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CNFinance Holdings Limited (NYSE:CNF)
Q2 2021 Earnings Call
Aug 23, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the CNFinance Second Quarter and First Half of 2021 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Ms. Zhang Zehui. Please go ahead.

Zehui Zhang -- Vice President

Good morning, and good evening, and welcome to the CNFinance second quarter 2021 financial results conference call. In today's call, our CEO, Mr. Zhai, will walk us through the operating results followed by the financial results from our Vice President of Capital market Department, Matt Lou. After that, we will have a Q&A section.

Before we start, 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 U.S. Private Securities Litigation Reform Act of 1995. This forward-looking statement can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, projects, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current markets and operating conditions and relates 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 this and other risks, uncertainties or factors is included in the Company's filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under law.

Now, please welcome our CEO, Mr. Zhai.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Thank you, operator, and thank you everyone for joining us in the conference call. On today's call, we will introduce Company's financial and operational results of second quarter and the first half of 2021, followed by Q&A section.

[Foreign Speech] Following this first quarter, the loan facilitation volume increased again in second quarter. After adding another RMB3.8 billion of origination loans in the second quarter, the total loan facilitation reached RMB6.6 billion in the first half of 2021, representing an increase of 100% and 113% respectively to the same period of last year. The net income in the second quarter and the first half of the year was RMB65 million and RMB150 million, respectively. Both increased significantly comparing to a net profit of RMB25 million and a net loss of RMB40.5 million in the same period last year.

[Foreign Speech] We not only delivered solid operational results in the second quarter, but also in the first six month of 2021. The loan facilitation volume even reached a new high since the infection of collaboration model. The reasons of our success are threefold.

[Foreign Speech] The huge demand for home equity loans in the second quarter as China's GDP grew 7.9%, the Guangzhou business operations of over 80 million run-through micro and small enterprises in China led to a huge demand for working capital. However, MSEs in China are usually covered with small scale and a stable cash flow. This cultures of MSEs made them difficult to meet the loan approval criteria at banks. Their demand for working capital cannot be satisfied by transitional financial institutions. In this market environment, we call ourselves the last-mile courier to build a network of an exclusive -- inclusive financial system in China. In the past two years, we have ordered loan services to over 40,000 MSEs in China.

[Foreign Speech] On the other hand, home equity loan is still one of the best interest bearing assets in the market. As we witnessed transition increase of property price in major cities since the second half of 2020.

[Foreign Speech] Since the inception of collaboration model, we have built a national worldwide consisting of 50 branches in 40 cities by collaborating with over 2,000 sales partners across China. With this network, we are able to establish a wide market coverage and serve MSE owners financing needs in a timely manner. In the first half of 2021, we facilitated loans with total amounts of RMB6.66 billion, representing a year-on-year growth of 118% from RMB3.05 billion. The Company's growth is back on a fast track.

[Foreign Speech] The collaboration model has been well recognized by the market as we kept refining the operation in the past two years. To secure sales partners loyalty to our platform, we have been optimizing our services providers buy.

[Foreign Speech] First, we have been consistently adding talent to our professional management team. We also offer training programs for our sales partners to help them to -- to help their team members gain deep understanding of the products and risk control criteria of the trust company partners so that they could serve MSE owners efficiently.

[Foreign Speech] Second, we optimize the data processing and storage of our online system to make it more efficient and visible to users. We help serve MSE owners in time and cut our own costs at the same time. The drastic increased in low origination volume, was the proof to the capacity and efficiency of our own process systems. Based on our internal assessment, our current system is capable to support an annual capability of RMB30 billion to RMB50 billion in the loan origination volume.

[Foreign Speech] We delivered strong results in the past two quarters, but at the same time, we also noted some challenges to our future growth, including.

[Foreign Speech] Funding pressure -- we are highly dependent on trust companies at founding partners. Since the beginning of 2021, the regulation on trust companies' loan products were tightened. As a result, trust companies reduced our funding quota. We also suffered from a subsequent rise of financing costs. We do not expect this regulation to loosen up in the rest of 2021 and therefore, our loan origination, will possibly be affected.

[Foreign Speech] We have noticed the uncertainties of property price and liquidity due the government policies in controlling property prices, and impact from the COVID-nineteen pandemic. In 2021, the government actively initiated measures to control property price including announcing suggested prices to second-hand property in multiple cities, as well as tighten mortgages, due to slow down property transactions. The management believes that such uncertainties will negatively affect the loan origination volume, and NPL disposal.

