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Operator: Hello, and welcome to the X Financial First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to Victoria Yu. Please go ahead.

Victoria Yu: 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. On the call today from X Financial are Mr. Kan Li, President; and Mr. Zheng Fuya, 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 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 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 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 be off to a good start in 2023. We delivered a solid operational and financial performance in the first quarter. The loan facilitation amount was in line with our guidance range and the net revenue grew steadily both year-over-year and quarter-over-quarter. We also saw a decent improvement in our bottom line. We have seen signs of economic recovery in China, with increased consumer spending and better-than-expected GDP growth in Q1. However, as stated by the National Bureau of Statistics, inadequate domestic demand remains prominent and the foundation for economic recovery is not solid yet. We saw increased competition in the personal finance industry with challenges in borrower acquisition.

Against this backdrop, our first quarter performance is very encouraging and impressive thanks to our strong business resilience and execution. In Q1, our total loan amount facilitated and originated reached RMB24.1 billion, increased by 58% year-over-year and 11% quarter-over-quarter. Despite intense competition, we continued to grow our premium borrower base. During the quarter, the number of active borrowers grew by 71.4% to more than 1.5 million. In addition, our asset quality remained stable sequentially and improved significantly year-over-year. Our delinquency rate for all outstanding loans past due for 31 to 60 days decreased to 1.05% as of the end of March 2023 from 1.31% a year ago. We do not expect our risk performance to fluctuate significantly for the remainder of the year.

In addition, with sufficient credit lines in place, we continue to negotiate funding costs with our institutional funding partners and expect to see a positive impact in the near future. During the recent May ‘Golden Week’ holiday, Chinese tourist spending has reached pre-pandemic levels for the first time, according to government figures. Although the economic recovery is still in its early stages and there are concerns about the sustainability of the growth, we remain cautiously optimistic about the steady business growth this year as the government releases various measures to stimulate domestic demand and accelerate economic growth. Meanwhile, we are keeping a close eye on the regulatory side and have been consistently cooperating with the government on the industry-wide rectification work previously scheduled to be completed by June 2023.

To-date, no further guidance has been released by the Chinese government, but we do not rule out the possibility that new interpretations or updated implementation details of the rectification work will be released, which could have an impact on the industry and our business. 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 deliver solid financial performance in the first quarter. Total net revenue was RMB1,005 million, increased by 13% year-over-year and 5% quarter-over-quarter. Our net income per basic ADS improved significantly to RMB5.94 from RMB2.52 in the same period of last year, reflecting our strong profitability and the impact of our ongoing share buyback program to enhance shareholder value. Going forward, we will continue to diversify our channels to reach – more borrowers, while maintaining our strategy of profitable growth with credit risk management at its core. We expect to deliver steady quarterly improvement in both our top and bottom lines throughout the year.

To create more value for our shareholders, we are taking steps to be able to pay dividends in the future. Now, I would like to brief some financial performance for Q1. Please note that all numbers stated are in RMB and rounded up. Total net revenue increased by 13% to RMB1,005 million from RMB888 million in the same period of 2022 primary due to an increase in total loan amount facilitated and originated this quarter compared with the same period of 2022. Origination and service expense increased by 36% to RMB634 million from RMB464 million in the same period of 2022. Primarily due to the following factors: one, an increase in commission fees resulting from the increase in total loan amount facilitated and originated this quarter compared with the same period of 2022.

Second, an increase in interest expenses as a result of increase in payable to institutional funding partners and investors and third, partially offset by a decrease in insurance fee paid for the insurance company. Provision for loan receivable was RMB20 million compared with RMB34 million in the same period of 2022. Primarily due to a decrease in the average estimated default rate compared with the same period of 2022, and partially offset by an increase in loans receivable held by the company as a result of the increase in total loan amount to facilitated and originated this quarter compared with the same period of 2022. Income from operations was RMB304 million compared with RMB314 million in the same period of 2022. Net income was RMB284 million compared with RMB140 million in the same period of 2022.

Non-GAAP adjusted net income was RMB307 million compared with RMB154 million in the same period of 2022. For further financial information, please refer to the earnings release on our website. Now for our business outlook, for Q2 this year, we expect a total loan amount to facilitated and originated to be between RMB25 billion and RMB26 billion. Now this concludes, our prepared remarks, and we would like to open the call to questions. Operator, please.

