Hello, and welcome to the X Financial Fourth Quarter 2023 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.xiaoying.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 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 and factors is included in the company's filings 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, future events or otherwise, except as required under the law.

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

Hello, everyone. We are pleased to conclude the year with solid operational and financial results, emphasizing our commitment to a sustainable growth. In 2023, we facilitated and originated 43% more loans than in 2022 and delivered notable year-over-year growth in both revenue and projects.

Total net revenue increased 35% on an annual basis, while income from operations increased 33%, and the net income improved by 46%. However, as we enter the second half of 2023, particularly in the fourth quarter, we experienced increased risk levels in asset quality.

While we strengthened our risk control system and implemented various measures to managing delinquency rates, we also made the strategic decision to proactively reduce loan volumes in the fourth quarter, prioritizing profitability over sheer volume growth.

During the fourth quarter of 2023, our total loan amount of facilitated and originated was RMB 26 billion, a 20% year-over-year increase, but an 11% quarter-over-quarter decline.

Delinquency rates for loans past due 31 to 60 days and the 91 to 180 days were 1.57% and 3.12%, respectively, at the end of the quarter compared with 1.02% and 1.93%, respectively, a year ago.

Our team remains vigilant in monitoring asset dynamics and has taken further steps to mitigate risk by reducing our exposure to higher risk areas and adjusting our business approach to ensure sustainable profitability.

We aim for continued gradual improvement over the course of 2024 and these measures have begun to have a positive impact on our risk indicators. For fiscal year 2024, our strategic approach will remain consistent and somewhat conservative, aligned with current market conditions in China.

We believe the regulatory environment has become stable and the government is committed to promoting economic recovery. However, we recognize that the challenges and uncertainties exist as the country undergoes a transformative shift in its economic growth model, away from a rapid expansion of the past. And structural adjustments are imperative.

All of this has far reaching impacts on various sectors, including our target market. Despite these challenges, we remain committed to executing our strategy and prioritization profitable growth. Our commitment to delivering value to shareholders is unwavering and we intend to pay dividends when probability and smooth operation allow.

This overall approach reflects our decision to navigate in the evolving economic landscape while ensuring the sustainable success of our business and returning value to our shareholders. Now I will turn the call to Frank, who will go through our financials..

Thank you, Ken. Hello, everyone. We are pleased to deliver solid financial results in 2023. Total net revenue increased by 35% year-over-year to RMB 4.8 billion and the net income rose by 46% to approximately RMB 1.2 billion.

In response to heightened asset quality risk in the first quarter, we proactively reduced loan volumes to satisfy probability, resulting in a 15% sequential decline in total net revenue for the quarter.

We recognized RMB 26 million and RMB 46 million of impairment losses on long-term investment related to our indirect investment in Newup Bank of Liaoning in 2022 and 2023, respectively, mainly due to depreciation in the market evaluation of the Chinese banking sector.

However, the banking loan portfolio and the operation remain healthy and we believe it continues to be a good investment for us. Looking ahead, we will now pursue pure loan volume growth at the expense of the probability, which is always our strategic focus to ensure long-term growth and returns to the shareholders.

We will continue to strengthen our risk management system to improve asset quality and balance our revenue and the probability growth. Now I would like to brief some financial performance for the Q4. Please note that all numbers stated are in RMB and rounded up.

Total net revenue increased by 25% to RMB 1,193 million from RMB 956 million in the same period of 2022, primarily due to an increase in the total loan amount facilitated and originated this quarter compared with the same period of 2022.

Origination and the servicing expenses increased by 28% to RMB 755 million from RMB 589 million in the same period of 2022, primarily due to an increase in the commission fees and the collection expenses resulting from the increase in total loan amount facilitated and originated this quarter compared with the same period of 2022.

Provisions for loans receivable were RMB 99 million compared with RMB 75 million in the same period of 2022, primarily due to an increase both in loan receivable held by the company as a result of increase in total loan amount facilitated and originated this quarter and in the estimated default rate compared with the same period of 2022.

Income from operations was RMB 254 million compared with RMB 274 million in the same period of 2022. Net income was RMB 189 million compared with RMB 275 million in the same period of 2022. Non-GAAP adjusted net income was RMB 231 million compared with RMB 278 million in the same period of 2022.

For further financial information, please refer to the earnings release on our IR website. Regarding our share repurchase plan, in Q4, we repurchased approximately 36,000 ADS for a total consideration of US$143,000. Since the beginning of 2023, we had purchased an aggregate approximately 838,000 ADS for a total consideration of US$3.5 million.

