Good morning and good evening, and welcome to CNFinance Second Quarter and First Half of 2022 Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Qian Jun, will walk us through the operating results followed by the financial results from our acting CFO, Ms. Jing Li. After that, we will have the 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, as defined in U.S. Private Securities Litigation Reform Act of 1995.

This forward-looking statement can be identified by terminology such as will, expect, anticipates, future, intends, plans, beliefs, estimates, targets, 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 this and other risks, uncertainties or factors is included in the company's filing 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 Mr. Qian Jun..

[Foreign Language] Thank you, everyone, for joining us in this conference call. On today's call, we will introduce the company's financial and operational results in the second quarter and the first half of 2022, followed by a Q&A section.

In the second quarter of 2022, our business was continuously impacted by the pandemic, prevention and control measures, but we were able to maintain stable business volume. During the quarter, we originated loans of 3.1 billion under our collaboration with trust companies and introduce loans of 200 million to the commercial banks.

The interest revenue under the collaboration model for the second quarter were slightly higher than the same period of 2021 and interest expense decreased marginally. After we adjusted our commission policy, our gradation cost decreased significantly year-on-year, which drove up the company's gross profit margin.

However, given the impact of pandemic prevention and control policy, as well as the uncertainty of the China's real estate market, we continue to be conservative in evaluating potential losses and recorded a provision for credit losses of 18 million for the second quarter.

And this was the main reason for the net income to be lower than the same period of 2021. Now I would like to give a more detailed introduction of the challenges we face and the measures we have taken and also share the management thoughts on our future developments. Our business continues to be challenged by the pandemic, prevention and control.

A number of cities, including Shanghai were locked down during the quarter and China's GDP fell by 2.6% as compared to the first quarter of 2022. At the same time, there were still uncertainties in China's real estate market.

The economic downturn has negatively affected our business growth and the increase in delinquency rate has also affected the liquidity of our sales partners. Under such conditions, we focus on stabilizing business models, reducing financing costs, management risk and empower our SaaS tenders during the second quarter.

The work we have done are as follows. First, in order to factor these followers and help MIC owners, we started our cooperation with two new trucks and make successfully originated loans of 39 million during the quarter. We have lowered the interest rate on former loan products this quarter.

Second, we continue to promote our partnership with commercial banks and recommended loans of 200 million to them. We have also started to facilitate loans under our collaboration with PICC. Second, cost control. We maintain dialogue with major funding partners and have reached consensus on reducing financing costs and optimizing the repayment policy.

So effective policy is expected to be adopted in the third quarter of 2022. Third, risk control. In the second quarter, several drug companies has signed agreement with third-party subordinated unit subscribers recommended by us, allowing this institution to directly invest in the subordinated units of the transplant.

By growing these third-party investors, we further reduced the amount our fund needed and also lower our risk exposure. Fourth, in terms of empowering sales partners, we continue to allow more sales partners to repurchase delinquent loans by installments. With the company judging uncertainty based on the terms.

We also plan to bring in an asset management company to provide our sales partners with post loan management services, including bad debt collection, arbitration and judicial proceedings. We hope that by collaborating with such asset management company, our sales partner could bear less risk and receive rather stable return on delinquent loans.

We will be presented with both challenges, opportunities in the future. According to the data recently released by the People's Bank of China, July's new RMB loans were [679.4] billion falling by 404.2 billion year-on-year. This indicates that the financing needs of both enterprises and customers has shrunk.

This means we will need to put up more efforts to maintain growth. However, we believe our more micro policies to stimulate the economic and support MSCs take effect. There were still opportunities in China's inclusive financing industry.

In order to see such change to expand our business and provide affordable and accessible financing services to more MSE owners. We will work on enhancing sales, reducing funding costs and improved portal management.

Our plans are; first, with the change of the market condition, the company will focus more on the demand side and build system that is sales oriented. We will establish an all-around sales partner system based on the data collection and resource coordination. And use technology as a tool to improve the overall efficiency.

Second, we will continue to promote our partnership with commercial banks and with PICC. We believe such partnerships will be an important supplement to our collaboration with trust companies as it could improve our product mix and the customer coverage.

In the future, we will not only set promotion plans to incentivize the sales staff of the commercial banks with PICC, but also cooperate with third-party sales channels to jointly expand the customer base and increase the sales volume. Third, reducing financing costs will continue to be one of our long-term strategic goals.

We will maintain dialogues with funding partners mainly focused on addressing the mismatch between funding supply and the loan applications. Our goal is to cut the overall cost of our loan products by reducing the balance of the idle fund. .

