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00:03 Hello, and welcome to the X Financial Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. 00:37 I would now like to turn the conference over to Tanya Wen. Please go ahead..

00:43 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. 00:58 On our 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.

01:20 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 management’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.

01:57 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.

02:19 It is now my pleasure to introduce Mr. Kan Li. Mr. Li, please go ahead..

02:27 Hello, everyone. We are very pleased to conclude 2021 with another solid quarter of financial results delivering profitability for the full-year. Both our top and the bottom line for the fourth quarter significantly improved over the same period of 2020.

02:45 Despite the challenging macro economy and the regulatory environment in 2021, we have successfully turned our business back on track and maintained a steady growth momentum compared with 2020. 02:57 The total loan amount facilitated and provided in 2021 increased by 75% year-over-year to RMB52 billion from RMB30 billion.

With a very focused product strategy and effective cost control initiatives, we turned profitable in 2021 and our bottom line outperformed the full-year of 2019, the year before the COVID-19 outbreak. 03:23 During the fourth quarter, our total loan amount facilitated and provided or reached RMB13 billion, an increase of 51% year-over-year.

As mentioned in our previous guidance we saw moderate to sequential decline in the loan volume in the fourth quarter, which was mainly attributed to the year-end outstanding loan balance requirements of our institutional funding partners. 03:47 In the first quarter of 2022, the level of available funds has resumed its normal pattern.

Since 2020, we have shifted our product focus to Xiaoying Card Loan, which contributed 100% to the total loan amount facilitated and provided in 2021. With this focused and proven product strategy, we are confident in our ability to sustain steady growth in the loan facilitation business in 2022.

04:14 Regarding asset quality, the delinquency rate for all outstanding loans that are past due for 31 days to 60 days as of December 31, 2021 was 1.48%, higher than 0.96% as of September 30, 2021 and 0.79% as of December 31, 2020. This fluctuation is mainly attributed to the liquidity tightening in the fourth quarter of 2021.

Since February 2022, we have seen our asset quality gradually improving as a result of ample liquidity in financial markets and our stricter risk management measures.

04:58 In 2021, we officially commenced operation of our microcredit business in the third quarter after we received regulatory approval for our microcredit license, and during the fourth quarter, we further increased its registered capital to RMB1 billion in compliance with the regulations.

We are on track with our microcredit business and look forward to creating more value for our shareholders. 05:25 In the fourth quarter of 2021, we invested RMB315 million and become an indirect minority shareholder of Newup Bank of Liaoning, a PRC company and non-state-owned bank.

We are exploring opportunities to cooperate with Newup Bank to better serve SMEs and we are confident that based on our advantages in technology and risk management capabilities, the co-operation with Newup Bank could bring more possibilities to our business to jointly empower and support the development of the economy in China.

06:02 Heading into 2022, we expect regulatory uncertainties to subside with clearer guidelines from authorities. The Chinese government has affirmed the value of Fintech industry to address people's inclusive financial needs and support the development of SMEs.

We remain cautiously optimistic about our business outlook while being prepared for any macro uncertainties that may emerge in 2022.

06:30 In order to pass on our confidence to the market and increase shareholders value, our board has been timely evaluating, based on our current market environment, regulatory policy and condition of business operation, multiple ways of returning profits to our shareholders, including share repurchase, as well as cash dividend distribution.

06:50 Recently, our board approved a US$15 million share repurchase plan, which reflects our confidence in the company's fundamentals, strategy, and sustainable growth. We are looking forward to an increase of shareholder value in the future. 07:07 Now, I will turn the call to Frank, who will go through our financials..

07:12 Thank you, Kan, and hello everyone. We are pleased to deliver solid financial results for both the fourth quarter and the full-year of 2021. The total net revenue increased by 15% year-over-year to RMB823 million in the fourth quarter.

We saw a significant improvement in our bottom line with non-GAAP adjusted net income improved to RMB183 million from a loss of RMB631 million in the same period of 2020. 07:48 For the full-year 2021, total net revenue increased by 65% to RMB3,626 million.

