X Financial (XYF) Q1 2019 Earnings Report, Transcript and Summary

Good day and welcome to the X Financial first quarter 2019 earnings conference call and webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Jennifer Zhang. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on the company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Justin Tang, Founder, Chairman and CEO, Mr. Simon Cheng, President, and Mr. Kevin Zhang, Chief Financial Officer. Mr. Tang and Mr. Cheng will give a brief overview of the company's business operations and highlights, followed by Mr. Zheng, who will go through the financials and guidance. 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 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 results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties, and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Justin Tang. Mr. Tang, please go ahead.

Hello, everyone. I'm pleased to report a solid start to the year with a total RMB 9.6 billion in loans facilitated during the quarter, RMB 776 million in net revenue, and a non-GAAP net income attributable to X Financial shareholders increasing 39.4% year over year to RMB 255.8 million. In 2019, we will focus on two new products: Xiaoying Wallet and Xiaoying Online Mall. Xiaoying Wallet is our revolving credit product, which enables users to use it for consumption purpose, both online and offline, with merchants. It is quite similar to a credit card. Xiaoying Wallet -- we have a pretty good start in our first quarter in 2019. We generated around RMB 200 million in transaction revenues and around 640,000 transactions during the first quarter. We also launched our Xiaoying Online Mall platform, which allows individuals to purchase merchandise online through loan installments, and this is also performing pretty well. These two products will help us to attract less loan-dependent users and will help us increase the quality of our borrowers over the long term. So, these are the two very important products for us in 2019. We also made solid progress during the quarter to strengthen our reputation in the market and improve our ability to attract more institutional investors. As of April 30th, we actually secured over RMB 10 billion in credit line approval from financial institutions to serve for the loans facilitated in our platform. We will continue to develop deeper relations with institutional investors to fortify our position in the market as the leading fintech players in China. Now, I will turn over the call to Simon Cheng, our President.

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

Thank you, Simon, and hello, everyone. We had extremely solid operational and financial results in the first quarter of 2019. Our total loan facilitation amount in the first quarter of 2019 was RMB 9.6 billion, representing an increase of 10.8% from RMB 8.7 billion in the same period of 2018 and an increase of 1.6% from RMB 9.5 billion in the fourth quarter of 2018. We are also very strong in operating efficiency and profitability by approximately 40% year-over-year increase in non-GAAP net income, and our non-GAAP net income margin remains at a very high level of 33%. Our balance sheet is very solid. By the end of March 31st, 2019, we had around RMB 1.55 billion of cash on hand. Now, let me give a brief introduction for the financial results in the first quarter. In the interests of time, I will not go through every detailed line. Please refer to our earnings release for further details. Our net revenues in the first quarter of 2019 is about RMB 776 million, and our revenue decrease is about 8.1%, which is 1% lower than that of the same period in 2018. The change of take rate is mainly due to the increase of the insurance premiums, guaranty fee, and partially offset by the lower operating cost. However, our [indiscernible] income tax in the first quarter of 2019 increased by 25% to RMB 259 million from RMB 207 million in the same period of 2018. The increase of income is mainly due to our strong execution of cost control, which fully absorbed the impact of the lower revenue situation. In the first quarter of 2019, the operating cost and expenses as a percentage of loan volume is about 5.2%, 1% lower than that in Q1 2018. Income tax expense in the first quarter of 2019 decreased by around 24% to RMB 49 million from RMB 65 million in the same period of 2018, primarily caused by the corporate income tax rate Article 23, "Major subsidiaries of companies," which was adjusted down to 15% as our subsidiaries qualified as a high-tech enterprise after the second quarter of 2018. Non-GAAP net income in the first quarter of 2019 was RMB 256 million, an increase of about 40% with a year-over-year basis. Next, I will give an update about the diversity of our insurance model. We've made significant progress in diversifying our insurance models we deploy for our loan products, and we've convinced our investors with different models. The proportion of products guaranteed by ZhongAn decreased to 82% in the first quarter from 90% in 2018 and 95% in 2017. Diversifying our insurance structures allows us to better serve and reward investors as we reduce our reliance on a single insurance provider. At this time, I would like to give brief guidance about Q2 of 2019. Our total loan facilitation volume will be approximately to that of Q1 2019. This concludes our prepared remarks, and we'd like to open the call to questions. Operator, please?

