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X Financial (NYSE:XYF) Q2 2019 Results Earnings Conference Call August 19, 2019 8:00 AM ET
Jennifer Zhang - IR
Justin Tang - Chairman and CEO
Simon Cheng - President
Kevin Zhang - CFO
- Jennifer Zhang - IR
- Justin Tang - 董事长兼首席执行官
- Simon Cheng - 总裁
- Kevin Zhang - 首席财务官
John Cai - Morgan Stanley
- 约翰蔡 - 摩根士丹利
Hello, and welcome to the X Financial Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
I'd now like to turn the conference over to your host today, Jennifer Zhang. Please go ahead, ma'am.
我现在想把会议转到主持人Jennifer Zhang。 请继续，女士。
Thank you, Operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on 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, CFO. Mr. Tang and Mr. Cheng will give a brief overview of the company's business operations followed by Mr. Zhang 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 Management's current expectations and the current market and operating conditions and relate to events that evolve 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 differ from materially some 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. Justin Tang. Mr. Tang, please go ahead.
今天来自X Financial的电话会议是创始人，董事长兼首席执行官Justin Tang先生;总裁Simon Cheng先生;和首席财务官Kevin Zhang先生。唐先生和郑先生将简要介绍公司的业务运营情况，随后张先生将负责财务报告。他们都可以在问答环节回答您的问题。
Thank you, Jennifer. Hello, everyone.
We are pleased to report a solid quarter where we made a significant progress across a number of different outlets. Our business momentum remains strong. With the qualities loans facilitated on our platform improving slightly, and our funding and some institutional investors expending.
I'd like to highlight some of these achievements. First, the industry regulatory environment are still challenging during the second quarter of this year. No matter what the regulation trends are, we are making ourselves thoroughly prepared to be qualified and in compliance with the new regulation in order to protect investors and the shareholders benefits.
The P2P industry continues undergoing so-called check and audit process per regulator's requirements and we are complying of regulators so-called fleet declined requirements by decreasing our loan balance and a number of active lenders. There are still potential outcome for the P2P industry at this moment is remain unclear. So we are not sure if the so-called restriction would ever be completed. At the same time, we are working with the local regulators to explore the possibility, to transport part of our business into microcredit loan company.
Second, the high quality loans for our platform and our strong reputation helping us to attract more institutional investors. During the second quarter of 2019, funding from non individual investors account for around 26.7% of the loans facilitated to our platform, a significant improvement from 44% in the first quarter.
Demand from institutional investors for our high quality assets remains strong and will gradually reduce our funding costs over time. Financial institutions have extended a credit line to us in the month approximately RMB 26.4 billion for also facilitated loan transaction or platform which reflects the trust, their financial institutions have seen the quality of our assets and the strength of our risk amendment. We are pretty confident if necessary, we can use institutional funding to maintain the stable growth ordinance without any interruption.
Third, our delinquency rate improved on a sequential basis as we continue to invest in our risk management system and in technology. We will diversify our customer acquisition channels as well so partnership with e-commerce platform and other channels with better customer quality.
Lastly, Xiaoying Wallet our recently launched reformulated product grew rapidly during this quarter with transaction volumes jumping significantly to RMB 970 million from RMB 200 million in the last quarter, and outstanding loan balance increased to RMB 578 million as of June 30, 2019 from RMB 177 million as of March 31, 2019.
Xiaoying Wallet was developed with the needs of our customer in mind, and we leverage our basically data analysis capability and advanced technology infrastructure to offer the best industry - best product in the industry.
In conclusion, we are counting our future growth prospects and ability to create a long term value for our investors, and the shareholders. We will continue to provide the best user friendly and convenient finance to borrowers and help them meet demand or consumption and to grow our online consumer lending business.
This will conclude my remarks. Now, I'll turnover to Simon Cheng, our President.
Thank you, Justin. Hello, everyone.
We are very pleased to see the quality of our loans has improved and the delinquency rates for both 30-days to 90-days and 90-days to 100-days went down sequentially, which reflects our strong risk management capability. Things later 2018, we have taken prudent approach in our credit policies and it is very good to see stable and improved credit quality during these uncertain macro environment. We will continue our prudent approach in our credit policies in later part of 2019.
