Hello, and welcome to the X Financial Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tanya Wen. Please go ahead..

Thank you, Operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on the company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Kan Li, President; and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr.

Li will give a brief overview of the company's business operations and highlights, followed by Mr. Zheng, who will go through the financials. They are all available to answer your questions during the Q&A session.

I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements are based on the company's current expectations and the current market and operating conditions and relate to events that involve known and 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 and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any other obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead..

Thank you. Hello, everyone. We are very pleased with our strategic execution in the third quarter. Both our loan facilitation amount and the net income were in line with our guidance. The total loan facilitation amount hit a new high for the second straight quarter.

At the same time, the increase in our net income has demonstrated our ability to enhance profitability, boost operational efficiency and reduce costs. During the third quarter, we further adjusted our pricing structure to comply with the 24% internal rate of return, IRR, regulatory cap.

We believe this is the government's initiative to support the real economy and stimulate healthy growth for SMEs and private consumption. The proportion of our loan facilitation amount subject to the 24% IRR cap improved to approximately 30% of our total loan facilitation amount in September.

And we expect it to grow to between 40% and 50% by the end of this year. Beyond the regulatory compliance requirements, we believe that this initiative can help us attract more quality borrowers as the demand for personal financing solutions increases.

During the quarter, our total loan facilitation amount reached RMB 50.1 billion, an increase of 87.9% year-over-year and 17.5% quarter-over-quarter. This was mainly driven by the strong growth in the loan facilitation amount of Xiaoying Card Loan, which increased 120.3% year-over-year and 17.5% quarter-over-quarter.

As of September 30, 2021, the total outstanding loan balance of Xiaoying Card Loan reached RMB 24.4 billion, an increase of 19.9% compared with the previous quarter. In the fourth quarter, there will be a moderate decline in our loan volume due to our institutional funding partners' year-end outstanding loan balance requirements.

We continued our efforts to improve our risk management capabilities. As of September 30, 2021, the delinquency rate for all outstanding notes that are past due for 31 to 60 days was 0.96% compared with 0.77% as of June 30, 2021, and 1.06% as of September 30, 2020.

Despite the quarter-over-quarter fluctuations, our asset quality is still within its best historical range in our operating history.

According to a new regulation, loan facilitation platforms are restricted from submitting credit assessment-related personal data directly to financial institutions, and such data transfer must be conducted through a licensed credit agency.

In response, we have been working closely with Baihang Credit, the second largest license individual credit bureau in China, in addition to the credit bureau of the People's Bank of China, PBOC, to execute a plan to comply with the new regulation.

We have noticed that 14 large companies on the regulator's top list for the rectification are either working on a plan or waiting for approval. We are getting ready and will fully comply with the new regulation. We expect minimal changes to our daily operational activities and the cost structure.

During the quarter, we continued our efforts to diversify our service offerings. Our microcredit business officially commenced operation in the third quarter. We also made a solid progress in our services to micro and small business and self-employed individuals, which are important target groups for our future growth.

We have certain favorable loan policies for this group and are adjusting and testing our systems to speed up the qualification and validation process. We believe we are on track towards our goals and all these efforts are bearing fruit and helping us to drive long-term sustainable growth in a fiercely competitive and strongly regulatory industry.

Now I will turn the call to Frank, who will go through our financials..

Thank you, Kan, and hello, everyone. We delivered another set of robust financial results for the third quarter, in line with our expectations. Total net revenue increased 72.3% year-over-year and to RMB 964.4 million.

Our bottom line also show strong growth with non-GAAP adjusted net income of RMB 277 million compared with a non-GAAP adjusted net loss of RMB 111.7 million in the same period of last year.

Moving ahead, we will identify and acquire more high-quality borrowers to adapt to our strategy in response to the 25 IRR cap, improve asset quality by leveraging our evolving data-driven and technology-empowered credit analysis capabilities. We will also deepen cooperation with our institutional funding partners to better serve borrowers' needs.

Our proven track record demonstrates that we are capable of navigating through regulatory and macroeconomic challenges. We believe we are well positioned to capture opportunities ahead, bringing more valuable returns to our shareholders. Now I would like to brief some financial performance for the third quarter.

Please note that all numbers stated are in RMB. Total net revenue in the third quarter of 2021 increased by 72.3% to RMB 964.4 million from RMB 559.8 million in the same period of 2020, primarily due to an increase in the total loan facilitation amount of Xiaoying Card Loan this quarter compared with the same period of 2020.

Origination and servicing expenses in the third quarter of 2021 decreased by about 13.8% to RMB 483.8 million from RMB 561.2 million in the same period of 2020, primarily due to the decline in collection expenses, resulting from the decrease in delinquency rates and a decrease in interest expenses related to the decline in the average loan balances held by the company, partially offset by the increase in commission fees resulting from the increased total loan facilitation amount this quarter compared with the same period of 2020.

Provision for the accounts receivable and the contract assets in the third quarter was RMB 15.2 million compared with RMB 24.3 million in the same period of 2020, primarily due to a decrease in the average estimated default rate compared with the same period of 2020, and partially offset by an increase in accounts receivable from facilitation services as a result of increase in total loan facilitation amount in the third quarter of 2021.

