Hello, and welcome to the X Financial Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. 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. Zhang, who will go through the financials. They're 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 management's current expectations and 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 and achievements to differ materially from those in the forward-looking statements.

Further information regarding these 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 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..

Hello, everyone. We are pleased with our operational and financial results in the third quarter. The loan facilitation amount reached the high end of our previous guidance. Asset quality steadily improved, and both top line and bottom line saw sequential growth.

Against the macro headwinds such as economic slowdown and consumption softness amid the COVID-19 resurgence, our performance further demonstrates our healthy fundamentals, effective strategic positioning, program strategy and strong execution capabilities.

During the third quarter, our total loan amount facilitated and originated reached about RMB20 billion, an increase of 31% year-over-year and 17% quarter-over-quarter. We continued to improve our asset quality with prudent risk management.

On a sequential basis, the delinquency rates for all outstanding loans past due for 31 to 60 days decreased from 0.93% to 0.77% as of the end of September. In addition, we further expanded our premium borrower base. Our number of active borrowers increased to 1.4 million in the third quarter, a new record in the Company's history.

This expanding premium borrower base has underpinned our quality growth during challenging times and laid a solid foundation for our future development. Moving ahead, we will continue to enhance our risk management and borrow acquisition efforts.

We believe China's consumer and micro and small business financing market still have great potential, and we are confident of delivering sustainable growth in the long term. During recent months, we continued to execute our share repurchase program initiated earlier this year.

This share repurchase program is aligned with our commitment to enhancing shareholder value and reflects the Board's confidence in the Company's long-term prospects. Our Board further increased our share repurchase program to $30 million.

We believe that our business strategy and execution will continue to further enhance shareholder value in the long term. Now, I will turn the call to Frank, who will go through our financials..

one, an increase in commission fees resulting from the increase in the total loan amount facilitated originated this quarter; second, an increase in interest expenses as a result of increased payable to the institutional fund partners; third, the partial offset by a decrease in insurance fee paid to the insurance company.

Provisions for the loans receivable was RMB70 million compared with RMB10 million in the same period of 2021 primarily due to an increase in loans receivables held by the Company as a result of increase in the total loan amount facilitated and originated this quarter compared with the same period of 2021, partially offset by a decrease in the average SME default rate compared with the same period of 2021.

Income from operations was RMB300 million compared with RMB411 million in the same period of 2021. Net income was RMB212 million compared with RMB267 million in the same period of 2021. Non-GAAP adjusted net income was RMB231 million compared with RMB277 million in the same period of 2021.

For further financial information, please refer to the earnings release on our IR website. Regarding our share repurchase plan. On September 30, 2022, we announced that our Board authorized an increase in our share repurchase program to $20 million from $50 million effective through September 2023.

Today, we had purchased an average of about 218,000 ADS and approximately 38 million Class A volume shares for a total consideration of $18 million. On November 16, 2022, we announced that our Board had authorized to further increase the share purchase program to $30 million. The share repurchase program will remain effective through September 2023.

Now for our business outlook. We expect total loan amount facilitated and for originated for the fourth quarter of 2022 to be between RMB19.5 billion and RMB21 billion. For the full year of 2022, we expect total loan amount facilitated and originated to be between RMB71.5 billion and RMB73 million.

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

Operator, please?.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from [Boyd Hinds] with Equinox Capital. Please go ahead..

Can you discuss your outlook for the take rate? And just any kind of discussion about how the interest rates have been trending since Q3?.

Regarding our take rate, because as a business still in the process to meet the demand regarding the products all should be below 24%, that is not a hard target, but it's a soft target. So, we are somewhere -- the take rate for the different products between 2% to 3% all the way to like 8% to 9%, so for different products, for different takeout.

We do not give overall takeout rate for ourselves..

Right.

So my question is really, do you think that interest rates that you can charge borrowers, has that sort of stabilized? Is it -- or is it still continuing to go down? What kind of competitive pressures, regulatory pressures are you continuing to see?.

