China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2019-Q2

[Lily Li, executive]

Welcome to CDF's earnings review for the first 3 quarters of 2019 with our spokesperson, Mr. Richard Chang. And I'm Lily from the IR team at CDF.

Today's broadcast will consist of two parts. First, we will start with a 15-minute presentation followed by a question-and-answer session. Please follow the instruction at that time if you would like to raise any question. Today's presentation will begin with CDF's performance review, strategic highlights, followed by performance update of CDF's subsidiaries.

Now please turn to Page 5. Please note that all third quarter and third quarter year-to-date figures for 2019 in this presentation are all unaudited.

CDF has now evolved into a full-fledged business group with 4 business drivers coming together as 1. CDF posted net income of TWD 10.7 billion in the first 3 quarters of 2019, up significantly 26% on a Y-o-Y basis and exceeding net income of TWD 7.9 billion in 2018. With 4 core business drivers providing more balanced earnings sources, 31% of CDF's profit for the first 3 quarters came from China Life, followed by 26% from KGI Securities, 24% from KGI Bank and 18% from CCG.

CDF's net worth declined to TWD 159.2 billion or book value of TWD 10.97 per share as of the end of 2018 due to unrealized loss that has bounced back to TWD 181.4 billion as of the end of June 2019 and unaudited TWD 185 billion as of the end of September 2019. CDF celebrated its 60th corporate anniversary with 4 core business engines in full engines (sic) [ full swing ] and new blood recruited will lead business forward by optimizing business models and cultivating regional niche markets.

Next, China Life's net income reached TWD 13 billion in the first 3 quarters of 2019, up 23% on a Y-o-Y basis. Traditional, regular paid policies continued to strengthen and improve the value of new business. And China Life maintains a stable RBC ratio above 300%. As to KGI Bank, with a stable global market investment contributing to its core income, KGI Bank's net income reached TWD 2.9 billion in the first 3 quarters of 2019, up 15% on a Y-o-Y basis. And KGI Bank will continue to strengthen and optimize its fee income sources.

As to KGI Securities, with its solid market share and contribution from funds and other investments as a result of favorable market momentum, KGI Securities posted net income of TWD 4.6 billion in the first 3 quarters in 2019, up 26% on a Y-o-Y basis. It's worth mentioning that its subsidiary, KGI SITE, has initiated a transformation plan since last March and witnessed its AUM growing by leaps and bounds at 1,502% from December 31, 2017, to reach TWD 150 billion as of September 30 this year and making it the top 10 for the first time.

Also our technology-driven trading solutions has been our high priority. CDF's subsidiary, KGI Asia and SogoTrade, a leading U.S. digital brokerage, launched a strategic international partnership in August this year. KGI Securities' clients will have the ability to easily trade stock options or other innovative products on American and Asian exchanges by using Sogo's wealth management tools and robo-advisory services.

Last but not least, CDIB Capital Group posted net income of TWD 2.15 billion in the first 3 quarters of 2019. CCG's principal investment stood at TWD 32.7 billion while private equity AUM reached TWD 41.1 billion as of the end of September 2019 with multiple forward-looking thematic funds in the pipeline.

More specifically, please turn to Page 6. The chart on the left-hand side shows CDF's net income of TWD 10.7 billion in the first 3 quarters of 2019, up 26% on a Y-o-Y basis while the chart on the right-hand side shows a more balanced profit contribution among the 4 profit engines in the third quarter of 2019. As a result, Page 7 shows that CDF's net income, earnings per share, ROA and ROE have all improved.

Please turn to Page 8. The chart on the left-hand side shows that profit of CCG, KGI Bank and KGI Securities in 2018 declined on a Y-o-Y basis primarily due to global financial market volatility in the second half of last year. The chart on the right-hand side shows that CDF's subsidiaries have all resumed profitability this year, thanks to a more favorable market momentum, except that CCG's net income slightly declined primarily due to adverse market valuation.

Page 9 shows solid capital structure of CDF and its subsidiaries. More specifically, as of June 30 this year, CDF's double leverage ratio reduced to 114.6%. KGI Securities reported a capital adequacy ratio of 321% and KGI Bank reported a BIS ratio of 14.2%, both well above the regulatory requirement.

