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CNFinance Holdings Limited (CNF -4.65%)
Q3 2021 Earnings Call
Nov 23, 2021, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to the CNFinance Third Quarter financial results conference call. [Operator Instructions]

After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Matthew Lou. Please go ahead.

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Matthew Lou -- Investor Relations

Good morning and evening. And welcome to the CNFinance third 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, Mr. Li. After that, we will have a Q&A section. Before we start, I would 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 US Private Securities Litigation Reform Act of 1995. This forward-looking statement can be identified by terminologies such as will, expect, anticipate, future, intend, plan, believe, estimate, project, 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 filing with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements as a result of new information, social 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 this conference call. On today's call, we will introduce the Company's financial and operational results of the third quarter of 2021, followed by Q&A section.

[Foreign Speech] In this quarter, the loan scale under the collaboration models continued to grow at a high speed. The loans facilitated during the quarter was RMB3.1 billion, with the revenue and net income pending at RMB450 million and RMB90 million, respectively. As of September 30, 2021, the outstanding loan principal under the collaborate amount of the main over RMB10 billion, which well exceeded our goal. We were able to finish with such results due to the following reasons.

[Foreign Speech] First, in market demand, where home equity loan remains strong. In the third quarter, China's economic growth maintained stable. The growth was driven by the fact that the MSEs which scattered across the nation, was able to deliver a fruitful operation. We have built a national network consisting of 60 branches in 40 cities and over 2,000 sales partners across China. With this network, we're able to establish a wide market coverage and serve MSE owners' financing needs in a timely manner. We were able to fulfill our responsibility at the last MAU period to build a network of our inclusive financial system in China by servicing another 5,000 MSE owners in the third quarter.

[Foreign Speech] Second, as the leader in the industry, we have established strong relationships with our trust company partners. Our loan products and operation capabilities are highly recognized by our trust partners. As a result, they strived to supply us with sufficient funding, even with stricter regulatory deadline. Other than that, we also managed to deepen our cooperation with commercial banks. And it's worth pointing out that, not only did we increase our collaboration scale with the Blue Ocean Bank, but also finalized our term to start a new collaboration with Everbright Bank and Guangzhou Bank.

[Foreign Speech] Last, but not least, since the collaboration model earned its recognition in the market, we are now in the driver's seat to select sales partners. We have started to introduce the concept of senior sales partners since the beginning of the year. Senior sales partners are usually experienced local loan facilitators with excellent operational history. CNF provides them with training programs on a regular basis to help them understand our products and the risk control mechanism. By doing that, we're also able to acquire customers more efficiently and improve the overall quality of the customers.

At the same time, we'd minimized our risk exposure as senior sales partners are more capable to fulfill their post loan obligation. The improvement of post loan management, was reflected by decreasing our provisions for credit losses under the collaboration model.

[Foreign Speech] Through the hard won results aside, we also noticed some challenges that may interfere with our future growth, including: First, funding pressure. We have been reaching out to cooperate with various types of funding suppliers. Yet, we are still highly dependent on trust funding at this moment. Since the beginning of 2021, the regulation on trust companies loan products was tightened. Although our funding demand was satisfied, the funding cost was in fact increased. We wanted to be responsible to this society and our customers. We decided not to further raise the interest rates of our loan products. As I reported in the last conference call, the government would not loosen deregulation for the rest of 2021. And our experience told us that, our earlier judgment was correct.

[Foreign Speech] Second, under the collaboration model, sales partners bear the 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 carry the assets on our financial statements, which seemed like a company with heavy assets whose revenue is generated from interest brand. The balance sheet cannot represent our asset-light business model. This has cost the concerned of potential funding partners, and it's hurting our valuation in the capital market.

[Foreign Speech] Third, with the liquidity of certain Chinese real estate developers in crisis, and considering the upcoming real estate tax, our management made an estimation that the Chinese property market is likely to fluctuate in the future. As the holder of the subordinated units, our asset quality is likely to be negatively affected with such fluctuation interrupt the efficiency of NPL disposal.

[Foreign Speech] In response to those challenges, we will continue to promote the asset-led transformation to better serve MSE owners and improve shareholders' return. The key task we will complete are as follows.

[Foreign Speech] First, we will continue to extend our cooperation with existing trust partners. It is even more critical than ever now to look for innovative ways of collaboration, given the regulation shows no sign to loosen up in the near future. We have taken a feel for active staff in this quarter. For example, our partnership with National Trust, was within the scopes of regulation, but not constrained by the CNF non-standard trust products. We will remain explorative to similar types of cooperation in the future. Another goal of ours is to expand our collaboration with commercial banks. Our plan is to make the loan under the bank lending model cut a relatively large share in the overall outstanding loan by next year.

