CNFinance Holdings Limited (CNF) Earnings Call Transcript & Summary

Good day, and welcome to the CNFinance Holdings Limited Third Quarter of 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Jay, Manager of Capital Marketing. Please go ahead.

Good morning, and welcome to CNFinance's Third Quarter Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Jun Qian, will walk us through the operating results followed by financial results from our acting CFO, Ms. Li. After that, we will have a Q&A session. 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 U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, futures, intends, plans, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based on management's current expectations and current market and operating conditions as it relates to the 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 statements as a result of new information, future events or otherwise, except as required under law. Now please welcome Mr. Jun Qian.

[Interpreted] Thank you for taking the time to join this conference call. We will discuss CNFinance Third Quarter of 2023 Operating and Financial Results and followed by the Q&A session. During the third quarter of 2023, the company focused on [ investments ] and improving asset quality. As achieved year-on-year growth in all important indicators. During the quarter, the company facilitating loans of RMB 5.1 billion increased by 20% year-on-year and achieved a net income of 53 million increased by 15% year-on-year. Furthermore, as a result of effective risk control mechanism, the company's recovery remains at 120%. The company's highlights for the quarter, include the following. Involvement to expanding business scale. During the quarter, the company's total loan origination volume was RMB 5.1 billion, representing a year-on-year increase of 20% and a 12% increase as compared to the second quarter of 2023. Among the RMB 5.1 billion loans facilitated, RMB 3.9 billion was under trust lending model and RMB 1.2 billion was under commercial bank partnership. Continuing to refine our surface to sales partners and help these derivativity of pressures. Due to our instalment policy, sales partner's liquidity has significantly improved. During the quarter, a few historical distorted sales partners were able to recommend their in-store payments. This has effectively reduced the risk exposure of the company. Optimizing products and help making finance more inclusive. In third quarter of 2023, the company's average financing costs were slightly lower than that in the beginning of the year. And the company adjusted portions of the lower interest rate products in its product-mix accordingly. By optimizing the product-mix and lower customer interest rates, we were able to give real benefits to the MSE owners and lay a good foundation for serving the needs of borrowers with better credit history. In order to improve the asset quality, the company has been continuously reforming the factors in its credit assessment and have fully leveraged technology to improve the accuracy of the assessment of borrowers and collaterals. In addition, the company has tactically shifted its business to core regions. During the quarter, loan facilitated in the first tier and new first-tier cities has reached 80% of overall loan facilitation. Management believes that China's market is currently in the period of recovery and the price of real estate market is still fluctuating. At the same time, we believe that China will continue to introduce similar policies and China's inclusive finance [ influctry ] is still in the opportunity period. We will continue to adopt the guiding principles of quality development, which emphasize scale, quality and compliance with the following specific objectives in mind. Optimize the product-mix, improved sales capabilities, refined risk control system, reach to prospective borrowers with high-quality collaterals as well as good credit records. In order to match this goal, the company needs to continuously broaden its financing channels, bring in new founders and launch new loan products. Continuing to promote the applications of models, systems and big-ticket data in credit approval, make the whole process more standardized, generative, systematized and intelligent, to reduce human integration and improve overall efficiency. Continue the transition to the platform model by accelerating the disbursal of non-performing loans. The company plan to transfer a bulk of the total loans to third party before the end of the year to recover cash and reduce the company's risk exposure. Now I'd like to hand the call over to Ms. Jing Li and she will walk you through the third quarter financials.

Thank you. Now we will go over the financials. Please note that currency we use will be in RMB as all comparisons will be made on a year-on-year basis unless otherwise stated. For the third quarter of 2023, total interest and fees income was RMB 425 million as compared to RMB 445 million. Interest and financing service fees on loans were RMB 388 million as compared to RMB 413 million. The decrease was due to the decrease of weighted average interest rate of loan outstanding. Interest income tied to sales partners was RMB 32.7 million as compared to RMB 33.5 million. Total interest and fees expenses decreased by 13% to RMB 117 million as compared to RMB 195 million. The decrease was mainly due to the lower funding cost of trust company partners as a result of recent regulatory development. Net interest and fees income increased slightly from RMB 254 million to RMB 255 million. Net revenue under the commercial bank partnership model was RMB 27.6 million as compared to RMB 0.4 million. The outstanding loan principal under the commercial bank partnership was RMB 5 billion as of September 30, 2023, as compared to RMB 0.6 billion at September 30, 2022. Collaboration cost for sales partners was RMB 87 million as compared to RMB 85 million. Net interest and fees income after collaboration costs increased 15.5% to RMB 196 million from RMB 170 million. Provision for credit losses decreased by 72% to RMB 12 million from RMB 41 million in the third quarter of 2023 from sales partners who forfeited their credit risk mitigation conditions due to the inability to fulfill their obligation to repurchase delinquent loans in last few quarters, we're able to recommend their payments, which had provided more protection to the loans. Total operating expenses increased by 27% to RMB 106 million from RMB 83 million. Employee compensation and benefits was increased 15% to RMB 58 million from RMB 50 million due to an increase in the performance-based bonuses as a result of an increase in loan origination volume during the third quarter of 2023. Other expenses increased by 71% to RMB 35 million from RMB 20 million, mainly due to the increase in fees paid to local channels who are rewarded for referring sales partners to the company and will also receive commissions of a certain percentage of loans recommended to the company by the sales partners they have referred. Net income increased by 15% to RMB 53 million from RMB 46 million. Now we would like to start the Q&A session. Operator, please.

[Operator Instructions] The first question comes from William Gregozeski of Greenridge Global.

Great quarter. With regards to the trust lending at RMB 3.9 billion, that's up quite a bit from where it has been. Can you just talk about where the demand you saw for that growth came from? And if you expect it to continue going forward?

[Interpreted] So for the increase of loan origination under the trusted model, and the main reasons are twofold. I think the first one is that in the beginning of the year, we have decided to shift our business more to Tier 1 and new Tier 1 cities. And also, the second reason was because we focused on our most competitive product, which is large ticket-size products with higher value as the collateral; those are the 2 main reasons that gave us the chance to grab the amount of the borrower in such uncertainties in the economy as well as the fluctuation in our property prices. Also, since we have been able to manage to decrease the overall financing cost, it allowed us to reach to customers with better select as well as better credit records. And that also helped to broaden our customer reach as well.

Okay. Great. As far as the origination, since we're getting close to 2024, do you guys have any forecast for where you're looking for that for next year on a total basis or broken up by trust and commercial?