We have approximately US$5.5 million remaining for the potential repurchase under our current plan. With respect to our dividends, our board has approved a semi-annual dividend policy.

Under this policy, the determination to declare and pay such semi-annual dividends and the amount of dividends in any particular half year will be made at the discretion of the board and will be based upon the company operations and earnings, cash flow, financial conditions, and other relevant factors that the board may deem appropriate.

Pursuant to the semi-annual dividend policy, the board has approved the declaration and payment of semi-annual dividend of US$0.17 per ADS in the second half of 2023. Now, our business outlook. For Q1 this year, we expect a total loan amount facilitated and originated to be between RMB 21 billion and RMB 22.5 billion.

This concludes our prepared remarks and we would like to open the call to questions. Operator, please..

[Operator Instructions]. The first question today comes from Boyd Hinds with Equinox Capital. Please go ahead..

I'd like to spend a few minutes talking about some of the recent changes in regulation. I'm wondering how some of those changes will affect you as a smaller consumer financing company..

Can you tell us exactly which regulation that you are referring to?.

Yes, there are two that I'm speaking of. One is the requirement for a minimum registered capital of RMB 1 billion or US$139 million dollars, and the other regulation is to have a major investor hold a stake of at least 50%. I'm just wondering how the company is going to be able to comply with those two regulations..

I can take this question first because I received his email on that one. First of all, we are not a consumer financing company in China. We are so-called fintech company, so that particular regulation is not directly applied to us, actually applied to the consumer financing company. Those kind of companies are usually owned by major banks.

They are mainly focused on issuing consumer loans. As you see the article, they haven't come out with the detail in terms of the timeline how to implement this. Mainly it's because the RMB 1 billion capital requirement, mostly they already meet that requirement.

About half, maybe over 10 consumer financing companies haven't met the largest shareholder at least up to 50% ownership. That second requirement, they haven't met. But once again, they have not come out with the detail in terms of when they have to apply the second requirement, as you see the article you sent to me. We are a fintech company.

So we are basically doing is mainly is acquire the borrower, mainly through online or offline methods. And by forward those consumer, we also get a certain risk profile sent to those potential demand to the bank, also to the consumer institution also.

So the banking, also the consumer institution, they both provide us funding for so-called loan portfolio. But those loan portfolio is legally under their, but not belong to us. So we are not – because we don't have a – except we have a small – our own capital about $1 billion capital, small loan company, we can directly issue the loan.

But because of the funding limitation, we mainly source of the funding is from the banks and the financial institution. So that one is to not – because of the Chinese monetary policy right now is very loose, and so we – that requirement do not affect us in terms of the lending – available our funding, that regardless – no effect at all.

So we don't see that having any effect on us anytime soon.

Kan, you want to add on something?.

No, I think you got it..

The next question comes from Mason Bourne with AWH Capital..

I have two.

To start, could you talk about your growth outlook? And I know you gave guidance for Q1, but just how you're thinking about the opportunity to grow going forward, given kind of the pullback in, I guess, your aggressiveness on growth, given what's happening on the risk side of things, and then how that looks longer term, I guess, 24 and beyond?.

Okay, I'll take this one. It's really difficult for me to give you a forecast for 2024 and beyond. Let's talk about 2024.

I think over Q1 and looking forward, it looks to us like the environment has been becoming from worse, from the bad situation to a little bit better one, but we still feel that the so-called better environment is not as good as the much better environment for the first half of 2023.

So in terms of growth, I think we will gradually go into the growth mode, but the growth rate will be slower than that of last year..

The second one, if I look at your dividend policy, it's good to see that you're returning some of the capital to shareholders, but if I look at peers, some of them are returning substantially more as a percentage of net income, up to about 50% through buybacks and dividends combined, or another competitor announced a large special dividend this week.

I was wondering how you think your balance sheet, given where tangible book value is per share and if you could do more on the dividend side of things..

Yes, we do have a decided dividend payout. We're looking for another way to return the shareholder value. Right now is we have just issued the Q4 and the last year financial reports, and we will do 20-F by the end of next month, and in May we will have – for the first quarter financial reports [indiscernible].

After that, we definitely, this year, looking for the way to have a more way to return the shareholder value. Our situation is a little bit different compared with our peers because we are – trading volume is very thin, and almost now – you know that. And so, we regular open window period, we just cannot buy much.

We are restricted by 25% of float on a daily basis. So we are looking for more way to return shareholder value. That's all I can say at this moment..