The pressure from interest rate is mainly from the regulatory pressure. We expect rate will continue to go down to be stabilized in -- sometime in the middle of next year. That's the best answer I can give you right now..

Okay. And how are you able to continue to generate such strong loan demand? You spend relatively very little on sales and marketing.

How are you finding customers that fit your risk model?.

Well, actually, we -- this year, we spent more on sales and marketing compared with the same period last year. And I think that mainly, the demand for our products, demand -- the potential market is very, very large. And we only -- I mean, for the all the players put together, we still tap a very small percentage of those demand.

And one factor maybe as a benefit to us is that [Mali] is regulated very -- from capital requirement perspective, it's been being regulated very strongly by the regulator for the last year or so. So their volumes shrink a lot. So everybody else in the -- every other player in the market all cause some got some share from them.

But overall market, I believe, still quite stabilized, never shrink much..

And are you continuing to target more individuals as opposed to SME?.

Well, I think most of our customer is individuals, even though I'm not quite sure, somewhere between maybe 10% to 20% among them are small business owners or small business. But we don't have an exact figure. We don't -- we never have a pool on those figures, but we guess it's between 10% to 20% belong to their small business owners also..

One other question about your share buyback.

What is the shares outstanding for your Class A shares as of the end of the quarter? So not the weighted average, but what is the actual share count as of September 30?.

Okay. I think the share, maybe -- I have maybe like a November 13 number but that number is maybe a little bit not quite a big difference from what you want to know. So we have a Class A share, it's about 193,429,088 plus A shares, and we have 97,600,000 plus B share.

We -- in aggregate, we bought back about 38,088,855 common Class A shares equivalent because some of them -- among them, about 21,000 is ADS. One ADS is counted for about six ordinary shares. The Class A share, Class B shares, the same thing, but except to voting power..

Right.

And how many of those -- so that -- the 38 million was that repurchased entirely in the quarter?.

In the quarter -- I think in the quarter, we did about 218,178 shares ADS and 28,201,772 ordinary Class A share. And actually, we already did in -- it's -- another 9 million, almost 10 million, in October..

Okay. So, it's interesting how you're executing the buyback. It seems that you're not able to do it in the open market here in the U.S. because of the volume -- the trading volume is very low..

Yes. The volume is indeed is very low, and we are under the law like 10b-5 and 10b-18. So, we only can buy like only like below 25% growth and on a daily basis. Also, we could not get anybody higher than that. So among 218,000,000 shares, only about 86 million is brought from open market during the opening window.

Another 132,000 share ADS is bought back from one of the employees who have ADS also during the open window. The order shares also did in open window and 9 million is -- we signed a contract with them in open window because they took them some time to set up an account to receive U.S. dollar. So until like October, we pay out money..

Yes. I hope you will continue to repurchase stock at these levels. You're obviously trading well below book value. Your price earnings multiple are very, very low..

Yes. We expanded our repurchase program, which has demonstrated our intention to continue to do the buyback. But I think based on current volume, we still expect very low volume will be bought back from open market unless the situation change.

But we have -- we still have a few one or two individuals willing to sell their Class A share back to us directly. So you will see -- the next quarter we'll see more, but not as big as the number we just already did, really small.

But those number, we -- I calculate, we already bought back total over 11% of the Class A, Class B share equivalent back from the market. And we'll continue to do that. We may be another -- have another few percentage points to do that. After that, I think we situation will be depending on the market volume.

And for the next year, I think we will use a combination of the stock buyback and the dividend payout to return to shareholder value..

That sounds great. Can you -- are you able to....

Most likely in the second half of the year. Most likely, the dividend payout most likely will be happening in the second half of next year because as I talked about, one year to set a mechanism to get RMB converted into the U.S.

dollar with like the 5% tax on those dividend payout to the Hong Kong because China has a currency control mechanism where China until now don't have free conversion for the RMB and the U.S. dollar or other currency, trying to have capital control at place. So, if you want to do that kind of thing, you need to have some mechanism to set up.

We are doing that. And we expect to be -- next year to be finished in the first half of next year. And the money we use right now, we use our current U.S. dollar, we got through IPO..

