CNFinance Holdings Limited (CNF) Q4 2021 Earnings Call Transcript

CNFinance Holdings Limited (NYSE: CNF) Q4 2021 earnings call dated Mar. 18, 2022

Corporate Participants:

Matthew Lou — Investor Relations

Bin Zhai — Chairman and Chief Executive Officer

Jing Li — Acting Chief Financial Officer

Analysts:

William Gregozeski — Greenridge Global LLC — Analyst

Presentation:

Operator

Good day and welcome to the CNFinance Fourth Quarter and Fiscal Year 2021 Unaudited Financial Results Conference Call. [Operator Instructions] Please note, today’s event is being recorded. I’d now like to turn the conference over to Matthew Lou. Please go ahead.

Matthew Lou — Investor Relations

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. 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 the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intend, plan, believes, estimates, target, going forward, outlook and similar statements.

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. Further information regarding these and other risks, uncertainties or 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 statement as a result of new information, future events or otherwise, except as required under law.

Now, please welcome our CEO, Mr. Zhai Bin.

Bin Zhai — Chairman and Chief Executive Officer

Thank you everyone for joining us in this conference call. On today’s call, we will introduce the company and operational results in the fourth quarter and the fiscal year of 2021. And then me and my colleagues will answer your questions. 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 product and business model.

The revenue for the fourth quarter and the fiscal year was RMB450 million and RMB980 million [Phonetic] respectively. Speaking by fluctuation of the economy and local outbreak of COVID 19 we disposed of a bulk of the liquid loans in the fourth quarter and were more conservative in evaluating potential upping. Yet, we were still able to record and net income of RMB65 million for the year and deliver operational results that exceeded our estimations at the beginning of the year.

Now, I am going to review our work during 2021, introduce the challenges we may face in 2022 as well as our business plans. In 2021, the impact of external environment our business persist to varying degrees. First, we experienced the funding pressures as our major funding partners, the trust company under tightened regulation. Second, the government imposed strict regulations on the demand side of housing market including introducing restricted measures on housing mortgages and purchasing houses and the implementation of government guidance price.

Such regulations have posted downward pressure on the housing market. And third, our business operation was interrupted by local outbreak of COVID-19 during the year. Under such environment the company focused on business expansion and risk control. Our main work in 2021 was as follows. First, with [Indecipherable] spending funding sources to ensure funding supply. Other than the current funding model we also worked with trust company partners to establish new body models that are within the scope of regulation, but not constrained by the tape of non-standard trust product.

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 RMB900 million — RMB700 million and we expect the loan scale under such funding model to grow continuously. Since the third quarter we have different collaboration with commercial banks. We extended the scale of our partnership with Blue Ocean Bank and also finalized term with Everbright Bank and Guangzhou Bank. First our estimation loans under the back lending model will cut a relatively large share in the overall outstanding loan by the end of 2022.

Our negotiations with insurance company have also entered into the final stage. As of the date the deal with [Indecipherable] Insurance has defined and we are close to finalize the terms the CIBC. We believe the partnership with insurance companies will be very helpful for a potential ABS product of our own. Second, we disposed off a bulk of legacy loans under the traditional facilitation model. We started our model transformation in 2019 and stopped facilitating loans under the traditional model. Following the transformation at the current loans under the traditional model being serviced gradually part of the traditional model are now delinquent.

It has been actively 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 trending the fluctuation in the housing market, the management evaluated the well achieved expense of holding and disposing of those legacy loans and made the decision to dispose them. In the fourth quarter, we hired a professional appraisal firm and compared quotations from [Indecipherable] and made a bulk sale of loans with the book value of RMB1 billion and an average discount of 65%. The sale of such lengthy loans was the main driver of the losses in the fourth quarter.

We plan to sell the remaining legacy loans of RMB300 million in the first half of 2022. Third, we were more prudent in sizing the risks related to sales partners. We consolidated the business scale and operating record of each sales partner and adjusted repurchase policy to better suit them. We have also taken a more conservative approach in evaluating the potential credit losses under the collaboration model. In 2022, the economic fluctuation and local outbreak of COVID-19 are likely to continue. With the focus on promoting the collaboration model to its 2.0 version as we believe this will lay a strong foundation for our future growth.

