Edited Transcript of 2858.HK earnings conference call or presentation 26-Mar-20 11:00am GMT

Our revenues for the year ended December 31, 2019, increased by 5% year-on-year to RMB 5,800 million, mainly due to the increase in loan facilitation services.

Our new core services revenues, which include revenues from loan facilitation transactions and the new self-operated financing lease transactions we facilitated during the year, increased by 21% to RMB 2,519 million. In 2019, our Loan services facilitation grew very fast. For the year ended December 31, 2019, we worked with 12 banks and the financial institutions as our loan facilitation partners, and they facilitated approximately 347,000 financed transactions through loan facilitation services, representing a year-on-year increase of 141%.

Our transactions through loan facilitation services contributed 66%, 49%, 73% and eventually 82% of the total financed transactions in the first, second, third and fourth quarter in 2019, respectively. And the aggregate contributed 66% for the full year of 2019 compared to only 30% for the year in 2018.

Our revenues from loan facilitation services increased by 210% year-on-year to RMB 1,668 million for the year ended December 31, 2019.

Our revenues from our self-operated financing lease services decreased by 8% year-on-year to RMB 3,755 million for the year ended December 31, 2019.

In November 2019, we successfully acquired 100% equity interest of Guangzhou Shengda, a company with a financing guarantee license, which enabled us to further strengthen the qualification and to diversify the guarantee channels so that we can further develop our loan facilitation business steadily and healthily.

Our total gross profit increased by 12% year-on-year to RMB 2,766 million for the year ended December 31, 2019, mainly due to the increase of total revenues. Our overall gross profit margin increased to 48% for the year ended December 31, 2019, compared to 45% for the year ended December 31, 2018, mainly due to the increased contribution of loan facilitation services in the revenue mix resulted from the rapid growth of the business.

In 2019, we began to see profitability improvement benefiting from our strategy shift as well as the business scalability and operational efficiency increases.

Our adjusted operating profit increased by 40% year-on-year to 400 — RMB 458 million for the year ended December 31, 2019, and our adjusted net profit increased by 27% year-on-year to RMB 439 million for the year ended December 31, 2019.

While Yixin maintained healthy growth and further solidified our leadership by leveraging our leadership advantage and a trackable credibility, we also experienced certain challenges, especially in the second half of the year.

Various local governments started to implement much stricter rules and the guidances on delinquent customer accounts’ payment collection. And in order to better comply with these new rules and guidance, we use litigation as our primary collection method. Since litigations take longer processing time, a lot longer, both our provision and our delinquent ratios were pushed up accordingly for the year 2019. At the end of 2019, our 180-day plus past due ratio and 90-day past plus due ratio for all financed transactions, including our self-operated financing lease services and loan facilitation services, were 0.33% and 1.3%.

The year 2020 came with the outbreak of coronavirus, which is believed to have significant impact on world and the China’s economy, affecting most industries, especially China’s auto market. The delay in employees returning to work following the spring festival holiday is also preventing auto manufacturers and dealers getting back to normal operations. The off-line stores were closed during the outbreak.

According to CAAM, the passenger vehicle sales in January 2020 decreased by 20% year-on-year and the worst impact happened in February. According to CAAM, the passenger vehicle sales in February 2020 decreased over 80% year-on-year. And due to the current situation, it is estimated that the total passenger vehicle sales of China’s market for the entire year will suffer the largest sales decrease in history.

The sharply decreased sales volume and the close of offline dealership — dealers shop and the disruption of our business operations caused also great pressure on Yixin’s business as well. It is our best estimate that both the total financed transaction volume and the P&L for the year 2020 will be negative impact resulting from this outbreak.

In early February, we took many measures to bring and to keep our customer service staff online to answer the calls and to solve problems for our customers. Suffering from this outbreak, customers’ repayment abilities are inevitably influenced and lowered. We do expect the overall delinquency ratio will rise in 2020. Despite such situation, we remain working closely with our loan facilitation partners to help customers to overcome such challenges.

