Yixin Group Limited (2858) Earnings Call Transcript & Summary

Hello and thank you for standing by for Yixin Group First Half 2020 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] I would now like to turn the meeting over to your host for today's conference, [ Helen Wu ], IR Director of Yixin Group. Please go ahead.

Thank you, operator. Good evening, and welcome to our first half 2020 earnings conference call. This is the [ Helen Wu ] from Yixin IR team. Today with me are Mr. Andy Zhang, Chairman and the CEO of Yixin Group; and Mr. Xiaoguang Yang, our CFO. After their prepared remarks, Andy and Xiaoguang will be available to answer questions. Before we proceed, we would like to remind you that our remarks today may include certain forward-looking statements. The number of risks and factors beyond our control may cause the actual results to differ materially from those contemplated by these forward-looking statements. During this call, we'll present both IFRS and non-IFRS financials. We will also discuss general market conditions for our industry and such information may come from a variety of resources outside of Yixin Group. For a detailed discussion of the risk factors we face and the non-IFRS measures, please refer to our public documentation on www.yixincars.com. As a reminder, this call is being recorded in addition, a live webcast and a replay of the conference call will be available on our website. With that, I will now pass the call to Mr. Andy Zhang, Chairman and CEO of Yixin. Andy, please.

Thank you, everyone, for joining our first half 2020 earnings conference call this evening. Year 2020 is quite unusual and has left an invaluable marks on the history. During the first half of the year, COVID-19 heavily and negatively impacted Yixin's business, consumers' consumption capabilities, various industries and the macroeconomic of China and even the whole world. China's total sales in new and used passenger vehicle for the first half of 2020 decreased by approximately 25 -- 21% year-on-year according to data from China Association of Automobile Manufacturers, and China Automobile Dealers Association. Yixin's total financed automobile transactions were 121,000 for the first half of 2020, representing a 58% year-over-year decrease. And the aggregate financing amount was approximately RMB 9.3 billion. Our financed and new and used automobile transactions contributed 69% and 31% for this first half of 2020. Impacted by the COVID-19, our revenues for the first half of 2020 were approximately RMB 1.624 billion, representing a 49% year-on-year decrease. Our new core services revenues, which include revenues from loan facilitation transactions and new self-operated lease transaction services we facilitated during the first half were approximately RMB 476 million, representing a 57% year-on-year decrease. Accordingly, our gross profit for the first half of 2020 decreased by 52% to approximately RMB 735 million, mainly due to the decrease in our revenues. In the 6 months ended June 30, 2020, we booked net impairment losses on financial receivables of RMB 1.381 billion due to the outbreak of COVID-19 and the reduced repayment capability compared to RMB 256 million for the same period last year, which negatively affected our profit. As a result, our adjusted net loss for the first half of 2020 was approximately RMB 871 million compared to an adjusted profit of RMB 343 million for the same period last year. While we are accompanied by the challenge arising from COVID-19 in this first half of 2020, and maybe the rest of the year, we're delighted to the social activities and the sales of our China auto industry as well as Yixin's businesses were gradually resuming starting from the second half of 2020. Yixin's total financed automobile transactions, included new and used, for the second quarter increased by 33% quarter-on-quarter to approximately 69,000, and our new core service revenues increased by 15% quarter over -- quarter-on-quarter. Besides that, starting from the second quarter of 2020, along with the work resumption and the economic recovery, we are also delighted to see improvements of repayment cash flow on a daily basis. As of June 30, 2020, our 180 days plus and the 90 days plus past due ratios for all financed transactions for both our self-operated financing lease services and our loan facilitation services were 1.4% and 2.46% compared to 1.55% and 2.6% as of March 31, 2020, respectively. As you may all know, on June 12, 2020, Yixin's holding company, Bitauto, announced that it has entered into an agreement and plan of merger. Pursuant to that -- to which Bitauto will be acquired by an investor consortium led by Tencent and Hammer Capital. Upon the merger becoming effective, there will be a change in statutory control in Bitauto. And as a result, the consortium or their affiliates will acquire control of Yixin through a possible unconditional mandatory cash offer. However, Yixin will remain as a Hong Kong listed company and operate independently. Looking ahead, we believe that the challenges arising from COVID-19 will continue. Our business and the industry will take some time to reach a full recovery. Despite a delighted improvement quarter-on-quarter, we will remain cautious for the full year 2020. And we will stick to the conservative risk assessment methodology to ensure the healthy development of Yixin. To sum of all -- the sum of all auto rises, and the various and inspiring local government supports were launched in the second quarter and in the August working meeting of People's Bank of China. It is pointed out that the more support and assistance should be provided to small and micro businesses to help lower their financing costs to overcome the difficulties. We believe lot of these will instill confidence in the market, and Yixin will definitely leverage our leadership and the advanced competitive advantages to be better positioned. I will now turn the call over to Xiaoguang to discuss the financial highlights.

