X Financial (NYSE:XYF) Q4 2019 Earnings Conference Call April 28, 2020 8:00 AM ET

Company Participants

Tanya Win – Investor Relations

Simon Cheng – President

Kevin Zhang – Chief Financial Officer

Conference Call Participants

John Cai – Morgan Stanley


Good day, everyone and welcome to the X Financial Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. At this time, I would like to turn your conference call over to Tanya Win [ph]. Ma’am, please go ahead.

Tanya Win

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 On the call today from X Financial are Mr. Simon Cheng, President; and Mr. Kevin Zhang, Chief Financial Officer. Mr. Cheng will give a brief overview of the company’s business operations and highlights, followed by Mr. Zhang, who will go through the financials and the 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 the current market and operating conditions and related 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. For the 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 and as a result of new information, future events or otherwise, except as required under law.

It is now my pleasure to introduce Mr. Simon Cheng. Mr. Cheng, please go ahead.


And ladies and gentlemen, Simon has dropped. I will ask you to please stay on the line. I will attempt to reconnect Simon’s line.

Tanya Win

Mr. Cheng?

Simon Cheng

Tanya, yes, yes. Sorry. Yes, sorry that the line dropped off, and then we joined again, okay. Sorry about that. Hello, everyone. We closed out this year with a solid quarter of financial and operational results. We remain committed to providing most user-friendly and convenient financial and business services to borrowers and made significant progress in doing so during the quarter, while ensuring we remain fully compliant with rapid changing regulatory environment. We rapidly made a necessary adjustment to our operations and a loan product portfolio during the quarter to comply with recent regulations governing the maximum interest rate lenders can charge.

As a result of the new regulations and adjustments made to our loan portfolio, our total loans facilitated declined on a sequential basis during the quarter. However, Yaoqianhua and Xiaoying Online Mall maintained a rapid growth moment as consumers increasingly turned to online platforms for consumption. This trend has accelerated significantly since the coronavirus disease outbreak at the beginning of 2020 as consumers were forced to consume online under government mandated quarantine, and we are well positioned to capitalize this opportunity.

The GMV of Xiaoying Online Mall rose to RMB160.9 million in the fourth quarter of 2019, representing an increase of 107.9% from RMB77.4 million in the third quarter. The number of transactions on Yaoqianhua increased significantly to 4.9 million during the quarter from 0.2 million during the same period last year. As of December 31, 2019, the number of active users of Yaoqianhua was around 408,000, representing an increase from around 330,000 as of September 30, 2019. And the transaction volumes for Yaoqianhua jumped significantly to RMB2 billion this quarter from RMB1.4 billion in the last quarter, while it’s outstanding loan balance increased to RMB1.5 billion as of December 31, 2019, from RMB949 million for September 30, 2019.

Yaoqianhua now has approved a cumulative credit line of RMB6 billion, and currently, has a credit utilization rate of around 25.6% as of December 31, 2019. This business is gradually contributing to a large percentage of revenue given it’s longer customer lifetime and the multiple opportunities it offers from cross-sell. We continue to actively negotiating with our funding partners, including CIT Trust – CITIC Trust, Kunlun Bank, Blue Ocean Bank, Huishang Bank and Yantai Bank, to further lower our funding costs. Institutional funding accounted for 50.2% of the loans facilitated through our platform in the fourth quarter, an increase from 35.7% in the previous quarter.

The trend is continuing with the proportion of funding from institutions increasing to 80.9% in January 2020. As of December 31, 2019, the credit line provided by our institutional partners expanded to RMB46.7 billion from RMB38.4 billion as of September 30, 2019, which I believe reflects their trust in the quality of the underlying assets and the strength of risk management systems. We are making solid progress in driving institutional funding for all new loan products on our platform in 2020. There is sufficient institutional credit line. We are confident to achieve 100% institutional funding this year.

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Since the outbreak of COVID-19, we have been tightening our risk management policies by adopting stricter requirements to evaluate borrowers and have reduced credit lines in addition to reinforcing our risk models. Over the course of last year, we have focused on strengthening our risk control capabilities and adopted even stricter control and evaluation of borrowers at beginning of the loan process, which is critical to reducing loan defaults at a later stage. The measures we impacted in response to the COVID-19 outbreak has been very firmly rooted into our process for a while now, have been strengthened during these trying times.

With the macroeconomic environment remaining highly uncertain at – as the outbreak of COVID-19 spreads overseas, our business will be adversely impacted during the first quarter of 2020. We expect total loan facilitations amount to decline on a sequential basis. With a clouded outlook for the next quarter, we are turning our focus on acquiring more high-quality borrowers with better credit profile during this time. We continued to ramp up investments in our technology-based risk infrastructure and consumer acquisition as we believe this is the foundation of our business growth and a major factor to attract institutional investor interest in the underlying assets on our platform. Based on our robust risk management capability, we will weather the storm of COVID-19 and emerge stronger than before.

