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CNFinance Holdings Limited (NYSE:CNF)
Q3 2019 Earnings Call
Nov 20, 2019, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the CNFinance Third Quarter 2019 Financial Results Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Christian Arnell. Please go ahead, sir.

Christian Arnell -- Investor Relations

Thank you. Hello, everyone, and thank you for joining us today. CNFinance's earnings release was distributed earlier and is available on the IR website at ir.cashchina.cn as well as on PR Newswire services.

On the call today from CNFinance are Mr. Bin Zhai, Chairman and Chief Executive Officer; and Mr. Ning Li, Chief Financial Officer. Mr.Zhai will review business operations and company highlights, followed by Mr. Li, who will discuss financials. Both will be available to answer your question during the Q&A session that follows.

Before we begin, I'd 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, 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 US 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 applicable law.

It is now my pleasure to introduce Mr. Zhai. Please go ahead.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech]

Thank you, Christian. Thank you all for joining our call. On today's call, I would like to cover some business and operational developments and discuss our strategy and future plans for creating shareholders value, despite the softening economy. After that, our CFO and I will be happy to take your questions.

[Foreign Speech]

During the third quarter of 2019, revenue came in at RMB680 million, while we were able to generate net income of RMB180 million. We recorded a provision for credit losses of RMB55 million in accordance with US GAAP, and sustain a recovery rate of 101%.

[Foreign Speech]

As we discussed on the last quarter call, in order to provide more effective and convenient services for our sales partner, we launched the loan partnership services platform, which includes training services, IT services, followed up communication and site visit with borrowers following loan approval.

I would like to give a more detailed introduction of application we designed for the sales partners this quarter. Whilst their identification are verified, sales partners could use this app to upload due diligence files of candidates. Check risk management -- the settlement process, following up with borrowers about their repayment status and track incentive they will receive. This application has been widely recognized for its quality and usefulness by sales partner since its launch.

The number of verified user was 100 -- 1,170 as of September 30, 2019. We believe our core competitive advantage is providing customized services to sales partners and our IT team will keep upgrading this application to provide our sales partner with better user experience and help them develop better sense of identity and compatibility with the platform.

[Foreign Speech]

Although we have made relatively stable adjustments to our business based on more than 10 years of experience in the home equity loan industry, we are also deeply aware that we are in a special period where there are both challenges and opportunities facing the current market condition, which make it more important to us than ever to keep sharp and make timely responses.

[Foreign Speech]

The People's Bank of China reiterated during the quarter, that properties should not be used for speculation, which continue to drive down property sales. Given the impact that macroeconomic headwinds are having on value and liquidity of collateral, in order to decrease our risk profile and safeguard interest of our shareholders, we decided to put a more stringent control over our LTV ratio. Our overall LTV ratio decreased to 58% at the end of the third quarter of 2019.

[Foreign Speech]

Facing those challenges and opportunities, our experience to manage team, take its commitment to shareholders seriously, when developing strategy that are stable, effective and can drive long-term sustainable growth. Despite all the challenges in business development, by the end of September 30, 2019, CNF do holds the record of zero loss on overall dispose loss.

[Foreign Speech]

On one hand, we continue to build out our long partnership services platform and are now successfully turning many former competitors into sales partner. By the end of third quarter we have signed a co-operational -- cooperation agreement with 1,150 sales partners. 600 of which have already facilitated loan. Total loan origination volume reached RMB1.7 billion during the quarter, also as we devoted extensive resources to the collaboration model, we have jumped into all aspects of the process and have conduct in-depth discussion with sales partner.

We were able to understand their most urgent needs and gain a lot of valuable experience. Right now the number of sales partners has reached a certain scale. We will emphasize on upgrading the sales partners system such as gradually carry out diversified services, establish a long-term incentive mechanism. All-in an effort to support future development of the collaboration model. We expect the number of sales partners to reach 1,400 by the end of this year and total loan origination model volume of RMB6 billion.