Coming into the late March, amid the pressures and the negative impact from the outbreak, we’re encouraged to see the relief packages gradually coming out of the market. For example, yesterday, Honda passenger vehicle volume control and the management office just approved a onetime increase of 20,000 passenger vehicle quota for the year 2020. At the same day, CBIRC published interim rules on insurance asset management products, which will be effective on May 1st. The rules clearly disclosed that the portfolio of the insurance asset management products may include the publicly issued asset-backed securities. These are quite inspiring for both China’s auto market and also the capital market. We’re optimistic with the determined and the continuous recovery supports from the local offices. And we also believe that by going through such challenges and the market consolidation, Yixin will be able to further prove itself to be better positioned with solidified market leadership and advanced competitive advantage.

As we are currently in the middle of the first half of 2020 and that there’s still uncertainties going on in terms of development of this coronavirus outbreak, we will be — it will be very difficult for us to accurately estimate at this moment. We will continue monitoring the challenges and seeking potential opportunities in our business as we move along.

I will now turn the call over to Nick, our Financial Controller, to discuss our financial highlights.

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Nick Hu;Financial Controller, [4]

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Thank you, Andy.

So our total revenues increased by 5% year-on-year to RMB 5.8 billion, mainly due to the increase in our loan facilitation services.

Our new core services revenues, which include revenues from loan facilitation services and new self-operated financing lease transaction we facilitated during the period, increased 21% year-on-year to RMB 2,519 million.

Revenues from our loan facilitation services for year 2019 was RMB 1,668 million, representing a year-on-year increase of 210%.

For the year ended December 31, 2019, we facilitated about 347,000 financed transactions through loan facilitation services, representing a 141% year-on-year increase in volume.

Revenue contribution from our loan facilitation services increased to 29% compared to 10% for the last year.

Benefiting from the growth of loan facilitation service, our total revenues from transaction platform business increased by 131% year-on-year to RMB 1,759 million for year 2019. Importantly, our transaction platform business contributed 30% of total revenues, increased from 14% for last year.

Revenues from our self-operated financing business decreased by 15% year-on-year to RMB 4,041 million, mainly due to decrease in revenue from our financing lease services for the year ended December 31, 2019.

For the year ended December 31, 2019, we facilitated about 175,000 financed transactions through self-operated financing business, representing a 49% year-on-year decrease in volume, reflecting our strategy to focus on loan facilitation services.

Revenues from our financing lease services decreased by 8% year-on-year to RMB 3,755 million. For year 2019, we generated RMB 2,905 million revenues from existing financing lease transactions in prior periods and RMB 850 million revenues from new financing lease transactions compared to RMB 2,559 million and RMB 1,542 million, respectively, for the year 2019 — sorry, 2018.

Revenues from other self-operated services decreased by 57% year-on-year to RMB 285 million, primarily due to a decrease in revenue from operating lease services and automobile sales as a result of our strategy to deemphasize such services.

Now let’s move into the cost of revenue and gross profit.

Cost of revenues for 2019 decreased to RMB 3,034 million from RMB 3,057 million for year 2018, primarily due to decrease in costs associated with automobile sales, the decrease in funding costs associated with our self-operated financing lease services, the decrease in automobile depreciation associated with operating lease services, and partially offset by the increase of commissions associated with our loan facilitation services.

The average funding cost of our net finance receivable was 5.7% for the year ended December 31, 2019 compared to 5.8% for the year 2018.

Our total gross profit increased by 12% to RMB 2,766 million for 2019 compared to RMB 2,475 million for 2018, primarily due to total revenue growth. Our overall gross profit margin increased to 48% for the year 2019 compared to 45% for year 2018.

Gross profit margin of our transaction platform business decreased to 59% for 2019 compared to 66% for 2018, primarily due to the change of revenue mix and the increase in commissions associated with loan facilitation services. Gross profit margin of our self-operated financing business increased to 43% for year 2019 compared to 41% for year 2018.

The average spread of our net finance receivables was 5.6% for the year ended December 31, 2019, compared to 5.9% for the year ended December 31, 2018, primarily due to increase of financing new automobile transactions as a percentage of total financed transactions.

Now let’s move into the operating expenses.

Selling and marketing expenses decreased by 3% to RMB 1,062 million for the year ended December 31, 2019, compared to RMB 1,099 million for year 2018, primarily due to decrease in marketing and advertising expenses, and partially offset by the increase of salary and employee benefit expenses and the increase of share-based compensation expenses.