Besides, we have expanded our funding channels to banks, trust companies and other financial institutions which can further strengthen our funding costs, and diversify our funding sources. In addition to that, we are expanding our borrower base by cooperating with other Fintech companies.
We are very happy to see Xiaoying Wallet our recurring consenting product is growing in the importance of our business as a result of junky month in the market. As Justin had mentioned, the number of transaction of Xiaoying Wallet in the second quarter increased by 347% quarter-over-quarter.
The number of registered and approved users of Xiaoying Wallet was 542,752 as of June 30, 2019, increasing from 192,891 as of March 31, 2019. Xiaoying Wallet is expected to maintain strong growth momentum and gradually account for a larger percentage of our overall business. We are very confident we will continue to deliver good results going forward in the challenging environment.
I will hand the call to Kevin, who will go through our financials.
Thank you, Simon.
We had solid operational results during 2019 second quarter despite the regulatory uncertainties remain. And the non-GAAP net income margin attributable to financial shareholder increased to RMB 342.5 million during this quarter, a 57% increase compared to our results in the fourth quarter.
We continue to expand our relationships with banks and trust companies, as well as other institutional funding partners. 26.7% of our funding in the second quarter is from the non-individual investors and we expect 45% and over percent of the funding will be supported by the non-individual investors in the third and fourth quarters respectively.
The overall funding costs remain stable, while we foresee a decrease in funding costs for financial institutions in the second half year of 2019 as low as 8% annually. In the interest of time, I will not go through every detailed line. Please refer to our earnings release for further details.
Our net revenues in the second quarter of 2019 is RMB 810 million, a 4.2% increase quarter-over-quarter. The revenue fixed rate is 7.96% slightly 0.1% decrease compared to the revenue fixed rate in the fourth quarter, since the product mix is relatively stable and APR of the main product [indiscernible] remains unchanged. The origination of fixed expense as a percentage of loan volumes facilitated increased 5.65% from 3.5% in Q1 through 4.15% in Q2, primarily due to an increase in current market operating costs for the recently launched revolving credit product Xiaoying Wallet.
We are pleased to see one of our major subsidiary classified as a Top Tier enterprise in May 2019 while full tax exempt of enterprise income tax of 2018 and is subject to our preferential EIT rate of 12.5% from 2019 to 2021. This contributes to our income tax benefit of RMB 140 million during this quarter. And we expect that the effective tax rate would be around 15% in 2019 a 45% decrease compared to adjusting in 2018.
Besides, we expect that the loan facilitation for the third quarter of 2019 to be approximately RMB10.5 billion. This forecast reflects the company’s current and preliminary view, which are subject to change.
In conclusion, we pleased with our operational and financial performance this quarter and we'll continue to rollout initiatives and apply technologies across our business to improve operational efficiency and equate to long-term sustainable value for our shareholders.
Now, this concludes our prepared remarks and we'd like to open the call to questions. Operator, please.
[Operator Instructions] And the first question comes from John Cai with Morgan Stanley.
Hi, thank you, management for taking my questions I have a few questions. And the first one is on the regulations. Can you talk about what's the latest communications with the regulators. What are the expectations on that - the pace of the three decline and also, Mr. Tang mentioned that you were talking about, transit in some of the business to a micro credit on island license. So just wondering if there's any colors or further details on that front.
So how many portion will go there and do we expect the license - or when do we expect the license to be resume because as the U.S. suspended. And the second question is about what was naturally, you mentioned that the risk has improved sequentially and we also have over RMB20 billion institutional funding standby. So I just wonder what kind of balance grows can we expect for the second half for this year.
And the third question is on the product I think we have seen a very strong momentum of the Xiaoying Wallet based on my calculation the ticket size seems to be very small it runs around RMB 200 million. Can the management also shares some takeaways tenures and profit contribution of this product in particular really in relations to the customer acquisition cost and also see that the origination and servicing cost has also increased.
So just wonder if you look at this in Wallet standalone can breakeven after - customer acquisition costs. And what sort of coffee contributions do we expect in the future? Thank you very much.
