CNFinance Holdings Limited (CNF) Q4 2021 Earnings Report, Transcript and Summary

00:09 Good day and welcome to the CNFinance Fourth Quarter and Fiscal Year 2021 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded. 00:09 I’d now like to turn the conference over to Matthew Lou. Please go ahead.

00:48 Thank you. Good morning and evening. And welcome to the CNFinance fourth quarter and fiscal year of 2021 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 acting CFO, Ms. Li. After that, we will have a Q&A section. 01:09 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 U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, targets, going forward, outlook, and similar statements. 01:44 Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. 02:10 Further information regarding these and other risks, uncertainties, or factors is included in the company's filing 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. 02:31 Now, please welcome our CEO, Mr. Zhai Bin.

02:35 [Foreign Language] 03:03 Thanks. Thank you everyone for joining us in this conference call. On today's call, we will introduce the company's financial and operational results in the fourth quarter and the fiscal year of 2021 and then me and my colleagues will answer your questions. 03:20 [Foreign Language] 04:35 Our loan facilitation business maintained fast growth in the fourth quarter. We facilitated loans of RMB3.1 billion during the quarter, and RMB12.8 billion for the year, representing a year-on-year growth of 15% and 45% respectively. Such results were another proof of how the market has recognized our products and business model. The revenue for the fourth quarter and the fiscal year was 450 million and [98 million] [ph] respectively. 05:07 Speaking by the fluctuation of the economy and local outbreak of COVID-19, we disclosed a bulk of delinquent loans in the fourth quarter and were more conservative in evaluating potential losses. Yes, we were still able to record a net income of 65 million for the year and deliver operational results that exceeded our estimation at the beginning of the year. 05:32 Now, I'm going to review our work during 2021, introduce the challenges we may face in 2022, as well as our business plans. 05:44 [Foreign Language] 06:26 In 2021, the impact of external environment on our business persist to [varying degrees] [ph]. First, we experienced funding pressures as our major funding partners across companies were under tightened regulations. Second, the government imposed strict regulations on the demand side of housing markets, including introducing restricted method on housing mortgages and purchasing houses, and the limitation of [government guidance price] [ph]. Such regulations have posted downward pressure on the housing market. 07:03 Third, our business operations was interrupted by local outbreaks of COVID-19 during the year. 07:11 [Foreign Language] 07:23 Under such environment, the company focused on business expansion and risk control. Our main work in 2021 was as follows. 07:32 [Foreign Language] 08:05 First, with work on spending funding sources to ensure funding supply. Other than the current funding model, we also worked with trust company partners to establish new funding models that are within the scope of regulations, but not constrained by the [indiscernible] non-standard trust products. 08:24 Our partnership with National Trust was one of the examples. Since the third quarter, we have partnered with the National Trust and facilitated loans of over [900 million, 700 million] [ph] and we expect the loans scale under such funding model to grow continuously. 08:44 [Foreign Language] 09:11 Since the third quarter, we have different collaboration with commercial banks. We expanded the scale of our partnership with Blue Ocean Bank, and also finalized terms with Everbright Bank and Guangzhou Bank. Since our estimation, loans under the bank lending model will cut a relatively large share in the overall outstanding loan by the end of 2022. 