X Financial (NYSE:XYF) Q4 2022 Earnings Call Transcript

X Financial (NYSE:XYF) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Good day, and welcome to the X Financial Fourth 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: Okay. 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. 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 the 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 were 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.

Further information regarding these and other uncertainties, 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 very pleased to end the year with another solid quarter. The loan facilitation amount in the first quarter of 2022 exceeded our guidance, and our total net revenue grew rapidly, increasing both on annual and quarterly basis. Despite the very challenging environment in the midst of the COVID-19 resurgence throughout the year, we’ve achieved a 42% increase in the non-facilitation amount in 2022 and maintained our asset quality at historically high levels. This further demonstrates the resilience of our business model, especially during the challenging times and confirms that we are on the right track for sustainable growth, thanks to strong execution by our team and the continuous optimization of our risk control system.

In Q4, our total loan amount facilitated and originated reached approximately RMB 22 billion, up 66% year-over-year and 9% quarter-over-quarter, bringing our total loan amount for the full year to approximately RMB 74 billion. Our premium borrower base remained stable, and we continue to improve asset quality by leveraging our data-driven and technology-empowered risk control system. Our delinquency rate for all outstanding loans past due for 31 to 60 days decreased to 1.02% as of the end of December 2022 from 1.48% a year ago. In addition, we have continued to strengthen collaborations with our institutional funding partners and with our credit line provided by them since Q4. We see further opportunities to optimizing our funding costs and improve operating efficiency.

With the end of the strict COVID control policy and reopening of China in December last year, the Company’s focus has shifted back to stimulating economical growth. We believe that domestic consumption will play an important role in driving China’s economy growth this year and so far in Q1, we have seen a recovery in consumer sentiment. In addition, small- and medium-sized enterprises are expected to receive more support from the government to derive their business recovery and further growth. All of these factors will benefit the overall personal finance market in China where our business is rooted. On the regulatory side, according to the Central Bank, Ant Group and 13 other platform companies have basically completed business rectification under the government’s guidance and supervision, and the regulators will continue to promote the healthy development of the platform economy.

While we believe that the overall regulatory environment will be broadly stable this year, we will closely monitor and adapt quickly to any policy changes and ensure compliance in our operations as always. In conclusion, we are cautiously optimistic about the outlook for this year and expect continued rapid growth in our loan facilitation amount and expansion in both our top and bottom line. Now I will turn the call to Frank, who will go through our financials.

Frank Fuya Zheng: Thank you, Kan, and hello, everyone. We were pleased to resume year-over-year top line growth in Q4. Total net revenue was RMB 956 million, up 16% year-over-year and 7% quarter-over-quarter. We have also significantly improved our bottom line on both annual and quarterly basis. Net income for the quarter was RMB 275 million, up 89% year-over-year and 30% quarter-over-quarter. Despite macro headwinds in 2022, we remain confident in our prospects and continued our efforts to reward our shareholders. Through an expanded shareholder repurchase program, we purchased a total of approximately 267,000 ADSs and 46 million Class A ordinary shares in 2022, which will be accretive to the earnings per share in 2023 as certain shares will be canceled or held as treasury shares during the year.

In 2023, we will continue to execute our share repurchase program, which will further enhance shareholders’ value. With sizable regulatory environment — with stabilized regulatory environment and a gradual post-pandemic economic recovery, we expect revenue growth to accelerate and earnings to improve in line with top line growth. Looking ahead, we remain committed to returning value to our shareholders, while maintaining sustainable business growth with healthy fundamentals, a proven strategy and strong execution capabilities. Now I would like to brief some financial performance for the fourth quarter. Please note that all numbers stated here are in RMB and rounded up. Total net revenue increased by 16% to RMB 956 million from RMB 823 million in the same period of 2021, primarily due to an increase in the total loan amount facilitated and originated this quarter compared with the same period of 2021.