嗨，谢谢你，管理层提出我的问题我有几个问题。第一个是关于规定的。你能谈谈与监管机构的最新沟通吗？对此的期望是什么 - 三次下降的速度以及唐先生提到你正在谈论的事情，将一些业务转移到岛屿许可证的小额信贷上。所以只是想知道这方面是否有任何颜色或更多细节。
那么有多少部分会去那里，我们是否期望获得许可证 - 或者我们什么时候才能恢复许可证，因为美国暂停了许可证。第二个问题是关于什么是自然的，你提到风险有所改善，我们还有超过人民币200亿元的机构资金待命。所以我想知道今年下半年我们可以期待什么样的平衡增长。
所以只是想知道你是否可以在Wallet独立后看到这一点 - 在客户获取成本后可以盈亏平衡。我们对未来会有什么样的咖啡贡献？非常感谢你。
Yes John, thanks yeah. So I will address the first and the second question and Simon and Kevin can answer the third question. In terms of regulation, like I mentioned in the coin at this moment the prospect or the registration as they remain unclear. You know basically, we are working with the local regulators it requires us to, decrease like say, decrease our loan balance or our P2P platform and also decrease the number of active lenders.
And we are complying with that. At this moment, out of over 20 billion loan balance we have, bought just over 60%, there are 65% - under 65% in our P2P platform. And so, and we have declined by around RMB500 million to RMB 800 million every month. And then we'll go ahead we’ll use registration process we don't know yet. At the same time, our working with regulators to explore the possibility of transforming part of our business into - the micro credit company, but this need to be work together between the local regulator and the regulatory.
And also we are working pretty actively with them and if and when that will happen in a way we don't know yet, but again, we are pretty well-prepared in all fronts. And no matter how the regulation will go we'll be able to maintain to scale our business without much interruption yeah. So the second in terms of growth prospects we will give guidance for the third quarter. You'll see our second quarter we have some small sequential growth from this quarter.
I think in Q3 we’ll see some further sequential growth from Q2 and in a single digit I think in Q4 will be better as well. At this moment, we only give us visibility for the second half of this year. We just don't want to make the premature prediction for the business and next year, because external economic environment still is a fairly uncertain as a general credit environment is still very challenging.
But the funding is not bottleneck at all we actually have sufficient funding to support to grow our business. I think the key really is to acquire the quality long demand we're very careful in terms of only, we will facilitate the quality of loan demand yeah. Kevin and Simon can answer the Wallet question, yeah.
我们遵守这一点。目前，我们拥有超过200亿的贷款余额，仅超过60％，我们的P2P平台有65％ - 低于65％。因此，我们每月减少约5亿元人民币至8亿元人民币。然后我们将继续我们将使用我们还不知道的注册过程。与此同时，我们与监管机构合作探索将部分业务转变为小额信贷公司的可能性，但这需要在当地监管机构和监管机构之间共同努力。
Yes, Xiaoying Wallet is a recurring consumption product, so it means - the customers is supposed to use the product very frequently and with a lot of transactions that’s our general transaction size is about 300 to 400 U.S. This is a small ticket transaction but the customer will continue to use it for longer time, which means a longer lifetime for the customer, because it's a consumption loan and this is also has a better credit quality and also because it lasts for quite a long time.
Then our revenue source will - be quite a diversified it’s not only from the interest income. So with all this the strong benefit from this product feature actually, currently we are trying to increase the wording of this active frequent consumption uses for our product. We see very strong demand in the market. We see a very strong growth in the future. So our focus right now is not profitability, but as we given the data we have, we expect that the customer will acquire can generate positive revenue after a year.
是的，小英钱包是经常性的消费产品，所以这意味着 - 客户应该非常频繁地使用该产品，并且有很多交易，我们的一般交易规模大约是300到400美元。这是一个小票交易，但客户将继续使用它更长的时间，这意味着客户的寿命更长，因为它是消费贷款，这也有更好的信用质量，也因为它持续相当长的时间。
Yeah I will give some moment details about this credit option submit actually when we are talking Xiaoying Wallet we are temporary I think for such document when is the consumption in the second kind of product kind of installment the third will be cash of advance. For about 2.8 million [indiscernible] transaction all sort of Xiaoying Wallet about 2.7 million will be the consumption. And the side for the consumption is only about as Simon mentioned 200 to 300 per transactions.