Lastly, we will deepen our collaboration with third-party executions to accelerate the disposal of delinquent loans and recover cash. By doing that, we hope to release the liquidity of sales partners so that they can use more resources in the business expansion. With that, I would like to hand the call over to Ms.

Jing Li, the acting CFO of the company, will walk you through the second quarter and first half 2022 financials..

Thank you, Mr. Qian, and thanks again to everyone joining us today. I will walk you through our second quarter and first half of 2022 financials. We believe year-over-year comparison is the best way to review our performance. Unless otherwise stated or the percentage change I'm going to give will be on GAAP basis.

Also, unless otherwise stated, or numbers I'm going to give will be in RMB. We will work further the figures for second quarter of 2022 first, followed by that for the first half. As of June 30, 2022, the total outstanding loan principal decreased to RMB 9.4 billion compared to RMB 10.4 billion, December 31, 2021.

The total loan origination volume was 3.1 billion compared to 3.8 billion in the same period of 2021. Interest financial service fee on loans was 408 million, a decrease of 9%, primarily due to the decrease of average daily outstanding loan principal in the second quarter of 2022 as compared to the same period of 2021.

The decrease in average daily outstanding loan principal was due to the lower loan facilitation volume in the second quarter results from the lockdown due to the local outbreak of COVID-19 in multiple cities within China.

Interest expense was 187 million compared to 195 million in 2021, primarily due to the decrease in the principle of other borrowings.

Collaboration cost for sales partners decreased to 77 million in the second quarter of 2022 compared to 107 million in the same quarter of '21 partly due to the lower fee rate, the company paid to the sales partner in the second quarter of 2022. Provision for credit losses was 18 million, compared to 15 million in the same period of last year.

The decrease was due to the increased economic uncertainties caused by lockdown and reaction to local outbreak of COVID-19 as well as the downward pressure faced by China real estate market during the second quarter of this year. The total operating expense were 91 million, an increase of 5% compared to 87 million in the same period of last year.

Income tax expense was 3 million, a decrease from 8 million in the same period of 2021, net income was 18 million, a decrease of 72 million from 65 million in the prior year. Now we are moving on our financials for the first half of 2022. The total loan origination volume was 5.4 billion, compared to 6.7 billion in the same period of last year.

Interest and financing service fees on loans was 843 million, a decrease of 6% probably due to the decrease of average daily outstanding loan principles in the first half of 2022 as compared with the same period of last year.

The decrease in the average daily outstanding loan principal was due to the lower facilitation volume in the first half of this year were some from the lockdown due to the low outbreak of COVID-19 in multiple cities within China.

Interest expense was RMB388 million compared to RMB351 million in the same period of last year, partly due to the increase of filling from the trust company.

Collaboration cost for sales partners increased to RMB156 million in the first half of this year, compared to RMB205 million in the same period of last year, primary attributable to the increase in loan balance under the collaboration model.

Provisions for credit losses was - a provision of RMB112 million compared to the recovery of RMB3 million in the same period of 2021.

The increase was due to the increasing economic uncertainties caused by the lockdown in reaction to the local outbreak of COVID-19 as well as the downward pressure faced by China's real estate market during the first half of 2022. Total operating expenses was RMB171 million, a decrease of 6% compared with RMB182 million in the same period of 2021.

Income tax expenses was RMB19 million compared to RMB38 million in the same period of last year, partly due to the increase in taxable income in the first half of 2022 as compared to the same period of last year. Net income was RMB61 million compared to RMB151 million in the same period of last year.

As of June 30, 2021, the company had cash and cash equivalent of RMB1.4 billion compared to RMB2.2 billion as of December 31, 2021. The delinquency ratio, excluding loans held for sale for loan origination by the company decreased from 16.2% as of December 31, 2021, to 14.9% as of June 30, 2022.

And the NPL ratio, excluding the held for sale - excluding the loans held for sale for loan originated by company decreased from 2.1% as of December 31, 2021 to 1.9% as of June 30, 2022. With that, we would now like to open up the call for Q&A.

Operator, please?.

[Operator Instructions] And the first question will come from William Gregozeski with Greenridge Global. Please go ahead, sir..

Hi. You talked about trying to do different things to help the sales partners and you obviously need the sales partners to grow the loan origination. You talked about some of the bringing asset management company.

What's the financial health of your sales partners? Are they liquid enough to source new loans? Or are they just trying to manage what they have now?.

[Foreign Language] Okay. So under the current condition, the liquidity pressure of our sales partners have been higher than before.

