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Operator: Good day, and welcome to the X Financial Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.

Unidentified Company Representative: Okay. Thank you, operator. Hello, everyone, and thank you for joining us today. The Company’s results were released earlier today and are available on the Company’s IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Kan Li, President; and Mr. Frank Fuya Zheng, Chief Financial Officer. Mr. Li will give a brief overview of the Company’s business operations and highlights followed by Mr. Zheng, who will go through the financials. They are all available to answer your questions during the Q&A session. I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the 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 were 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 uncertainties, 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.

Kan Li: Hello, everyone. We are very pleased to end the year with another solid quarter. The loan facilitation amount in the first quarter of 2022 exceeded our guidance, and our total net revenue grew rapidly, increasing both on annual and quarterly basis. Despite the very challenging environment in the midst of the COVID-19 resurgence throughout the year, we’ve achieved a 42% increase in the non-facilitation amount in 2022 and maintained our asset quality at historically high levels. This further demonstrates the resilience of our business model, especially during the challenging times and confirms that we are on the right track for sustainable growth, thanks to strong execution by our team and the continuous optimization of our risk control system.

In Q4, our total loan amount facilitated and originated reached approximately RMB 22 billion, up 66% year-over-year and 9% quarter-over-quarter, bringing our total loan amount for the full year to approximately RMB 74 billion. Our premium borrower base remained stable, and we continue to improve asset quality by leveraging our data-driven and technology-empowered risk control system. Our delinquency rate for all outstanding loans past due for 31 to 60 days decreased to 1.02% as of the end of December 2022 from 1.48% a year ago. In addition, we have continued to strengthen collaborations with our institutional funding partners and with our credit line provided by them since Q4. We see further opportunities to optimizing our funding costs and improve operating efficiency.

With the end of the strict COVID control policy and reopening of China in December last year, the Company’s focus has shifted back to stimulating economical growth. We believe that domestic consumption will play an important role in driving China’s economy growth this year and so far in Q1, we have seen a recovery in consumer sentiment. In addition, small- and medium-sized enterprises are expected to receive more support from the government to derive their business recovery and further growth. All of these factors will benefit the overall personal finance market in China where our business is rooted. On the regulatory side, according to the Central Bank, Ant Group and 13 other platform companies have basically completed business rectification under the government’s guidance and supervision, and the regulators will continue to promote the healthy development of the platform economy.

While we believe that the overall regulatory environment will be broadly stable this year, we will closely monitor and adapt quickly to any policy changes and ensure compliance in our operations as always. In conclusion, we are cautiously optimistic about the outlook for this year and expect continued rapid growth in our loan facilitation amount and expansion in both our top and bottom line. Now I will turn the call to Frank, who will go through our financials.

Frank Fuya Zheng: Thank you, Kan, and hello, everyone. We were pleased to resume year-over-year top line growth in Q4. Total net revenue was RMB 956 million, up 16% year-over-year and 7% quarter-over-quarter. We have also significantly improved our bottom line on both annual and quarterly basis. Net income for the quarter was RMB 275 million, up 89% year-over-year and 30% quarter-over-quarter. Despite macro headwinds in 2022, we remain confident in our prospects and continued our efforts to reward our shareholders. Through an expanded shareholder repurchase program, we purchased a total of approximately 267,000 ADSs and 46 million Class A ordinary shares in 2022, which will be accretive to the earnings per share in 2023 as certain shares will be canceled or held as treasury shares during the year.

In 2023, we will continue to execute our share repurchase program, which will further enhance shareholders’ value. With sizable regulatory environment — with stabilized regulatory environment and a gradual post-pandemic economic recovery, we expect revenue growth to accelerate and earnings to improve in line with top line growth. Looking ahead, we remain committed to returning value to our shareholders, while maintaining sustainable business growth with healthy fundamentals, a proven strategy and strong execution capabilities. Now I would like to brief some financial performance for the fourth quarter. Please note that all numbers stated here are in RMB and rounded up. Total net revenue increased by 16% to RMB 956 million from RMB 823 million in the same period of 2021, primarily due to an increase in the total loan amount facilitated and originated this quarter compared with the same period of 2021.

Our origination and servicing expenses increased by 53% to RMB 589 million from RMB 386 million in the same period of 2021, primarily due to an increase in commission fees resulting from the increase in total loan amount of facilitated and originated this quarter compared with the same period of 2021. Provision for loan receivables was RMB 75 million compared with RMB 40 million in the same period of 2021, primarily due to an increase in loans receivable held by the Company as a result of the increase in total loan amount facilitated and originated this quarter compared with the same period of 2021. Income from the operations was RMB 274 million compared with RMB 312 million in the same period of 2021. Net income was RMB 275 million compared with RMB 146 million in the same period of 2021.