CDF has rolled out strategic initiatives for its future growth. And Page 10 reviews the progress. Regarding our goal to leverage group resources to boost synergies, cross-selling performance has been reviewed on a quarterly basis and linked with top management's KPI with teamwork and cross-selling being embedded within our corporate DNA. Just take KGI Bank's credit card and personal loans referred by China Life and KGI Securities, for example.

The upper chart shows that the referral program among subsidiaries has obviously started to bear fruit. Regarding our goal to foster asset management brand and expand portfolio scale, CCG and KGI SITE have been capitalizing on group resources to scale up the size of their fund management portfolio. And the lower chart show that KGI SITE expanded its product line to cater to customers' needs and witnessed a phenomenal growth in AUM to TWD 150 billion as of September 30 this year, up 624% on a Y-o-Y basis while CCG's [ 10 ] PE funds registered AUM of TWD 41.1 billion as of September 30 this year.

Page 8 (sic) [ Page 11 ] summarizes CDF's sustainability efforts and achievements. Since socially responsible investments, or the so-called SRIs, have become a prevailing investment strategy, CDF makes a great effort to promote sustainable development. And our progress has earned increased recognition. For example, on the environmental front, CCG, KGI Bank and KGI Securities have all increased either green investment or green finance to enhance sustainability. In particular, KGI Bank is one of the consortium members to finance the first solar plant and the first floating solar panel in Taiwan.

On the social front in particular, CDIB Capital Innovation Accelerator is dedicated to becoming a start-up platform and led a team of Taiwanese startups to visit top enterprises in Japan in June this year. And our first trip was highly rewarding. In addition, on the corporate governance front, our efforts to promote gender equality in government can be evidenced by the fact that 2 of CDF's 4 major subsidiaries are headed by female presidents. And CDF's achievement was evidenced by its inclusion in several ESG indices and improved scores in major international and domestic sustainability surveys, which all helped raise CDF's visibility on the global stage and attract more long-term investors.

Now please turn to Page 13. China Life posted net profit of TWD 13 billion in the first 3 quarters this year, up 23% on a Y-o-Y basis and continued to maintain positive spread. Page 14 show that China Life maintained solid capital level. And its shareholders' equity was boosted by the rebound of unrealized gains. Please note that third quarter and third quarter year-to-date figures this year are all unaudited.

Page 15 shows that China Life continues to promote traditional and regular premium products to enhance new business value and long-term embedded value. And Page 16 is a snapshot of China Life's strategic initiatives for your quick review. In general, China Life delivered solid growth and will strengthen its digital transformation as well as cross-selling performance.

Now let's move on to Page 18 for KGI Bank's overview. The chart on the left-hand side shows that the expansion of KGI Bank's total assets slowed down somewhat in 2019, but the overall asset allocation is more optimized to focus on yield rather than growth alone. And the chart on the right-hand side show that global markets has resumed profitability this year.

Please turn to Page 19. The chart on the left-hand side show that KGI Bank's total loans grew 6% on a Y-o-Y basis in the first 9 months this year. Although corporate loans accounted for 60% of total loans, SME is the fastest-growing section and would lay the foundation for cross-selling wealth management products to increase fee income. The right-hand side chart show that total deposits declined 4% on a Y-o-Y basis for the first 9 months this year primarily due to the realignment of the deposit structure with demand deposits growing the fastest to reduce the funding cost, which was supported by our cross-selling efforts and expanding product lines.

Please turn to Page 20. The chart on the left show that with strong risk discipline, KGI Bank has maintained a stable NPL ratio, which has also been lower than its industry average. And the chart on the right-hand side show that KGI Bank has maintained a solid and higher-than-average NPL loan coverage ratio.

Please now turn to Page 21 to review the fee income. The chart on the left show that loan fees have been the fastest-growing area for the first 3 quarters this year. Wealth management accounted for 60% of KGI Bank's fee income while the chart on the right-hand side show that shifting composition with bond and structured products growing the fastest.

