Chailease Holding Company Limited (5871) Earnings Call Transcript & Summary

Welcome to the Chailease Fourth Quarter 2024 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And for your information, a webcast replay will be available within an hour after the conference is finished. And now I would like to turn the call over to Kimberly Lian, the Project Manager of the Chailease Holdings. Ms. Lian, please go ahead.

Hello, everyone. Thank you for joining us today for our fourth quarter 2024 results conference call. With me this afternoon is Ms. Sharon Fan, Head of IR, and she will open to your questions in Q&A section. The presentation I'm giving today will be available for download on our official website at www.chaileaseholding.com.tw. And as a reminder, please refer to the disclaimer in Slide 2 regarding forward-looking statements. Our actual results may differ from such statements. Today's agenda, including management highlights for 2024, followed by the consolidated performance review segment review for our major operations, Taiwan, China and ASEAN operations. Now I would like to start the presentation from Slide 4, highlights for an overview of our fourth quarter 2024 operating results. First, the summary table here shows the loan portfolio growth for the quarter. On a year-over-year basis, Taiwan, China and ASEAN portfolio grew 3%, 1% and 6%, respectively. On a consolidated level, we achieved 4% year-over-year loan portfolio increase. As for the quarter-to-quarter comparison, it shows a flattish portfolio growth as we see this year's continuous weak macro environment and the company's decreased credit appetite. Secondly, we see the overall funding costs start to show some improvement after the interest rate hike cycle comes to an end, and we expect an improvement trend to continue in this year, which will help to enhance the interest spread. Third, one of our main action plans for this year is continue to speed up the process of recovery after write-off. As for the portfolio growth target in this year, we plan to grow around 5% for Taiwan and China market. For ASEAN, 10% to 15% of portfolio growth target is set for Vietnam, Malaysia and Cambodia, and Thailand is targeted to grow 5% of its portfolio. Moving to Slide 6. Consolidated credit portfolio reached TWD 825 billion at fourth quarter end of 2024, with 4% year-over-year growth as external macro environment remained quite challenging last year. The next slide, Slide 7, shows you the trend of consolidated average loan yield and cost of funds for the past 3 years. In recent 2 quarters, we saw a slightly decrease of cost of funds, mainly due to the decrease of the USD benchmark rate since we do have some USD borrowing in our total funding as well as the stabilization of [ MPD ] benchmark rate. We will discuss the change of each operating region in the next section. Next slide, Slide 8, on the left-hand side, the consolidated revenue for the year end of 2024 reached TWD 102.3 billion, achieved a new record high and representing 5% growth compared to the same period last year, which was quite in line with the portfolio growth. For the quarter-over-quarter comparison on the right-hand side, fourth quarter revenue was down 3% quarter-over-quarter due to lower solar income, and this is because of less sunshine in the winter term. Moving on to Slide 9. On the left-hand side, the consolidated net profit for 2024 totaled TWD 22.6 billion, and the earnings per share was TWD 13.31 billion. The year-over-year decrease in net profit was mainly driven by more expected credit loss and less tax rebate received for China. For tax rebate amount in 2024, China's tax rebate is RMB 310 million in 2024 versus RMB 466 million in previous year. On the right-hand side, fourth quarter consolidated net profit was down 32% quarter-over-quarter, mainly due to the more expected credit loss were booked in China and lower solar income booked for the fourth quarter. Turning to Slide 10. This slide shows you the loan portfolio mix and profit contribution in terms of operating region. On the left-hand side, we can see Taiwan loan portfolio accounts for 56% of group's total loan portfolio, same as last year. China is 29%, also same contribution as last year, and ASEAN is 15%, up 1% compared to last year. On the right-hand side, Taiwan net profit contribution accounts for 51% and China was lower lowered to 41% due to more expected credit loss booked and less tax rebate received in 2024 and ASEAN's contribution 5% to the consolidated net profit. Moving to Slide 11. The chart on the left-hand side, cost-to-income ratio maintained at 28%, same as last year. The chart on the right-hand side, asset to equity decreased to 5.3x, lower than previous quarter as we received the proceeds from the new share issue. Slide 12. For 2024, the consolidated ROA on an annualized basis was 2.4%, decreased from 2.9% last year, mainly due to a decrease in net profit. With previously mentioned lower leverage ratio, the consolidated ROE on the right-hand side was 15% for 2024. And the calculation for ROE has excluded the preferred share. Next slide, Slide 13. The consolidated delinquency ratio on the left-hand side at fourth quarter end 2024 was up 0.2 percentage points to 3.9% from prior quarter. Later in the presentation, I will talk about each region in more detail. Moving to the right-hand side. Allowance to loan portfolio ratio was also up 0.2 percentage points to 2.8% compared to previous quarters to reflecting the increase in delinquent amount from China and Taiwan. Moving on the segment review. Let's look at our operating performance region by region. On Slide 15. Taiwan's credit portfolio reached TWD 459.7 billion at fourth quarter end 2024, representing 3% year-over-year and quarter-to-quarter was up 1%. The slower portfolio growth was mainly due to that we