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CNFinance Holdings Limited (NYSE:CNF)
Q4 2019 Earnings Call
Mar 16, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and evening, and welcome to the CNFinance Fourth Quarter 2019 Financial Results Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Simon [Phonetic]. Please go ahead.

Simon -- Investor Relations

Thank you. Hello, everyone, and thank you for joining us today. CNFinance's earnings release was distributed earlier and available on our IR website, as well as PRNewswire services.

On the call today from CNFinance, Mr. Ning Li, Chief Financial Officer, will review business operations and the Company highlights, followed by financial result and the Q&A section [Phonetic]. Our CEO, Mr. Zhai want me to send his regrets. He can't join call today, because he has meetings with our regulators to ensure we are in a better market position in MSE, our back-end business.

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 and 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 terminologies 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 and achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in 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 and otherwise, except as required under applicable law.

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

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] Thank you. Thank you, all for joining our call today. We would like to report on business operation and development and financial results in the last quarter of 2019, and 2019 as a whole. I know you are even more interested in, and I will talk more about the impact of COVID-19 outbreak on CNFinance business, the challenges and potential opportunity it presents. During the outbreak in China, CNFinance implemented operating policy to ensure the health and safety of our employees, partners and clients. We will continue to grow and create value for our shareholders. Later, we will answer your questions.

[Foreign Speech] The fourth quarter revenue and net income came in at RMB598 million and RMB61 million, respectively. For the fiscal year of 2019, we recorded a revenue of RMB3 billion and a net income of RMB535 million. After full year of business model upgrade, we transformed from a captive sales force business model through a collaboration model, collaboration sales model. 2019 has proven to be a year of establishment and development of an effect -- efficient and more cost-effective business model. Although the total loan generated from the new model was short of our original target, based on the lesson we learned, we are confident that the advantage of collaboration model while be fully realized in the near future.

[Foreign Speech] First, CNFinance further tightened the risk control criteria in the first quarter of 2019, due to the uncertainty of the market condition and slowdown of the GDP growth in China. The average LTV ratio was adjusted down to 55% in the first quarter. Consequently, the total loan origination volume was short of our target. Another contributing factor of the slower loan origination value, our origination growth in 2019 was the longer-than-expected time for us to establish and fine tune the collaboration model in the first half of 2019. The loan origination volume started to show steady growth in the second half of 2019.

As a matter of risk control and the key factor of the collaboration model, we reduced in-house sales force significantly in 2019. As a result, CNFinance was able to cut down fixed costs, such as employee compensation and office space rentals, saving RMB237 million in the whole year. Therefore, the Company has successfully transformed itself to the new business model and reach out -- and reached our goal in business operations.

[Foreign Speech] Secondly -- second, we maintain a high liquidity. In the second half of 2019, CNF -- CNFinance came into new agreement with our existing trust partners. It allows CNFinance to transfer the repayment of loans to the trust partners without continuing to pay the interest on idle cash and the maturity of the loan. The modification reduced the amount of idle cash and the interest cost, borne by CNFinance which was a major cost in the first half of 2019. More importantly, as another key factor of the collaboration model, CNFinance has received RMB1 billion in total in credit risk mitigation position paid upfront by our sales partners when they sign up to the collaboration model, which help, make the Company more risk resistant.

[Foreign Speech] Third, CNFinance accelerated NPL disposals in the fourth quarter based on our negative outlook on property price and the liquidity in certain cities as a result of the government's continued emphasize on housing for living not speculations and associated housing regulations to stabilized land and property price in the long run. In the first quarter of 2019, we dispose NPLs in the total amount of RMB600 million, representing a collection recovery rate of 97%. A quick turnaround of NPLs is crucial to reduce risk to our operating results. We will continue to monitor the property market in China and adjust our NPL disposal process based on our assessment of the market condition.

[Foreign Speech] 2020 will be a year of both challenges and opportunities for CNFinance, benefiting from the infrastructure of the collaboration model established in 2019, CNFinance has a solid foundation to access and respond to risk and achieve sustainable growth in the long run. We will leverage our advantage to seize opportunities.

[Foreign Speech] First, we are highly risk-resistant. [Foreign Speech] In the first two months of 2020, the outbreak of the coronavirus has negatively affect our business in China. CNFinance is no exception. We expect loan origination volume and delinquency rates to deteriorate during the first half of 2020. However, we are confident that we can further the temporary downturn on the strength of the collaboration model which transfer our operation to a low fixed cost, low capital dependent and high liquidity model.