Right. How are you feeling about next fiscal year? Do you still -- you've obviously dealt with a lot of headwinds, regulatory, economic in fiscal year '22. Some of those appear to be lifting going forward. So, I would presume that -- and you've still been able to grow your loan originations even in the face of that.

How are you feeling about what the potential growth could be for fiscal for next year?.

For the next year, I think we still have a great uncertainty regarding next year. I think that's why you never heard anybody even as end of year, any player give you any concrete forecast for the next year. I think the big uncertainty is still regulatory stuff.

And -- but for the general feeling, after finishing the 2020 Party Congress, the leadership would be set up. And overall, all the industries expect there will be no more draconian measure -- additional measure to be issued.

And we will -- all the industry regarding to the regulatory will be focused on implementation for the current all the stuff they've been issued before. So, we will -- fortunately, for us, because we are not in the first year to be kept those rule. And we will definitely follow up like Mali, and we have a hope they will give us some examples.

But once again, we are cautiously optimistic for the next year, but no guarantee..

Okay. Last question and then I'll drop off. In terms of your stock and the listing here in the U.S., I think one of the big concerns that investors have is that you could be delisted for various reasons.

What assurance can you give investors that you're going to be able to find some way to help remove that risk of delisting? I mean, would you consider taking the Company private if it came to that?.

We don't have an intention to delisting, and we don't have a plan to do second listing in Hong Kong because we couldn't do second listing in Hong Kong because our market size is just not big enough. So that's not option for us. But we are very pleased to know the examiner from [PCB], they wrap up their early work in Hong Kong earlier, about two weeks.

I think in -- within the next two months, I think the SEC will have some kind of revaluation with Chinese Finance Minister. I think that those will, to a large extent, will resolve the issue regarding potential risks -- Chinese-listed company in the U.S. to be delisted because of the U.S. law.

To be honest with you, the delisting is mainly is a concern from the U.S. side, not from Chinese side. So if that issue to be resolved, so which means our auditing firms in China, their working paper could be -- will be subject to examination by the PCLB in the future. I think most of the Company, maybe except a few state-owned company.

There may be exceptions, but all the private company listing in the U.S. will continue to be listed in the U.S. That's the best I can tell you..

The next question comes from [Matthew Larson with Vincadia]. Please go ahead..

The previous caller covered a lot of ground and so probably answered a number of my questions. But let me ask you all this. On the share buyback, you did little, if any, in the ADS because 212,000 times roughly $2 is $400,000, $500,000. I think that's what you had said you had done last quarter.

So the transactions have been done in the Class A or B shares, which reduces your outstanding and increases your earnings nicely. So that's a positive. But I guess we won't see a bid in the market here for the ADS because it's not very liquid.

But why do you think your company trades at 1x its earnings, okay? It's entire capitalization you earn and you also got a cash balance that is almost equal to the entire market cap. There's another company, I'll just mention it, it's a [Uindai], which trades at 1/5 of its cash. They have no debt.

And it trades at less than 1x earnings, and levels that make no sense at all because trading below the cash on the balance sheet, particularly if you're growing the way you are.

So my question is, why do you think that's the case? And to add to that, what do fintechs or lending platforms like you have, what sort of multiple do they trade at, say, in Shenzhen or Shanghai or even Hong Kong? So as a comparison, we could see how U.S.

investors are unwilling to pay up versus if you were to somehow get relisted or to go private and sell to somebody else or -- there must be a frustration on your part that the Company is priced as low as it is..

So, I'll take that question. I think it's really difficult to determine what is the right price for the stock, right? Someone asked us before. And my answer has always been, well, this is really not the question that I'm trying to answer. I think this is a question that the U.S.

investors probably have a better answer than we as the management of the Company. Even though, it's difficult to determine the real price, but I think that we all agree that our valuation is certainly much, much lower than what we should be. So in that sense, that we still hope that some people will take interest in us and buying our stocks.