intentionally slowing down the used car installment financing from the outside agents this year. If we exclude the impact of used car financing business, the other product line in aggregate still delivered about 7% of portfolio growth in 2024. The macro business installment sales and offshore USD business remains the main growth driver for longer. Slide 16. The slide shows the change of Taiwan net solar assets. Taiwan solar net asset has reached TWD 58.1 billion at fourth quarter end 2024, representing 9% year-over-year increase and quarter-to-quarter was also up 2%. We will continue to deliver steady growth in the solar business and maintain our #1 market share in the market. Next slide, Slide 17. This page presents the trend of our Taiwan loan yield and funding costs. The slightly decrease in cost of funds at fourth quarter 2024 was mainly due to the decrease of benchmark rate in the United States. And we do have some USD borrowing in our Taiwan operation. We see decrease in yield in Taiwan operation, and this was mainly due to the product mix change instead of price competition. Moving on to Slide 18. Revenue for our Taiwan operation for 2024 reached TWD 54.8 billion, representing 4% year-over-year growth. The solar revenue accounts 14% of Taiwan's revenue for last year. For the quarter-over-quarter comparison on the right-hand side, fourth quarter revenue was down 6% due to lower solar income recognized in the fourth quarter, and this is because of less sunshine in the winter time. Turning to next slide, Slide 19. Taiwan's profit reached TWD 13.2 billion for 2024, which decreased by 5% compared with the same period of last year, mainly due to increase in expected credit loss for the year of 2024. On the right-hand side, the fourth quarter Taiwan's net profit was down 19% quarter-over-quarter as less solar income booked and a little bit more expenses towards the year-end, that causing the cost-to-income ratio slight up in the fourth quarter last year. On Slide 20, on the left-hand side, Taiwan's delinquency ratio at fourth quarter 2024 was up 0.1 percentage point to 2.9% for the quarter. New delinquent amount for the quarter slightly increased from the prior quarter. However, we have seen some sign of stabilization of new delinquency formation in Taiwan. On the right-hand side, recovery from delinquency remained for the quarter and write-off amount increased a little from prior quarters. Next slide, Slide 21. Allowance to loan portfolio for Taiwan was maintained at 2%, same as last quarter. Let's start China operation on Slide 22. China's credit portfolio reached RMB 53.9 billion at fourth quarter end 2024, which grew by 1% year-over-year and flat quarter-to-quarter. For China, as economic growth remains low and uncertainty, in response, we also remain conservative and low-risk appetite for the new loan disbursement. Turning to Slide 23. This page shows the loan yield and cost of funds trend for our China operation. We continue to manage to maintain stable spread over the quarters. The slightly lower cost of funds reflect lower -- low prime rate and continued adjustment of our funding structure in China. Next slide, Slide 24. China revenue for 2024 totaled TWD 33.1 billion, increased 6% compared with the same period of last year. On the right-hand side, fourth quarter revenue was down 2% sequentially as less interest revenue booked this quarter. Moving to Slide 25. China for 2024, net profit reached TWD 10.7 billion, decreased 17% compared to the same period last year. The decrease in profit was mainly driven by more expected credit loss this year -- last year and less tax rebate received last year. China's tax rebate is RMB 310 million in 2024 versus RMB 46 million in previous year. On the right-hand side, China fourth quarter 2024 net profit was down 46% sequentially, as more expected credit loss was booked for the quarter. Turning to next slide, Slide 26. On the left-hand side, China delinquency ratio at fourth quarter was up 0.6 percentage points to 5.1%, giving quite flattish portfolio growth and new delinquency formation remained at similar level as previous quarter. On the right-hand side, recovery and write-off amount increased for the quarter compared to the prior quarter. Slide 27. China's allowance to portfolio ratio at fourth quarter 2024 was up 0.5 percentage point to 3.5%, reflecting increase in accumulated delinquent amount when conducting the year-end risk model reassessment. Moving to our ASEAN operation on Slide 28. Credit portfolio at fourth quarter end 2024 reached TWD 121 billion, up 6% year-over-year and down 3% sequentially. Malaysia remains as the main growth driver for our ASEAN operation this year. Next slide, 29. The left-hand side, ASEAN's revenue for 2024 totaled TWD 14.0 billion, grew 6% compared to same period last year, which was quite in line with portfolio growth of ASEAN. On the right-hand side, ASEAN's fourth quarter revenue was also up 4% sequentially. Moving to Slide 30. ASEAN's net profit reached TWD 1.8 billion for 2024, decreased by 19% due to more expected credit loss were booked last year. On the right-hand side, ASEAN's fourth quarter 2024 net profit was up 16% sequentially due to more nonoperating income compared to previous quarter. The last slide, Slide 31. On the left-hand side, ASEAN's delinquency ratio at fourth quarter was up 0.1 percentage point to 5.2% compared to prior quarter due to weaker portfolio growth when calculating the ratio and also reflecting Thailand's sluggish economy. On the right-hand side, ASEAN's allowance to portfolio ratio for the fourth quarter was also slightly increased 0.1 percentage point to 3.8%. And this also brings us to the end of my presentation for today. And thank you for your time. I would like to turn the call back to moderator to open the line to questions. Jason, back to you.