[Foreign Speech] Secondly, I wanted to talk about our products and services. Due to the shutdown and health of operation and production, we forecast a surge of demand for working capital by MSEs after the distribution of business and the productions in China. The virus financial support provided by the government were not fully limited [Phonetic] the demand from the MSEs. On MSE -- therefore, we expect explosive demand in loans from now potential MSE customers to capitalize on this unique opportunities. We and our trust partner are working together to develop new products to meet the financial need -- financing needs of highly qualified MSE customers.

[Foreign Speech] At the same time, this epidemic will bring consolidations to home equity loan industry. It is very likely that many smaller competitors in the industry, will go bankrupt in the tough environment. We believe that is -- that it will be the best time for us to further develop our collaboration model, expand our market share. We will cherry-pick and invite the qualified loan facilitator across the country to join our platform. A huge growth in the scale of the collaboration model is expected.

[Foreign Speech] In summary, 2020 will be a challenging year for CNFinance. They will also bring many opportunities as a leader in home equity loan business. We will apply all of our resource and knowledge accumulated around the past decade to rollout better products and serve our customers. We will continue to provide accessible affordable and efficient financing solution to MSE owners in China.

[Foreign Speech] Now I will walk you through our fourth quarter and fiscal year of 2019 financials. We believe, year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage change I'm going to give will be on that basis. [Foreign Speech] We will go through figures for fourth quarter of 2019 first, followed by the -- for the fiscal year of 2019. [Foreign Speech] As of December 31st, 2019 total outstanding loan principal decreased to RMB11 billion compared to RMB16 billion as of December 31st, 2018. [Foreign Speech] Total loan origination volume was RMB1,917 million compared RMB1,130 million in the same period of 2018. [Foreign Speech] Interest and financing service fee on loans was RMB597 million, a decrease of 43%, 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 a new collaboration model started since 2019.

[Foreign Speech] Interest expenses was RMB237 million compared to RMB470 million in the same period of 2018, primarily due to A, the decrease in interest-bearing borrowings which has higher interest rate; and B, the instant payment to trust companies after borrowers made payments for the underlying loans, which result in a decrease of idle cash. [Foreign Speech] Collaboration cost for sales partners increased to RMB76 million for the fourth quarter of 2019, compared to the nil in the fourth quarter of 2018, primarily due to the development of the new collaboration model started since 2019.

[Foreign Speech] Provision for credit losses was RMB40 million, a decrease of 68% from RMB122 million in the same period of 2018. The decrease primarily due to the following reason, A, the decrease in the overall outstanding principal of non-delinquent loans and loans delinquent within 90 days result in a decrease in collectively assessed sales allowances, and B, under the new collaboration model, the Company's sales partners provide credit risk mitigation position as guarantees for loans originated through them.

[Foreign Speech] Total operating expense were RMB163 million, a decrease of 8% compared with RMB176 million for the same period of 2018. [Foreign Speech] The income tax expense was RMB23 million, a decrease from RMB65 million in the same period of 2018. [Foreign Speech] Net income was RMB61 million, a decrease of 68% from RMB188 million in the same period of 2018.

[Foreign Speech] And now we are moving on to our financials for the fiscal year of 2019. [Foreign Speech] Total loan origination volume was RMB6,340 million compared to RMB9,530 [Phonetic] million in the same period of 2018. [Foreign Speech] Interest and financing service fee on loans was RMB2,917 [Phonetic] million, a decrease of 31% primarily due to the decrease of loan origination volume which is the result of the Company's strategic focus on ensuring loan quality over the growth of loan volume and devoting its resources to the new collaboration model started since 2019.

[Foreign Speech] Interest expense was RMB1,310 million compared to RMB1,943 in the same period of 2018, primarily due to A, the decrease in the interest-bearing borrowings which have higher interest rates, and B, the instant repayment to trust company of prepaid [Phonetic] loans from customers which result in a decrease of idle cash. [Foreign Speech] Collaboration cost for sales partners representing sales incentive paid to sales partners was RMB75.8 million for the fourth quarter of 2019, and it was nil for the same period of 2018, mainly due to the development of a collaboration model started since 2019.

[Foreign Speech] Provision for credit losses was RMB363 million, a decrease of 16% from RMB434 million in the same period of 2018, primarily due to the following reason, A, the decrease in the overall outstanding principal of non-delinquent loans and loans delinquent within 90 days result in a decrease in a collectively assessed allowance, and B, under the new collaboration model, the Company's sales partner provide a credit risk mitigation position as guarantees for loans orginate through them.

[Foreign Speech] Total operating expense was RMB531 million, a decrease of 29%, compared RMB547 million in the same period of 2018. [Foreign Speech] Income tax expenses was RMB186 million, a decrease from RMB297 million in the same period of 2018, primarily due to the decrease in taxable income in the fiscal year of 2019. [Foreign Speech] Net income was RMB535 million, a decrease of 38% from RMB861 million in the same period of 2018. [Foreign Speech] As of December 31st, 2019, the Company had cash and cash equivalent of RMB2 billion compared with RMB3 billion as of December 31st, 2018.