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Operator: Thank you. Our first question comes from from Vincadia. Please go ahead.

Unidentified Analyst: Good evening, everybody. Thanks for taking my call, great quarter. I mean you guys just do it every quarter, year in, year out. And what is frustrating as a long-term shareholder, for me, is that your valuation really makes no sense relative to what a fintech company would trade at any place else? I mean if I were to annualize your earnings for the first quarter, you’re trading at less than one times earnings. You’re trading at cash value and a fraction of book value. How many ADS are outstanding, by the way, I see this 294 million shares fully diluted. What’s the conversion into ADS? Can you answer that technical question for me first, please?

Frank Fuya Zheng: It’s one area – equal about six shares plus eight shares. So that’s the conversion ratio and our – yes. We have about outstanding about RMB22 million ADS outstanding, I think that’s – total RMB22 million.

Unidentified Analyst: RMB22 million ADS outstanding and the float is?

Frank Fuya Zheng: Yes, yes. Well, RMB46 million equivalent total, but tradable – has been converted to ADS is only about RMB22 million.

Unidentified Analyst: So that’s what’s available on the float?

Frank Fuya Zheng: Yes.

Unidentified Analyst: But as if this 294 million shares divided by six, yes, that’s 40-some odd so, the floats only 22 million shares. And okay, just a couple of questions, I mean the valuation, this stock should be $10 at least, and that’s it would be a – if you’re going to grow your revenues, and top and bottom line every quarter for the rest of the year, you’re still looking at $4 a share in earnings potential? The stock, which is up a little bit this morning in heavy volume, who knows if it will hold – as it did that about a month ago, it traded 1 million shares and came right back down. But this has just been stuck in a narrow range. I know you’re buying back some shares, which, by the way, was there a reason you didn’t buy back any in the first quarter?

Frank Fuya Zheng: Because the first quarter, there’s no open window for that. And we only – so far, we only get a buyback through open window and actually for the whole buyback, which was about 20 million so far. Most of it is by through Class A share, which do not affect our flow much. Our ADS for the total last year, we only bought it like – I don’t know, maybe over 200,000 shares that’s about it. So all the – buybacks – mass majority is a buyback to Class A share, which we try to avoid – have a less impact on the flow, which also is not big as I stated before.

Unidentified Analyst: Sure. But for a U.S. investor, I can’t buy the A shares, okay? It’s only the ADS?

Frank Fuya Zheng: Yes.

Unidentified Analyst: And even though you’ve reduced your share count of the A shares the valuation just – it just doesn’t make sense. Now there are some other companies that are in your similar space, which I’ll give you the symbols you know where they are. I’m not saying they are exactly the same, but they were all underwritten by Morgan Stanley, FINV, for example, QFIN just reported even YRD okay, companies that initially were peer-to-peer lenders and have migrated to lenders using capital-light models and things like that? But the frustration is – there’s a lot – every day, there’s some small cap companies that are domiciled either in China or Hong Kong, that go up five or 10 fold on no news. And it would be great if one of them, I owned worked.

So let me ask you this. You all should – could be putting on more information. I mean, you’ve been using AI as far as I’m concerned for years or some variation of artificial intelligence? You use an algorithm to make immediate credit assessments from all the people who have the – your app on the phone, and they tap in from what I understand, how much they want to borrow kind of like credit card and you make an assessment based on their credit history, their ZIP code, whatever it is, but it’s not a human making that decision on these small loans. So why don’t you put out some news saying that? I mean, just look at the stocks in United States that are involved in – artificial intelligence NVIDIA, for example, as I’m sure you’re familiar with that company.

It’s just such a high-growth thing. You all could be putting out more news, because I assume you want your stock higher, why not? I mean, it’s a fraction of where it was when it came public, but you performed extraordinarily well? So you might want to rethink your public relations, your news releases, because you should be – I mean you didn’t even mention on the news release, what price to book you’re trading at. I couldn’t figure that out – that’s why I was asking how many shares are outstanding. So is there – besides there’s a share buyback, which, frankly, even though your float isn’t big here, if you guys bought 1 million shares just out of the market here? It would at least put a bid in the market for U.S. investors to benefit from it, because the small float isn’t helping.