Thanks to our relentless efforts on cost management and total operating costs and expenses decreased by 36% to RMB2,315 million. Non-GAAP adjusted net income improved to RMB914 million in 2021 from a loss of RMB1,228 million a year ago.

08:29 In conclusion, we are greatly encouraged by the strong results we delivered in 2021, which fully demonstrate the resilience and growth potential of our business.

Going forward, we will continue to expand and deepen our cooperation with more institutional funding partners to meet the needs of consumers and SMEs, and execute our proven strategy to drive sustainable long-term growth and returns for our partners and shareholders. 09:04 Now, I would like to brief some financial performance for the first quarter.

Please note that all numbers stated here are in RMB. Total net revenue in the fourth quarter increased by 15% to RMB823.4 million from RMB716.3 million in the same period of 2020, primarily due to an increase in the total loan amount facilitated and provided of Xiaoying Card Loan this quarter compared with the same period of 2020.

09:43 Origination and servicing expenses in the fourth quarter decreased by 29.9% to RMB385.8 million from RMB550.7 million in the same period of 2020, primarily due to decline in the collection expenses resulting from the asset quality improvement and a decrease in insurance fee paid to insurance company.

10:12 Provision for accounts receivable and contract assets in the fourth quarter was RMB19.5 million, compared with reversal of provision for accounts receivable and contract assets of RMB13.2 million in the same period of 2020, primarily due to an increase in accounts receivable from facilitation services as a result of the increase in total facilitation amount in the fourth quarter of 2021, compared with the same period of 2020.

10:48 Provision for loans receivable in the fourth quarter of 2021 was RMB40.3 million, compared with RMB33.7 million in the same period of 2020, primarily due to an increase in loans receivable held by the company as a result of the increase in total loan amount facilitated and provided in the fourth quarter of 2021, compared with the same period of 2020.

11:15 Income from operations in the fourth quarter was RMB311.6 million, compared with loss from operations of RMB857.3 million in the same period of 2020.

Net income attributable to X Financial shareholders in the fourth quarter was RMB145.5 million, compared with net loss attributable to X Financial shareholders of RMB655.5 million in the same period of 2020.

11:49 Non-GAAP adjusted net income attributable to X Financial shareholders in the fourth quarter was RMB183 million, compared with non-GAAP adjusted net loss attributable to X Financial shareholders of RMB630.8 million in the same period of 2020. For further financial information, please refer to the earnings release at the company's IR website.

12:18 Now for our business outlook. We expect total loan facilitation amount for the first quarter of [2022] [ph] to be between RMB15.0 billion and RMB15.4 billion, and the range of incremental in total loan amount facilitated and provided for [2022] [ph] to be from 15% to 25%.

This forecast reflects our current and preliminary views, which are subject to changes. 12:50 Now this concludes our prepared remarks, and we like to open the call to questions.

Operator, please?.

12:59 [Operator Instructions] The first question comes from Mason Bourne of AWH Capital. Please go ahead..

13:47 Hi. Thanks for taking questions.

To start, I was hoping you could give more background on your investment in Newup? Why now and your main goals?.

13:59 Hi, Mason, this is Frank. Thanks for your question. And the Newup Bank is one of the seven banks owned privately. So, it is not state owned bank.

And the purpose is only – one purpose only is we try to – with this equity interest, we try to explore the opportunity and a new way to develop jointly to develop our SME Business, which is very encouraged by the government at the current times..

14:42 And then… go ahead..

14:45 Yeah, sorry, so you will now see in some of the business volume or otherwise there is much and this is more like long term strategic investment for us. Thank you..

15:00 And then on the SME side, how do you think about potential profitability of that segment, compared to your current business?.

15:13 That side is kind of a tough. That market is quiet, is different from us, but have some overlap with the current business, with our current at the market we serve. We are mainly right now served in consumer market for the individual mainly. Up to like 80% or whatever. The overlap is about somewhere – anywhere between 10% to 30%.

So, the bank is there, especially for the small bank they are mainly lack of technology ability to develop the [SME market]. 16:06 They have their own market, but they have kind of reached, you know approached our market in very traditional way. It's mainly by person by – So, by this cooperation, we try to leverage our each other's advantage from us.