09:37 [Foreign Language] 10:00 Our negotiations with interest companies have also entered into the final stage. As of the date, this deal with [indiscernible] interest has been [declined] [ph] and we are close to finalizing the terms with [PIBC] [ph]. We believe the partnerships with insurance companies will be very helpful for a potential ADS product of our own. 10:23 [Foreign Language] 11:36 Second, we disposed of a bulk of legacy loans under the traditional facilitation model. We started our model transformation in 2019 and started facilitating loans under the traditional model. Following the transformation, as the current loans under the traditional model being servicing [indiscernible] gradually [Technical Difficulty] the traditional model are now delinquent. 12:00 It has been negatively affecting the company's financial performance, our negotiations with potential funding partners, as well as our valuation in the capital markets. In the third quarter, [indiscernible] fluctuations in the housing markets, the management evaluated the relative expense of holding and disposing our legacy loans. And made the decision to dispose them in the fourth quarter with higher professional appraisal firm and compared quotations from [indiscernible] and made a bulk sale of loans with the book value of 1 billion at an average discount of 35%. 12:42 The sale of such likely loans was the main drive of the losses in the fourth quarter. We plan to sell the remaining legacy loans of 300 million in the first half of 2022. 12:56 [Foreign Language] 13:18 Third, we were more prudent citing the risks related to sales partners. We consolidated the business scale and operating record of each sales partners, and adjusted a repurchase policy to better system. We have also taken a more conservative approach in evaluating the potential credit losses under the collaboration model. 13:44 [Foreign Language] 14:04 In 2022, the economic fluctuations and local outbreak of COVID-19 are likely to continue with a focus on promoting the collaborative model [Service 2.0] [ph] version as we believe this will lay a strong foundation for our future growth. Our work trends are as follows: 14:24 [Foreign Language] 14:49 First of all, we will co-operate with venture investors. Our goal is to bring in third-party investors to subscribe to the subordinated units of new loans facilitated. Such plans was sent to our Trust Company Partners and has already entered the stage of admission. We're also working closely with the insurance companies to finalize the terms. 15:17 [Foreign Language] 15:46 Second, we will diversify our loan products to cover more customers. We will continue to facilitate the current Class B trust products and expand our partnership with commercial bank Going forward, our product combination will consist of four differentiated products on Class B to Class A+ to serve the needs of borrowers with different risk preferences and reduce our funding costs. 16:14 [Foreign Language] 16:41 Third, we will adopt digital and smart technology in our platform. We will refine the automatic valuation and the approval of loan application by increasing the capacity of data storage and the efficiency of data analysis. 16:58 We expect to better manage our process and make it more efficient. We also expect to better coordinate the loan applications we receive and the funding we obtain. We will also continue to maintain and upgrade the sales partner service platform [indiscernible] to users. 17:19 [Foreign Language] 17:32 We will keep communicating with regulators at all levels and make sure our operation and business model are in full compliance. 17:42 [Foreign Language] 18:46 The year of 2021 was very important in our history. We’ve faced many challenges and scored many achievements. In 2021, our service system was refined. Our management was more efficient. We stay true to our mission, not providing affordable, accessible, and efficient financial services to MSE owners, and we are now more confident in the meaning of our work. As I have introduced on many occasions, CNF and many other enterprises like us have formed an important part in China's exclusive financial system. 19:28 In 2022, we will keep refining our model and growing our business while restore more responsibilities to provide MSE owners with financing services that are more convenient and with solid fee cut. 19:43 [Foreign Language] 20:00 Now, I would like to hand the call over to Ms. Jing Li, the Acting CFO of the company, and she will walk you through the fourth quarter and fiscal year of 2021 financials. Thank you.