Thank you. We will now begin the question and answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question today will come from John Cai of Morgan Stanley. Please go ahead.

Hi. Thank you, management, for taking my questions. I have three questions. The first one is on the product. Can you share some more details on the product mix for the first quarter of '19? How much portion is due to the car loan; how much is for the loans to the other online platforms? Also, I noticed that the ticket size has declined sequentially in the first quarter, so I just wonder what's the reason behind that. That's the first question from the product side. The second question is on the cash. I noticed that we have a very strong quarter-on-quarter increase in cash. I just wonder what's driving that. And, the third question is on the risk and asset quality. What are the latest trends we are seeing, and how does that impact our growth outlook? I noticed that in April, our institution funding has already accounted for 25% versus 10% in the first quarter. Are we ramping up the de-facilitations on a month-to-month basis? Thank you very much.

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

Okay, yes. Kevin, go ahead.

I will talk about [indiscernible]. Among the RMB 9.6 billion of loan volume, car loans are still our main products. That's about RMB 7 billion. It's a 10% increase compared to Q4 2018. Besides that, we also have RMB 1.5 billion of loan facilitation service to other platforms. That's about a RMB 200 million decrease compared to Q4 2018. That's about our major product mix. That means car loan and the loan facilitation to other platforms are still our core product. And now, I would like to draw your attention that we have around RMB 200 million of loan facilitation for our Xiaoying Wallet project, and that gained such volume. Q4 2018 was only about RMB 77 million. But, that will be our major product mix for the product. With regard to our ticket size, in Q1, we have tremendous volumes of Xiaoying Wallet. That means the ticket size for Xiaoying Wallet is only about RMB 300. That's decreased our average ticket size. But, when you go back to our car loan, our car loans' average ticket size is about RMB 12,000. That's about a 25% increase to that in Q4 2018. In Q4 2018, our average ticket size for car loan is about RMB 9,500. I hope this will be helpful to your first and second questions.

Right. Basically, the ticket size increase -- to follow up on Kevin's question, the ticket size decrease is primarily due to the mix change. We have Xiaoying Wallet, which is a very small ticket. It is a consumption transaction. In addition to that, our preferred loans actually had higher ticket size, though the volume of that keeps driving. So, that's for the second question. For the third question, the credit quality, during Q1 2019, we saw our credit quality actually improve, and it's quite stable. This is the current situation.

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

We now have RMB 1.55 billion of cash on hand, and the increase consists of first, our general operating cash flow in, and second is the actual way -- at the end of March 31st, 2019, our loans held for sales decreased by around RMB 480 million. That means in the first quarter, we had more than RMB 530 million on hand. We actually released lots of the loans held for sales from our balance sheet. Actually, the subtraction of the loans held for sales is why our operating cash flow generally increased about RMB 500 million.

[Operator Instructions] The next question will come from Calvin Leung of Deutsche Bank. Please go ahead. Calvin, your line is open. Calvin, your line may be muted on your end. Your line is open.

Thanks for taking my question. I have two questions, actually. The first one is about P2P trial registration. I want to know if management has any view on the trial registration going forward, and if that has any impact on our business. And, the second one is about institutional funding. Can we get the funding cost of such channel and how many partners you're currently cooperating with? Thanks.

Sure. Thanks, Calvin. For P2P registration, it seems it's moving ahead slowly. So, over the last couple months, there has been discussion that we're going to move to some kind of trial. The key cities, obviously, are still Beijing, Shenzhen, Shanghai, and [indiscernible] to move into trial. But, at this moment, I think there's still -- the issue is still pending the division of duty between the central government regulators and the local regulators. I think the central government issued a guideline, but the local regulators need to take the responsibility. So, again, it's still moving ahead, but exactly when do we expect the first company will receive actual registration, I think it remains unclear. I think internally, the government still also has some difference of opinion as of this moment. This doesn't really have much influence on our operating business. Obviously, starting from Q4 last year, we already have a cap on our online loan facilitation platform, but this is in line with our strategy to move our funding source more toward institutions in any case. So, at this moment, actually, combining between our platforms, individual investors, and the institutional funding, we actually have sufficient -- more funding than we could supply to quality assets. So, again, I would say the progress of registration does not have any impact in our business. In terms of institutional funding, I would say in Q1, we started to see funding costs actually come down. So, initially, when we start pushing the institutional funding, like Q4 last year, a lot of funding will come in around 9.5% or even 10%, which is higher than -- at that time, our funding platform cost around 8% plus. Recently, we started getting institutional funding coming down to anywhere between -- around 8.5%, less than 9% level. But, we are very strong. We see very strong institutional funding demand. Like we mentioned, as of April 30th, we have the written approval of credit lines from financial institutions already over RMB 10 billion, and we have much more on the way. A typical credit line is anywhere between RMB 500 million to RMB 2 billion for each financial institution, so you're basically seeing...we have approximately 10 financial institutions -- the relevant ones are around 10 at this moment, and we see many more coming.