Thank you, Andy. Our total revenues for the first half 2020 were RMB 1.624 billion, representing a 49% year-over-year decrease mainly due to the decrease in our loan facilitation services and financing lease services. Our new core service revenues, which include revenues from loan facilitation transactions and new self-operated financing lease transactions we facilitated during the period decreased by 57% to RMB 476 million compared to RMB 1.1 billion for the same period last year. Revenues from our loan facilitation services was RMB 462 million, representing a year-on-year decrease of 45%. For the 6 months ended June 30, 2020, we facilitated about 103,000 financed automobile transactions through loan facilitation services, representing a 37% year-over-year decrease in volume. Revenue contribution from our loan facilitation services were 28% (sic) [ 29% ] compared to 27% for the same period last year. Revenues from our advertising and other services decreased by 20% year-on-year to RMB 34 million due to our strategy to deemphasize such services. Due to the decrease in loan facilitation, our total revenues from transaction platform business decreased by 44% year-on-year to RMB 496 million. [ While ] the contribution of our transaction platform business, the total revenue increased to 31% from 28% for the same period last year. Revenues from our self-operated financing business decreased by 51% year-on-year to RMB 1.128 billion for the 6 months ended June 30, 2020, compared to RMB 2.28 billion for the same period last year, primarily due to the decrease in revenues from financing lease services. In the first half of 2020, we facilitated approximately 18,000 financed transactions through self-operated financing business, representing a 85% year-over-year decrease in volume, reflecting our strategy to focus on loan facilitation services. Revenues from our financing lease services decreased by 47% year-on-year to RMB 1.11 billion. For the first half 2020, we generated RMB 1.097 billion in revenues from existing financing lease transactions in prior periods and RMB 14 million revenues from new financing lease transactions compared to RMB 1.82 billion and RMB 261 million respectively, for the same period 2019. The average yield of our net finance receivables was 9.7% for the 6 months ended June 30, 2020, compared to 11.7% for the same period last year. We conducted several sales promotion and offered more products with lower interest rates to stimulate the recovery of financed automobile transactions from COVID-19. Revenue from other self-operated finance services decreased by 92% year-on-year to RMB 17 million, primarily due to the decrease in automobile sales. Revenues from automobile sales was RMB 11 million for the first half 2020 compared to RMB 171 million for the same period last year. Moving on to cost of revenues and gross profit. Cost of revenues decreased by 45% year-on-year to RMB 889 million for the 6 months ended June 30, 2020, compared to RMB 1.63 billion for the same period last year, primarily due to the decrease in commissions associated with our loan facilitation services. The decrease in funding costs associated with our self-operated financing business and the decrease in costs associated with automobile sales. Our total gross profit decreased by 52% year-on-year to RMB 735 million for the first -- for the 6 months ended June 30, 2020, compared to RMB 1.532 billion for the same period last year, primarily due to the decrease in total revenue. Our overall gross profit margin decreased to 45% for the first half of 2020 compared to 48% for the same period last year. Gross profit margin of our transaction platform business decreased 58% for the 6 months ended June 30, 2020, compared to 61% for the same period last year, primarily due to the change of revenue mix in our transaction platform business. Gross profit margin of self-operated financing business decreased to 40% for the 6 months ended June 30, 2020, compared to 44% for the same period last year, primarily due to the decrease in revenues from financing lease services. The average spread of our net finance receivables was 4.1% for the 6 months ended June 30, 2020, compared to 6% for the same period last year, primarily due to our sales promotion which offered more products with lower interest rate. Moving to operating expenses. Selling