[Foreign Speech] Second, we will start dialogue with investors who understand our business and have the intention to participate, and our trust company partners. Our goal is to finalize a deal with the terms that allow such investors to take CNF's current result as the holder of the subordinated units of the trust plans. Upon the finalization of such negotiation, our role as the loan service provider and the mezzanine level investor will be clear, allowing us to focus on building an asset-light loan platform with the prospect and capability to expand with quick turnover.

[Foreign Speech] Third, to promote the company's strategical transformation to an asset-light platform, we plan to dispose off certain legacy loans under the traditional model in the fourth quarter. We believe the advantages are threefold. First, this will improve our financial performance and help the company to broaden funding sources and improve its valuation in the capital markets. Second, the company's compliance risk will be reduced. And third, when the legacy loans are disposed, we will be well-positioned when price of the property markets fluctuate. We have obtained quotations from several potential buyers. We will conduct evaluations and endeavor to sell such loans at fair market prices.

[Foreign Speech] In the process of our transformation, we will keep frequent and constructive dialogue with regulators at all levels, and proactively consult our auditor regarding the accounting treatments to ensure that they complying in all aspects the full-time during our operation.

[Foreign Speech] As an ancient Chinese saying warns, how our good efforts, that we should ensure that the costs achieved fruition. We believe this also applies to our business operations. We have experienced ups and downs, but never lost our dedication. We have made every effort to follow the government's call of developing an inclusive financial system. We hope to finish our transformation in the near future and carry forward our mission of make finance more human. Our pursuit to service MSE owners will remain unchanged. By leveraging our advantage gained from years of dedicated work, we will continue to provide MSE owners with affordable, accessible, and efficient financial services.

[Foreign Speech] With that, I would like to hand the call over to Ms. Ning Li from the Capital Market Department, who will walk you through the third quarter financials.

Ning Li -- Executive Director and Chief Financial Officer

Thanks, Mr. Zhai. And thanks again to everyone joining us today. I will walk you through our third quarter financial. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage changes I'm going to give are beyond that basis. Also, unless otherwise it states, all numbers I'm going to give will be in RMB. The total outstanding loan principal was RMB11.1 billion as of September 30 [Phonetic], 2021 compared to RMB9.7 billion as of December 31, 2020. While the total loan origination volume remained stable at RMB3.1 billion in the third quarter of 2021 compared with the same period of 2020.

Interest and financial service fee on loans decreased by 3.7% to RMB455 million for the first quarter of 2021 from RMB473 million, primarily due to the combined effect of A, the increase in the balance of average daily outstanding loan principals, and B, the lower interest rate on loan facilitated in the effort to comply with the rules and regulations. Interest balance have increased by 18.8% to RMB219 million for the third quarter of 2021 compared to RMB184 million, probably due to the increase in principals of other borrowings, as well as the funding course for trust company.

Collaboration costs for sales partner decreased to RMB102 million for the third quarter of 2021, from RMB113 million, primarily due to the fact that, the company cut down the rate of incentive pay to sales partner in response to the overall lowered interest rate on loans. Provisions for our credit losses increased by 4.8% to RMB33 million for the third quarter 2021, from RMB31 million. The increase was mainly attributed to the combined effects of A, the increase in outstanding loan principal of non-delinquent loans and loans delinquent within 90 days, which result in the increase in collectively successful allowance. And B, the company revised recoveries in the third quarter after changing down the loan, that 180 days past due to the net realize value.

Total operating expense decreased to 21% to RMB93 million for the third quarter of 2021, compared with RMB118 million in the last year. Income tax expenses decreased by 73% to RMB7 million for the third quarter of 2021, from RMB25 million, primarily due to the decrease in the amount of taxable income. Net income decreased by 62% to RMB19 million for the first quarter of 2021 from RMB60 million. As of September 30, 2021 and December 31, 2020, the Company had cash, cash equivalents and restricted cash of RMB2 billion and RMB2 billion including, RMB1.4 billion and RMB1 billion from structured funds respectively, which could only be used to grant new loans and activities.

The actual delinquency rate for loans originated by the Company, decreased to 20.4%, as of September 30, 2021, from 22.6% as of December 31, 2020. The actual NPL rate for loans originated by the company decreased to 7.5% as of September 30, 2021, from the 11.7% as of December 31, 2020.

With that we'd like to open up the call for Q&A. Operator, please.

Questions and Answers:


We will now begin the Q&A session. [Operator Instructions] Our first question comes from William Gregozeski with Greenridge Global. You may go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. A couple of questions. When you're talking about disposing of the legacy loans, are you talking about the loans prior to the current structure with the sales partners or are you talking about getting rid of everything that you have a subordinated interest in to really clean off the balance sheet?

Matthew Lou -- Investor Relations

[Foreign Speech]

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Thank you for the question.

[Foreign Speech] So when we say legacy loans, we are referring to those loans that was facilitated before the model transformation which is under the traditional model plan prior to the sales partners model.