Non-GAAP adjusted net income was RMB 278 million compared with RMB 183 million in the same period of 2021. For further financial information, please refer to the earnings release on our website. Regarding our share repurchase plan in November 2022, we announced our Board authorized to increase our share repurchase program to $30 million from $20 million, effective through September 2023. In Q3, we repurchased an aggregate of approximately 49,000 ADS and 18 million Class A ordinary shares for a total consideration of approximately $8 million. Now for our business outlook. For Q1 this year, we expect the total loan amount t facilitated and originated to be between RMB 23.8 billion to RMB 24.8 billion. Now this concludes our compared remarks and we would like to open the call to questions.

Operator, please.

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Operator: And our first question today will come from of Equinox Capital.

Unidentified Analyst: The first couple of questions I have is about the current state of regulation. Can you just tell us what is your view of how do the regulators look at the capital-light business model? I’m specifically concerned about their view of your risk taking. It seems that, that was a concern that they had. How much — and how many of the loans that you have on your book are you considered to be at risk with? And just in general, how do you feel about the state of regulation right now in the country?

Kan Li: Okay. I’ll take that question. This is Kan. Thanks for your question. It’s really difficult for me to tell what the regulator think in their head, I guess. But in terms of our business model, I think the one thing about our business model is that we being in the market for several years already and in terms of the competition, in terms of the quality and our brand has been recognized by our institutional funding partners. So no matter what the regulator is thinking about the whole industry, the cooperation between us and our partners has been very smooth. So that is a very good thing for our business growth. In terms of our portfolio risk, because if you look at our portfolio closely, that our average loan amount per client is really small.

So one client risk doesn’t really factor into our overall portfolio risk. And I think that is one of the most important in our risk — portfolio risk. So our management has been fairly confident in terms of our risk management skills. So we are not particularly concerned about how the external shock will bring negative effect on our portfolio. And that being said, as a loan business that our #1 focus has always been risk management. So we spend — we have been investing a lot in terms of human capital, in terms of our — in terms of other resources in order for us companies to improve our risk management.

Frank Fuya Zheng: This is Frank. I’ll add on a few words. Regarding to your question, I think it is not a direct answer for that, but we can influence for what regulators has been doing to answer your question. First of all, I think from regulators perspective, they were like so-called this — for consumer loans, they were like the bank whoever provide the money for the loan are directly responsible for their stuff. So that’s the whole thing for the last year or so. So to me — we, in China kind of class is not a pure financial institution. We’re kind of a kind of financial institution, okay? Take example like Ant Finance because Jack Ma had a big mouth talk in Qidong and they stopped Ant Financial to go IPO the day before a few days ago because of that speech.

But nobody ever talk about Ant Financial, their portfolio, which is much, much bigger at a time like — over the period, CNY 2 trillion portfolio at a time. They never talk about you have a portfolio risk issue. But what they talk about is you do the financial — do the loan business under the sky of a technology company, which is not allowed. So you have to have a license to do that business. Second of all, they set up a threshold. If you do join the loan, you have to put up the capital, your own money, at least 30%. So that’s why for the last few years, so the Ant Financial, their business side has been dramatically shrink because they — even Ant Financial cannot put a much big capital to finance or facilitate this size of a loan. So that’s what’s the thinking.

There’s some area effect to regulate and emphasize. You have to have license to do loan business, nothing to do with your quality of your portfolio, okay? Second one, you have with the joint loan. You should show that even if you have a capability manage your loan as big as a few trillion dollars with low — very low manageable risk, but still whatever job you do is not that important. Important is the loan should be issued by the banks and the financial system with license and provide the money for it. That’s the best answer for you. A similar time thinking goes for everybody else.

Unidentified Analyst: That’s very helpful. So as far as you know, X Financial is fully compliant that stands right now and your interpretation of it. And I assume you’re in reasonably close contact with those regulators at this point. Is that fair to say?

Kan Li: Yes, it’s fair.

Unidentified Analyst: Okay. And in terms of the loan ceiling of 24%, how is the Company progressing towards meeting that goal? And how much of the current loans on your book are above 24%?

Frank Fuya Zheng: We rather not disclose that kind of information, but we have been making great progress in this area for the last year or so. But we are — that’s also the fact that we are not 100% within 24%. And I don’t think — once again, the loan rate as the current structure is not defined by us as long as the banks or whoever provided money for the loan that — they have the right to issue that kind of loan. We are just to facilitate it. So strictly speaking, we are not legally determined that kind of loan rate as long as help financial institutions with license to issue those loans, they are regulated. It’s okay with that. That’s okay with us. I think that’s the best way I can answer your question.