Administrative expenses decreased by 34% to RMB 506 million for 2019 compared to RMB 763 million for 2018, primarily due to the decrease of salary and employee benefit expenses, share-based compensation expenses and professional service expenses.

Research and development expenses for year 2019 decreased by 18% to RMB 196 million compared to RMB 239 million in 2018, primarily due to the decrease in salary and employee benefit expenses and partially offset by the increase in share-based compensation expenses.

Net impairment losses on financial assets include provision for expected credit losses of finance receivables, provision for impairment of trade receivables and other receivables. Net impairment losses on financial assets increased by 66% to RMB 1,108 million for year ended December 31, 2019, compared to RMB 669 million for the year ended December 31, 2018.

Provision for expected credit losses of finance receivables was RMB 812 million for the year ended December 31, 2019, compared to RMB 497 million for the year ended December 31, 2018.

From the second half of year 2019, we were facing much strict regulatory environment in delinquent consumer account collection and started to use litigation as our primary method of collection. The longer processing time adversely affect our efficiency in delinquent account collection, and both our delinquency ratio and the provision for expected credit losses of finance receivables were pushed up.

Provision for impairment of trade receivables was RMB 268 million for the year ended December 31, 2019, compared to RMB 170 million for the year ended December 31, 2018. Trade receivables were generated mainly from the services to auto dealers we no longer provided. In consideration of general economic slowdown, we made such a provision for the impairment of trade receivables, especially in the first half of year 2019. Starting from the second half of 2019, the provision of trade receivable has decreased significantly, and we expect it to continue to decrease in the future.

Provision for impairment of other receivables was RMB 27 million for the year ended December 31, 2019, compared to RMB 3 million for year 2018.

Our adjusted operating profit increased by 40% to RMB 458 million for the year 2019 compared to RMB 328 million for year 2018.

Our overall adjusted operating profit margin increased to 8% for year 2019 from 6% for year 2018. The increases were primarily due to the increase in gross profit and a decrease of operating expenses.

Due to the same reason, our adjusted net profit increased by 27% to RMB 439 million for 2019 compared to RMB 345 million for 2018. And our adjusted net profit margin increased to 8% for 2019 compared to 6% for 2018.

Our operating profit for 2019 was RMB 50 million compared to an operating loss of RMB 184 million for the year 2018, mainly due to the increase in gross profit and the decrease in operating expenses.

Our net income for 2019 was RMB 31 million compared to a loss of RMB 167 million for year 2018 due to the same reason above.

Now let’s move to the balance sheet and asset quality.

Our carrying amount of finance receivables decreased to RMB 26.9 billion as at December 31, 2019, compared to RMB 36.8 billion as at December 31, 2018 and RMB 34.3 billion as at June 30, 2019, primarily due to our strategy to focus on loan facilitation services.

Total borrowings reached RMB 19.8 billion as at December 31, 2019 compared to RMB 30.2 billion as at December 31, 2018 and RMB 27 billion as at June 30, 2019.

Asset-backed security debt as a percentage of our total borrowings was 37% as at December 31, 2019.

As at December 31, 2019, we had cash and cash equivalents of RMB 1,587 million as compared to RMB 2,160 million as of the end of 2018 and RMB 1,712 million as at June 30, 2019. The decrease was mainly due to the repayment of borrowings due.

As I mentioned previously, in responding to the strict regulatory environment in delinquent customer accounts collection, we adopted the litigation as our primary collection method. The longer and uncontrollable process pushed up our delinquency ratio. So for all financed transactions for both our self-operated financing business and the loan facilitation business, our 180-plus days past due ratio was 0.33% at December 31, 2019, and our 90-plus days, which include 180-plus days past due ratio, were 1.3%.

And this is our prepared remarks. And we will now open the call to Q&A. Operators, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your question comes from the line of Brian Gong of Citigroup.

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Brian Gong, Citigroup Inc, Research Division – Equity Research Associate [2]

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So I just want to ask about the impact of the coronavirus on the industry and on our company. How do we view the outlook for the rest of the year right now? And what’s our strategy under this environment?