I guess I’m frustrated, because your stock should be several times where it’s at, but it kind of falls between the cracks, because there’s no analyst that follows the company, and there’s a few people even know about it. What can you tell me about other efforts to get your stock price higher?

Frank Fuya Zheng: Let me try to answer your question. And first of all, I completely agree with you. Our stock is severely undervalued. And not just our stock and our peer stocks, all are undervalued – to a large extent. See like our TVs, right now is $0.22 on the dollar. I have more cash than my market cap, I ordered by KPMG for sure, I cannot do anything financing, I have RMB22.4 million cash deposits in the bank in order to support my business. So you, just, not including the cash on my balance sheet. So you just figure out how much we undervalue. But our peers, whatever the name you mentioned, you see they all book, they all value below the book value – like somewhat a little bit better than me. So, we will take your advice.

We’ll do some marketing road show. And you see right now, we are so – there is a regulatory deadline on June 30. So let’s get that pass. So we have – so in some sense, we are – we get first – we are now, our survivability is not in question. But the prospect – the future of our industry in future – definitely in doubt, that’s why I believe that’s why we have this kind of valuation. We will take your advice. We will do some PR stuff – you just mentioned starting second half of this year. But in additional the buyback which we did last year, which we reduce our – the total share accounted by 16%, which is a lot, but still not much enough. Help much in terms of the stock price, I don’t know how to answer that, but I think whoever else did the buyback also – did not work – that way or either.

So I’m not alone in that category also. But we will definitely – what I will tell you is we will – starting this year, we will pay – definitely, we’ll pay dividends on our company – our shares – for our shareholder value and relative will be higher compared – with other industry and so far so on. So that’s – and we will consistent do that for the next few years. That’s our intention that’s our Board attention and so far so on. Let’s see how that will work out.

Unidentified Analyst: All right and there’s usually not many people in this conference call so let me take a little more time. You talked about the regulatory response, which is due in June. Since your companies have come public, they’ve been under regulatory review or scrutiny by the government. I mean, again, there was, a lot of peer-to-peer lending companies and that was a business model that was pretty much outlawed. And for various reasons, there was some bad actors, okay? We go through the same thing in our country, where financial – loose financial structure can lead to disappointment among consumers. But you discussed that the survivability of your industry might even be at risk. I mean it seems to be you all provide an important service to consumers in the PRC, you’re allowing them credit.

You’re doing so in a very business-like fashion by capital-light type of structures where you’re syndicating the loans through a bunch of banks? You’re just providing the credit check, the credit review and the customers and the banks may loan the money for the most part and that’s good for the economy, because from what I understand, there’s an interest to grow the consumer base economy versus export-based economy in the PRC. So why would your industry be even at risk of survivability if you’re providing a service, I mean credit makes the world go around. It greases the wheels of commerce.

Frank Fuya Zheng: Yes, yes. I understand what you mean. I think I can answer that question. I think our industry has been going through a very tumultuous for the last few years. And our order – most bad actors has been playing like so called P2P peers and claimed by the company. I think all – everyone, including government will agree on this – the survival of this industry is much, much healthy and much comply everything in every respect comply with government rule and regulation on both – most Chinese side also report on U.S. also, but that definitely is true. But the issue is government, for the last two years government always try to strongly promote a small business owner a small business. That’s for sure. They are supporting for the companies that provide a loan.

But the only thing it’s not very clear is they seem like to provide very low interest loan from mostly state-owned banks, but our business model and mainly is based on risk factor, and we don’t make a ton of money. Our – into the spread we are – our business is compatible with big banks, but probably a little bit higher wider than them, but we also take more risk out. So that’s why I think that we target a little bit – on a little bit more in terms of interest spread, I think, it is fully justified. But that is not – probably that’s – the fundamental reason is not totally believe in those – by the government or regulatory – that question has still have made very clear or very clear for everyone. That is why – because we relatively speak to the people we charge still is – relative high.