[Operator Instructions] First, we'll have Alex Leung, UBS for questions.

I have 3 questions. Number one is, can you remind us on the latest portfolio mix on your Taiwan loan book? You used to give us some breakdown in terms of SME leasing and consumer leasing and U.S. dollar book leasing. After the decline in your consumer book last year so what does that ratio currently is that at the moment at the end of Q4? Second question is on, I think, in the end of the Chinese presentation, management mentioned that in the China operation, specifically on the collection efforts, so you are starting to allow for some sort of restructuring for borrowers. Can you give us some more color on how far is that arrangement done? So after that, after some sorts of arrangement, does that mean the delinquent -- it wouldn't be account for as delinquent numbers, right? Just wanted to confirm that. And how does that -- how is that going to help your future collection, if you could give us more color on that, that would be helpful. And lastly, management also mentioned that you expect to generate an extra solar revenue of TWD 150 million in 2025 prove the sales of green power. I just want to ask, does that have any cost implication to that in order to achieve that?

Okay. So for the first question, the breakdown of our Taiwan portfolio, roughly in terms of the customer segment, I think SME customer-related financing business still accounts for about 50% of the Taiwan book. And for the micro business, it's about 10%. And we have the other clients is bigger corporate, especially for those overseas financing-related products, it's about 20%. And for the consumer, because the impacted part is only one of the car financing and it's about 50% of our consumer financing book. So after the negative impact, I think still accounts for probably 6%, 7%, yes. And the second question about the -- in the Chinese session, our CEO mentioned about we try to enhance, improve some of our collection work. Out of those are delinquent cases, which I think the major purpose is to maintain a more satisfactory level of the loss given default because as you know, for the past 1 or 2 years, the legal process in China for our collection work is kind of prolonged. So I think we try to do some internal action plan to help us to try to -- sometimes we try to renegotiate or restructure those default cases. I think the major purpose is try to increase the willingness for our SME clients to continue to repay for the remaining like our account receivables. So I think it didn't change our definition of the recognition of the delinquency. So it's more -- probably it's more related to we -- because right now, it's kind of delay of the collection for those delinquent cases. So probably before the write-off, the amount kind of decreased. But after -- we still write off on the schedule. But after the write-off, we still got -- we got higher chance to do the -- to have the recovery. So actually, all in all, it won't change our loss given default too much. However, we just tried to enhance the efficiency and speed up our recovery process. And for the solar revenue in Taiwan, I think our CEO tried to mention that actually for all our solar energy capacity, which is about 1.4 -- 1.5 gigawatt, actually, we have some opportunity to try to increase the price given that we are entitled to sell the renewable energy certificate that just started the transaction platform, I think probably like last year. So that's one of the add-on revenue source for our Taiwan operation. So this TWD 150 million add-on profit contribution will be related to that part. And yes, I think although it's not a big amount, but we just try to do everything to try to make more out of our Taiwan business, yes.

[Operator Instructions] Next one, Anupam Mathur, Goldman Sachs.

I just had one question on China, new delinquency trends. What is our expectation in first quarter? Or what are the trends in January? Is it worsening? Or is it stable? Or is it improving? Any trends around new delinquency formation?