and marketing expenses decreased by 31% year-on-year to RMB 402 million for the 6 months ended June 30, 2020, primarily due to the decrease in salary, employee benefit, share-based compensation expenses and professional services fees. Our admin expenses increased by 8% year-on-year to RMB 222 million (sic) [ RMB 224 million ], primarily due to the increase of provisions for impairment of other noncurrent assets and partially offset by the decrease of salary, employee benefit and share-based compensation expenses. Our research and development expenses decreased by 21% year-on-year to RMB 82 million for the 6 months ended June 30, 2020, primarily due to the decrease in salary, employee benefit and share-based compensation expenses. Credit impairment losses include provision for expected credit losses of finance receivables, provision for expected credit losses of risk assurance liabilities and provision for impairment of trade receivables and other receivables. It increased by approximately 181% year-on-year to RMB 1.489 billion for the 6 months ended June 30, 2020, compared to RMB 530 million for the same period last year, primarily due to the increase in provision for expected credit losses of finance receivables. Provision for expected credit losses of finance receivables was RMB 1.381 billion for the 6 months ended June 30, 2020, compared to RMB 256 million for the same period last year, primarily due to the outbreak of COVID-19 and reduced consumer's repayment capability. Our adjusted operating loss was RMB 1.19 billion for the 6 months ended June 30, 2020, compared to a adjusted operating profit of RMB 384 million for the same period last year. Our adjusted net loss was RMB 871 million for the first half 2020 compared to a adjusted net profit of RMB 343 million for the same period last year. The decreases were mainly due to the decreased gross profit and the increase in credit impairment losses. Due to the same reason above, our operating loss for the 6 months ended June 30, 2020, was RMB 1.372 billion compared to an operating profit of RMB 164 million for the same period last year. Our loss for the first half of 2020 was RMB 1.053 billion compared to a profit of RMB 123 million for the same period last year. Now let's move on to the balance sheet and asset quality. Our carrying amount of finance receivables decreased to RMB 17.7 billion as of June 30, 2020, compared to RMB 26.9 billion as of December 31, 2019, primarily due to our strategy to focus on loan facilitation services. As of June 30, 2020, our total borrowings were RMB 14 billion compared to RMB 19.8 billion as of December 31, 2019. The decrease was mainly due to the company's reduced direct lending and strategy to focus on loan facilitation services. Total borrowings comprised of, number one, asset-backed securities and notes of RMB 4.4 billion as of June 30, 2020; and number two, bank loans and borrowings from other institutions of RMB 9.6 billion. Asset-backed securities and notes as a percentage of total borrowings was 31% as of June 30, 2020. As of June 30, 2020, we had cash and cash equivalents of RMB 2.168 billion compared with RMB 1.587 billion as of December 30, 2019 (sic) [ December 31, 2019 ]. The increase in cash and cash equivalents was mainly due to the collection of interest and principal from our financing lease services. Our net cash inflow generated from operating activities was RMB 7.4 billion for the 6 months ended June 30, 2020, compared to RMB 3.9 billion for the same period last year. Due to the negative impact arising from COVID-19 and reduced consumer's repayment capability, we saw our past dues ratios were pushed up in the first half of 2020, especially in the first quarter. Starting from the second quarter of 2020, along with the work resumption and economic recovery, the repayment cash flow on a daily basis has been improved. As of June 30, 2020, our 180-day plus past due ratio and 90-plus days past due ratio, including 180 days plus for all financed transactions, including both our self-operated financing lease services and loan facilitation services, were 1.4% and 2.46%, respectively, compared to 0.33% and 1.3% as of December 31, 2019, respectively, and 1.55% and 2.6% as of March 31, 2020, respectively. This is our prepared remarks. And we will now open the call to Q&A. Operator, please go ahead.