So, we are mainly providers and maybe technical approach, you know to their [indiscernible] maybe provide some other market assets marketplace for us. But I'll be cautious, any outcome at this stage is very preliminary and see we would not strongly advice anyone should not give any forecast or projection regarding the result about it..

16:59 Okay, great.

And then on your guidance, you provided total loan volume expectations, how do you think about profitability in 2022?.

17:13 So, we are kind of, not just us, our competitors are kind of cautious in general for this year. We gave like 15% to [25%] [ph] increase in terms of volume for this year.

And we did not give any earning forecast at this time, mainly it caused even though regulatory side it's – we believe it will be a quite stable situation in 2022, but from the economic size, it is quite uncertain, especially and the current right now is zero tolerance on COVID-19.

18:07 Right now, you know the biggest city in China, like Shanghai is right now in, like a total lockdown, and not just Shanghai, many, many cities in the COVID situation is quite spread among 27 Provinces, many, many city, it's a kind of [indiscernible] they are doing the test, COVID test every day, otherwise, you know… So, there's a supply situation and some industry affects a lot like the restaurant, travel, entertainment, all greatly affected a lot of people in those industry kind of in [further status] [ph].

You know, what I mean. 19:01 So, but those employees in those industry, I think is some kind of related to our business – they are the people we serve [indiscernible] market basically.

You know, what I mean? So, we kind of are cautious, did not give – that’s the main reason we did not give earning at this time, but one thing we're pretty sure and we will be profitable substantially this year, but not, maybe not as big as much as last year, but we are, kind of reluctant to provide exactly figure at this time. Thank you..

20:00 I can appreciate that. And then lastly, it's good to see buyback put in place.

Could you talk more about how you think about capital allocation going forward?.

20:13 Just as we stated in the press release, we will do the back – from time to time, but we are not trying to a correct so-called this very severe undervalue share price situation. I think we are not in position; you know to correct that situation by also long, it's the industrial-side situation, it's tied to many, many other things.

But we definitely will do when we think it's very much on the line in terms of share price. So, we will still use our, mainly and use our cash to exploit the new business opportunity and acquire more customer and grow our business basically. That’s our intention..

21:30 Great. Thank you..

21:32 Thank you..

21:35 The next question comes from Matthew Larson with National Securities. Please go ahead..

21:43 Okay. Thanks for taking my call.

Do you have an explanation why your company, plus some of your, I’ll call them competitors, whether it's 360 or even to a certain extent YRD and [FINV] [ph], you're trading at one or two times earnings, and yet your earnings are growing, you faced the same headwinds that any lender has, you know uncertainty about the economy, delinquencies where your underwriting has to be strong and regulatory issues? We've experienced those for year’s here with our lending companies, whether the payday loan, companies or peer to peer lenders, there's a company called Upstart which trades at probably 50 times your multiple.

That seems to have a very similar business model. I think the share buyback is very smart because your volume is dried up and you really could make a difference by putting a floor in the stock and it's very, very accretive of course also to be buying your stock down here and you could buy it even up quite a bit.

23:09 Do you have any explanation why your industry group's trade at essentially some of them trade with low cash on the balance sheet.

I mean, is that just an anomaly because you as investors have lost interest or is there something else out there?.

23:30 Mr. Larson, thank for your question. I believe this is your time joining call. And I think if we get like a cash value for our share, we will be very happy actually. We are actually much lower than cash, okay.

And the short answer for your question is because our industry right now [indiscernible] no future for our industry because the regular environment that I will put it very blankly at..

24:08 I think what Frank is trying to say is that in some of the investor sites that this industry has no future, right. I think it's a very difficult to comment on why other people that this industry should be valuable like this. And we have a management team, we certainly think our stock is undervalued.

That is why that we put in this repurchase plan as we just mentioned, and we think that at this moment, it's just a natural move for us to buy back some of our shares. 24:43 I think in the end it is really the risk, right? Different people are associated with different industry with different risk levels.

