X Financial (NYSE:XYF) Q3 2022 Earnings Call Transcript

X Financial (NYSE:XYF) Q3 2022 Earnings Call Transcript November 17, 2022

Operator: Hello, and welcome to the X Financial Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.

Unidentified Company Representative: Thank you, operator. Hello, everyone, and thank you for joining us today. The Company’s results were released earlier today and are available on the Company’s IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Kan Li, President; and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr. Li will give a brief overview of the Company’s business operations and highlights, followed by Mr. Zhang, who will go through the financials. They’re 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 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 statements.

Further information regarding these and other risks, uncertainties and factors is included in the Company’s filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead.

Kan Li: Hello, everyone. We are 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 demonstrates our healthy fundamentals, effective strategic positioning, program strategy and strong execution capabilities. During the third quarter, our total loan amount facilitated and originated reached about RMB20 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 rates for all outstanding loans past due for 31 to 60 days decreased from 0.93% to 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 borrow 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.

See also 14 Best Most Active Stocks To Invest In and 10 Best Canadian Gold Stocks To Buy.

Frank Fuya Zheng: Thank you, Kan, 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 RMB895 million, while net income increased by 14% quarter-over-quarter to RMB212 million. We continue to deepen our collaboration with institutional funding partners to serve diverse personal financing needs and disciplined 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 review some financial performance for the third quarter. Please note that all numbers stated are in RMB and rounded up. Total net revenue decreased by about 7% to RMB895 million from RMB964 million in the same period of 2021, partially due to a decrease in average total borrowing cost of the borrower and also partially offset by an increase in the total loan amount facility and originated this quarter compared with the same period of 2021. Origination and servicing expenses increased by 12% to RMB540 million from RMB484 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 originated this quarter; second, an increase in interest expenses as a result of increased payable to the institutional fund partners; third, the partial offset by a decrease in insurance fee paid to the insurance company.

Provisions for the loans receivable was RMB70 million compared with RMB10 million in the same period of 2021 primarily due to an increase in loans receivables 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 SME default rate compared with the same period of 2021. Income from operations was RMB300 million compared with RMB411 million in the same period of 2021. Net income was RMB212 million compared with RMB267 million in the same period of 2021. Non-GAAP adjusted net income was RMB231 million compared with RMB277 million in the same period of 2021. For further financial information, please refer to the earnings release on our IR 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. Today, we had purchased an average of about 218,000 ADS and approximately 38 million Class A volume 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 effective through September 2023. Now for our business outlook. We expect total loan amount facilitated and for originated for the fourth quarter of 2022 to be between RMB19.5 billion and RMB21 billion. For the full year of 2022, we expect total loan amount facilitated and originated to be between RMB71.5 billion and RMB73 million.

This forecast reflects our current and limited views which are subject to change. Now this concludes our prepared remarks, and we would like to open the call to the questions. Operator, please?

Q&A Session

Operator: We will now begin the question-and-answer session. The first question comes from with Equinox Capital. Please go ahead.

Unidentified Analyst: 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?

Frank Fuya Zheng: Regarding our take rate, because as a business still in the process to meet the demand regarding the products all should be below 24%, that is not a hard target, but it’s a soft target. So, we are somewhere — the take rate for the different products between 2% to 3% all the way to like 8% to 9%, so for different products, for different takeout. We do not give overall takeout rate for ourselves.

Unidentified Analyst: Right. So 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?

Frank Fuya Zheng: The pressure from interest rate is mainly from the regulatory pressure. We expect rate will continue to go down to be stabilized in — sometime in the middle of next year. That’s the best answer I can give you right now.

Unidentified Analyst: Okay. And 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?

Frank Fuya Zheng: Well, actually, we — this year, we spent more on sales and marketing compared with the same period last year. And I think that mainly, the demand for our products, demand — the potential market is very, very large. And we only — I mean, for the all the players put together, we still tap a very small percentage of those demand. And one factor maybe as a benefit to us is that is regulated very — from capital requirement perspective, it’s been being regulated very strongly by the regulator for the last year or so. So their volumes shrink a lot. So everybody else in the — every other player in the market all cause some got some share from them. But overall market, I believe, still quite stabilized, never shrink much.

Unidentified Analyst: And are you continuing to target more individuals as opposed to SME?

Frank Fuya Zheng: Well, I think most of our customer is individuals, even though I’m not quite sure, somewhere between maybe 10% to 20% among them are small business owners or small business. But we don’t have an exact figure. We don’t — we never have a pool on those figures, but we guess it’s between 10% to 20% belong to their small business owners also.

Unidentified Analyst: One other question about your share buyback. What is the shares outstanding for your Class A shares as of the end of the quarter? So not the weighted average, but what is the actual share count as of September 30?

Frank Fuya Zheng: Okay. I think the share, maybe — I have maybe like a November 13 number but that number is maybe a little bit not quite a big difference from what you want to know. So we have a Class A share, it’s about 193,429,088 plus A shares, and we have 97,600,000 plus B share. We — in aggregate, we bought back about 38,088,855 common Class A shares equivalent because some of them — among them, about 21,000 is ADS. One ADS is counted for about six ordinary shares. The Class A share, Class B shares, the same thing, but except to voting power.

Unidentified Analyst: Right. And how many of those — so that — the 38 million was that repurchased entirely in the quarter?