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Yintech Investment Holdings Limited (YIN)
Q1Â 2020 Earnings Call
May 27, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the First Quarter 2020 Yintech Investment Holdings Ltd Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Yvonne Young, Investor Relations Director. Please go ahead.
Yvonne Young -- Investor Relations Director
Thank you, and hello, everyone. Welcome to Yintech's first quarter 2020 earnings conference call. Our earnings release was released earlier today and is now available on our IR website.
On the call today from Yintech are Mr. Wenbin Chen, Chairman and CEO; Mr. Raphael Qian, CFO; and myself, Investor Relations Director. Mr. Chen will review business operations and company highlights, followed by Raphael Qian, who will go through the financials and provide guidance for the second quarter. We will all be available to answer your questions during the Q&A session that follows. Questions can be asked in English or Mandarin. If you ask your questions in Mandarin, please translate it into English yourself afterwards, or I may have to do the translation.
Before beginning, we would like to remind you that discussions during the call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yintech's filings with the US Securities and Exchange Commission. Yintech does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
During the call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or substitute for the financial information prepared and presented in accordance with the US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.
I'll now turn the call over to Mr. Wenbin Chen. Mr. Chen will give his remarks in Mandarin. I will translate for him.
Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer
[Foreign Speech]
Thank you, Yvonne, and thanks to everybody for joining. First, I hope you and your families, colleagues remain safe and healthy during this unprecedented and challenging time.
[Foreign Speech]
May 18, 2020 marks the ninth anniversary of our company. The turbulence of the industry we experienced in the past few years united [Phonetic] us to maintain acute insight on and accommodate with market trends and invest in business ahead of key micro trends that have positioned us well. This was especially true, seen from the outstanding operating outcomes in the first quarter.
[Foreign Speech]
Despite the overwhelming impact to economies, business and investment, and turbulence among financial market caused by the COVID-19 pandemic, along with fewer trading days due to the Chinese Lunar New Year and the virus, we posted solid operational results in our primary business. Our customer trading volume reached RMB846.5 billion, an increase of 134.7% year-over-year. And net commissions and fees were RMB416 million, an increase of 68.8% from the same period last year. The numbers of our active accounts and tradable accounts both grew, a testament to the resilience of our employees, the strength of our client relationships in a period and the track of our capabilities.
[Foreign Speech]
As a result, our total revenues once again exceeded management's high-end guidance, reaching RMB490.9 million, represent 8.1% increase year-over-year. We continued to improve operating leverage. If you do an apple-to-apple comparison on our primary business, our net commissions and fees increased by 58.8%, whereas our total expenses increased by nearly 22.6%. Our net income attributable to shareholders increased by 28% to RMB88.6 million with better operating leverage. If comparing with net income generated from commodities and securities, or if excluding the investment gains or loss, which to a large extent was correlated to market conditions, our bottom line improved even further.
[Foreign Speech]
The growth was attributable to a number of factors, which include our key investment insights on the Chinese financial market, our investment analytics capabilities, our deep understanding to the Chinese individual investors, our completely digital engagement model, and our unique organizational and operational agility. This places us in a strong position to manage through crisis and win.
[Foreign Speech]
As a trusted partner to our customers, we have been highly engaged with and servicing their evolving needs in any way accessory, while intensely focusing on protecting our employees and working in a remote environment in a special period in the first quarter. Our daily market price webinars and informed posting on equities and commodities developed by our in-house securities investment advisors and analysts from our spot and futures commodity research team have been particularly impactful as we responded to clients' area of interest, including investment implications of COVID-19, updates on global financial markets, government and regulatory implications for key investment strategies and products, and public company research reports. We never stopped servicing our customers as their companion for a single day, even during the most difficult time of the virus.
