otherwise, how can you, right, like, you know, price those stock at such ridiculous way? I think the time will tell. I think the PCAOB, you know, have ability and can examine the, you know, audit firm operate in China.
Alleviate those kind of concerns over the time. Also I think is the maybe a third concern I think for the U.S. investor, they probably will like to see, you know, the regulatory situation to be, you know, stabilized somewhat before do any meaningful investment. For us, I think we are, you know, just take this advantage and do we can to manage the company the best we know how and do the more buyback and that kind of stuff. I think that over the long run and maybe what do we do right now will be correct. Thank you.
Oh, thanks for that answer. I have one, I guess one more question. You've touched a couple of times about the threat of regulatory change that could eliminate your business model. That was one of the risks. What would be the incentive of authorities in the PRC to, you know, eliminate a model that is presumably, you know, helping with consumption, you know, getting money to people who need it to consume, and you're doing it effectively at a rate that isn't, frankly, much different than here in the United States if somebody has credit cards, you know, which are very common?
What incentive for the authorities is there to, you know, do away with an industry that increases consumption, and it's something that people rely on, you know, to manage their own cash flow needs, whether it's to buy P.C.s for school or whatever the case might be? Why would that be a risk?
Well, sorry, we can't comment on what the government think, right? We work closely with them. If there's any way that both the government and us can reach a good result, I think that will be great for us and for our industry.
All right. I guess finally, how come there are no fintech companies that trade in Shenzhen or Shanghai? There's four or five that trade here in the United States. There was more, but some of them weren't managed very well. You know, I'm thinking of, well, you know the ones I'm referring to, of, well, LexinFintech or 360 DigiTech. How come none are trading over there in the PRC?
Well, I guess that already answered your previous question, right?
Actually, okay. Go ahead.
I'm sorry.
No, that's it. I think that your observation is very acute, and I think that basically answer your previous question.
All right. I mean, the only one to note is Ant Group's had trouble coming, and it's a massive company, but there is expectations, I guess, that they will be listed at some point. Anyway, that's a different discussion. Very well. Thank you for your answers. Again, hope you continue to do what you're doing, which is returning money to shareholders. We're finally getting some sort of positive response as your stock is lifting along with many, you know, stocks listed in the form of ADS here. Thank you, and I look forward to following your progress.
Thank you for your questions.
We have a follow-up from Brad Hines with Equinox Capital. Please go ahead.
Thanks for allowing the follow-up question. Just to follow on that discussion and conversation about how to increase interest in the stock here in the U.S. I don't know that you're followed by any analysts out there, so it's often very difficult for investors outside of China to even hear or learn about the company. The other thing that you could do, the management team could purchase shares here in, you know, in ADS form, and make some note of that publicly so that it's a reiteration of your confidence in the outlook of the company and in the company shares, which I think, you know, the delisting concern is, and the risk is real because as you've said you are not large enough to relist in Hong Kong.
The concern that I have, as always, is that if you do lose your listing, here in the U.S., I don't have any recourse as an investor in your company. If you could somehow, you know, speak to those concerns, that would be great.
No, we could consider that. Thank you. Yes. Only when analyst cover us, like, you know, just right after IPO and, you know, because of the stock performance as can most people, you know, it's not worthwhile to cover us. I think, you know, maybe in the second half of next year, after regulatory environment situation more or less clear and or finished, we will initiate those effort to recruit someone to cover us. Thanks for the suggestion.
Thank you.
We have a follow-up from Matthew Larson with Fincadia. Please go ahead.
Thanks for taking my call again. The threat of delisting, I had historically not dismissed, but thought it was overrated for many companies because there have some that have just been delisted for other reasons historically here. Maybe they didn't get their auditing done in time, their 20-Fs or something, and they went to the Bulletin Board or Pink Sheets, but they still traded, and many of them that I've owned or have went private, not always at the premium I would have liked. If your company's too small to be listed in Hong Kong, you know, what would be the recourse?
Taking it private would be the only thing because, you know, your majority shareholders, the people, the founders of the company, would, you know, need some vehicle to manage. Is this the threat really that since you're too small to list in Hong Kong? I mean, there must be many small companies in your other exchanges on the mainland. Would you sell out to a larger entity that trades at 10x earnings? I mean, you know, you're trading at 1x, so you could sell out if that was the only alternative at many times your current value, and it would be accretive to any buyer. I mean, are these options you've considered?
Because there's been many small companies that have gone private, generally by the founder, and, you know, at a premium because they went public 10 years ago at, like, $10, and now they're with $1. I mean, what a great transaction. You raise money at $10 and you buy yourself back at, you know, a fraction of that, even though you've grown five or 10-fold. I guess if you could just address a little more about the risks of delisting. What recourse outside of going private is there?
You know, first of all, we believe the chances are to be delisting is very small because we always manage our business and even manage our, you know, very responsibly. We do not afraid, you know, any, you know, the auditing work or the, you know, to be checked by anyone. That chance is, first of all, it is very low. When 100% our effort is, I think is continue to what we do, and I think we will be keep listing in the U.S. For the stock price, it is, you know, as far as I know, the delisting required is about a $15 million.
I fully believe we will not, you know, trade below that threshold because our intrinsic value, our business, our company. Once again, we do not believe the chance of delisting, you know, not just not real. We're not doing that. Okay? Talk about what-if contingency, if that is just not our focus. Our focus on running our business the best we can. We know how and I don't believe that delisting is the very imminent, you know, issue for us for the next year or so. I just don't believe that. Okay?
That's the best way I can answer your question. Thank you.
Okay. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.
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 follow-up contacts. We look forward to speaking with you again in the near future. Thank you.
The conference has now concluded. Thank you for attending.