20:14 Thank you, Mr. Zhai and thank you everyone for joining us today. I will welcome you to our fourth quarter of 2021 financials [indiscernible] fiscal year of 2021. We believe year-over-year comparisons is the best way to review our performance. Unless otherwise stated, all percentage changes I’m going to give will be on GAAP basis. Also, unless otherwise stated, all numbers I'm going to give will be in RMB. 20:45 In the fourth quarter of 2021, total loan origination volume was 3 billion during the fourth quarter of 2021, representing an increase of 15% from 2.7 billion. Interest and financing service fees on loans increased by 7% to 448 million, as compared to RMB417 million, primarily due to the increase in the balance of average daily outstanding loan principal. 21:19 Total interest and fees expense increased by 29% to 205million, as compared to 159 million, primarily due to the increase in the principal of other borrowings, as well as the funding cost from trust companies. Collaboration cost for sales partners, representing sales incentives paid to sales partners, increased to 120 million, as compared to 104 million, primarily due to the increase in average daily outstanding loan principal under the collaboration model as compared to the same period of 2020. 22:03 Provisions for credit losses recorded a reversal of 308 million, as compared to a reversal of 31 million, primarily due to the combined effect of: first, higher loss given default, LGD, under the current expected credit loss, CECL model, which takes into account the company's historical data of actual loss in the past few years; and second, the fact that the company transferred loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021 and the allowance of such loans was reversed. 22:45 Net losses on sales of loans were 469 million compared with a net gain of 44 million, primarily attributable to the fact that the company transferred loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021. Such loans were all facilitated prior to 2019, and the majority of them were long past due and therefore sold at a large discount. 23:18 Total operating expenses decreased by 8% to 106 million, compared with 115 million. Income tax expense was 15 million as compared to an income tax expense of 24 million, primarily due to the fact that the company recorded a loss before income tax for the fourth quarter of 2021, such loss was due to the loss associated with the sale of loans under the traditional facilitation model in bulk during the fourth quarter of 2021. Net losses was 105 million as compared to a net income of 105 million. 24:00 Now, let's me move on to the financials of 2021 as a whole. Total loan origination volume was 13 billion, representing an increase of 46% from 9 billion. Interest and financing service fees on loans decreased by 3% to 1,770 million as compared to RMB1,829 million, primarily due to the lowered interest rate on loans facilitated in an effort to comply with rules and regulations issued by relevant PRC regulators, including the decisions of the Supreme People's Court to Amend the Provisions on Several Issues concerning the Application of Law in the Trial of Private Lending Cases issued in August 2020. 24:55 Interest and fees expenses increased by 6% to 776 million, as compared to 731 million, primarily due to the increase in the principals of other borrowings, as well as the funding cost from trust companies. Collaboration cost for sales partners increased to 426 million, as compared to RMB415 million, primarily due to the increase in average daily outstanding loan principal under the collaboration model as compared to the same period of 2020. 25:34 Provision for credit losses recorded a reversal of 279 million, as compared to RMB278 million, mainly due to the combined effect of: first, the fact that the company transferred loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021 and the allowance of such loans was reversed; second, the higher loss given default under the current expected credit loss model, which takes into account the company's historical data of actual loss in the past few years, partially offset by; third, the lower probability of default under the current expected credit loss model, which takes into account the outlook of a more positive economy growth of China in the fiscal year of 2021 as compared to that of the same period of 2020 under the impact of COVID-19 pandemic. 26:44 Other gains, net was 50 million, compared with 20 million. When a loan defaults and the sales partner chooses to repurchase such loan in installments, the company would charge certain percentage of the loan as the fund possession fee. The increase in other gains for fiscal year of 2021 was mainly due to the fact that there was a larger number of cases where delinquent loans were repurchased by the sales partner in installments, which led to an increase in fund possession fee received by the company. 27:21 Total operating expenses decreased by 15% to 381 million, as compared to 449 million. Income tax expense decreased by 40% to 29 million, as compared to 48 million, primarily due to the decrease in the amount of taxable income. Net income decreased by 43% to 65 million as compared to RMB115 million. 27:50 Total outstanding long during the quarter was 10 billion as of December 31, 2021, as compared to 10 billion as of December 31, 2020. As of December 31, 2021, the company held cash and cash equivalents of 2.2 billion, compared with RMB2 billion as of December 31, 2020, including RMB1.5 billion and [RMB1 billion] [ph] from structured funds, which could only be used to grant new loans and activities. 28:30 The actual delinquency rate for loans originated by the company increased to 24.1% as of December 31 from 22.6%. Under the collaboration model, the actual delinquency rate for first lien loans increased to 29.1% as of December 31, 2021 from 18%, and the actual delinquency rate for second lien loans increased to 19.5% as of December 31, 2021 as compared to 15.6%. 29:11 The actual NPL rate for loans by the company decreased to 9.4% as of December 31, 2021 from 11.7%. Under the collaboration model, the actual NPL rate for first lien loans increased to 12.5% as of December 31, 2021 from 6.7%. The actual NPL rate for second lien loans increased to 6% as of December 31, 2021 from 4.6%. 29:49 With that, we would like to open up to the Q&A Section. Operator, please begin.