[Foreign Speech]
Our in-house securities advisors and research analysts working closely with the back-end team to engage clients on changes to the investment priorities and portfolios to seize the unprecedented opportunities in gold is another example. You may have observed that the spot gold in China extended its value in Q1 to hit the highest a few days ago in more than eight years. We made proactive decisions before this trend to reapportion resources to focus more on this key area and on the interested customer in this asset class. We were rewarded for the record trading volumes and commissions in our history. We believe that supporting our clients as partners through all environments and ensure our clients' success will allow us to deepen this important relationship.
[Foreign Speech]
We believe maintaining our financial flexibility, building ample liquidity to further strengthen our balance sheet through the uncertain environments like what we are facing now will allow us to continue to operate from a position of strength. As of the end of Q1, our total cash and investment securities remained flattish at RMB2.08 billion, and we have no debt. Our free cash flow was significantly improved to RMB190 million from RMB140 million, a significant increase of 32% from the end of last year. And total shareholders' equity increased to RMB2.85 billion.
[Foreign Speech]
It's clear that 2020 is turning out to be a much more challenging year than anyone of us ever would have anticipated. On a macro level, in addition to the impact of from coronavirus, at the business level, the new regulations for investment advisory business expected to be rolled out this year and more rigorous supervision will follow. We believe that Yintech, as one of the leading companies in the industry that strictly enforce industry standards, will continue to adhere to the concept of being a lifelong partner of our customers' investment and wealth management and strictly abide by regulations in the new regulatory environment. Meanwhile, we will invest in accelerating the upgrade of O&M, further strengthen out and improving customer service with focus on brand upgrades. These actions will lay a solid foundation and position us well for a big move in the new environment after industry consolidation in the quarters to come.
[Foreign Speech]
Clearly, at Yintech, we are committed to a sustainable growth and strength of our balance sheet with an eye toward improving our leverage profile and continuing to invest in new area of business for greater growth. We are excited to see a strong start.
[Foreign Speech]
Throughout the year, we looked to continue to return capital to our shareholders. This includes our consistent dividend payout. As market conditions and our profitability improve, it allows us to create the financial flexibility for investment and growth in the future for our business. Then that might also provide us ample room to reward more to our shareholders, such as a more generous dividend plan and plus additional share buybacks as the Board has just extended our share repurchase plan to 2021.
[Foreign Speech]
With that, I'll now turn the call over to Raphael Qian, our CFO, to discuss our financial results for the first quarter of 2020 and provide guidance for the second quarter.
Di Qian -- Chief Financial Officer
Thank you, Mr. Chen. Hello, everyone. I'm glad to speak with you on today's call. While the first quarter was in line with or even better than our expectations, the COVID-19 crisis has changed things dramatically since early February in China, including among other things, the high volatility in capital markets and across all financial assets. The impact [Indecipherable] cost to businesses and the individual assets. I am proud of the speed and the decisiveness our team has shown in adapting and responding to this pandemic, as well as most notably, leveraging the opportunities it brought to us to maintain top tier services to our customers.
In addition to operating safely and our continuity in servicing our customers in this special quarter, we have also taken actions to enhance and improve our liquidity position and financial performance. We closed the first quarter with strong results from all key aspects.
First, liquidity. Our financial position is strong. We ended the first quarter with RMB2.1 billion of cash positions, consisting of cash on hand of RMB242 million and investment securities of RMB1,841 million. We had no borrowings. We generated RMB189 million of free cash flow, a significant growth from RMB143 million at year-end 2019. The ample liquidity relative to the run rate cost help us to navigate through any uncertainty we would probably be facing in the future. We also remain confident in our ability to continue to execute on our strategy and maintain healthy cash level on an ongoing basis.
Second, our financial performance. We finished Q1 at RMB490.9 million in total revenues, up 8.1% from the same period last year, seemingly not strong. However, as Mr. Chen mentioned in his remarks, the revenue related to our business, which comprises mainly of net commissions and fees, increased to RMB429.5 million, up 65.4%. This is the most important indicator, and we split it from total revenues to show a clearer picture of the strength of our core businesses, starting from Q1 this year. We continued to generate investment gains, which was RMB54.8 million, significantly lower than RMB187.1 million a year ago, as it largely correlated to market volatility. Total customer trading volume was RMB846.5 billion, up 134.7% from the same period last year, primarily due to an increase in trading volume of spot commodities.