[Operator Instructions] Your next question comes from Frank Chen from Macquarie.

And I firstly have 2 questions. First, just want to understand why Yixin's Q-on-Q recovery trend seems weaker -- a little bit weaker than the Q-on-Q rebound of the underlying auto industry, especially auto sales in China? How should we think about the trend if we're looking into second half and the relatively -- relative growth trend compared with underlying auto industry? And the second question is that we noticed that Chinese regulator is putting a maximum lending rate of 15.4% on private lenders. I just want to know how the sales would impact your business in overall.

Okay. Thank you, Frank, for your questions. So for your first question, my answer would be, yes. We -- in terms of volumes, we were little bit slower than the industry. Actually, this is the -- this has been done by choice. We have been in a -- took the credit assessment policy to ensure that the business fundamentals are there. And so because the financing industry it's always the lagging behind in terms of the automobile transactions. In Q1, we have experienced the COVID-19. And also, as I mentioned earlier, the lack of a repayment capability from some of our consumers. So we took big actions to ensure that the asset is fit. But starting from June this year, from the numbers I can see, we have been recovered quite well as of -- as the fact -- as a matter of fact, and we -- the July numbers is quite good. And the sales productivity on average basis has been equal or better than the same time last year. To your second question, I think this has been just -- the new regulation has just been out for a few days, and we're still waiting for the dust to settle. Our early assessment is that the impact to Yixin will be minimal in the short term because our pricing -- majority of our products has been -- in terms of pricing, is below the threshold put out by the Supreme Court, right? And at the same time, we have the capability to maintain the margin by lowering the commission for sales channel. On the other hand, some small players in this industry may not have the [ advantage ] to do so because their strategy was high priced, high commissioned, and that may not be able to go on. So as a matter of fact, we see there are some opportunities in the market maybe, that means that in the longer term, our assessment is that in the light of sufficient liquidity in the whole market, the LPR rate itself may go on in the downward trend so that would put some pressure on our pricing in the longer term. To be honest, there are still many things to be verified. For example, the 15.4% rate, is that a nominal annual rate or is that an effective annual rate? We don't know yet. And we are still waiting for the feedback from the banks and some financing institutions, which we have relationships with. They are -- I think it may take some time for them to sort out with -- to get PBIRC, which is their regulator.

Your next question comes from Brian Gong from Citigroup.

Management, I have 2 questions. First is regarding the past due rates. So the past due rates have been pushed up by the COVID-19 and I know -- how does management plan to control the rates? And the second question is about -- regarding the second half of this year, will there be -- still be a large amount of provisions?

Okay. Thank you, Brian, for your questions. To your first question, yes, we have seen the impact coming in after spring festival this year, which is the February, because of 2 reasons. Number one, some of the consumers may not have a stable income process, so which impacted negatively on their repayment capability [ as Mr. Xiaoguang ] mentioned a little bit earlier. And the second, also some of our workforce cannot be put to work because many of them were quarantined after January and February time. So this is a double impact to the performance. But what we have seen and what we have -- actually, the management team has done a couple of things in the past few months to ensure we can have a good sleep during the night. Number one, we put enough, I think, quite a bit workforce in collection team, and we have been working in full force. Number two, we also -- we are speeding up the litigation process to make sure that our past dues are being [ dealt ] out properly. And so what we have seen in the past 2 -- actually, the 2 months was the flow rate from the delinquency bucket have been stable and even improved somewhat, right? So that gave us a little bit of confidence in terms of forecasting, controlling the delinquency ratio for the second half of this year. The other -- of course, we cannot foresee what the economy will be like in the months to come because there are still a lot of uncertainties because the trade wars, the relationship between China and U.S. and our economy in itself high, it's going to perform. There are still a lot of question marks. But based on what we have seen there are also opportunities. And in the first half, we wrote off about RMB 1.3 billion to RMB 1.4 billion delinquent assets on our book. But that does not mean we will not be able to recover. We -- but it takes time. As I mentioned, we are undertaking efforts primarily in the legal litigation -- through legal litigation process, which takes us at least 1 year and 1.5 years. So we'll see. That -- so that will add back to our income statement, when we can actually come to that [ position ] up here. So I would just say that the worst time has passed. I'm pretty certain that the second half of this year would perform better. Actually, I believe I answered both of your questions, but let me know if I have not.

Yes, yes, definitely. That's very helpful.

Your next question comes from Ashley Xu from Crédit Suisse.

There are 2 from me. One is that could management share your views on the latest industry situation and how you think the second half momentum would be? And secondly, will the management share more colors on the competition landscape, please?