In concluding, we are confident that our growth strategy has laid a solid foundation to adapt to changing times, while we transition from a pure financial service provider to a more comprehensive business service provider. We are ideally positioned to continue to benefit from enormous growth opportunities in China’s personal financial industry. We are committed to providing most user-friendly, convenient and comprehensive financial and business service and the best loan service to our customers.

Now I will turn the call to Kevin, who will go through our financials.

Kevin Zhang

Thank you, Simon, and hello, everyone. Although we are facing a series of challenges, including changing regulation requirement, transitioning of funding source from P2P to institutional funding, the impact of COVID-19 in the past 6 months, we still have some strong points, here, in the fourth quarter and the whole year of 2019.

Total loan facilitation amount was RMB39 billion in 2019, an increase of 6.8% year-over-year. The total loan facilitation amount in the fourth quarter of 2019 was RMB8.9 million – RMB8.9 billion, at the higher end of our previous announced guidance range. Even though the total number of loans facilitated of Xiaoying Term Loan in the fourth quarter decreased year-over-year, the average loan amount per transaction was RMB14,600, an increase of about 64% from the same period of 2018 and an increase of 13.7% sequentially. The average consumption amount per user of Xiaoying Revolving Loan also increased 49% in the fourth quarter to RMB8,268 compared to RMB5,600 in the third quarter of 2019. The number of active borrowers during the quarter decreased by 29% because certain existing borrowers are not qualified to borrow money on our platform anymore after we implemented our most – a more stringent standard to evaluate borrowers in October 2019.

Together with more modification to our pricing model, we believe that the transformation would make us finally survive under current volatile environment. The percentage of loan products we facilitated that were covered by ZhongAn Insurance decreased further to 73% during the quarter as we continue to reduce our insurance coverage rate to lower our customers’ borrowing costs. We expect that in 2020, the percentage of loan products covered by ZhongAn will be less than 50%. So change would minimize the risk of high concentration to ZhongAn for the proposed credit enhancement and increase the flexibility and the diversity when we’re planning our products. It is our mission to create more value for our customers and shareholders as we recover from high and lows of 2019 and navigate the challenging market in 2020. We remain in full compliance with current regulations and are confident in our ability to stand out amongst our peers and take advantage of market consolidation. And we’ll reduce costs further by improving operational efficiency.

Now I’d like to brief some financial performance. I will not go through our detailed lines. You can refer to more details in our announcement. The net revenues in the fourth quarter of 2019 decreased by 22.9% to RMB665 million from RMB863 million in the same period of 2018. The revenue in 2019 decreased by 12.8% to RMB3,088 million from RMB3,540 million in 2018, primarily due to: first, a change in product mix with Yaoqianhua, which now accounts for a larger proportion of transaction volumes. And then second, an increase in the proportion of the revenue generated by the loans facilitated through the Consolidation Trusts, which was recorded over the life of the underlying financing using the effective interest mode.

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Origination and servicing costs – servicing expenses in the fourth quarter of 2019 increased by 26% to RMB413 million from RMB327 million in the same period of 2018. It was primarily due to the following factors: first, an increase in collection expenses, which were in line with the growth of company’s business. And second, an increase in customer acquisition costs for the recently launched revolving credit product, Yaoqianhua. And then the third, an increase in interest expense related to loans facilitated through the Consolidation Trusts.

The G&A expenses and the sales and marketing expenses, all decreased in the fourth quarter of 2019. For the G&A expenses, it has decreased by 23% to RMB53 million from RMB69 million in the same period in 2018. Further sales and marketing expenses have decreased by 62% to RMB20 million from RMB52 million in the same period of 2018, which reflects the fact that where we were adopting a series of measures of cost controls. Provision for contingent guarantee liabilities in 2019 were RMB7.7 million compared with RMB216 million in 2018, as because there was no deterioration in the estimated default rates for loans subject to guarantee liabilities facilitated in prior periods. Provision for accounts receivable and contract assets in the fourth quarter of 2019 decreased by 52% to – by 53% to RMB52 million from RMB111 million in the same period of 2018, primarily due to a decrease in accounts receivable and contract assets, which were in line with an increase in the proportion of net revenue generated by the loans facilitated through the Consolidated Trusts.

The non-GAAP adjusted net income attributable to X Financial shareholders in the fourth quarter of 2019 was RMB113 million compared with RMB280 million in the same quarter of 2018. But our cash and cash equivalents were still very strong. It was RMB1,006 million as of December 31, 2019, compared with RMB931 million as of September 30.

Considering the impact of the COVID-19 outbreak in early 2020, the company’s total loan facilitation amount for the first quarter of 2020 has been negatively impacted. Although the decline has been partially offset by the relative growth in Yaoqianhua and Xiaoying Online Mall, X Financial expects a first quarter loss with drop in revenue. The company plans to provide a business update in the first quarter 2020 earnings release. This forecast reflects the company’s current and preliminary views, which are subject to changes.

Now, this concludes our prepared remarks and we would like to open the call to questions. Operator, please.