Unidentified Analyst: Okay. Now it appears that the country is returning to a more normalized period of economic activity. So can you just remind us, you’ve given guidance for loan facilitation in the first quarter, and that’s sequentially above the fourth quarter. But generally speaking, is the first quarter, in terms of seasonal impacts, is that a period of lower loan facilitation volume for you in terms of Q2, Q3, Q4?

Kan Li: In terms of the volume that we normally will see the first half of the year has the higher volume. But if you look at our 2022 that we actually continue to grow from Q1 all the way to Q4. And I think this year, again, that we are talking about the expectation — forecast, which I’m not 100% confident, but we do expect that this year is likely to follow last year’s trend. So we should be able to see quarterly growth facilitate amongst us.

Unidentified Analyst: Okay. Great. Your tax rate was slightly elevated in 2022. It appears that it began to normalize a little bit in the fourth quarter. Can you provide us with an outlook on what you think your tax rate is going to be in 2023?

Frank Fuya Zheng: 2023, the tax rate — effect tax will be lower. The reason is the Chinese — the tax you actually pay will eventually reflect what the U.S. — the effect you see on the U.S. But there’s time lag about 6 months because Chinese have a different collection cycle and so far so on. But in terms of the number you see right now, we just apply to like 25%, but as we more — because all our operations, all our entity, operational entity are based in China. And those entities get a more favorable treatment into the tax — effective tax rate — U.S. effective tax rate will also will follow the downward trend. I can’t give you — because it’s a little bit harder to project the forecast for that, but overall trend is going down this year, for 2023.

Unidentified Analyst: No, I would — I think there was some kind of change in the valuation allowance and that impacted the reported tax rate that you show on your income statement. So fair to say that it’s going to be about 20% to 25% this year instead of what it was last year?

Frank Fuya Zheng: I think — yes, I think there’s 2 things. Once again, I think effective tax rate for 2023 were somewhere between 15% to 20%. And the line, you’ll see, I think if you see the tax line, income tax expenses for 2023, there’s a few tuning in our last 2021 Q4. There’s a special item called tax item, which is deferred tax allowance, which is about CNY 103 million. That is because we — for some reason, we — the reason I already explained last year, so we couldn’t use that deferred tax benefits, so that will be added to the last year. So actually, last year, 2021 the extra tax rate should be that number minus CNY 103 million, okay? That’s that is.

Unidentified Analyst: Okay. So it appears that, that specific issue will not be there — not be present in 2023. Is that correct? That change in valuation allowance?

Frank Fuya Zheng: Yes. If you see the — if you check the deferred tax allowance on the balance sheet, you will find that the number is dramatically come down, okay? That’s corresponding with the balance and the income statement is corresponding to item.

Unidentified Analyst: Great. Okay. Last question, and then I’ll drop back in queue for others to ask. You’ve done a very commendable job on your aggressive share repurchase. And I just wanted to say that I appreciate that. I’m just curious, do you still have — how much do you have left remaining on that share repurchase plan?

Frank Fuya Zheng: About $9 million. So far, we used up — from the $30 million, we used like a little bit over $21 million, so we have a $9 million left — about a little bit less than $9 million.

Unidentified Analyst: Okay. And it sounds like there was kind of an unusual situation. You had a cofounder that wanted to receive cash for his shares. Is that a — I mean do you still have others, large domestic shareholders who’re looking to sell? Or do you think that you might be able to repurchase more of the ADS as part of your repurchase plan?

Frank Fuya Zheng: Yes. The second largest shareholder, he sold his ordinary shares, he never even convert to ADS. He sold his ordinary share back to us in Q3 last year. And I think we don’t want to speculate the reason for that. But if we check, he is also the individual shareholder of the largest — the private owned banks in Shenzhen also. That may be the reason, but I’m not sure also — but to answer your question, I — based on the current volume we have right now on a daily basis, we don’t think we can buy much — buyback a lot of share back. Even last year, that we haven’t buy much back because the very low volume, almost no volume on our company trading volume. So we have 1 month or 2 months to set up the firm entity in Hong Kong to make that operational, that will take a little more than 6 months.

We hope we can finish that change and that will make the entity to receive the dividend distribution from a Chinese entity to the entity qualify, maybe in end of April or May. And we hope we on next earnings call in May — sometime in middle of May, we will issue a dividend for the first time, if I remember correctly. So we will — we still want to return value to shareholders, but we probably have to more rely on dividend instead of a share buyback, starting this year. Now definitely, we will keep enough money for the operation purpose first.