[Foreign Speech] Under the collaboration model, sales partners bear risks. However, due to the business structure agreed upon with the trust companies, we are the holder of subordinated units in the trust plan. As a result, we have to consolidate the assets on our financial statements. We streamlined the Company with heavy assets where our revenue is generated from interest spread. The balance sheet cannot represent our true business model which is in fact an asset-light loan origination platform. At the meantime, the look of the balance sheet is also constrained when we reach out to new funding partners.

[Foreign Speech] In order to consistently grow our business and serve MSE owners in a changing market, we plan to further refine the current platform model and introduce a new asset-light service platform by taking the following measures.

[Foreign Speech] Transferring our assets and risks to any investor with preferences in high-risk and high-return asset-backed by property, our company will focus on online and offline loan origination and post-loan management service.

[Foreign Speech] Collaborating with different types of funding partners to serve MSE owners with different credit ratings. Other than strengthening our collaboration with trust companies, we have selectively reached out to various financial institutions. We hope by introducing more diversified loan products, MSEs could enjoy the benefits of more affordable loans. We have signed collaboration agreement with commercial banks, including Everbright Bank, Blue Ocean Bank and Guangzhou Bank with a possibility to issue ADS. We believe that creating a broader financial channel will help us bring diversification of our loan products and offer more choices to MSE owners.

[Foreign Speech] We will continue to improve our service to MSE owners. First, we will further expand our service network national wide. The current network has 50 branches covering across 40 cities, penetrating into markets, and discovering the financing need of MSE owners. Other than that, we will prioritize technology development to improve the loan measurement system capability installing data and to increase efficiency in overall process to satisfying the financial needs of MSE owners. Also, with the goal to reduce the operating costs of our Company.

[Foreign Speech] To achieve our mission of make finance more human and follow the government's policy of developing an inclusive finance system, we will leverage our advantage gained from years of dedicated work in industry and be a service platform that is asset-light, turnover-high, and scale large. We will proactively work with funding partners to push out diversified loan products, consistently to provide MSE owners with affordable, accessible and efficient financial services.

[Foreign Speech] At last, today, we announced our CFO, Mr. Li Ning, will step down from CFO position in November. I want to take the time to thank Mr. Li's years of hardwork. Mr. Li has served as our company's CFO since 2010. In the past eleven years, he made significant contributions in leading CNFinance to become a leading home equity loan service provider in China and put dedicated work in transformation from a privately held company into a NYSE listed company. On behalf, all of us here in CNFinance, I would like to thank Mr. Li Ning for his leadership, dedication and professionalism. I wish him best of luck with his future endeavors. We have already commenced the search for new CFO.

[Foreign Speech] With that, I would like to hand the call over to Ms. Zhang Zehui, the Vice President of the Capital Market Department, who will walk us through the second quarter and the first half financials.

Zehui Zhang -- Vice President

Thanks, Mr. Zhai, and thanks again to everyone joining us today. I will walk you through our second quarter and first half of 2021 financials. We believe our year over year comparison is the best way to review our performance. Unless otherwise it states, all percentage changes I'm going to give will be on that basis. Also, unless otherwise it states, all number I'm going to give will be in RMB.

We will go for the figures for the second quarter of 2021 first and followed by that for the first half. As of June 30, 2021, total outstanding loan principal increased to RMB11.6 billion compared to RMB9.7 billion as of December 31, 2020. Total loan origination volume was RMB3.8 billion, increased 113% from RMB1.9 billion in the same period of 2020. Interest and financial service fee on loans was RMB449 million, a slight decrease of 0.2%, primarily due to the combined effect of: A, increase of average daily outstanding loan principles; and B, lowered interest rates on loans facilitated to comply with the rules and regulations issued by relevant PRC regulation authorities. Interest expense was RMB195 million compared to RMB187 million primarily due to the increase in the principals of borrowings from the trust companies.