But when we talk about the installment and cash flow advance it will be around 1,000 to 3,000 per transaction. For the transaction, just like we use our credit card to say purchase [indiscernible] so actually, we will provide around seven days with period. So the tender for those transactions will be very short. So when we talk about installment and cash advance it will be around seven to nine months and a little bit similar to our - product of car loans.
And as we know those refactoring product usually have a longer use life compared to our loan project. So at the first several months, we’ll usually we’ll like to invest more on our customer acquisition cost and that means at the first several months we expect that will be an personal loss for the segment, but after around one year or one to two year operating especially the total business will be pretty even. John?
Thank you, yes, yes. Can I have a follow-up on the customer acquisition costs. So just wonder what's the trend and what's the cost we're paying for maybe Xiaoying Wallet and a new question actually about the corporation with [indiscernible] what's the mix at the moment and what's the cause and any new partners we are working with? Thank you very much.
谢谢，是的，是的。 我可以跟进客户获取成本吗？ 所以只是想知道潮流是什么，我们为小英钱包支付的费用是多少以及实际上关于公司的一个新问题[音频不清晰]目前的混合情况是什么，原因是什么以及我们正在合作的任何新合作伙伴？ 非常感谢你。
Okay, I will add some colors first and then maybe Simon and Justin can help to submit. Actually when we're talking about customer between cost we now tend to invest about working to 50 to around 200 to acquire a new active customer for the Xiaoying Wallet. And we expect the average acquisition cost will remain stable in the following - in the second half of 2019 yeah and that was foreseeable view for the customer acquisition cost for the Xiaoying Wallet.
When talking about our corporation with ZhongAn yes actually we now lay about 80% of our principal was now secured by ZhongAn Insurance [indiscernible] about 82% and that means in this quarter we slightly improved slightly. And now we are still seeking the corporation with other insurance company and guaranteed companies to increase the percentage of transaction supported by other partners. But we are still on our way but we will have partners or pipeline to negotiate with our partners.
好的，我先添加一些颜色，然后Simon和Justin可以帮助提交。 实际上，当我们在成本之间讨论客户时，我们现在倾向于投资大约50到200左右，以获得小英钱包的新活跃客户。 我们预计平均收购成本将在以下保持稳定 - 在2019年下半年是的，这可以预见小莹钱包的客户购置成本。
在与中安谈论我们的公司时，实际上我们现在约有80％的本金现在由中安保险[音频不清晰]担保约82％，这意味着在本季度我们略有改善。 现在，我们仍在寻求与其他保险公司合作，并保证公司增加其他合作伙伴支持的交易比例。 但我们仍在继续前进，但我们将与合作伙伴或管道公司进行谈判。
Yes Kevin just said actually so as the - our largest insurance partner at this moment and we have very good relationship with ZhongAn and at the same time quarter-by-quarter, the loan issued by ZhongAn has decreased. We are actively seeking other partners, including insurance companies or some guaranteed companies. We have very good response from their part as well. We would continue to diversify the guaranteed partner for our business.
是的，Kevin实际上只是说 - 我们这个时候最大的保险合作伙伴，我们与中安的关系非常好，同时按季计算，中安发放的贷款减少了。 我们正在积极寻求其他合作伙伴，包括保险公司或一些担保公司。 我们也有很好的回应。 我们将继续为我们的业务多元化保证合作伙伴。
Thanks a lot. It's very helpful.
Thank you. And the next question comes from [Matthew Larson with National Securities].
谢谢。 接下来的问题来自[Matthew Larson with National Securities]。
Thank you, gentlemen, for taking my call. I got on the conference little late, so if I'm asking a question that you addressed, I apologize. You gave guidance in the earnings release for the third quarter do you have guidance for the full year?
先生们，谢谢你接我的电话。 我迟到了会议，所以如果我问你提出的问题，我道歉。 您在第三季度的收益发布中给出了指导，您是否有全年的指导？
Kevin go ahead.
Okay actually we quoted a very safe [indiscernible] towards the end of quarter. So when we’re talking about the whole year, we expect around the 40 billion to maybe 41 billion for loans operational amount for the whole year.
All right and so it's reasonably flat and that's because you're replacing your peer-to-peer funding with more institutional funding is that why that's the case?