[Foreign Speech]

On the other hand, we continue to explore cooperation opportunities with various other financial institutions. During the quarter we deepened cooperation with existing trust company partner such as China Project Trust and Zhonghai Trust. And also began partnering with new ones, including Hunan Trust and Shaanxi International Trust, and have successfully launched new lending business during the quarter. In addition, we also proactively reach out to a number of banks and fund companies to discuss potential business opportunities.

[Foreign Speech]

As our collaboration model extends to scale and we further reduce funding costs, we believe, we will be ideally positioned to provide the customer with more affordable and accessible financial services in the near future. This will help the development of inclusive finance and as part of our effort to meet the financial needs of macro and small enterprise owners.

[Foreign Speech]

With that, I will now hand the call over to our Chief Financial Officer, Li Ning, who will walk through our financial result this quarter.

Ning Li -- Executive Director and Chief Financial Officer

Hi. Thanks Mr. Zhai and thanks again to everybody joining us today. I will walk you quickly through our third quarter financials. May be the 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.

As of September 30, 2019 total outstanding loan principal decreased to RMB12 billion compared to RMB16 billion as of December 31, 2018. Total loan on origination volume was RMB1,709 million compared to RMB2,603 million in the same period of 2018. Interest and financing service fee on loans was RMB676 million, a decrease of 39%, primarily due to the decrease of the loan origination volume, which is a result of the company's strategic focus on ensuring loan quality over loan growth and devoting its results on the new collaboration model. This slowed down the loan facilitation and led to a decrease in the interest and the financing service fee on loans.

Interest expenses was RMB295 million compared to RMB522 million in the same period of 2018, primarily due to the decrease in interest bearing borrowings, resulting from a general decrease of the loan origination volume.

Collaboration cost for sales partners increased to RMB57 million for the third quarter of 2019 from nil in the third quarter of 2018, primarily due to the development of the new collaboration model started in 2019. Provision for credit losses was RMB55 million, a decrease of 37% from RMB87 million in the same period of 2018. Total operating expenses were RMB113 million, a decrease of 41% compared with RMB191 million in the same period of 2018. Income tax expenses was RMB62 million, a decrease from RMB83 million in the same period of 2018. Net income was RMB177 million, a decrease of 25% from RMB235 million in the same period of 2018.

As of December [Phonetic] 30, 2019, the company had cash and the cash equivalent of RMB1.5 billion compared with RMB3.2 billion as of December 31, 2018. The aggregate delinquency rate for loans are originated by the company which represents total balance of outstanding loan principal for which any installment payment past-due. As a percentage of the aggregate total amount of loans, we originated since 2014, slightly decreased from 7.6% as of December 31, 2018, to 6.2% as of September 30, 2019.

With that we now like to open up the call for Q&A. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Z.B. Yang [Phonetic] of SWHY. Please go ahead.

Z.B. Yang -- Shenwan Hongyuan -- Analyst

[Foreign Speech]

I have two questions for our CFO, Mr. Li. The first one is on cash and cash equivalents on the balance sheet is lower than the same period of last year. And the second question is, other liabilities shows an increase comparing to the same period of last year. I want to ask Mr. Li to give a brief explain of that?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech]

Let's talk about cash first. It decreased from RMB3.2 billion from last year to RMB1.5 billion now, as the end of third quarter.

[Foreign Speech]

Most our cash and cash equivalents, no matter was RMB3.2 billion or RMB1.5 billion, most part of that was the cash we're putting in the trust plans.

[Foreign Speech]

The drop of the cash amount represents a better negotiation we've made with the trust plans to better structure our fund.

[Foreign Speech]

It was restricted by its tenure in -- before. So it wasn't really that efficient before.

[Foreign Speech]

So in the third quarter of 2019, we have reached -- pass through agreements with many of the trust companies, so that we don't have that much idle cash. That way we are actually saving interest on that.

[Foreign Speech]

So we are using the cash more effectively and the overall expense on the cash is actually lower in the future.