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Xuan Zhang, Yixin Group Limited – Chairman & CEO [3]

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Okay. I’ll take the question. Obviously, we are approaching the end of the first quarter. For the last 2.5 months, we actually seen auto sales volume being cut almost down to half of what the last year’s level. But the positive side is that we have also witnessed the recovery of the market since early March, where some of our stats show that we’re seeing about 40% recovery from a complete meltdown of the February sales volume. So we do see a good chunk of our sales that’s been taking place in March. And we’ve also seen most of the dealerships are now open and running. We’ve also seen OEMs are back into their factories and start cranking out cars.

My guess is that for the entire first quarter, we’re going to see entire China sell less — 2.5 million passenger vehicles less than last year’s level. For the first half of the year, second quarter will definitely continue to recover from the slump. But still, I think second quarter, comparatively speaking, will also be less than what last year had sold in terms of passenger vehicles.

But the good part is that this whole virus outbreak also taught general population that when it really comes to emergency needs, personal vehicle is actually — comes very handy, so to speak, in the time of needs when you have to be restricted to a confined space where there’s no other source of contamination, especially when you have to travel from point A to point B. We’ve also witnessed traffic recoveries from different websites that’s involved in auto sales, that’s involved in the auto industry. We’ve also seen people are actively asking questions regarding passenger vehicles now versus about a month ago.

So I think my overall guess then, probably back into late third quarter, early fourth quarter, the market will be completely back to last year’s level or probably be actually better off than the prior year. But still, this whole process will take — still will take a little time.

So what that means to the industry is that for the entire year, we definitely will see a less of sales volume compared to 2019. That also means less of a market for people like us in terms of Yixin YX. But the good part is that because of this whole virus outbreak and also the slowdown of the — every other or every — pretty much every economic indicator, that we do see a concentration of businesses that’s towards larger players in pretty much every sector. OEM wise, we’ve seen that as well, dealership wise, as well as upstream and lower stream of other players in the auto sector.

So for us, a much looser, a much more liquid market will also enable us to refinance a lot easier compared to 6 to 12 months ago. And also, more liquidity will also help us to lower the overall cost on our own self-financed products as well as the partners that we work with on the facilitation side.

But we also see a lot of the regional players are being phased out during this outbreak. A lot of the players, because of the tight monetary policy prior to the outbreak, were also on the edge of being broken down. So we’ve seen them falling down in the last 2, 3 months as well. So hopefully, we have a little bit more business to pick up in the different regions after the market recovers.

So I think for Yixin, the primary focus is to, first of all, get through this outbreak safely. Safely not only by means of the health of our employees, but also by the health of the company in terms of financial performance wise. And while that happens, I think it’s only natural for sort of the head companies like us to take more market share after the market recovers. Especially when I started to meet with different banks in the last 2, 3 weeks, we’ve also learned from them, our partners, as that — has seen that the partnerships have been strengthened through this particular pandemic situation where that they’ve seen us as more strategic than ever.

Also, we’re the very few companies in this particular field that has a suite of licenses that’s enabling us to perform our tasks, perform our daily businesses, completely complying with the regulations and rules that’s been published lately in the last 3 to 4 months. There have been a lot of them. But fortunately, we have been able to comply with pretty much every one of them, and because of the readiness on the license that we — that fits to the particular area of the business that we carry out.

So overall, I think survival for now. And the outlook seems to us is definitely brighter than some of the other players in the industry. We just continue to plow through and making sure that we reach that point. Thank you.

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Operator [4]

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Your next question comes from the line of [Pin Ging]. Your next question comes from the line of Alex Xie of Crédit Suisse.

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Alex Xie, Crédit Suisse AG, Research Division – Analyst [5]

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My question is more on the used car transaction side. How do we see the trend? And what’s expected ahead for used car transaction and our facilitation business related to used car? And my second question is about our budget on the marketing front. How much are we budgeting for the full year given the current situation?

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Xuan Zhang, Yixin Group Limited – Chairman & CEO [6]

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Well, yes, I’ll answer both, I guess. For the used car, obviously, in terms of volume wise, we have a little control over that at the end of last year. I think for 2020, it will be similar. We will do more new car than used car. Because in nature, new car are better quality versus a used car, regardless if self-financed or a facilitation. However, with that being said, we’ve also, with the banks and partners that we’ve been talking to, they’ve — in terms — in order for them to increase their business volume and also the remaining so-called new territory for them is also used cars. So we’ve seen a lot of partners are very — showing great interest in the used car business, especially on the facilitated financial services side.