Collaboration costs for sales partners increased to RMB107 million for the second quarter of 2021, compared to RMB104 million in the second quarter of 2020, primarily due to the high outstanding loan balance which was originated under the new collaboration model. Provisions for the credit losses was RMB15 million, a decrease of 74% from RMB57 million in the same period of 2020. The decrease was mainly attributable to the combined effect: A, the increase in outstanding loan principle under the collaboration model that was guaranteed by credit risk litigation positions put up by the sales partners; and B, lower probability of default under the current expected credit loss model, which takes into account a more positive outlook for the Chinese in the second quarter of 2021 as compared to that of the same type of 2020 under the impact of COVID-19 pandemic; and C, the Company received recoveries in the quarter after charged down loans that are 180 days due to net realizable value.

Total operating expenses were RMB87 million, a decrease of 24% compared with RMB114 million in the same of last year. Income tax expense was RMB8 million, a decrease of 46% from RMB16 million in the same period of 2020. This is primarily due to the decrease in the amount of capital income. And net income was RMB65 million in this quarter, an increase of 159% from RMB25 million in the same period of 2020.

Now, we are moving on to our financials to the first half of 2021. Total origination volume was RMB6.7 billion compared to RMB3.1 billion in the same period of last year. Interest and financing service fees on loans was RMB871 million, a decrease of 7% primarily due to the combined effect of: A, increase of our average daily outstanding loan principal; and B, lower interest rate of loans facilities and efforts to comply with the rules and regulations issued by relevant PRC regulation authorities. Interest expenses was RMB351 million compared to RMB388 million in the same period of 2020, primarily due to the decrease in principals of borrowings under guarantee and repurchase.

Collaboration costs for sales partners increased RMB205 million for the first half of 2021 compared to RMB198 million in the same period of 2020, primarily attributable to the increased loan balance under the collaboration model. The provision for credit losses was a recovery of RMB3 million while there was a provision of RMB277 million in the same period of 2020. This is primarily due to the result of: 1, the increase in outstanding loan principal under the collaboration model that was guaranteed by the credit risk mitigation position put up by the sales partners; and B, lower probability of default under the current expected credit loss model which takes into account more positive outlook for the Chinese economy in this year as compared with that in last year same period under the impact of COVID-19 pandemic; and C, the Company received recoveries in the first half of 2021 after changed down loans that are 180 days past due to net realizable value.

Total operating expenses were RMB182 million, a decrease of 16% compared to RMB215 in the same period of last year. Income tax expenses was RMB38 million an increase from RMB1 million in the same period of 2020, primarily due to the fact that we recorded an income before income tax expense for the first half of 2021 as compared to a loss before income tax expenses for the same period of 2020. Net income was RMB151 million compared to a loss of RMB41 million in the same period of 2020.

As of June 30, 2021, the Company had cash and cash equivalent of RMB1.6 billion compared with RMB2 billion as of December 31, 2020. The actual delinquency rates for loan origination by the Company decreased to 18.9% as of June 30, 2021 from 22.6% as of December 31, 2020. The actual NPL rate for loan origination by the Company decreased to 8.6% as of June 30, 2021 from 11.7% as of December 31, 2020.

With that, we now like to open up the floor for Q&A. Operator, please begin.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. Congratulations on the big loan origination volume number. Are you seeing a continuation? Or do you expect to see a continuation in that number or growth and also do you have the availability of funds to support that level of demand?

Unidentified Speaker

Hi, Bill. Could you repeat your first question again? We kind of had a bad connection just now.

William Gregozeski -- Greenridge Global -- Analyst

Yeah. I just said you had huge loan origination volume growth, do you see that continuing? Is that demand going to continue and do you have the access to the capital to support that demand?

Unidentified Speaker

Okay.

Zehui Zhang -- Vice President

[Foreign Speech] I will take your questions. Like CEO just mentioned in his remarks, as China's economy growth by high speed, we continually to see on the future demand from the MSE owners for Capital. [Foreign Speech] And we had a very established sales network and our system is capable to support our loan facilitations. [Foreign Speech] So, like I just -- like the CEO just mentioned in his remarks too, our system is capable to support annually loan facilitation of RMB30 billion to RMB50 billion. [Foreign Speech] And we believe the huge demand from the MSE owners will continue and carry-through. [Foreign Speech] And our CEO have something to supplement.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] This year so far, we had huge demand for capital from MSE owners and we think this will carry through to the remaining of the year. [Foreign Speech] And the main challenge to us right now is that we are -- like, as we are highly depended on the trust companies to support our capital, our fundings, but they are facing tightened regulations so that our partner was kind of brought down by the trust companies.