Question-and-Answer Session


[Operator Instructions] And our first question today comes from John Cai from Morgan Stanley. Please go ahead with your question.

Simon Cheng

Hi, John.

John Cai

Hi, hi. Can you hear me now? Hi, yes, sure. Thank you for taking my question. Sorry, I joined a little bit late, so I missed – I guess I missed some part on the prepared remarks. So just wonder if there are any more colors on the risk trend we see basically on a month-on-month basis? How does that recover? Any colors or quantitative metrics that we can share, so related to that is, do we have an assessment of loss – credit loss related to the outbreak as of this moment? And the second question is on a volume basis. So just wonder on a month-on-month basis, April, March, do we see any pickup of the sequential growth? And the final question is on the income tax. I think it’s a credit. So just wonder what’s the reason behind that? And how should we think of the tax rate in this year? Thank you.

Simon Cheng

Okay. Thank you, John. This is Simon. I think your question is regarding the Q1, the outbreak of COVID-19, what’s the impact on our business? Absolutely, there is a big impact in our business because people are not – were not allowed to go out to work. So some of our customers have – are losing their income. We saw an increase in delinquency in February and March. However, in April, we’re pretty much back – our delinquency situation is pretty much back to what it was before the outbreak. So it’s going to be a onetime shock to our business, where we would have some loss, but it is just one-time. And it’s – the size is – it is still manageable to our business. So that is regarding the loss. And the second question is regarding the trend. If we see some growth – we still see a huge demand this time in March and April. However, because of this macro economical environment, this uncertainty around the future economic situation as well as the employment and the income of our customers, we are quite cautious at this time, actually. We see the demand, but we are – our credit policy is very tight at this moment. So that’s why we will see our business – loan volume facilitation will decline, that is Q1 2020. And regarding the income tax, I think, Kevin.

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Kevin Zhang

Yes. I will explain your question of the income tax. Okay, first, I would like to address into as a whole year. For example, you may – you can get number. For the whole year, we have net income before tax that’s probably around – sorry, that’s around CNY683 million. And our – and actually for this year, our actual tax rate is about 15%. And that means for the CNY600 million profit that we have, we should have a CNY90 million of income tax expense. But finally, we – in our P&L item, we showed an income tax benefit of CNY93 million. And that’s because we have a total income tax benefit of CNY180 million, which includes about CNY110 million of tax exemption for our major subsidiary, which was actually qualifying as a new and hi-tech enterprise. And that means we have tax – we totally have a tax benefit from this company. That’s a total tax exemption of – the tax of this subsidiary in 2018, that would be the above CNY110 million. And the remaining CNY70 million that was – consists of two parts: first, we have a withdrawal of or the reverse of the withholding tax of around CNY47 million. And the withholding tax in respect to the previous accrual of the profit and our – such uncertain VIE, VI entities. But in 2019, some of the VI entities actually were in a loss. So the previously accrued withholding tax was now reversed. And the remaining CNY23 million are mainly for the additional tax reduction in 2019. For example, the R&D cost, tax reduction, and such a calculation was made mainly in the fourth quarter of 2019. So I hope that could resolve all your questions.

John Cai

Yes. So just one quick follow-up, yes, can you hear me now?

Simon Cheng

Yes. Yes, we can hear you.

John Cai

Yes, okay thank you. One quick follow-up on the – I saw on the prepared remarks that in this quarter, we addressed to comply with latest APR cap. So just wonder how would that impact our take rate going forward? Is there any guidance on the take rate? And given the COVID-19, what’s the further pressures from the COVID-19 on our take rate? So yes, just take rate guidance in short. Thank you very much.

Simon Cheng

Okay. First – for example, first, we previously communicated, and we actually have some changes in the – in November 2019. That means we tried to fully apply the recent regulation requirement that will change our total capital – total borrowing costs from APR 36 to – totally to the IR 36. But after considering a series of reduction, for example, the impact of risk and the other cut-off to the tax, so on. And so we – so for the Q4, actually the take rate for our service income decreased about – was 0.7%. And we believe that in the first quarter of 2020, it will keep decreasing because the change was previously adopted in November 2019. That’s only about Q4 in 2019. So actually, we believe that the take rate will keep on decreasing. And secondly, we actually increased our insurance premium and the guarantee fee premium, which was another way to decrease our take rate. So actually, we found that maybe in ‘20 – in the last months of – sorry, in March 2020, the take rate for our payments will be very low. And then it may be only around 1% to 2%. And that means, actually, that’s why we actually foresee a loss in Q1 2020.

John Cai

Okay thank you very much.


[Operator Instructions] And ladies and gentlemen, at this time, I’m showing no additional questions. I’d like to turn the conference call back over to Ms. Zhang for any closing remarks.

Kevin Zhang

Okay. Thank you, everyone, for joining us on the call today. If you haven’t got the 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.


Ladies and gentlemen that does conclude today’s presentation. We do thank you for joining. You may now disconnect your lines.