So I guess, for us, we are playing sort of a balance. We want to have a good volume that will be sort of conducted during the year. But we also want good quality volume as well. So I think management are taking everything case-by-case, meaning that our system will actually recognize on each application as to new or used versus what the percentage would be as well as — so a lot of things will be, I’ll say, system decided in terms of what orders to take and what order not to take. Depends on the credit score, it depends on the type of vehicle vs new or used, which brand, what area, et cetera, et cetera. So the so-called the normal flags of identifying who’s a good borrower versus a less of a quality borrower. But for used car itself, we have nothing against it. It’s just that they’re going to somehow — at the end of last year, we lowered this volume because that sort of helped us to control our quality of our assets. But when we were actually steering into 2020, especially beginning the virus outbreak, we do expect — there are people affected, affected permanently, and they may lost their job and they may wind up not being able to meet their payments. But in generally speaking, we still do see that the new car owners are better in quality, so to speak, on a general perceptive basis. So — but we’ve already factored everything into our credit scoring system, which the system will help us to identify and approve and grant credit accordingly. And also, it relates to the partners that we work with, depending on the bank or financial services company or leasing company or vice versa. They all have different sort of credit requirements or credit tolerances. That will also help them to sort of pair to their need, so to speak.

On the budget side, I think YX Yixin, historically, we have not spent that much money on marketing in general. So Yixin is actually a company brand. It’s not a consumer brand just yet. But I think what we do marketing normally is to sort of promote us within the industry, with the dealers, with the OEMs and whatnot. That amount of spending on the marketing side is extremely limited compared to the entire P&L of Yixin. So that’s a fairly small number on a year-over-year basis. So I guess maybe Nick can fill in later on with you as to see whether that number is significant to look further into. But normally, we don’t do TV commercial ads or website traffic directions, and that kind of acquisition, that kind of a cost. That’s more of a BITA, Bitauto kind of issue versus a YX. So that part is very limited, so to speak. All right? Thank you.

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Operator [7]

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Your next question comes from the line of [Frank Ji] of Macquarie.

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Unidentified Analyst, [8]

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I have one follow-up on the budget on the cost side. I think we controlled our costs very nicely last year. And I wonder how should we think of our cost structure or margin outlook during first half and during full year 2020 given the challenging market outlook and the pressure on our top line?

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Nick Hu;Financial Controller, [9]

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I’ll take this one. Thank you, Frank. I’ll take your question. So as to the cost and expense side, yes, we do have some pressure from the sales part because of the coronavirus outbreak. So — but as to the cost, we think — because we are focusing more and more on loan facilitation services, and as Andy just mentioned, because of the liquidity and the customer relation policy supplied by the local government, we do see a decrease of the cost of funding, especially in China’s market and because we have very good credit history among all financial institutions. So we will see our cost of fund still decrease in the year 2020. Well, that’s the biggest cost for our self-operated financing business. And as to the — for facilitation services, the only cost we have is the dealers commission. So that is purely based on the market condition. And so we will provide a very competitive dealers commission compared to — it appears…

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Xuan Zhang, Yixin Group Limited – Chairman & CEO [10]

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What Nick tried to say is that when you have less competitors, so you will be more poised or better poised to capture the market with less cost, so to speak, with the distributions, which is dealerships, regardless, primary the fresh dealers or the secondary market, which is the second-tier new car dealers or the used car dealers.

So I guess, on the pure cost side, that’s actually a pretty nice outlook for us as long as the volume itself will continue to catch up quickly. But in terms on the below the line costs, the head count costs, I mean we’ve been actually having less head count in the last 2, 3 months compared to end of last year due to basically lack of work, so to speak, in the last 2, 3 months. But also, we have less leasing space because a lot of the stimulus packages and also stipends given by the government. They also provide us with the lease-free treatments in different places. But those numbers are fairly small compared to some of the, we’ll call the distribution costs and also funding costs. But in pretty much every aspect on the P&L side, we have been looking over them very carefully, try to control the costs as good as we can. But I think right now, the uncertainty is when the market will fully recover. It really depends on the entire virus situation, when would it be fully under control, not just locally in China, but globally, because this virus also start to impact the auto parts supply chain in other parts of the world where that most of the models that’s been made in China or being so-called OEM’d in China are having more or less imported parts. But if those parts company are being closed or remain closed for longer than we expected, we may be running into a shortage of vehicles to sell during the year some time. Or my expectation probably, we’ll run into that in the third quarter. Demand will be high by then. But now you just can’t roll off the cars off the production line because you just lack of different parts. So that will actually probably evolve to be another problem that we have or have to deal with within the industry. But unfortunately, the fact is that we’ve already seen a lot of those parts company being closed down, i.e., in Europe, in the U.S. and what not, other parts of the world. As far as we know, we don’t know exactly when they’re going to be reopened or back to the volume or the capacity that they used to run on. So again, we’re just going to be patient and hopefully be more alert and just to basically make ourselves available for the market if it becomes fully recovered. So that’s how we will be doing.