Our origination and servicing expenses increased by 53% to RMB 589 million from RMB 386 million in the same period of 2021, primarily due to an increase in commission fees resulting from the increase in total loan amount of facilitated and originated this quarter compared with the same period of 2021. Provision for loan receivables was RMB 75 million compared with RMB 40 million in the same period of 2021, primarily due to an increase in loans receivable held by the Company as a result of the increase in total loan amount facilitated and originated this quarter compared with the same period of 2021. Income from the operations was RMB 274 million compared with RMB 312 million in the same period of 2021. Net income was RMB 275 million compared with RMB 146 million in the same period of 2021.

Non-GAAP adjusted net income was RMB 278 million compared with RMB 183 million in the same period of 2021. For further financial information, please refer to the earnings release on our website. Regarding our share repurchase plan in November 2022, we announced our Board authorized to increase our share repurchase program to $30 million from $20 million, effective through September 2023. In Q3, we repurchased an aggregate of approximately 49,000 ADS and 18 million Class A ordinary shares for a total consideration of approximately $8 million. Now for our business outlook. For Q1 this year, we expect the total loan amount t facilitated and originated to be between RMB 23.8 billion to RMB 24.8 billion. Now this concludes our compared remarks and we would like to open the call to questions.

Operator, please.

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Q&A Session

Operator: And our first question today will come from of Equinox Capital.

Unidentified Analyst: The first couple of questions I have is about the current state of regulation. Can you just tell us what is your view of how do the regulators look at the capital-light business model? I’m specifically concerned about their view of your risk taking. It seems that, that was a concern that they had. How much — and how many of the loans that you have on your book are you considered to be at risk with? And just in general, how do you feel about the state of regulation right now in the country?

Kan Li: Okay. I’ll take that question. This is Kan. Thanks for your question. It’s really difficult for me to tell what the regulator think in their head, I guess. But in terms of our business model, I think the one thing about our business model is that we being in the market for several years already and in terms of the competition, in terms of the quality and our brand has been recognized by our institutional funding partners. So no matter what the regulator is thinking about the whole industry, the cooperation between us and our partners has been very smooth. So that is a very good thing for our business growth. In terms of our portfolio risk, because if you look at our portfolio closely, that our average loan amount per client is really small.

So one client risk doesn’t really factor into our overall portfolio risk. And I think that is one of the most important in our risk — portfolio risk. So our management has been fairly confident in terms of our risk management skills. So we are not particularly concerned about how the external shock will bring negative effect on our portfolio. And that being said, as a loan business that our #1 focus has always been risk management. So we spend — we have been investing a lot in terms of human capital, in terms of our — in terms of other resources in order for us companies to improve our risk management.

Frank Fuya Zheng: This is Frank. I’ll add on a few words. Regarding to your question, I think it is not a direct answer for that, but we can influence for what regulators has been doing to answer your question. First of all, I think from regulators perspective, they were like so-called this — for consumer loans, they were like the bank whoever provide the money for the loan are directly responsible for their stuff. So that’s the whole thing for the last year or so. So to me — we, in China kind of class is not a pure financial institution. We’re kind of a kind of financial institution, okay? Take example like Ant Finance because Jack Ma had a big mouth talk in Qidong and they stopped Ant Financial to go IPO the day before a few days ago because of that speech.

But nobody ever talk about Ant Financial, their portfolio, which is much, much bigger at a time like — over the period, CNY 2 trillion portfolio at a time. They never talk about you have a portfolio risk issue. But what they talk about is you do the financial — do the loan business under the sky of a technology company, which is not allowed. So you have to have a license to do that business. Second of all, they set up a threshold. If you do join the loan, you have to put up the capital, your own money, at least 30%. So that’s why for the last few years, so the Ant Financial, their business side has been dramatically shrink because they — even Ant Financial cannot put a much big capital to finance or facilitate this size of a loan. So that’s what’s the thinking.