[Foreign Speech] The aggregate delinquency rate for loans are originated by the Company, which is calculated by dividing, A, total balance of outstanding loan principal for which any installment payment is past-due as of particular date, B, the aggregate total amount of loans we originated since 2014 decreased from 7.6% as of December 31st, 2018 to 5.4% as of December 31st, 2019.

[Foreign Speech] With that, we'd now like to open up the call for Q&A. Operator, please begin.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi, guys. Thanks for the commentary on the coronavirus and what looks to be opportunity for you guys, a longer term. Shorter term, are you seeing any impact from your sales partners where they might not have enough capital to bring as many loans to you guys as you would like?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] We are seeing the epidemic more serious, bringing more impact than we expected. [Foreign Speech] We have, gave you a brief reductions in our former stated script. [Foreign Speech] As for your question, we would like to say that we have two types of partners, one for sure is the existing ones who will keep on investing and the other combination is the new partners we want to bring in. [Foreign Speech] As for the existing partners, there are some of them, there is sufficient funding sources and they are very competitive in the market. I think they will keep on investing and bringing more business to us. [Foreign Speech] And we couldn't deny that there are some other sales -- existing sales partners that are lack of capital and are not that competitive. They will contribute less than they used to do in the future.

[Foreign Speech] As for the company, our primary service target are those with, and sufficient funding sources and they will be eligible to expand the market share with us. And as for those smaller ones they will be our secondary service target. [Foreign Speech] As for the incremental sales partners, I think this epidemic is beared by all of us, including us and the sales partners in the market. However, as a leader in the home equity loan industry, I think we will be competitive enough to address, bring them in to join us. [Foreign Speech] As we have mentioned in our script, I think this epidemic will bring a consolidation to the entire market. And I think we'll just bring, more and more sales partners will just join to our platform and expand our market share together.

And I think the advantages of the collaboration model which will be fully recognized by the market in the future -- in the near future. [Foreign Speech] Just to sum up, we will just provide better service for our existing sales partners as well as trying to attract more incremental sales partners from the market. Okay. Thank you.

William Gregozeski -- Greenridge Global -- Analyst

Okay. Thanks. Two other quick questions, you mentioned working with your trust partners to lower the interest rates, can you say where the interest rates are or what the average rate is you're seeing? And then also, what is the average duration on the loans outstanding right now? Thanks.

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] I will answer your question number one. [Foreign Speech] Well, our funding cost right now for the -- our funding that's under one year is maximum of 9.5%. [Foreign Speech] For over one year is around 11.5%. [Foreign Speech] We don't used to separate those funding matters in the past. It was around 12% and 12.5%. [Foreign Speech] Our primary target is to separate funding sources with different durations to and to lower the cost. [Foreign Speech] And the goal we want to achieve in the future is therefore the funding that's under one year, our funding cost won't exceed 9%. [Foreign Speech] For those more than one year, we are hoping to reduce it to under 11%.

[Foreign Speech] As for your second question, for those eco installment, our average duration is around 18 month to 24 months, just like in the past. [Foreign Speech] And for the interest-only, we are seeing an average of 12-month duration. [Foreign Speech] Does that answer your question?

William Gregozeski -- Greenridge Global -- Analyst

Yes, yes. Thank you guys very much.

Ning Li -- Executive Director and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] The next question comes from Rong Zhuang [Phonetic] of Cafe Capital [Phonetic]. Please go ahead.

Rong Zhuang -- Cafe Capital -- Analyst

[Foreign Speech] I want to ask what's your expectation for the scale of the new collaboration model in 2020 and how did the management, get that expectation?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] We made our first focus during 2019 and after the epidemic, I think our focus to results will be influenced a little bit. [Foreign Speech] Our loan origination volume during the full year -- the fiscal year of 2019 was RMB6 million -- RMB6 billion, sorry. [Foreign Speech] Taking into the -- even though taking into the consideration of the epidemic, we are still thinking double the long origination in 2020. [Foreign Speech] But it all depends, when will the epidemic be well contained. But as for now, we are still sticking to the number on RMB12 billion in loan origination. [Foreign Speech] And it is -- the answer on how we are planning to achieve that goal is quite similar to the first question. [Foreign Speech] It -- all depends on how big the scale of the number of the sales partners and how much they can invest and they can -- how much they can introduce to us. [Foreign Speech] We will work from both perspectives. First of all, we will provide better services to -- to the existing sales partners who are very competitive, just hope, so that they can introduce more loans to us. And secondly, go out into the market and seek more sales partners to join us.