And in our particular case, I think [indiscernible] the industry is still, I would say, even though we will [indiscernible] for governance, the amount of governance is still not very clear how this industry will be going – how this industry is going to develop going forward. 25:11 And another one, of course, is relationship between China and U.S.

is not, I would say it's not great, right. So, I think that where investors are thinking about Chinese company that they majorly put, [indiscernible] put some discount on it. So, I think that in the end it's really, nobody knows what is the correct evaluation is, you probably have a feeling of where it should be.

And at this moment, we certainly think to that we are lower than where we should.

25:43 Well [Multiple Speakers] go ahead..

25:46 [Indiscernible] issue for this. The order Chinese company listed in the U.S. is [indiscernible] trade the work between China and U.S. as you all know.

So, there's a PCLV issue, I'm sure you all are aware of that and that is a question whether all Chinese listed company or Chinese company could be continued to be listed in the U.S., it’s in doubt right now and we hope that will be solved some time when we [indiscernible]. For our particular industry, I think another answer is very simple.

It’s – the visibility is almost zero because the order, regular environment and the regulatory uncertainties for our industry, the issue I also believe you are all aware [indiscernible] anything, I think that's the answer for your question..

26:51 Well, if I could just, I'm sorry, I’ll spend a couple more moments because it's a frustration for investors because I don't look at your industry is a value trap. It's been you guys were, and some of your competitors were….

27:10 Excuse me, sir. This is the operator. There's an interruption. The speaker location disconnected, just a moment, please..

27:20 Sure..

27:21 Thank you. Excuse me, I’ve reconnected the speaker location. Thank you..

28:07 Hello?.

28:10 Yes, Mr. Larson was asking another question..

28:13 Yes, as a long term investor, obviously, I'm interested in growing my investment and your company has done very well and it’s got a couple of runs at considerably higher prices.

And hopefully that would occur again, but I guess I would say that the share buyback is very, very – is a very good thing to do because it's a large enough buyback, 7% or 8% of your market cap and I don't know what percentage of the flow, but I just would be very – for me, just looking at how accretive it is, and you have enough spare cash on the balance sheet to do such thing.

29:03 And I mean, you could really put a bid in the stock and we could get this company and others to really see some upward trajectory after being, kind of just forgotten. They just, they've been orphaned almost because investors, kind of ignore stocks once they get down to the share price that your stock has been at $2 or maybe $3 if we're lucky.

And so, I just hope you continue to see ways to not only continue to show good operating earnings and do well within your industry, but find a way to elevate your stock, because you could easily trade at twice where it is now, which would give it still a small earnings multiple and a big discount to book, but you would bring in more investors if this stock would to get above say $5, which is a minimum for any investors.

30:03 So, that would be a goal to do it one way or another besides just the obvious, which is to continue to operate your business in a very profitable manner. So, I look forward to you guys being aggressive with share buybacks, particularly at the price where it is now where it's extremely attractive and accretive.

I mean, you're trading at less than 2 times earnings, trailing earnings, you know, which is, you would never find that in United States. So, thank you for listening to me and congratulations for the quarter and I like the guidance going forward..

30:37 Thank you, Mr. Larson and thank you for your question. That’s exactly, regarding to the share buyback that’s exactly what we were trying to do legally. We try to – basically we, kind of set a floor for the share price. And, but as you know, the floor is not that big.

So, I am afraid we probably, there is [indiscernible] to buy a lot of shares unless we checked the price very big way, that’s not something we want to do because we were in that industry, everybody's [trade is below] [ph] [indiscernible], something like that. 31:27 We are kind of very low, but we can improve a little bit.

We are definitely not in the like 10 times earnings, earnings traded at 10 times earnings. That's kind of we’re saying. So, we basically do something you expect and thank you for the question again..

31:45 Alright. Thank you..

31:50 This concludes our question-and-answer session. I would like to turn the conference back over to Tanya Wen for any closing remarks..

32:02 Thank you 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 the follow-up contact. We look forward to speaking with you again in the near future. Thank you..

32:15 The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..