Thank you, Ashley. Obviously, the market is recovering. We've seen different numbers in terms of car sales coming from different OEMs as well as dealer groups as well as the associations within the industry. I think July was a good month, it just passed. And I think Xiaoguang just mentioned that we've seen actually month-to-month recoveries in terms of market share in terms of the good growth of our business that we've already witnessed in there pretty much resuming to the point where that we've seen in the past. I think from a quarter-over-quarter basis that you also saw the growth in second quarter from the first quarter. But if you look at month-to-month, I think the growth rate is also quite on the track of where we want it to be. I think, hopefully, by end of the year, we'll be back to where we were before the virus attack, so that's actually adding a lot of confidence to us in terms of how we see this market growth. But since I do see from other sources of numbers that even though the second half will be recovering in terms of auto sales. But for the whole year, I think the lack of selling on the first half of almost 3 million, a little bit shy of 3 million units, most likely will not be fully recovered through the second half. So other words, that the growth rate in the second half of the year will not necessarily be able to cover what we lost in the first half. So it's reasonable to assessing the market where that we're looking at about maybe 17 million to 18 million new passenger car sales in 2020. That was the number that we actually had discussed within the -- our people within the industry, obviously, on the more private terms as to what their outlooks are to the industry, but we will always take time. So we're definitely missing out somewhere between 2 million to 3 million units compared to 2019 for the year. I mainly mean that in the retail side, not necessarily on the wholesale, but on the retail side for sure. So again, I think, again, if you look at the bright side, there's still 17 million, 18 million units, still the largest new car market in the world. We will actually host the Beijing International Auto Show, which will be probably only one international scaled auto show in the -- globally this year. So we do expect fourth quarter to be a good rebound. The auto show will start at the end of September, and last all the way through the October 1 vacation, holiday time for China. So hopefully, we see the [ King Zhou ] issue, [ King Zhou ] the growth in September, December, October thing coming back this year. So I think we are ready as to in terms of a facilitating whatever that's necessary for the consumers to purchase on a leverage either through a bank loan or through a leasing. So we're getting the teams ready. We did take some headcount shed in the first half of the year, but we actually started to adding more sales team already in the second half of the year. So that's also a good sign for us. Just on the grant market side, other than the auto market, we're talking about a little bit about financial services market, mainly the cost of various funding. So I think the prior question from another analyst stated that the recent cap they're putting on, the 15.4%. But I think that's something that everyone is needing time to digest as to what the actual impact would be, how retroactive, how everyone is readjusting the product mix and whatnot. But I think so far, our intake is a minimum impact on us because we rarely have any products over there. But what I would also like to add is that we also have seen our funding costs in general has been decreasing from what we had seen at the highest level ever last year, 2019, to what we have seen currently. So I think the overall funding cost for us is gradually coming down, somewhere around 50 to 100 basis points. Hopefully, this trend will continue for the next 6 to 12 months, well, at least to be more or less stable to that level. If that situation really pans out or sustains, it will also help us in terms around the -- on reengineering some of our products to get better clientele base as well as to contribute a little bit more on the profit side as well. So that's what we are looking at in terms of on the financial services area where that are having a little bit impact on us. Your second question was relating to the market share basis, right? So the competitors, how are they doing? I think the biggest competitor for us is [ Yiren ]. I mean, throughout the history, there are different competitors coming in now. So on the sustainable basis on the longevity basis, I think more or less, [ Yiren ] is the key. I think [ Yiren ], not only they have their own auto financing divisions within their banks. But also -- they also have their leasing division as well in terms of within the auto sector. So yes, and also because of their funding cost advantage as well as out of their better analysis capability as well as their clientele bases. So yes, this is a tough competitor. But again, this market is a more than RMB 1 trillion market every year. So I think it's not a single player who should pick up any material market share. But for us, I think, as a pure third-party player, I think we do sustain the leadership in the sector. I think we've also seen some of the areas where that regional players had die out, more and more regional markets will be claimed and reclaimed either by us or by bigger players like [ Yiren ]. So I think for us, we hate to deal with those regional small players where that -- they are not necessarily -- a lot of times, not necessarily play by the rule, so to speak. But because of the size of our company and because of our status and as well as the license that we carry, we're actually under a lot of scrutiny from different parties all over. So a lot of times, we are at a competitive disadvantage to these smaller players at the regional level. But because of the limitation of 15.4%, because of this whole sort of a virus situation where the long tails have really seen long tails being fading out, more and more markets are being taken by the mad players. I'm just happy that -- to see that we are still the hot player in the sector. I think given the trend I'm looking at from July, this past July as well as this last half a week from August. My guess is that we're still sustaining leadership in the industry for the year as well. So hopefully this all will pan out as I predicted. All right. Thank you very much.

That's all for the Q&A section. I will now pass the call back to Mr. Xiaoguang Yang for the closing remarks.

Thank you all for joining us today. If you have any further questions, please contact our IR team at [email protected].

That does conclude our conference for today. Thank you for participating. You may now all disconnect.