Mr. Chen already shared a lot about our business priority in Q1, and I won't repeat. Effective fee rate for the quarter was slightly down at 0.037% compared with 0.041% last year.
Now, turning to expenses, they were RMB375.6 million, up 22.6% from the same period last year, mainly because of the increase in advertising and promotion expenses. Obviously, our operating leverage has improved as our revenue growth from net commissions and fees far outpaced the increase in expenses, mainly due to the scale advantage when our business is more stabilized, as well as the effective cost control measures we put in place.
As a result, the net income attributable to Yintech for the quarter was RMB88.6 million, representing an increase of 28% from the same period last year. This translates to diluted earnings per ADS of RMB1.18 compared with RMB0.92 from the same period last year, and non-GAAP diluted earnings per ADS was RMB1.25 compared with RMB1.14 in Q1 last year.
Finally, in light of the fact that our liquidity position has been built to be more than adequate to fund our operational requirements and the worst case, the economic downturn impacting our results I mentioned a few minutes ago. We therefore view part of our liquidity as available to fund potential M&A in a consolidating industry. And we have seen in the past that such opportunities can come along at any time. Moreover, as Mr. Chen mentioned, our Board is evaluating the plan to reward our shareholders. We would consider more aggressive 2020 dividend plan. It will also help to improve our capital structure and eventually our return on equity.
All in all, Q1 put us in a strong position to grow further in this year despite all the negatives caused by COVID-19, and that gives us [Technical Issues] deliver better operational and financial targets we set for the year. As we move through Q2, given the anticipated strong demand in our commodities and securities services continues, we expect total revenues will be in the range of RMB590 million to RMB610 million, representing an increase of 104.2% to 111.1% compared to the same period last year. This includes revenue related to business of RMB570 million to RMB590 million, representing an increase of 77.6% to 83.8% compared to the same period last year.
This concludes our prepared remarks for today. Operator, we will now open the call to questions. Thank you.
Questions and Answers:
Operator
[Operator Instructions] The first question today comes from Hunter Diamond with Diamond Equity Research. Please go ahead.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Hi, Yvonne and team. Firstly, congratulations on the very strong results in a very difficult economic environment. So, my first question, in terms of the potential recession that we could maybe see due to the pandemic, how is Yintech planning to respond to the fluctuations, abnormalities in the domestic and international markets in terms of risk control and product optimization?
Yvonne Young -- Investor Relations Director
Risk control, and what's the next?
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Product optimization.
Yvonne Young -- Investor Relations Director
Product commercialization?
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Optimization, looking at new different products.
Yvonne Young -- Investor Relations Director
Optimization.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Gold trading. Yeah.
Yvonne Young -- Investor Relations Director
Okay. [Foreign Speech]
Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer
[Foreign Speech]
Yvonne Young -- Investor Relations Director
Okay. First, yes, well, seemingly -- it seems that people are more pessimistic about the global economic outlook. But if you look at specifically to the business we are involved in and which is commodities and securities services, the situation might not be true in our case. As you can see from the Q1's result that the Q1 market and the market going forward will continue to experience high volatility for most of the financial insights [Phonetic], including commodity and capital markets. Well, this high volatility or turbulence in the financial markets actually help our business, as you know that investor trade on volatilities. If there is no volatility, investor is not going to make any profit from that. So virtually, that's why you see that we delivered very strong Q1 results, and we expect that that situation will continue. And more specifically, if you look at both products, which is actually hedged to the current negative market situations, so that will be -- investors will invest to preserve their asset by investing in gold. So overall, we see -- we are very optimistic to our business outlook in the spot commodities and securities segment that we engage in.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Right. It makes sense. I think the gold is very well positioned in this market and obviously something that investors are going to be using more of to preserve value, like you said. My next question, this is a very timely topic. As you know, with Luckin Coffee in NASDAQ, they're considering many more regulations. Now, my view as an analyst is, I think this could be very good for Chinese listed companies like Yintech because they're going to regulate them more, and companies like Yintech that are very well positioned and capitalized may actually get more US investors because there are more stricter requirements. So I wanted to know is Yintech prepared for sort of NASDAQ's new rules that are likely coming in terms of, I guess, auditing, shareholder requirements, whatever they may be? Has that been something that NASDAQ has reached out or something that you feel well prepared for?