That being said, I think right now the fintech valuation has been extremely, extremely low. And you asked us what is a comparable company to us in terms of either Asia or in Mainland China or Hong Kong market, and I can tell you that there is no fintech stocks in Asia. So they're absolutely no comparison.

There are some -- the so-called fintech company, but I'm really not paying attention as a management of the Company that we don't really pay too much attention on our stock. But our goal has always been trying to deliver stable growth in terms of both scale and profit for our company. And that has always been our goal.

And no matter what is the price of our stock, we are always trying to achieve that goal. And in terms of what is the right valuation model for our company, I think many people can see that we continue to deliver very stable growth, very stable profit.

But the concern has always been number one, the supervision -- the Supervisory Committee will allow our company to survive or whatever that is. And I think that's always been the number one. And the second one, of course, is due to the so-called conflict between China and the U.S.

There has always been some uncertainty with regard to how long that our company can be listed in the market, I think that both you and the previous caller have been asking the same question, right? Because of these two huge uncertainties, I don't think that you will see not high value, not even fair valuation for the fintech companies.

So my prediction can be that as long as these two uncertainty exists, that we won't see a very high valuation or even a fair valuation for our company..

Let me add some more color for your question. I think that your observation is correct, which means our -- not just our stock, but our peers, the space, all the so-called fintech company in China or buyer for some cases have been on strike for some time now. The reason -- the biggest reason I think I could come up with. The first one is legal risk.

Legal risk is you see something like some educational company in China one day -- the day you legally could operate; the second day, you are out of business. That's -- by those kind of risks, without any warning, definitely could be applied to anyone.

We -- our fintech industry because we charge maybe -- the market that we focus on is the supply market. So, it's not apolitical correct or favorable in China. I believe you understand that. The second one is, I think that, say, likely all at buyers -- all the purchaser in the U.S.

is spooked to say the least, because I know that all the institutional, they have a legal responsibility to responsibly manage client's money. And therefore invest something could be out of the business or legally out the business in one day is just something could not be accepted. That kind of risk is not something you can calculate.

I think that's the big -- legal risk is the biggest reason. The other reason is the phenomena is like that, it's not just we are trading below -- around or below the cash, it's even for the, nobody seems like losing money.

And the only reasonable conclusion is all the management in the tech, fintech company, in China will manage the Company very irresponsible way. They're not just not going to increase shareholder value and they will be squandered all the money they already have. Otherwise, how can you like price those stuff at such ridiculous way.

But I think that the time will tell. And I think the PCAOB have ability and can examine the -- auditing all different operate in China will maybe will alleviate those kinds of concerns over time. And also, I think is the maybe circus, I think for the U.S. investor.

They probably we would like to see the regulatory situation to be stabilized somewhat before to any invest -- meaningful investment. For us, I think we are just take this advantage and do our -- do all that we can to manage the Company the best way know-how and do more buyback and that kind of stuff.

I think that over the long run, maybe whatever we do right now will be correct. Thank you..

I have one -- I guess one more question. You've touched a couple of times about the threat of regulatory change that could eliminate your business model. So that was one of the risks.

What would be the incentive of authorities in the PRC to eliminate a model that is presumably helping with consumption, getting money to people who need it to consume and you're doing it effectively at a rate that isn't frankly much different than here in the United States if somebody has credit cards, which are very common.

But why -- what incentive for the authorities is there to do away with an industry that increases consumption and it's something that people rely on to manage their own cash flow needs, whether it's to buy PCs for school or whatever the case might be.

So why would that be a risk?.

Well, I'm sorry. We can't comment on what the government thinks, right? But we work closely with them. So if there's any way that we will -- that the government and us can reach good results, then I think that will be great for us and for our industry..

All right. And then I guess, finally, how come there are no fintech companies that trade in Shenzhen or Shanghai? There's four or five that trade here in the United States. There was more but some of them weren't managed very well. I'm thinking -- well, you know the ones I'm referring to, LexinFintech or 360 Digital.

But why -- how come none are trading over there in the PRC?.

Well, I guess that already answered your previous question, right? Actually -- go ahead..

I'm sorry..

No, that's it. I think that your observation is very acute. And I think that basically answered your previous question..