Unidentified Analyst: Yes. No, I appreciate all the efforts that you’re doing. Look, I mean, the valuation here is truly incredible and just based upon what you have been able to do, but you’re not the only one in this. There are 2 or 3 others, U.S.-listed Chinese fintechs that are about the same size. You’re all trading at multiples that do not reflect, I think, what your business has been capable of doing. The challenge is how do you attract international investors? How do you attract people of size willing to invest in your company because you just — you don’t have an institutional base of shareholders right now. That’s your challenge.

Frank Fuya Zheng: Yes.

Unidentified Analyst: So I mean how do you think you can expand that investor base?

Frank Fuya Zheng: As the regulatory environment will stabilize this year, I probably will be start doing road show in the second half of this year. Definitely, we’ll do next year. But we will start to do the road show maybe end of starting second half of this year. That’s something we will try to do. But I think in terms of valuation, it’s — as you point out, is industrial issue, it’s not like can be addressed by one company alone. So we will do what we could do and try the best and hope for the best luck.

Operator: Our next question will come from Mason Bourne of AWH Capital.

Mason Bourne: Nice to see the Company executing well. I guess I just wanted to dovetail off the last guy. And it sounds like you’re planning to do a dividend and some of your peers have done that. How do you think about that as far as the potential size of it? And would it be a quarterly dividend that would be variable depending on earnings or what is your outlook for that?

Frank Fuya Zheng: It’s a little bit premature for me to answer at this time because we haven’t gone through Board approval or something like that. But most likely, we will do like a onetime dividend once a year — onetime one year stuff, something like that.

Mason Bourne: Okay. And then I guess on valuation, I’ve got your stock somewhere under 2x earnings and about 0.3x book. And I hear what you’re saying about the volume, that’s an issue that we face just in the stock on the ADS. But could you do a tender where you could come to the market with a price and say show confidence do you think your stock is undervalued and maybe you get some people that offer up 1 million or 2 million ADS something like that or maybe even more, just if you put a price out in the market and say this is what we’re willing to buy back at.

Frank Fuya Zheng: Yes. I think I answered your last time regarding the same question. I’m a little bit not familiar with this mechanism in terms of how to achieve that. And also, as I just point out, I don’t think even we did that, probably not going to jump our share price. To be little bit frank, I think to jump our — the price into whatever timeframe is not the first priority for our guys, our guys — our priority is to run the business the best we could, and we will do whatever we should do including return the shareholder value. And everything else will fall into place in due time.

Mason Bourne: Yes, I get that. I just — I guess, tender can kind of serve the purpose where you get people that are looking to arbitrage the stock. So it doesn’t necessarily have to be a huge bid. But if you’re looking substantially above the current price, but just if it’s a 1% or 2% spread, you can get people that kind of bring volume into the stock even without necessarily running it up. I get that you try to buyback at the most accretive levels. But it just seems like maybe it’s something potentially worth exploring in my opinion.

Frank Fuya Zheng: Yes, yes. I definitely put in the consideration. As I just said before, let me move my money in terms of from R&D into the U.S. — turning to U.S. dollar first, then with the money in hand, we can talk about maybe — why not maybe try to do that one time or not. But you know my view on that. I don’t think that one deal will solve the valuation issue. I think the valuation issue is not our company specific, it’s actually the industry way, something like that. But that definitely maybe will improve, like from PB of 0.2% to maybe 0.6% or 0.5%. If we can do that, if we can achieve that, why not? So we put that under consideration. Once again, let me focus on converting RMB into the U.S. dollar first, which will be done — you see the news, there’s a big mutual funds based in the U.S. They have a little bit trouble move their own money about $5 million, $6 million to overseas.

They’re actually in their own account, and they’ll make a news out of that because move money out even if it’s own money is not an easy thing. China has a capital control issue. So let me do that first. We are having money in the Hong Kong Bank, we will consider, okay?

Mason Bourne: Okay. And on the Hong Kong piece, last thing for me is, is there anything about — separate listing there? Or this is still just kind of more in trying to move currency?

Frank Fuya Zheng: Just move currently, as we — in terms of our market cap, we are a little far from the Hong Kong listing requirement. So that’s probably not going to be an issue anytime soon.

Operator: And at this time, we will conclude the question-and-answer session. I would like to turn the conference back over to Victoria Yu for closing remarks.

Unidentified Company Representative: 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 the follow-up context. We look forward to speaking with you again in the near future. Thank you.

Operator: The conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.