Yvonne Young -- Investor Relations Director
Okay. Yeah, that's a good question. Thank you and let me translate.
[Foreign Speech]
Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer
[Foreign Speech]
Yvonne Young -- Investor Relations Director
Well, first of all, I will add some following points after Mr. Chen's point. First of all, Mr. Chan thinks that, well, this is more than a company level but a national level relationship. So, well, we have discussed very intensively with the auditors that review our -- audit our financial results. And according to their feedback and their research, as everybody, they cannot discuss this, not cover this, so they have done [Phonetic] some intensive analysis on the situation as well. So, they shared their view with us. They think that point one, this is more on a national level, as I just now mentioned. And it's hardly to predict how the situation will evolve, given the relationship between China and the US is uncertain. So -- and then secondly, we think that in the past, these two countries have some cooperation in the history on some of the review to provide a review audit book to the regulators. So this is more related to the confidential entity [Phonetic] from a national level. So both points are actually beyond our control. So as a -- particularly in -- for a particular company, at this point, we cannot do much on a company level. But of course that we are prepared for any potential changes on the policy or regulatory level. And then, we think that at present, it's not passed by the House yet. It's only passed by the Senate. It's not passed by the House of Republic [Phonetic]. And it finally needs to be passed by the President so that you can litigate [Phonetic]. And SEC needs to take some effort to roll out some more specific regulation rules on that. So we think that at present, still too much early to discuss the potential results and the -- and then the preparation from a company level. But as a company, we are fully compliant with the US and SEC laws and regulations. We welcome any policy or regulation change, and we make sure that we are fully compliant as always.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Right. It makes perfect sense, Yvonne. And I actually think it could be a good thing for the capital markets because smaller Chinese equities that -- maybe there's some fear because there's been a few major frauds in the US markets. I think if they maybe implement these changes, then maybe US investors will feel more interested in sort of Chinese public equities because they'll feel that they're more audited and they will feel more confident that all the numbers are correct, right, if they're listed. So I actually think our clients and other ones we talk to, it may be overall good despite being maybe additional expenses temporarily.
Yvonne Young -- Investor Relations Director
Right.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Okay. Yeah. My next question is...
Yvonne Young -- Investor Relations Director
Okay. I'm sorry, let me translate for the team.
[Foreign Speech]
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Okay, great. So my next question relates to -- you mentioned potentially changing the dividend. There's a few things you guys have to create shareholder value. The repurchase plan, which I see you just extended. You are maybe going to increase the dividend, which is another way as well. And then, the other thing which potentially could happen, and I wanted to ask more about this, is you're well capitalized. So -- and maybe there's other smaller fintech companies that in this COVID environment are struggling and that could potentially be acquired, right, at very good prices because they need capital, they need infrastructure, and you can offer that, right, as you have with other businesses for licenses or their technology. So I'm wondering are you seeing -- in terms of shareholder value, are you seeing a lot of M&A opportunities right now, maybe smaller start-ups or companies that you could get for cheap and sort of integrate? Or do you think more -- the company is looking more, like you said, at the dividend, share buybacks to increase shareholder value? Or are they more focused do you think on M&A and seeing maybe interesting things that they could acquire?