All right. I mean the only one that note -- not the notice Ant Financials had trouble coming, and it's a massive company. But there is expectations, I guess, that they will be listed at some point. But anyway, that's a different discussion.

Very well, thank you for your answers, and again, I hope you continue to do what you're doing, which is returning money to shareholders. We're finally getting some sort of positive response as your stock is lifting along with many stocks listed in the form of ADS here. I look forward to following your progress..

Thank you for your questions..

And we have a follow-up from [Boyd Hinds] with Equinox Capital. Please go ahead..

Just to follow on that discussion and conversation about how to increase interest in the stock here in the U.S. I don't know that you're followed by any analysts out there. So it's often very difficult for investors outside of China to even hear or learn about the Company.

And the other thing that you could do, the management team could purchase shares here in ADS form and make some note of that publicly so that it's a reiteration of your confidence in the outlook of the Company and in the Company shares, which I think the delisting concern is and the risk is real because, as you've said, you were not large enough to relist in Hong Kong.

So the concern that I have, as always, is that if you do lose your listing here in the U.S., I don't have any recourse as an investor in your company. So, if you could somehow speak to those concerns that would be great..

No, we could consider that. Thank you..

Yes, the only one I just write up IPO and because of the stock performance, I think most people think it's not worthwhile to cover us. I think maybe in the second half of next year after regulatory investing situation are more or less clear, and I'll finish, we will initiate those efforts to recruit someone to cover us. Thanks for your suggestion..

And we have a follow-up from [Matthew Larson with Vincadia]..

The threat of delisting, I had historically not dismissed but thought it was overrated for many companies because there have some that have just been delisted for other reasons historically here. Maybe they didn't their auditing done in time, their 20-Fs or something.

And they went to the bulletin board or pink sheets, but they still traded, and many of them that I've owned that have, went private, not always at the premium I would have liked.

But if your company is too small to be listed in Hong Kong, what would be the recourse? Would you take -- taking it private would be the only thing because you would need to -- your majority shareholders, the people -- the founders of the Company would need some vehicle to manage.

Or is there a threat really that as you're too small to list in Hong Kong? I mean, there must be many small companies in your other exchanges on the Mainland. Or would you sell out to a larger entity that trades at 10x earnings? I mean, you're trading at 1x.

So you could sell out if that was the only alternative at many times your current value, and it would be accretive to any borrower -- I'm sorry, any buyer.

I mean, are these options you've considered? Because there's been many small companies that have gone private, generally by the founder and at a premium because they went public 10 years ago at like $10. And now they're $1, I mean, what a great transaction.

You raised money at $10 and you buy yourself back at a fraction of that, even though you've grown five or tenfold. So, I guess if you could just address a little more about the risks of delisting, what recourse outside of going private is there..

Just one moment, please. We've lost the speaker location. I'll need to reconnect them. Just one moment, please. Thank you. [Technical Difficulty] This is the operator. I have reconnected the speaker location. Mr. Larson, if you wanted to continue your question or I think you'd finished your question..

Well, I don't know if they heard -- did they hear the whole question?.

Yes, I did. Yes, I did..

Okay. It was a long question..

No, no. I know. First of all, we believe the chances our -- to be delisting, this is very small because we always manage our business and even manage our book very responsibly. We do not afraid any audit work or to be checked by anyone. So that chances, first of all, it's very low.

And 100% our effort is, I think, is continue to do what we do, and I think we will be keep listing in the U.S. And for the stock price, if it's -- as far as I know, the delisting required is about $15 million. I think -- I fully believe we will not trade below that threshold and because of increase the value of our business, of our company.

So once again, we do not believe the chance of delistings, any have -- it's just not real. We're not doing that, okay? So and talk about what-if contingency, that is just not our focus. And we are -- our focus is running our business the best we know how. And I don't believe that the listing is the very imminent issue for us for the next year or so.

I just don't believe that, okay? That's the best way I can answer your question..

This concludes our question-and-answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks..

Okay. Thank you. 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 contacts. 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..