29:55 Thank you. [Operator Instructions] And today's first question comes from William Gregozeski with Greenridge Capital. Please go ahead.

30:31 Hi. Can you – with regards to the commercial bank lending, what – can you disclose the amount you went from commercial banks in the fourth quarter? And in regards to your target for the year-end of this year, is that incremental to the trust lending or replacing that amount of trust lending?

30:57 [Foreign Language] 32:02 Thank you. We actually started to negotiating with the commercial banks since the beginning of 2021. And the main reasons are: first of all, our main fund – funding providers, which are the trust companies were under tightened regulations throughout the year and we think we'd like to take one-step ahead and expand our funding sources.

32:32 [Foreign Language] 33:02 And our second thought was to just cover more customers with different risk preferences. As you know, the funding cost with the trust companies are high as compared with little banks and this has limited our ability to reduce our interest rate card in our loan product, which has also limited our customer [indiscernible]. 33:33 [Foreign Language] 33:46 And in 2021, we were mainly negotiating with the commercial banks and entering into the stage of admission that the [indiscernible] working in 2021. 33:57 [Foreign Language] 34:01 So, the overall loan facilitation would be [indiscernible] model wasn't at high. 33:57 [Foreign Language] 34:22 Yes, in the first few months of 2022, we have maintained a facilitation [indiscernible] model of over 10 million in each month. 34:36 [Foreign Language] 34:59 To answer your second question, I don't think the bank menu model is going to replace the current trust lending model. We think in 2022 would be the partnership with trust companies will still, made up the majority of our loan facilitation. 35:17 [Foreign Language] 35:29 So, our most updated estimation is that to make the loans under the bank lending model to up to 10% to 15% of the total outstanding loan principal by the end of 2022. 35:46 [Foreign Language] 35:48 That's the answer to your question. Thank you.

35:53 Okay. Thanks My next question is about the investment in technology and the platform, you talked about on the call. How much are you looking to spend and is that investment going to change at all depending on how much you do on a share repurchase?

36:12 [Foreign Language] 36:49 Okay. So, first of all, we have to admit that the investment in technology is on the – I’d say, very small proportion of our expenses at this moment. 37:01 [Foreign Language] 37:10 And I think one of the reasons is that the development of the technology has spread down the overall cost of the information technologies, and no matter it's [hardware or software] [ph]. 37:26 [Foreign Language] 37:42 And I think what [indiscernible] and of the current expenses at this moment are the psychological talent. And I think our plan is to cooperate with them in the future. 37:59 [Foreign Language] 38:08 So, I don't expect this to take out a whole lot of our cash, and I don't think the repurchase program is going to interfere with our investment in technology. 38:20 [Foreign Language] 38:21 Thank you.

38:24 Okay, great. Last question is about the property market, has the uncertainty with that affected your ability to assess borrower risk or facilitate loans? I know loans were obviously up, but is it impacting what you guys are able to do going this year based on how the market is right now?

38:45 [Foreign Language] 39:22 To answer your question, so starting from the fourth quarter of 2022, we have been rather conservative when it comes to the estimation in – of housing market in China. 39:35 [Foreign Language] 39:46 So, as I have introduced, we disposed of certain legacy loans in bulk during the fourth quarter of 2021 and also to pay more conservative approach too in the evaluation of potential credit losses. 40:05 [Foreign Language] 40:25 Right. We are [confident] [ph] of the government – we are positive and confident in the government’s ability and anticipation to stabilize the economy and future growth economy. 40:46 [Foreign Language] 40:54 So, based on our estimation, I think the [brands] [ph] of properties and houses will stop the downward churn and remain rather stable in 2022. 41:10 [Foreign Language] 41:36 So, in terms of loan applications and risk assessments, and the evaluation of borrowers, our standards didn’t really change a whole lot in this year. And one of our intention is to roll-out cheaper loan products to the high quality borrowers whose collaterals are also with high quality. 42:06 [Foreign Language] 42:19 So, as I introduced our – one of our goals is to be very customized loan product to each customer depending on the conditions of their collateral, as well as their credit reference. 42:36 [Foreign Language] 42:37 Thank you.

42:39 Okay, great. Thank you. Congratulation on a good quarter.

42:45 [Operator Instructions] And ladies gentlemen, this concludes our question-and-answer session. I like to turn the conference back over to management for any final remarks.

43:03 Thank you, again. Thank you for joining us in today's conference call. If you have any further questions, please feel free to reach us at time at ir@cashchina.cn. Thank you.

43:15 Thank you.

43:17 Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.