And Page 22 illustrates KGI Bank's fintech strategy to deliver more real-time client-driven services. Internally, KGI Bank has been optimizing its systems and pilot-testing its digital platforms for core products with profit potential. And successful pilot programs can be applied more broadly across various products and expanded through strategic alliances. Page 23 outlines KGI Bank's customer-centric and value-oriented strategies in 2020 to focus on better efficiency, lower funding costs and higher asset yield, all aiming to increase its ROE.

As to our KGI Securities, please turn to Page 25 for the 4 pillars of KGI Securities' strategy. First of all, KGI Securities pursues further growth opportunities in our client investment business by improving content, value and efficiency of our existing retail brokerage network, selectively targeting high net worth client base and tapping into new generation as well as seizing on the momentum in KGI SITE to assist institutional and retail clients in more challenging markets.

Secondly, KGI Securities defends its Taiwan market position by enhancing client segmentation, catering to our dominant client needs and leveraging internal synergies to deliver efficient services. Thirdly, KGI Securities will rationalize its regional footprint to complement Taiwan and add revenue diversification through -- by exporting Taiwan best practices and growing local franchises where we can compete. And of course, we will continue to enhance our infrastructure to meet changes in trading mechanism and client needs.

Please turn to Page 26. Although brokerage business has been providing a stable recurring income sources, accounting for about 76% of KGI Securities' revenue for the first 3 quarters this year, as shown in the upper left-hand side chart, the share of wealth management has been increasing from 10% in 2015 to 24% as of September 30, 2019.

And the upper right chart shows that KGI Securities has been transforming its traditional brokerage business, aiming to become a wealth management service provider with wealth management AUM increasing to TWD 108.1 billion as of the end of September this year in Taiwan. The lower left chart shows that major asset classes of KGI SITE all ranked high among its peers. Also the lower right-hand chart shows that KGI SITE's AUM has been growing phenomenally to hit a record-high of TWD 150 billion as of the end of September this year.

Page 27 show that KGI Securities continue to top local peers in all areas of business performance, including brokerage and wealth management, investment banking and global markets. Page 28 highlights that KGI Securities' overseas operations generated 21% of KGI Securities' total profit for the first 3 quarters of 2019 and will continue to complement securities business in Taiwan. In summary, looking forward, KGI Securities will continue to rationalize its regional footprint, defend its dominant Taiwan market position, grow client investment business and invest in technology, as shown in Page 29.

Now let's move on to Page 31 for CCG's strategic planning for 2020. Echoing CDF's strategy to monetize assets and reallocate capital, CCG continues to monetize principal investments and noncore assets with cash proceeds reaching TWD 2.1 billion in the first 3 quarters this year. On the other hand, CCG's PE fund AUM has been fast-growing and registered TWD 41.1 billion as of the end of September this year with multiple forward-looking thematic funds in the pipeline to further increase AUM.

For example, in addition to Global Opportunities Fund and CDIB Yida Healthcare Fund just closed in September this year, CCG has been raising AI funds and other NT dollar health care funds this year. Page 32 summarizes that CCG will also increase its dry powder for its funds to capitalize on investment opportunities. Most importantly, CCG recruited several seasoned industry veterans to lead the next growth cycle.

Please turn to Page 33 to review CCG's performance. The upper left chart show that CCG's AUM stood at TWD 41.1 billion as of the end of September this year with recurring management fees increasing in line with AUM as shown in the upper right chart while the lower left chart shows CCG continues to generate cash proceeds from asset monetization. And the lower right chart shows that CCG's direct investment balance has been decreasing due to its asset monetization strategy.

And Page 34 shows that our asset management portfolio covers the entire spectrum of investing, including 4 NT dollar-denominated bonds in green, 3 U.S. dollar-denominated funds in blue and 2 renminbi-denominated funds in red, already established to focus on different regions and investment stages. And the lighter colored area in each fund indicates the dry powder for your quick reference. And pies in dotted lines are still in fundraising process.

This concludes today's presentation session. And now we begin the question-and-answer session. [Operator Instructions]

As there is no further question, we thank you for your participation in our webcast conference. There will be a webcast replay within an hour. Please visit www.cdibh.com under the Investor Relations section. You may now disconnect. Thank you again and goodbye.