[Foreign Speech] We are hoping that the effective sales partners will be just 1.5 more than what we are having right now. [Foreign Speech] Also as the existing sales partners keep on introducing more loans to us. We are optimistic that we will achieve that goal with that. [Foreign Speech] And that's how, we are going to devote the Company's resources. And this is based on the market condition as right now if they are fluctuations in the future, we will report to our investors in the future conference call. [Foreign Speech].

Rong Zhuang -- Cafe Capital -- Analyst

Okay. Thank you.

Operator

The next question comes from Ni Pani [Phonetic]. Please go ahead.

Heer -- Analyst

[Foreign Speech] I am Heer [Phonetic] from [Indecipherable]. I have three questions. The first one is, how is the Company planning exactly to scale the collaboration model? The second one is under the epidemic, how is the Company's collection going. And the third one is, how is the -- how is the disposing system of the Company going?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] Ask all the questions, I will answer one by one. [Foreign Speech] About how we are going to acquire effective sales partners. [Foreign Speech] Like, we introduced the -- we have been fine-tuning our system, our policy regarding the sales partners during 2019. [Foreign Speech] And based on the information we're having now, we have tried to set up networks scheduled across the country and we have feedbacks from our sales partners. [Foreign Speech] Based on the feedback we're getting from them, our platform is highly attractive to the sales partners. [Foreign Speech] And there is a certain wait and see period for the sales partners as well. [Foreign Speech] So again based on the feedback from our sales partners, first of all, we don't see many competitors that's doing the similar model as us. And second thing is that our model is very well recognized of the -- by the sales partners as well. So what we are thinking about now is, just how to rollout this model to the whole country.

[Foreign Speech] Starting from the second half of 2019, we have been giving seminars and just introduce this new model to the potential sales partners. [Foreign Speech] As the very first group of our sales partners, they have achieved very positive goals sending up to our collaboration model, I think their experience, their success was very convincing to the other sales partners -- other potential sales partners. I think the main source of the potential sales partners are our former competitors in the market. [Foreign Speech] As we keep on promote, our collaboration model, I think is advantages will quickly show itself to our potential sales partners. And we have started the market. As we said, there are many small and scattered loan facilitator seen in the country. So we think the potential market of the sales partners are very huge in China.

[Foreign Speech] And just to sum up to, our key factor to success was just to do more promotion and let the sales partners earn what they deserve and I think that's the key factor to our potential success. [Foreign Speech] That's for your first question. [Foreign Speech] We have to admit that under the epidemic, our collection was somehow troubled. [Foreign Speech] It's not just for us, it's for -- it's beared by the entire industry. [Foreign Speech] And it is because of the epidemic many -- some of our former collection methods could not be conducted at the moment. [Foreign Speech] Such as on-site collecting. [Foreign Speech] It is also a great opportunity to see on if what we did last year was successful. We have set up several measures several different ones to -- for the loan collection.

[Foreign Speech] On-site collection is only one of the procedure we could be using. [Foreign Speech] We have goal more for judicial procedure during the -- during 2019. [Foreign Speech] And the third one is, and also we are -- we seek to transfer non-performing loans to third parties in bulk as well. [Foreign Speech] That made our collection procedure more flexible. [Foreign Speech] And we had disposed about RMB2 billion of non-performing loans during 2019. [Foreign Speech] I think our advantage is the variety of collection method they could be using, and that's our -- that's our biggest competitive advantage as well. [Foreign Speech] So under this very under the circumstances where everybody in the market is impacted. I think we, the contrary, isn't impacted as much as our competitors. [Foreign Speech] And especially under the new model, we have developed another very helpful collection method where the our sales partners will also try to dispose or collect those non-performing loans for us.

[Foreign Speech] Because they have to put up the credit risk mitigation position as a guarantee to the loans they introduced, they are also very motivated to deal with the delinquent loans with us. [Foreign Speech] And if there are delinquent loans and the sales partners choose to forfeit the credit risk mitigation position, they have put up, it actually gives us more room in the price -- in negotiating the price of a network, whenever we try to dispose the non-performing loans. It gives us the possibility to put more discount on it. [Foreign Speech] It couldn't be achieved under the original model.

[Foreign Speech] So I think our -- we hope our collection method, our collection procedures very competitive in the market in the industry. [Foreign Speech] I think your third question is pretty much contained in the second one. I hope this answers your question. [Foreign Speech] Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Simon for any closing remarks.

Simon -- Investor Relations

Thank you. That concludes today's call. If you have any further questions and comments, please refer to reach out IR room. Thank you and good luck.

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] Thank you.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Simon -- Investor Relations

Ning Li -- Executive Director and Chief Financial Officer

William Gregozeski -- Greenridge Global -- Analyst

Rong Zhuang -- Cafe Capital -- Analyst

Heer -- Analyst

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