[Foreign Speech]

That's about the decrease of cash.

[Foreign Speech]

Now, so there is a account on the balance sheet called other liability. I want to talk about this increase for now.

[Foreign Speech]

And first thing I want to point out is that this increase of other liability is caused by our new model.

[Foreign Speech]

Under the new model for every loan we originate, the sales partners have to put up a credit risk mitigation position which equals to around 20% of the loan amount.

[Foreign Speech]

So among the other liability, there is around RMB0.7 billion, that is the credit risk mitigation position put out by the sales partners.

[Foreign Speech]

This is somewhat special.

[Foreign Speech]

If the clients or the borrower, they repay on time is recognized as the liability, because we will have to return those amount of money back to them to the sales partners.

[Foreign Speech]

And in the circumstances, when there is delinquent loan and the sales partners refuse to but to repurchase, the -- the delinquent loan. This part of the other liability will just be used to reverse our asset and increase our quality -- the quality of the asset.

[Foreign Speech]

So that's why I call this part of liability special.

[Foreign Speech]

I hope you found the answer helpful.

Z.B. Yang -- Shenwan Hongyuan -- Analyst

[Foreign Speech]

Thank you.

Operator

[Operator Instructions]

Ning Li -- Executive Director and Chief Financial Officer

We actually got an online question from Macquarie. And he is asking, I see the quality of your asset has been improved a little bit. I want to ask CFO, Mr. Li to give a brief explanation on that and how he see it goes in the future.

[Foreign Speech]

The first thing I want point out is that, the quality of the asset of the company has always been good in the past.

[Foreign Speech]

The first thing is we have collateral for every loan they've put, we facilitate. Even it show some of the delinquent loans on the financials -- on the financial reports. As time pass by, we can always get back those part of -- we can always collect those part of loan.

[Foreign Speech]

As we have completely shut down our old business model at the end of last year, so they -- the delinquent loans under the old model has all been exposed, and we don't see much more coming from the old model in the future.

[Foreign Speech]

On the other hand, when it comes to the collecting of non-performing -- collecting of delinquent loans, it takes time. So most of the delinquent loans under the old model has entered into the collection period. So it shows a lot of collection amount.

[Foreign Speech]

Looking into the future, we don't really see the delinquent rate to go higher, it is just going to be lower and lower as time passes by.

[Foreign Speech]

As for the new model, since we have repurchased or buyback clause with our sales partners, we have seen some delinquent loans, but most of it has been repurchased by the sales partners.

[Foreign Speech]

So again, looking into the future for the new model considering all those factors we think the delinquent rate will remain stably low in the future. I hope you find this answer helpful.

Operator

Thank you. [Operator Instructions] Our next audio question comes from William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. What was the average loan size during the quarter and what was the amount of loan origination between the sales partners and your existing customer base?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech]

As for your first question on the average ticket size wasn't -- didn't really change a large comparing to other time. It remained at around RMB0.6 million.

[Foreign Speech]

And since we have shut down our old model completely, so in this three quarters all of the loans was facilitated under the new model.

William Gregozeski -- Greenridge Global -- Analyst

Okay. All right. Thank you.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech]

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech]

Operator

[Operator Instructions] And today's next question comes from Jin Niang [Phonetic] of First Trust. Please go ahead.

Jin Lian -- First Trust -- Analyst

[Foreign Speech]

I have a question for Mr. Li. Under the new model, since there is a credit risk-mitigation position, has the company considered to go to more cities to facilitate loan?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech]

And that was a good question. I think the new model has brought us to opportunities as of the development of our business.

[Foreign Speech]

Since there is the existence of sales partners, the first thing is they can reach out for business and the second thing is since they are putting out 20%, -- around 20% of the credit risk-mitigation position, its actually lowering our risk, as the risk of the platform. So that gives us more choices in designing products and selecting cities.