Our work plans are as follows. First of all, we will cooperate with venture investors. Our goal is to bring in third-party investors to subscribe to the subordinated units of new loans facilitated. Such plan was sent to our trust company partners and has already into the stage of admission. We are also working closely with insurance companies to finalize the terms. Second, we will diversify our loan products to cover more customers. We will continue to facilitate the current plus trust product and expand our partnership with commercial banks.

Going forward our product combination will consist of four differentiated products from Class B to Class A plan to serve the needs of borrower with different risk preferences and reduce our funding costs. Third, we will adopt digital and smart technology in our platform. We will refine the automatic evaluation and approval of loan application by increasing the capacity of data storage and the efficiency of data analysis. 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 fundings obtained. We will also continue to maintain and upgrade the sales partner service platform to make [indecipherable] to users. We will keep communicating with regulators at all levels and make sure our operation and business model are in full compliance.

The year of 2021 was very important in our history. We faced many challenges and scored many achievements. In 2021 our service system was refined, our management was more efficient. We stayed true to our mission of 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 in the premise like us have formed an important part in China’s inclusive financial system. In 2022 we will keep refining our model and growing our business where we saw more responsibilities to provide MSE owners with financing services that are more convenient and with solid fee cut.

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.

Jing Li — Acting Chief Financial Officer

Thanks Mr. Zhai and thanks again to everyone for joining us today. I will walk you through our fourth quarter of 2021 financials followed by that of fiscal year of 2021. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated all percentage changes I’m going to give will be on that basis. Also, unless otherwise stated all numbers I’m going to give will be in RMB. In the fourth quarter of 2021 total loan origination volume was RMB3 billion during the fourth quarter of 2021.

We presented an increase of 15% from RMB2.7 billion. Interest and financing service fees on loans increased by 7% to RMB448 million as compared to RMB417 million primarily due to the increase in the balance of average daily outstanding loan principal. Total interest and fees expense increased by 29% to RMB205 million as compared to RMB159 million, primarily due to the increase in the principal of other borrowings, as well as the funding cost from trust company. Collaboration cost for trust partners representing intensive paid to [Indecipherable] increased to RMB120 million as compared to RMB104 million primarily due to the increase in average daily outstanding loan principal and the collaboration model as compared to the same period of 2020.

Provision for credit losses recorded a reversal of RMB308 million as compared to a reversal of RMB31 million, primarily due to the combined cycle. Higher loss default LGD under the comment is back to 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 term loans under traditional presentation model to third parties in bulk. During the fourth quarter of 2021 the allowance of such loans were reversed. Net losses on sales of loans RMB459 million compared with a net gain of RMB44 million, primarily attributable to the fact that the company transfer loans under traditional presentation 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 less discount. Total operating expenses decreased by 8% to RMB150 million compared with RMB115 million. Income tax expense was RMB15 million as compared to an income tax expense of RMB24 million, primarily due to the fact that the company recorded a loss before income tax for the fourth quarter of 2021. Such loans were still the loss associated with the sales of loans under traditional presentation model in bulk during the fourth quarter of 2021.

Net loss was RMB105 million as compared to a net income of RMB105 million. Now, lets me move on to the financials of 2021 as a whole. Personal loan automation were RMB13 billion representing an increase of 46% from RMB9 billion. Interest and financing fees on loan decreased by 3% to RMB1,770 million as compared to RMB1,829 million, primarily due to the lower interest rate on loans facilitated in an effort to comply with rules and regulations issued by relevant PRC regulators including the decision of the Supreme People’s Court to amend the provision on several issues concerning the application of law in the trial of private lending issued in August 2020.

Interest and fees expense increased by 6% to RMB776 million as compared to RMB731 million primarily due to the increase in the principals of other borrowings, as well as the funding costs from trust companies. Collaboration cost for trust partners increased to RMB4,026 million as compared to RMB450 million, primarily due to the increase in average daily outstanding principal under the collaboration model as compared to the same period of 2020. Provision for credit losses recorded a reversal of RMB279 million as compared to RMB278 million, mainly due to the combined cycle growth.

The fact that company transferred loans under traditional the facilitation model to third party in bulk during the fourth quarter of 2021 and allowance of such loans was reversed. Second, the higher loss given defaults 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 the lower probability of the differed under the current expected credit-loss model which takes in account the outlook of the more positive economy growth of China in the fiscal year of 2021 as compared to that of the same period of 2020, under the impacts of COVID-19 pandemic.