And I think that's mainly because of the increase of the delinquency ratio because under our collaboration with the sales partners, they will have to bear the obligations to repurchase the default loans, so that has put a lot of pressure on the liquidity? So ever since the beginning of 2022, we have remained very supportive to our sales partners.

And I think the first thing we did is to allow them to fulfill repurchase obligations by installments. And also entering the second quarter of 2022, we have been giving them extensions so that they can pay smaller installment every month.

And also, we have been negotiating with a third-party asset management companies to see if they could provide post loan services for the sales partners so that way they could have their cash recovered faster. And so that they could also release their liquidity and spend on the business expansions.

Does that answer your question?.

Yes.

Could you also - just talk about the quantity of sales partners you have? I mean are you seeing more interest? Or are sales partners shrinking down in the quantity they're trying to source?.

You mean the quantity for?.

Yes. So the total number of sales partners you have, is that number increasing or decreasing? And are they - are you seeing them being more active or less active..

It is still going up slightly. And also in terms of the number I can give - numbers of sales partners, here's the data. So the sales partners who have signed the collaboration agreement with us has went up slightly to 90,000 as of the end of the second quarter.

And we have also seen a rising number of active sales partners, and that would be around 500 as of the end of the second quarter of 2022, which is a 9% increase as compared to the same quarter of 2021. So as for your question, the number has gone up, as well as the number of active sales partners..

Okay. Perfect. There's been a lot of news in the media about the real estate market from developers having cash shortfalls.

The number of unfinished unlived in homes interest rate cuts, how do you guys view the real estate market as a whole and how it impacts CNF going forward?.

Okay. So after nearly 20 years of high-speed growth of China's real estate market, I think it seems like even into that end. And I think that mainly affected people, especially the consumers view towards the housing market.

And as for us, like you mentioned, there are a number of problems in the real estate market, including the insufficient cash of the developers and as well as the unfinished homes and stuff. And particularly to us, I think, first of all, the development of the home equity loans depends on the price of the properties, and that's for sure.

And that mainly affects our business volume and stuff. And also for us, if the liquidity of the houses went down and the housing market is less active, it might influence our efficiency of disposing delinquent loans and the collaterals. But we are still positive towards the future development of the real estate market.

As we - because we believe that our government is going to put more macro measures to stimulate and control the real estate market in China. And in the long run, the price and liquidity of houses will be more and more stable.

And also, we have observed one thing, even in the fluctuation of the real estate market, the houses in the major blocks in Tier 1 and Tier 2 cities remained rather stable in terms of prices and liquidity. And our collateral are mainly located within such areas.

So we think our collateral and our business is more resilient to the fluctuations of the capital - of the real estate market..

Yes.

Can you just - you said most of the loans are in Tier 1, Tier 2 cities, what percent of your portfolio is in Tier 1, Tier 2?.

Okay. So we're lucky that because of our experience in the home equity loan industry, our collaterals are mainly located in the major blocks in Tier 1, Tier 2 cities. As for the detailed percentages. So over 90% of our collaterals are in Tier 1 and Tier 2 cities. And in that, about 30% of the collaterals are in Tier 1 cities.

And that's in terms of the loan origination. And that's under the - our collaboration with trust companies. And I also want to give you the numbers that are associated with our partnership with commercial banks.

So that is rather the loans under the commercial bank partnership, which is located - which is - around 7% that is facilitated in Tier 1 cities, which is rather lower than that of our partnership with trust companies. But there are around 70% of the collaterals that is located in Tier 2 cities under our partnership with commercial banks..

Okay. Perfect. And last question is, you've talked in the past about some technology upgrades you wanted to make.

Can you just outline where you are on that process? What are you what's the focus for the remainder of this year and next year? And what's the cost going to be for that?.

So in the past three years, under the COVID-19 pandemic, we have seen that how important it is for a company could do their business online. And as the - our business volumes kept going up, we have been investing more into the technology.

And I think I want to make one thing clear that to improve our technological capability is to support the sales by coordinating data so that we can provide better services to the sales partners and the borrowers. So as - so as of this moment, as of today, the cost was not very significant as we - the major project was done by our in-house staff.

But as for the future, we do not really have a certain plan for right now. But our thought is that to make the investment towards technology a certain percent of revenue. That means if the revenue goes up with the investment in the technology will also go up.

And our long-term goal is to make CNFinance a company that could promote business both online and on site..

Okay. Perfect. Thank you..

[Operator Instructions] This will conclude our question-and-answer session as well as our conference call for today. You can view the company's information at ir.cashchina.cn. Thank you for attending today's presentation. You may now disconnect..