If you see the so called loan provided to the small business, individual owner, whatever from government, they only charge about maybe 4%, 7% some in that range anyway. But once again, I think that is not based on – this effect. And if you ask you’re taking the risk factor those, loan I think is most of it will be bad. To be frank, I think I don’t know how that economically workable, but we do different model. Our model is not once again, not fully endorsed by the authorities, that’s why – yes.

Unidentified Analyst: Well, you have unsecured loans, if you’re having discussions with them, I can tell you what credit cards, which would be similar to how you loan money on an unsecured basis, credit cards in the United States, Bank of Americard, Citibank, American Express, they’re 23% or 4%, all right? And they got to be paid back every month or you got to pay that 23% or 4%. If I were to get a collateralized loan, a secured loan from a bank like a mortgage it would be 6%. So we just – as you said, it’s a different model. If I have a small business and I have cash flow, I can borrow against my receivables, right? But if I just want to borrow money on an unsecured basis, when I go to a restaurant or want to buy a laptop and I use a credit card, it’s 22% or 23% or 24%.

So your rates are not out of line by any means because credit cards, you still have to have a credit history and – to even get one. And if you haven’t in the past, paid it back, you can’t even get a credit card. So, you’re right. Your business model is different than when banks are loaning small businesses who they can loan against secured revenues? So in any case, I wish you the best. I’d love to see your – I mean your stock could be 10 times higher for Pete’s sake. If you make $4 a share, why wouldn’t it be trading at $25, okay by any measure, because that’s a financial institution has shown your track record of keeping loan losses down to like 1% I think you’re at. That’s very, very good credit assessment, all right? So whatever business model you have, whatever algorithm you have for assessing who to loan to and who not to is extremely good?

So – all right well, thank you for the time put out more news, please. And if you’re using AI or some sort of artificial intelligence computation to make your loans, make that known that you’re a technology company, okay, as much as a finance company. You use technology and you use it very effectively.

Frank Fuya Zheng: Thank you, thank you for the question and thank you for . Thanks.

Unidentified Analyst: I’ll let somebody else, if they are on the phone call in. Thank you.

Frank Fuya Zheng: Thank you.

Operator: Our next question comes from from Equinox Capital. Please go ahead.

Unidentified Analyst: Hi, thank you for taking my questions. I also wanted to focus on regulation, because I think that’s the primary issue here, that’s held back the valuation of the stock. And the discussions that you had with the regulators, what have been the primary concerns that they have with your business model?

Frank Fuya Zheng: We don’t have much regulatory dialogue with regulator regarding the business model. And mandatory sometimes just the only issue they care right now for the last three years. So it’s a customer complaint. And so, we are just the best – that’s their KPIs, the number one KPI. So, we do our best to address those issues. And other than – in other area we are – comply voluntarily. So, we frankly will never have a discussion with the regulator regarding our business model. I don’t think that’s their concern well this is not yet 30.10.

Kan Li: Let me take this question. I think Frank has been made it very clear. It’s not that we have a huge barrier, between us and the regulators. I think one of the key issues here is that the Chinese government has made it very clear that if you are doing the financial activities, then you need to be licensed. But in terms of licensing us – should we get a license or should we just be some other companies who should not be doing any financial activities. I think the regulator is balancing this one question, and they haven’t made it very clear. And this – and I think this uncertainty has been kind of tying over there. We don’t have any question – we don’t have any answers for that question. I mean this – I think this is a key issue between – for the fintech company in China, because that our business actually – the financial activities.

Frank Fuya Zheng: Yes, so we are engaged in financial activities as a facilitator as – indicated, what we call it. But the question is according to philosophy our government, all financial activities should be licensed and whether they will issue a license for a company like us, maybe not. So that probably is the key question.

Unidentified Analyst: Yes. I think everybody is having – I think they’re having a hard time understanding whether you should be regulated as a bank or not?

Frank Fuya Zheng: Yes, yes.