Okay. I think in terms of China delinquency, I think although we've seen some stabilization for some months, the stabilization of the new delinquency formation, but it hasn't really confirmed the trend yet. So I think as of now, management still thinks it's too early to say whether we will start to see the decrease of this new delinquency formation, but probably is close to the stabilization. So then this is the one factor related to this delinquency ratio performance. The other major factor is we need to at least come back to better like portfolio growth to make this ratio like start to decrease. So as you can see the first -- that for the first quarter, it's always a slower season. So I think probably for the first quarter, it's not -- probably it won't have a very -- I mean, it won't start to decrease this ratio that soon. And I think probably the earliest we can expect probably will be starting from the middle of this year. And when we start to pick up the portfolio growth momentum. And also, we can continue to monitor and to make sure this new delinquency formation already pick up, yes, and start to show some decreasing trend. We see some monthly favorable like decrease of this new formation, but 1 month probably won't become a trend. So we need to continue to monitor, yes.

And how about delinquency ratio? So formation remains elevated. So do we expect this delinquency ratio to continue to inch up in the coming quarters?

As I tried to explain, probably this ratio will continue to tick up a little bit in the first quarter because the portfolio growth usually is kind of slow in the first quarter.

Got it. Okay. And how about delinquency ratio in Taiwan?

Taiwan, there's a much better chance to see stabilization or slightly improved.

[Operator Instructions] Next one, Shane Mathews, WhiteOak Capital.

Just one question on the China business, given, let's say, the challenges you've seen over the past 2, 3 years, how are we thinking differently about the way we run the operations? Have there been differences in, let's say, how we are, let's say, acquiring new customers, let's say, the target segments we are focusing on, the kind of businesses we want to enter into and let's say, the recovery process, et cetera. So I just wanted to get a better sense of how you are thinking about China then, and how you're thinking about China now? And what are the steps taken to make this business, let's say, a more -- let's say, less volatile to these kind of circumstances?

I think we've been doing business in China market for almost 20 years since 2005. And basically, for the past so many years, we are still pretty much focused on serving our very traditional, very core products, which we developed here in Taiwan, which is the -- mainly serve the SME, the financing product, especially using the leasing as a product design. And over the years, we already built up a quite good scale and over quite -- I mean, broader coverage of our presence. Like currently, we have 62 branch offices nationwide in China. And we also already built a very diversified SME, like customer sector exposure. So, so far, we still maintain quite good return for serving this market segment. Like even with the higher credit cost last year, 2024, we still delivered like 4% of the ROA and mid- to high double-digit, yes, like mid-teens to high teens of the ROE return. So I think from the management point of view, we are still quite confident that there's quite a growth opportunity in China market going forward for the next at least like 10, 20 years. And for the past 2 years of the sluggish growth, especially last year, I think it's more because of the external macro economy quite weak in China. And so I think we are still quite confident that there's quite growth potential there for continuing to focusing on our very core services in China market.

Got it. Got it. And just on, let's say, the one -- let's say, you mentioned, right, the legal process in China, there's been some collection delays because of that, et cetera. So one aspect you had mentioned of, let's say, renegotiating or restructuring more cases going forward? Any other initiatives which you think can be taken to, let's say, improve collections or other measures to tighten up over here?

I think this time because we've been through some economy cycle in China market like previous down cycle is like 2015, '16. However, this time, the cycle is really long, longer, much longer than before. It's more than 2 years now. We haven't seen a clear sign of the recovery. So that caused some of the -- we need to fine tune, adjust some of our like operation like, for example, the collection activity that probably -- because in the past, usually, our leasing contract, the tenure is only for 3 years. And so it's quite short. Usually, we don't need to do such a restructuring. That's our normal practice here in Taiwan. But in China, this time, management team probably, we need to adjust a little bit to help to more accommodate the current China like situation. So I think basically, that won't cause -- probably it will only be temporary. So we will see if the macro economy go back to a normal situation, then we will see whether we can continue to do some like improvement, yes.

Got it. And just finally, my last question. How much of the China book has gone into the renegotiated or restructured part at the moment? Or is it just going to start off in 2025?

It's only a quite small portion, yes.

[Operator Instructions] Ms. Lian, we don't have further questions at the moment. Thank you.

Okay. We can end the call. Thank you, Jason.

Thank you. And ladies and gentlemen, we thank you for your participation in Chailease's conference. You may now disconnect. Thank you, and goodbye.