I think that's another major driver, because actually we took a very prudent approach in our credit policy at the moment, the environment is quite uncertain at this moment. So we really try to make sure we have good quality for our asset. So we have a stable starting to increase this is the plan at this moment.
我认为这是另一个主要推动因素，因为实际上我们目前在信贷政策中采取了非常谨慎的态度，此时环境尚不确定。 因此，我们确实努力确保我们的资产具有良好的质量。 所以我们有一个稳定的开始增加这是这个时刻的计划。
Okay and by the end of the year, could you give me your goal as far as what percentage of your business will be institutionally funded?
We said, by the end of this year, which is over 60% of our funding will be from the financial institutions.
Good. Was that 60 or 50 did you say?
Six zero okay, alright. And it seems to me that's with the regulators are pushing for so that sounds like a majority and a big move up from where you were this time last year. Let me see your stock, which came public at 14 is $2.60 trades well below book value. And at my the estimates I'm using maybe from my previous caller, the Morgan Stanley analyst well, at this point, it looks like you're trading at 2.5 times earnings, maybe thereabouts is there any thought of a dividend or buying back some shares at this low level in addition to the other work you're doing?
六零没关系，好吧。 而且在我看来，监管机构正在努力推动，这听起来像是一个多数人，并且从去年的这个时候开始大幅提升。 让我看看你的股票，14日公开是2.60美元的交易，远低于账面价值。 根据我的估计，我可能会使用摩根士丹利分析师，也就是我以前的调用者，在这一点上，看起来你的收益是2.5倍，也许有人想到股息或买回一些 除了你正在做的其他工作之外，还处于这个低水平？
We were made $15 million dividend for fiscal year 2018 I think we'll continue to make a dividend in 2019 as well. We have not found a stock repurchase yet well the reasoning is the liquidity of our stock is fairly low. And so it is pretty hard for us to buy much and if we're buying, we will further reduce the liquidity in the open market that it’s not going to be good.
And the second also is that because there are different parts or outcome for the regulation where we want to reserve some cash in terms in case we need to fund some financial institution, the requirement so at this moment, we would -- I think we were just going to have a pretty stable dividend policy.
我们在2018财年获得了1500万美元的股息我认为我们将继续在2019年分红。 我们还没有找到股票回购，但理由是我们股票的流动性相当低。 因此，我们很难买入很多，如果我们买入，我们将进一步减少公开市场的流动性，这不会是好事。
第二个也是因为我们希望在某些金融机构需要资助的情况下，我们希望保留一些现金的监管有不同的部分或结果，所以此时此要求，我们会 - 我认为我们是 只是会有一个非常稳定的股息政策。
All right that sounds good when do you expect to announce the dividend for 2019?
We would do it once a year so will be after the fiscal 2019.
So after the fiscal 2019 it'll be okay so six months at least okay. Well it looks like your business is humming along pretty well and I guess the uncertainty is, the regulatory rules that everybody is waiting for but I would assume a well capitalized firm like yourself with a large cash balance, which is trying to raise the institutional funding, would be one of the survivors in a business that is consolidating and you would pick up market share at one point. So that's what I would be expecting so thank you. Appreciate it.
因此，在2019财年之后，这将是好的，所以六个月至少可以。 嗯，看起来你的业务一直很好，我猜不确定的是，每个人都在等待的监管规则，但我会假设像你这样资本充足的公司，拥有大量的现金余额，这是试图提高机构资金 ，将是一个正在整合的业务中的幸存者之一，你会在一个点上获得市场份额。 这就是我所期待的，所以谢谢你。 欣赏它。
Thank you. Yes. We certainly think so yeah. Thank you.
谢谢。 是。 我们当然这么认为。 谢谢。
Thank you. And that is all the time that we have for questions, I would like to return the floor to Jennifer Zhang for any closing comments.
谢谢。 这就是我们提出问题的所有时间，我想请Jennifer Zhang发表评论。
Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we'll be pleased to answer them to fill out context we look forward to speaking with you again in the near future. Thank you very much.
感谢大家今天加入我们的电话会议。 如果您没有机会提出问题，我们很乐意回答这些问题以填写背景，我们期待在不久的将来再次与您交谈。 非常感谢你。
Thank you. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
谢谢。 电话会议现已结束。 感谢您参加今天的演讲。 您现在可以断开线路。
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