[Operator Instructions]. The next question comes from Matt Larson with Fincadia Capital Markets..

My questions just kind of follow up from the previous two people who've called in. Thanks for the dividend because it puts you on the map and is returning some capital to shareholders. What I'm asking is kind of abstract.

Your company trades at a multiple, which one would never see in certainly in the United States and probably in not many parts of the world of slightly above 1 to 1.5 times earnings. The dividend will definitely draw in a few more investors.

But in the past, when people have brought up the subject of maybe going private or finding a way to get your share price higher, the answer was that that wasn't an option. And so, I'm kind of wondering, what is your plan? A couple of your competitors do trade at 4 times earnings or so. They pay a similar dividend to what you are forecasting.

So if you could get your multiple to 4, that's at least a tripling your price and it gets you to a level where I think your primary shareholders would be happier from a financial point of view and also for any long-term investor. Your stock has been in an uptrend, which is contrary to what the stock indices out of the PRC have been in.

So one can't complain over the last six or eight months. But is there a game plan to get better awareness of your company and the fact that you've had pretty stable earnings, consistent earnings, so that more investors are aware of your stock? It's thinly traded, but that can work both ways.

If social media or other sites here in the United States became more aware of a company trading at 1.3 times earnings with significant cash on the balance sheet, it wouldn't take much to move the stock.

Sorry I'm rambling on here, but for investors to be frustrated with a stock trading 1-and-change multiple, what game plan do you have? My suggestion is to get the word out there, and that would be more news releases and things like that.

Sorry to take so long, but interested in what you have to say?.

We are in kind of not that sexy industry. Also, we are definitely among the leaders of this industry, like the leader Ant Financial, and so far – you know what I mean. In terms of whatever visibility for the sector and for the whole thing, you can contribute a lot of factors.

We are not very much interested in – to talk about it, but I think everyone agrees that those factors are not in our control, like the US relationship with China, something like that.

So, we believe things are on board, we believe we should continue to do what is right, mainly run our business as best we could and the correspondent return of shareholder value. I think over time it will play out, but definitely I don't know when.

Regarding the privatization, I would say once again, that it was kind of tricky because US investors consider privatization is basically the value play and you definitely have no obstacle to reshape and come back anytime you want to do this. But in China, it's different.

If you don't believe me, just look at it, there's a big company, real estate company, they run the biggest – in China, run the biggest mall, used to be a real estate company, they run [indiscernible] and run the biggest shopping mall in China, the Wang Jianlin, the [indiscernible].

They used to list in Hong Kong, then somehow in 2015, 2016, they see the valuation is horrible, they go to privatization and they want to relisting in a domestic A market, but they never got permission and they never get a chance to come back to the Hong Kong market. We are somehow in the consumer sector also.

Chinese, there's a rule on the book, definitely apply to us, say anything you have over 1 million consumers, we have to get approved from the Chinese government in order to list overseas, especially in the US. Hong Kong is a little bit gray area because technically you can consider it is a China territory.

So if you're delisting, relisting is not sure, that's all I want to say. It's because we are subject to government approval because we have more than 10 million customer base, that's much more than that. So that is another something we can talk about and we can have someone think there is no insurance policy for that.

So if we're delisting, maybe we're never going to list it. So that's why everyone do not want to do that. It's kind of a – listing status is kind of a privilege in China. In terms of the plan, I don't have a detailed plan, but I have a general plan. The first plan is get our stock at over $5. So the institutional investor can technically contact us.

So if we have some period of time, say like more than half a year, our stock is mainly over $5, we will probably rethink our PR policy. Maybe I will be more on the road show, on the road, do whatever usually the stuff we do, and hope for the best result. That's the general plan. I hope I answered your question..

Yeah, you did in a way. You're kind of trapped in your current listing because you can't go private because then you've got no other exit strategy. But I guess, I was looking for some sort of, I don't know, illumination of the game plan because your stock's been mired in a low multiple. You're not the only one there.

I understand there's one or two fintech companies that trade less than 1 times earnings in Hong Kong. So it's just a sector that people are concerned about regulation and things like that. But when you're trading your cash value, just coming from the capital markets here in the United States, we have options to handle that.

Like, going private or merging. What would prevent you from selling to a partner who has like a bank or something that has a significantly higher multiple where it'd be very accretive to them to buy a company of yours with your client base and your reach with all your millions of customers. But I'll leave that there just for you to consider.

Thanks for your time..

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 everyone for joining us on the call today. If you haven't got the 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..