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

Hi. Thank you for taking my questions again. So, I want to follow up on the growth. Basically, given the stabilizing asset quality and the institutional funding, do we see any potential to ramp up the growth -- in particular, the outstanding loan balance? Do we expect that to have sequential growth from this level? And then, the second question is on the new focus on the Xiaoying Wallet and the Online Mall. So, I'm just wondering if we expect any financial impacts in terms of the cost here because I'm not sure if we offer the interest-free period for the Wallet product, and do we need to subsidize the funding partners if we have that? And, for the Online Mall, do we have more details on the products we offer? Do we offer discounts to them? Basically, what will be the cost for us to launch the product? Thank you very much.

Sure. Thanks, John. The first question is in terms of loan balance growth. In first quarter 2019, we actually saw our loan balance remain stable, or even decline a little bit. One of the key reasons is...basically, it is almost a discontinuation of our preferred loan. So, over the last couple of years, preferred loans were one of our key products, and a lot of these served for the small and medium enterprises. Over the last year, the risk for that segment was higher than expected, so we literally discontinued that product line, except to serve some of the higher-quality repeated borrowers. So, that basically drove no growth in our loan balance. Going forward -- again, at this moment, I don't want to give very aggressive expectations of the loan volume growth -- again, because also, the macroeconomic environment -- we still want to be relatively conservative on the credit quality. So, actually, if you look at Q1, the approval rate for our credit card-related loan activity came down from Q4 last year. It actually came down quite a bit. So, again, at this moment, I would say if you look at -- last year, we had about RMB 36 billion in loan facilitation. This year, I think we will see some growth, but I don't want to project aggressive growth in our loan volume or loan balance at this moment. Your second question is our two new products, Xiaoying Wallet and Xiaoying Online Mall. Like I mentioned, one of the key reasons we started these two products is traditionally, our borrowers tend to be more heavily loan-dependent customers. These customers tend to have relatively lower credit quality. Also, the loan typically tends to be a more low-frequency product, so it's harder to build a closer relationship with our users. So, this year, we introduced this more consumption-focused Wallet and Online Mall. These target -- No. 1 is the more consumption-oriented customer, second is more high-frequency users help us to build a closer relationship with them. For our Wallet product, our standard product, we do have a seven-day basic grace period -- no-interest grace period. Obviously, we need to subsidize, but those sales are included in the revolving credit model, so at the end of the day, the interest carried balance will be able to pay for that anyway. I think what we will invest on, really, is customer acquisition. So, we will need to spend some money to acquire the customer early on for both the Wallet customers as well as the Online Mall customers, but these customers tend to have longer lifespans than the average loan customer, and will also have arguably longer lifetime customer value than loan customers. But, in the beginning, we do need to make some investments, which we believe is a very strategically important investment we need to make. Also, you mentioned subsidized -- again, if you look at our company's culture, we tend -- typically, we try to build a very confident product. Historically and now, we really use too much subsidized product to attract customers, so even for this, we will be investing the sales and marketing to acquire good-quality customers, but our tendencies -- we don't want to use over-aggressive subsidized policies to attract lower-quality customers coming mainly for the subsidy.

Yeah, thank you. So, a quick follow-up on the Online Mall -- what problems are we offering now, like 3C or others? Also, what's the -- do we make a positive margin on the GMV sold? Thank you.

Yeah, sure. Right now, obviously, for this type of online mall, the best-selling product for male customers is the 3C, and for female customers, it's cosmetics like lipstick, facial cover, et cetera. So, ours is no different. We do make a positive gross margin on merchandise sales, yes.

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

Thank you, operator. Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we 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, and we thank you for attending today's presentation. You may now disconnect your lines.