[Foreign Speech]

Under the new model, we have -- want to develop business in a new city, we have to train our own sales personnel. But since the sales partners, they come to us with business, it saves us a lot of time in regarding of training, sales. So that give us more choices when entering into new cities.

[Foreign Speech]

Speaking of the risks, when we enter into a new city and we consider it as a city with highly risk. We will adjust the percentage of credit risk mitigation position.

[Foreign Speech]

So that way it will lower our risk. It will protect those from the risk profile as well.

[Foreign Speech]

And it won't really be a problem for us to enter into new areas. Thank you. Hope you find this helpful.

Jin Lian -- First Trust -- Analyst

[Foreign Speech]

Thank you, Mr. Li. Thank you.

Operator

Our next question today comes from Ruth Quan of Protect [Phonetic]. Please go ahead.

Ruth Quan -- Protect -- Analyst

[Foreign Speech]

Thank you for the opportunity to ask question. I have two questions for the management. You have mentioned that you've been exploring cooperation opportunities with new trust companies under the new model. So first thing I want to ask that, under the new model and the old model was the structure of on such companies you have been working with. And second thing is, I heard from you that you are considering and trying to lower the financial expense of the company. I want to ask what's the average financial expense rate as for now?

Bin Zhai -- Chairman and Chief Executive Officer

Okay.

[Foreign Speech]

For right now in this particular period until now our biggest partner is still China Project Trust.

[Foreign Speech]

I think every trust company has its own competitive advantage.

[Foreign Speech]

And some of the trust companies are really good at raising funds.

[Foreign Speech]

For example, China Project has the best long-term fund providing to us.

[Foreign Speech]

And there are other trust companies such as Hunan Trust, Shaanxi International Trust or Zhonghai Trust that they have an advantage that they are cheaper, in short-term fund raising.

[Foreign Speech]

And there are other trust companies that have a even cheaper rate on the even longer term fund raising, because they are bringing in bank money, so that way they can provide us with 5 year, 10 year or 8 year tenure products.

[Foreign Speech]

We really take it seriously with all the trust companies that we have been working with and we are working with right now.

[Foreign Speech]

And we are hoping that by creating such a portfolio will bring us a better structure of the fund source of the company.

[Foreign Speech]

As for the financing cost, for those products as sure that's within one year, we have a interest rate at around 10%.

[Foreign Speech]

For the long-term fund, we are raising around 11%.

[Foreign Speech]

I hope my answer could help you.

Ruth Quan -- Protect -- Analyst

[Foreign Speech]

Thank you.

Operator

And ladies and gentlemen our next question today comes from Summer Sue, a Private Investor. Please go ahead.

Summer Sue -- Analyst

[Foreign Speech]

I heard from CEO, in his script that the recovery rate of the company during the third quarter was around 101%. So does that mean there is no actual loss as for the company?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech]

Yes, to speak overall, yes, there is no actual loss.

[Foreign Speech]

We do recognize loss on maybe on certain projections. But to speak overall we do not recognize any loss.

[Foreign Speech]

The transactions, which causes a loss to us is very rare.

[Foreign Speech]

And just again, we -- from -- since the beginning to right now, we have been able to recover every loan, that we put up. Thank you.

Summer Sue -- Analyst

[Foreign Speech]

Operator

[Operator Instructions] And ladies and gentlemen, seeing no further questions, I'd like to turn the conference back over to Christian Arnell for any closing remarks.

Christian Arnell -- Investor Relations

Thank you. That concludes tonight's call. If you have any further questions or comments, please don't hesitate to reach out to the IR team. Thank you, and good night.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Christian Arnell -- Investor Relations

Bin Zhai -- Chairman and Chief Executive Officer

Ning Li -- Executive Director and Chief Financial Officer

Z.B. Yang -- Shenwan Hongyuan -- Analyst

William Gregozeski -- Greenridge Global -- Analyst

Jin Lian -- First Trust -- Analyst

Ruth Quan -- Protect -- Analyst

Summer Sue -- Analyst

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