Yvonne Young -- Investor Relations Director
Yeah, got you. Thank you.
[Foreign Speech]
Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer
[Foreign Speech]
Yvonne Young -- Investor Relations Director
Well, first of all, I'd like to share my views on the M&A opportunities you just now mentioned. Well, in terms of this initiative, we are -- yes, we are looking at any potential to expand our business, either on M&A or any possible forms of business expansion. But as far as we know that according to the statistics of our research on the market, there are very few companies that can be successful in the merger and acquisition because of a number of reasons. So we see that it has very low chance for us to succeed to have a very good merge when we acquire the company, first of all. So we will not consider this M&A as a major possibility of business expansion. But we do -- if we consider, we will only consider to acquire those companies with the business within our capabilities or we have the knowledge or capacity, capabilities to merge with that company and their business is complementary to our existing one so that we can help them to grow and also help us to achieve a greater growth. So this will be the potential target that we are looking for all the time.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Right. It makes perfect sense. And generally, I would agree with you. The only reason I bring it up is because I know we talked to a few companies, and their strategy right now is, they're looking at very distressed companies, right, because given COVID, there is the potential to maybe buy companies at almost asset sale prices. So, that maybe changes the math. But I completely agree that generally, acquisitions, they've shown in university studies that they generally are not accretive and it's better to just do, like you're doing, a repurchase if the shares are low or higher dividends. Okay, perfect.
My last question, and then I'll open the line for other investors. Just in terms of areas, I know you have a significant or somewhat significant R&D budget. What areas -- obviously, the gold trading and the spot trading is a very high growth area and where you're seeing a lot of trading volume. What are the most exciting areas the management is investing in or seeing potential for new products?
Yvonne Young -- Investor Relations Director
[Foreign Speech]
Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer
[Foreign Speech]
Yvonne Young -- Investor Relations Director
Well, I just now actually mentioned that we'll be very much focused on the primary business we are doing now, including the spot commodities services. We are now looking -- we are not looking around to see any business that's beyond our ability, so beyond our expertise. So we are still -- we have formed five product lines, and after two years of transformation -- these are some of the points Mr. Chen mentioned in the earlier question I think I forgot to translate. So now I will translate this point. We have formed five product lines and two categories of products. After two and three years' transformation, we think that we have established a very solid business growth after the two-year testament. So we will continue, going forward, focusing on these two product lines.
And specific to the gold area, even though we are -- we have ample cash position and we have a lot of cash to invest in the R&D area, as you just now mentioned, but we still would like not to be too distracted. We're still looking at the core capabilities we have and the knowledge and the capabilities circle we have. So compared to the marketing size of the spot gold, we are very, very minimal compared to the very huge market potentials that our business is in. So we think that even this spot gold trading business can give us tremendous room to grow and to pursue market share and to grow market share. So we are at this stage -- only after two or three years' transformation, we are now looking at something else. We'll be very much focused and very, very, very attentive to the things we are doing now.
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
Okay, great. No, that makes a lot of sense, Yvonne. And again, congratulations on the great results in a very difficult environment. And stay safe in the meantime.
Yvonne Young -- Investor Relations Director
Yeah. Thank you very much and stay safe, to you and to your team.
Operator
[Operator Instructions] Since there appears to be no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Yvonne Young for any closing remarks.
Yvonne Young -- Investor Relations Director
Thank you, everyone, for joining today's call. And in these very difficult and challenging times, we do appreciate your efforts and appreciate your company with us for this transformation period. And we wish you and your families and colleagues safe and healthy. Okay. Thank you, bye.
Operator
[Operator Closing Remarks]
Duration: 48 minutes
Call participants:
Yvonne Young -- Investor Relations Director
Wenbin Chen -- Co-Founder, Chairman, Chief Executive Officer
Di Qian -- Chief Financial Officer
Hunter Diamond -- Diamond Equity Research LLC -- Analyst