Unidentified Analyst: I mean like – you seem to be doing a fantastic job at managing the credit risk. And I think that’s also at least the regulators in the U.S. would be concerned about with the issues like – do you have a lot of undisclosed risk that’s not on your balance sheet. And I think that’s what some of the other competitors in the fintech space are beginning to address, which is they’re actually making more of the loans themselves. They’re going back to a capital-heavy model, which is where they’re actually holding the loans on their balance sheet? They’re not just facilitating the loans where you’ve got corporate or institutional partners that you have that are actually making the loans and they’re just taking the information that you’re giving them about the borrower and you’re basically – that’s what your model is based on facilitating those loans.

People just don’t know how to treat you. They’re worried that you’re helping to provide information without potentially any risk that you should be showing in your balance sheet. I think that’s probably the key issue here is – and how would you address that? Would you – I mean, you have – you do a lot of work with third-party guarantors. Have you analyzed their financials, because – and I know you do back-to-back guarantees. So you are, in effect, taking on the risk. But is it shown on your balance sheet? I think that’s probably the key issue here?

Kan Li: Well, in terms of our business model, we don’t show that in our balance sheet. I think that’s true. But on the other hand, if you just take a very crude leverage comps right? So we’re managing around RMB40 billion – sorry, RMB40 billion loan business, and our total – our net capital is around 60 – sorry $6 billion, so if we not – RMB6 billion. So if I take that – very rough ratio, it’s about 1 to 6 or 1 to 7, right, which in terms of the way that – the risk that we can handle, I think that the room over there is quite high. So what I will be looking at is – when we compare across the industry that I normally have to take a look at that ratio. And another thing is that just as Frank mentioned, we have about RMB2.7 billion deposit in different institutions.

And that is a model offer that we can use to offset any credit risk that is coming up. But in terms of our overall business that we are very – that we generate – various sales tax is low. So our company itself does not to need to take that much of a risk for our business. And another thing that you just mentioned that in terms of moving the balance from the, let’s say, banks or other financial institutions to our own balance sheet that – this is another dilemma that I cannot solve, because our company – have not directly issued loans, but other than the micro loan company that we own and that micro loan is under very heavy supervision. So, we can’t really offer a lot of loans to the company. So, some of the solution actually does not apply to our business here.

Unidentified Analyst: I mean, could you potentially partner or sell yourself to a larger financial institution that already has the proper licensing. I mean, there’s got to be a way for you to recognize the value that you’ve created here, because the market clearly doesn’t care.

Frank Fuya Zheng: I think that’s probably not actually, but as you say – since our model is not recognized by government through a license or through other kind of means. There’s no big institution in China will acquire us that kind of business, because in terms of the culture, in terms of compatibility between – our business and their business. I don’t think they are – the big financial guy in China will likely quite – at a valuation desirable for you guys. I think that’s highly unlikely.

Unidentified Analyst: Okay. Just one last housekeeping question about the tax rate, do you expect that rate to be consistent with what you reported in the first quarter going forward?

Frank Fuya Zheng: I think that – I answered that question before. I think – because most of the entity – our entity in China, we operate in China, is tax rate is about 15%. So we actually charge – U.S. tax rate is about 20%. That is being – there’s a way to being reconciled over the time. So I think once again, our effective tax rate will be below 25% on going forward basis and will be stabilized.

Unidentified Analyst: Okay. And in terms of that date of June 30, is that kind of like once you get past that date and there’s no – I mean, are you in the clear after June 30 or is there still going to be ongoing series of regulatory issues?

Frank Fuya Zheng: I don’t know, I don’t know. You know what I mean, we are not in the – even including to that 13 plus one, which is and financial. They are being marked to be regulated and first to ratification. We not even marked, but no one ever mentioned that 14 others, we are others. And all the work, I think the government I think is pretty much focused on – and end financial alone and financial in fact I write I know from the news as everybody they are basically finished. Then other 13, what they will do to comply fully, I think they will be. I don’t know – maybe just pass the magic stage June 30 will be, but we hope they all pass, they all pass – maybe a pass along, I don’t know, you asked me, but I’m not even in – the position to answer that type of question.

Unidentified Analyst: Okay, thank you very much for answering my questions, and good luck to you. Thanks.

Frank Fuya Zheng: Thank you very much.

Operator: There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Victoria Yu, for any closing remarks.

Victoria Yu: Okay. 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 our follow-up context. We look forward to speaking with you again in the near future. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.