[Foreign Speech] And we have taken many measures to reduce the effect of tightened trust company fund, but we will see that to be of our assistant not until Q4, the fourth quarter or the first quarter in 2022. [Foreign Speech] So that's my answer to your question.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And you mentioned signing up the commercial banks, which seems like a great thing for you guys in the platform and getting that access to capital from that channel. How much availability do you have? I mean are these trials or is it a good amount of capital you're going to have and what's the rate on that?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] So, we have already signed collaboration agreements with three commercial banks. [Foreign Speech] So, one being the Everbright Bank. [Foreign Speech] One being the Guangzhou Bank. [Foreign Speech] And there is a smaller one comparing to the last two mentioned the Blue Ocean Bank. [Foreign Speech] The main advantage that brought up by collaborating with commercial banks is that we can cover MSE owners with different credit ratings. [Foreign Speech] So, the agreement deal is signed. Right now, we are just trying to see if we are compatible in our collaborations and trying to see how the system is going. So, yes, that's my answer to the question.

William Gregozeski -- Greenridge Global -- Analyst

Okay. So there hasn't been any large scale lending from the banks yet. It's just more in a test run?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Yes, you're correct.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And last question is, on previous calls, you've talked about Class A, Class B, and Class C loan products, you were going to roll out with different rate structures, can you provide an update on those?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] So that's our initial ambition. When we said, we are trying to collaborate with commercial banks is that we want to just cover customers with different ratings with different credit ratings. So, we were slowly collaborating with trust companies. The customer we could cover was mainly so in our internal, in our internal classification, the Type B and Type C customers. But based our past experiences, we don't really see that they have two high a risk. So, by collaborating with the commercial banks, we are trying to cover the so-called Type A customers, but however, we are not sure at this moment if they are really going to be of higher quality than the customers we are serving now because right now in China, the credit system -- credit rating system, isn't fully established. So, we really have -- we are not really fully sure of whether the Type A customers are going to be by their customers than B and C customers.

[Foreign Speech] So, what we're hoping right now is that we could offer loan products with interest with annual interest rates from 10% to 18% so that we can cover more customers -- more borrowers. That's my answer to your question.

William Gregozeski -- Greenridge Global -- Analyst

Okay, perfect. Thank you guys very much.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Thank. Thank you for your question.

Operator

[Operator Instructions] The next question comes from Neil Gagnon of Gagnon Securities. Please go ahead.

Neil Gagnon -- Gagnon Securities -- Analyst

Yes. Good afternoon. Can you give us your review on this quarter? How did it live up to your expectations? And what base does it set for your expectations for the second half? Thank you.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] First of all, we are seeing sufficient -- huge demand for the whole year. [Foreign Speech] So, from -- based on our internal record, the application every month is well over RMB2 billion. [Foreign Speech] However, we could only facilitate around RMB1 billion every month. [Foreign Speech] So, there is a 50% gap in between the demand and supply. [Foreign Speech] And since last year, we have seen consistently increase of property price in China. [Foreign Speech] The increase was even over 30% in some major cities in China. [Foreign Speech] So those two factors lead us to believe that there is going to be huge demand in the remaining of the year, in the second half of the year. [Foreign Speech] But there are two considerations. [Foreign Speech] First off, is to secure enough -- secure access to enough funding. [Foreign Speech] And the second thing is that starting from this June, we have seen tightened regulations on the property price as well.

[Foreign Speech] So we tend to be more conservative when doing businesses in those cities where the property price is considered to be too high. [Foreign Speech] But after all, we are still very confident to reach our set goal from the beginning of the year to reach RMB10 billion in outstanding loan principal by the end of the year. Actually, we have already reached that goal at the end of the second quarter. [Foreign Speech] So, we are working on refining our business by this moment. That's our priority. [Foreign Speech] Thank you. Thank you for your question.

Neil Gagnon -- Gagnon Securities -- Analyst

Thank you.

Operator

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

Zehui Zhang -- Vice President

This will conclude the conference call today. If you have any further questions, please reach out at ir@cashchina.cn. Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Zehui Zhang -- Vice President

Bin Zhai -- Chairman and Chief Executive Officer

Unidentified Speaker

William Gregozeski -- Greenridge Global -- Analyst

Neil Gagnon -- Gagnon Securities -- Analyst

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