[Foreign Speech] So the carrying value of such loan, we're talking about the current loans and the loans that are delinquent or nonperforming is around RMB590 million right now at this moment.

[Foreign Speech] So by disposing off such loans, we are hoping to accelerate our transformation into an asset-light platform, which focuses on operations and bears minimum risks.

[Foreign Speech] So in many years of our development, especially when we transformed to the sales partners model, which is the collaboration model there have been and there still are many third-party investors who understands our product, and they're interested in participating by investing to us. So we have been in touch with them and we have reached a couple of consensus. We hope to address the deal in the coming quarter, which is the fourth quarter of 2021.

[Foreign Speech] So to sum up just by doing another upgrade in our model, we are hoping to create to build a platform that is asset-light which focuses on servicing and operations, and we are also hoping to improve our financial performance on the financial statements.

[Foreign Speech] Thank you.

William Gregozeski -- Greenridge Global -- Analyst

Okay, thank you for that. And then next question is with regards to the availability of capital. Has there been any change in what's available from trust companies to you guys since the last conference call and then how much have you gotten from commercial banks so far to lend out?

Matthew Lou -- Investor Relations

[Foreign Speech]

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] To answer your first question. The regulatory pressure is still there. We don't see any signs of loosening up yet.

[Foreign Speech] It is worth noticing though our trust company partners strived no matter how hard it was to supply us with very sufficient fund during the quarter.

[Foreign Speech] I was rather concerned by the end of the second quarter about our funding supplies in the coming third and fourth quarter. However just as I mentioned, our trust company partners start of every aspect and they strive to still supply us with sufficient funds during the third quarter.

[Foreign Speech] We experienced the rise of the financing cost in the quarter though due to such conditions.

[Foreign Speech] So, all-in-all, we don't expect the regulatory pressure to loose especially on the non-standard trust products. I think theirs type is still going to be very limited. However from what we see in the third quarter, we are still the first priority of our trust company partners. We will first satisfy all our funding needs. So, I think that's also a proof of our leading position in the industry, as well as our strong brand recognition of the market.

[Foreign Speech] We could have just simply transferred the rise of our financing costs to the market, which will make things more -- which will make things much easier. However, we felt like that, not the really responsible thing to do. So, we did lift the interest rate of our loan product a little bit, but not by much. We think -- we feel like by doing that, our revenue and net income in the near-term will probably be a little bit lower than we estimate. But in the long run, this is to our best.

[Foreign Speech] And what brought us more confidence is that, our trust company partners promised to satisfy our needs and put it in the priority or two in -- next year, when there is enough money supplies.

[Foreign Speech] As for your second question about the fundings from commercial banks. So, this year we are mainly was negotiating the term and finalizing them. So just as I introduced in my speech, I hope that the -- the loan's principal under the bank lending model, will cut a relatively large share by next year.

[Foreign Speech] So, I'd also mention one thing, except for commercial banks and the current trust companies, we have already -- we also made several constructive negotiations with insurance companies. So maybe in the near future, not only can we cooperate with trust companies and banks, the insurance companies will also be on our book.

[Foreign Speech] Thank you.

William Gregozeski -- Greenridge Global -- Analyst

Okay, great. And last question, and I appreciate all the detail you're providing in the answers. You touched on the property prices with the uncertainty with the developers, do you think those fluctuations in property prices are going to be nationwide or more geared toward kind of the smaller cities?

Matthew Lou -- Investor Relations

[Foreign Speech]

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Well, first off, we have strong faith and confidence in the Chinese government.

[Foreign Speech] So we feel like there are still plenty of tools in the toolkit of the Chinese government to prevent systematical and regional risks.

[Foreign Speech] So for the short term, there is potentially a decline in the -- of the property price.

[Foreign Speech] But if we look at the long run, we believe the Chinese government is capable to keep the property price in a stable range.

[Foreign Speech] So let me address this again, the whole purpose of disposed of the legacy loan. The first reason is that to avoid these short-term fluctuation of the property price. And the more important thing is that we don't want our business to be fluctuating, if there is fluctuation in the property market and stuff. And again, we just want to finish our transformation and focus on servicing and operations.

[Foreign Speech] Thank you.

William Gregozeski -- Greenridge Global -- Analyst

All right. Thank you very much.


[Operator Instructions] There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Lou for any closing remarks.

Matthew Lou -- Investor Relations

Thank you again for joining us today. If you have any further questions, please feel free to contact us or log on to our website at ir.cashchina.cn. Thank you.

Bin Zhai -- Chairman and Chief Executive Officer

Thank you [Foreign Speech]

Matthew Lou -- Investor Relations

Thank you again for joining us. That's from our CFO.


[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Matthew Lou -- Investor Relations

Bin Zhai -- Chairman and Chief Executive Officer

Ning Li -- Executive Director and Chief Financial Officer

William Gregozeski -- Greenridge Global -- Analyst

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