Provision for the loans receivable in the third quarter of 2021 was RMB 10.2 million compared with RMB 58.1 million in the same period of 2020, primarily due to a decrease in the average SME default rate compared with the same period of 2020.

Income from operations in the third quarter of 2021 was RMB 410.6 million compared with the loss from the operation of RMB 101.4 million in the same period of 2020.

Net income attributable to X Financial shareholders in the third quarter of 2021 was RMB 279.9 million compared with net loss attributed to X Financial shareholders of RMB 113 million in the same period.

Non-GAAP adjusted net income attributable to the X Financial shareholders in the third quarter of 2021 was RMB 277 million compared with non-GAAP adjusted net loss attributed to X Financial shareholders of RMB 111.7 million in the same period of 2020.

Cash and cash equivalents was RMB 971.8 million as of September 30, 2021, compared with RMB 1.1839 billion as of June 30, 2021. Now for our business outlook.

We expect total loan facilitation amount for the fourth quarter of 2021 to be between RMB 12 billion and RMB 13.2 billion, which makes total loan facilitation amount for the 2021 to be between RMB 50.8 billion and RMB 52 billion.

We expect non-GAAP adjusted net income attributable to X Financial shareholders for the fourth quarter of 2021 to be no less than RMB 240 million, which makes non-GAAP adjusted net income attributable to X Financial shareholders for 2021 to be no less than RMB 971 million.

This forecast reflects our current and preliminary views, which are subject to changes. Now this concludes our prepared remarks, and we would like to open the call for questions.

Operator, please?.

[Operator Instructions] The first question is from Boyd Heinz of Equinox Capital..

I have 3 questions I'd like to start out with. Could you just discuss and give us a little bit more color about why the -- your institutional funding partners are reducing their loan balance requirements at the year-end? And then talk about your cost of capital in the quarter.

And then lastly, please address capital allocation and how you're thinking about share buybacks, and perhaps at a management purchases of company stock?.

Okay. I think it's usually for -- the volume for the first quarter is compared with the Q3, usually, it's about flat or a little bit down. That's the normal pattern for the past -- always, for the past few years, except for the last year. Last year, it's one exception for cost still grow.

I think we are, in general, is just back to the normal pattern regarding to this Q3 and Q4 volume. For our -- for those funding partners working for us, they have some requirements. Most of they are all doing fine. They are finished -- I think they finish their KPI quarters or whatever. So they have just have some balance requirement, they have that.

Deeply, I don't know that. So if you compare with our peers, they -- even though they still, in general probably give the same pattern. The pattern is, which is first the Q4 volume will be equal or less than Q3. That's what I see, okay.

I think the cost of capital -- I believe what you mean is the selling cost of our -- the fund we get from our funding partner. We are around about around about somewhere between 8% to 9%, which is a little bit higher than our peers, about 1.5% higher than that.

As we move on, we are starting from like this basically start from -- for the quarter of this year, we're starting doing 24%, that's the loan. And over time, as we accumulate about at least 6 months down the road, we can talk to our funding partner regarding our customer risk profile so far, so on.

We believe we will have a lower funding cost sometime starting from middle of next year, and we will have maybe around 1% going down from here next year. Regarding to the shareholder stock buyback or dividend policy, we have some loss last year. So we are -- this year, we earn some money. We accumulate some capital.

And I know almost all our peers, they have some buyback plan and then the share buyback plan or dividend policy in place. We definitely will consider to do that maybe sometime next year. But I must be very frank with you, this kind of buyback plan and dividend, at least for now, it's not help in their valuation much.

But for our stock, it's a total quite a different story. We are basically -- it's a price almost at a -- almost will be bankrupt in a few years time, this kind of valuation. So we -- the market maybe know something we don't know.

So it's quite frustrating for us, but we not necessarily believe the so-called dividend policy or buyback plan will change that very quickly or in a dramatic fashion. So -- but as I say, we will still -- we will definitely -- we will consider to do that sometime next year..

Okay. Can you address or just discuss any kind of high-level outlook for fiscal year ‘22. It sounds like you’re expecting continued growth in your loan originations, but anything you could sort of say to talk about what you think about next fiscal year, that would be helpful..

2021 is a great year for our industry. It’s quite – for the last few years, a lot of regulation coming down. We think next year from regulatory front, it will be up relatively – still will relatively come. But we still have things to do like still seeing like 24% requirement and so far and so on.

And also, you need to have a connected with – having new relationship with your funding partners so far so on. But we think next year – very high level, we think next year will be okay, and we’ll be okay. Still, we have a growth but not – maybe not as fantastic as this year, that’s what I feel.

But I think all the players, when they reach the Q4, they have more clarity and more color regarding the next year..

[Operator Instructions] There are no more questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tanya Wen for closing remarks..

Thank you, everyone, for joining us on the call today. If you haven’t got a chance to raise your questions, we will be pleased to answer them through follow-up contact. We look forward to speaking with you again in the near future. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..