But the good thing, that we’ve been struggling for tight liquidity in the last 18 months, so we do see a very good liquidity market for the next 12 to 18 months because of this whole economic slowdown as well as the virus. And being one of the top companies in this field, we will enjoy more liquidity, we will enjoy lower cost of funding for sure. So — but how much? We don’t know yet. How much? We’ve seen some, but not that material just yet. But I guess as the liquidity increases itself and more and more fund and more and more different types of fund will be able to allow into this sector or this area, we’ll have more to choose from, more cheaper funding to choose from. So that’s what we’re really looking forward to. Thank you.

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Operator [11]

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The next question comes from the line of Jason Chen of Blue Lotus Capital.

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Jason Chen;Blue Lotus Capital;Analyst, [12]

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Actually, I have questions in regarding to the asset quality. So given the 2019, the delinquency ratio or past due ratio seems increased from the 2018, and it was mainly because of the stricter regulation in the second half of 2019. But given the epidemic happening in the beginning of this year, so are we going to see a relatively sharp increase for the delinquency ratio in the first half this year probably because people have less ability to pay back their payments or loan payment?

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Nick Hu;Financial Controller, [13]

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Thank you, Jason. I’ll take your questions. Yes, we do see an increase in the delinquent ratio from the second half of 2019 for a couple of reasons. One important one is, actually, the much stricter regulatory environment that impacts our delinquent account collection method. So we have to use liquidation — litigation as our primary method of collection, which typically will take about 6 to — 9 to 12 months. And unfortunately, because of the outbreak of the coronavirus, this period will be dragged longer maybe to over 12 months maybe in 2020. So that actually will adversely affect our delinquent ratio and will push up both delinquent ratio and provision as well. So — but I think that the increase of delinquent ratio is controllable because the outbreak period — perhaps the impact of that period mainly focused on January and February. And in March, because of the resume of this facility, and we do see a lot of workers back to work, so we do see an improved situation of the delinquent ratio.

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Xuan Zhang, Yixin Group Limited – Chairman & CEO [14]

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In late January, early — entire February, what we see is that the lack of sort of a method or lack of facilitation for a lot of the consumers to repay us back. But ever since March, most of the people are actually back to work, other than Hubei province, but everybody else is more or less back to work. The banks are reopened. Companies or their accounting departments are being reopened, and processing has been taken care of. We’ve seen a actually very nice sort of recovery from this regular population of our borrowers, basically. So we still see this ratio to go up every day. Ratio meaning that the people who actually try to make up their missed out payments in February because of technical difficulties and whatnot.

But moving forward, we do see ratios go up. But again, I think it’s not to the point that’s out of control. It’s to the point where that we think, because of this whole litigation process that’s longer — taking longer — much longer than we expected, especially with this whole outbreak thing. And also, we would not be surprised in some of the balances that we’ve been written off are actually be recoverable once the process has been finished.

So keep in mind that we started this whole litigation replacing collection back in last April, May time. So other words that we’ve still had less than a year to process most of our so-called delinquent accounts. So it’s very early to say where exactly we’re going to be. But so far, as to monitoring the growth rates and everything, we think still controllable to our end. So we’re happy. Thank you.

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Operator [15]

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We are now approaching the end of the conference call. I’ll now turn the call back to Nick Hu for his closing remark.

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Nick Hu;Financial Controller, [16]

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Thank you all for joining us today. If you have any further questions, please contact our IR team at [email protected].

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Operator [17]

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Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Goodbye.