Other gains were RMB15 million compared to RMB20 million when the loan default and the sales partner due to the purchase installment, the labor charge certain percentage of the loan as the same recessions peaked. 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 delinquency loans delinquent loans were repurchased by trust partners in installment, which led to an increase in fund possession fee received by the company.

Total operating expenses decreased by 15% to RMB381 million as compared to RMB449 million. Income tax expense decreased by 40% to RMB79 million as compared to RMB48 million, primarily due to increase in the amount of taxable income. Net income decreased by 43% to RMB65 million as compared to RMB160 million. Total outstanding loan principal was RMB10 billion as of December 31, 2021 as compared to RMB10 billion as of December 31, 2020. As of December 31, 2021, the company held cash and cash equivalent of RMB2.2 billion compared with RMB2 billion as of December 31, 2020 including RMB1 billion and RMB1.5 billion from structured funds, which could only be used to grant new loans and activities.

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 rates for the first lien loan 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%. The actual NPL rate by the company decreased to 9.40% as of December 31, 2021 from 11.7%. Under the collaboration model the actual NPL rate for the first lien loans increased to 10.5% 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%.

With that we would like to open up to the Q&A section. Operator, please begin.

Questions and Answers:

Operator

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

William Gregozeski — Greenridge Global LLC — Analyst

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?

Bin Zhai — Chairman and Chief Executive Officer

Thank you. We actually started negotiating with the commercial banks since the beginning 2021 and the main reasons are twofold. First of all our main funds — funding providing, which is the which are trust companies were under tightened regulation throughout the year and we think we like to think one step ahead and expand our funding sources. 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 to commercial banks and this has limited our ability to reduce our interest rate card in our loan products, which has also limited our customer reaches.

And in 2021 we were mainly negotiating with the commercial banks and enter into the stage of admission. That’s main work in 2021. So the overall loan facilitation under the bank lending model wasn’t as high. Yes, in the first two months of 2022 we have maintained facilitation under the bank lending model of over RMB10 million in each month. To answer your second question, we don’t think the bank lending model is going to replace the current cost to lending model. We think in 2022 the partnership with trust companies will still — made up the majority of our loan facilitation. So our most updated estimation to make the loans under the bank lending model to come up to 10% to 15% of the total outstanding loan principal by the end of 2022. That’s the answer to your question. Thank you.

William Gregozeski — Greenridge Global LLC — Analyst

Okay, thanks. My next question is about the investment in technology and the platform. You talked about it 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?

Bin Zhai — Chairman and Chief Executive Officer

Okay, so first off, we have to admit that the investment in technology is already — has a very small proportion of our expenses at this moment. And I think one of the reason is that the development of the technology has dragged down the overall cost of the information technologies and no matter hardware or software. And I think was very reflective and of course current expense at this moment are the technological talent and I think our plan is to cooperate with them in the future. So I don’t expect this to take up a whole out our cash, and I don’t think the repurchase program is going to interfere with our investment in technology. Thank you.

William Gregozeski — Greenridge Global LLC — Analyst

Okay, great. And 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 are obviously up. But is it impacting what you guys are able to do going this year based on how the market is right now?

Bin Zhai — Chairman and Chief Executive Officer

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. So as I have introduced we disposed of certain legacy loans in both during the portfolio of 2021 and also to pay more conservative approach in the evaluation of potential credit losses. We are positive and confident in the government’s ability and anticipation to stabilize the economy and future growth of the economy. So based my expectation, I think the price of properties and houses will stop the downward turn and remained rather stable in 2022.

So in terms of loan applications and risk assessments and the evaluation of borrowers, our tenders didn’t really change a whole lot in this year. And we, one of our intention is to loan out cheaper loan products to the high-quality borrower who’s collateral with are also with high quality. So as I introduced, one of our goals is to give very customized loan product to each customer depending on the condition of their collateral as well as their credit efforts. Thank you.

William Gregozeski — Greenridge Global LLC — Analyst

Okay, great. Thank you. Congratulations on a good quarter.

Operator

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

Matthew Lou — Investor Relations

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

Bin Zhai — Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]