China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2020-Q2

[Lily Li, executive]

Welcome to CDF's performance review for the first half of 2020, with our spokesperson, Mr. Richard Chang, and I'm Lily of the IR team at CDF.

Before we get started, I would like to remind you that CDF has not published its audited quarterly financial statements, and therefore, information disclosed in this presentation is unaudited and subject to revision upon completion of CDF's audit process.

I will take you through the earnings presentation, which is available for download on our website. Afterwards, we will be happy to take your questions. [Operator Instructions] Today's presentation will begin with CDF's performance review, followed by updates of our subsidiaries, that is China Life, KGI Bank, KGI Securities and CDIB Capital Group.

Starting on Page 5 for a quick performance review of the first half of 2020. Global capital markets have been recovering as economies reopen and central banks worldwide take proactive stance amidst global easing. CDF's unaudited net income rebounded to TWD 3,524 million in the second quarter of 2020, bringing net income to TWD 3,036 million for the first half of 2020.

For the first half of 2020, China Life was still CDF's largest profit contributor for TWD 2,211 million, followed by TWD 1,722 million from KGI Bank and TWD 1,710 million from KGI Securities. CDIB Capital Group was the only subsidiary posting net loss of TWD 1,462 million for the first half of 2020 primarily resulting from unrealized mark-to-market valuation loss of some international investments. It is worth mentioning that CDF reported preliminary July net income of TWD 2,263 million, the highest in 2020 so far and bringing January to July earnings to TWD 5,300 million as global capital markets extended the momentum on the back of monetary easing, along with fiscal stimulus programs. More importantly, CDIB Capital Group's July profit of TWD 141 million, albeit a slight gain, put it back in the black narrowing January to July net loss to TWD 1,321 million.

The pandemic has a grip on the economy, and it doesn't seem likely to loosen until vaccines are widely available. We'll keep managing through this with a sharp emphasis on our risk management. We did observe that global financial markets have gradually got back on track since April this year. However, we continue to thoroughly review the credit quality of our loan and investment portfolio and have further tightened our already prudent risk management by increasing the frequency of monitoring and evaluating the economic impact of COVID-19 on our profit and net worth as well as conducting stress tests for stricter supervision of our Board and Risk Management Committee. In addition, CDF's commitment to ESG responsibilities is evidenced by it being again ranked among the top 5% in the 6th Corporate Governance Evaluation System announced in April.

Regarding each subsidiary's performance. Driven by its product mix enhancement strategy, China Life continued to deliver resilient net income of TWD 8,003 million for the first half of 2020, of which CDF recognized TWD 2,211 million. As to the status of CDF's further acquisition of China Life, the management team reported a preliminary plan to the Board just recently and has been refining the action plan accordingly and will report such plan to the Board and FSC as required.

As to KGI Bank, its core net revenue continued to show steady growth, while global markets' net income has resumed momentum in the second quarter. Also, with solid capital structure and sound asset quality, KGI Bank continues to optimize its loan and deposit structure to lower its funding cost and enhance yield.

As to KGI Securities, its profit rebounded in the second quarter on increased brokerage and investment revenue in spite of financial fluctuations and FINI Taiex sell-off. In addition to strengthening risk management, KGI Securities will continue to rationalize its regional footprint to complement Taiwan and add revenue diversification as well as grasping opportunities amidst COVID-19 storm. It is worth mentioning that its subsidiary, KGI SITE had TWD 182.3 billion in AUM, up 42% on a Y-o-Y basis and ranked seventh among peers as of the end of July.

Last but not least, CDIB Capital Group posted net loss of TWD 1,462 million for the first half of 2020 primarily resulting from the unrealized mark-to-market valuation loss of some international investments. However, as mentioned earlier, its loss in the first quarter this year has turned into slight gains in the second quarter and therefore, generative unrealized mark-to-market loss has gradually narrowed in the second quarter of 2020. We anticipate such investment valuation should pick up as global capital markets recover from previous down swings.

Also, with investment valuations coming down as well as small and mid-sized venture capitals exiting the market, CDIB Capital Group is actually in a better position to engage targets at more reasonable prices. In addition, following CDF's capital reallocation plan, CDIB Capital Group continues to monetize its direct investments to less than 20% of CDF's net worth as of the end of the second quarter.

Also, upon its recent Board approval to launch a public tender for the CDF headquarters building, the management team has been working on necessary details to carry out the plan as scheduled. On the other hand, CDIB Capital Group's private equity AUM reached TWD 369 billion as of the end of the second quarter this year, with multiple forward-looking thematic funds in the pipeline.

Above all, we evaluate that the biomedicine industry will take center stage again in the post COVID-19 era. With biomedicine-related investment in excess of TWD 10 billion, CDIB Capital Group will actively established a cross-strait biomedicine investment ecosystem to aid Taiwan's biomedicine industry in raising international capital, cultivating tailwinds as well as integrating into the international biomedicine community.

More specifically, please turn to Slide 6. The chart shows CDF's net income of TWD 3,524 million in the second quarter of 2020, with KGI Securities being the largest profit contributor, while Slide 7 shows CDF's net income of TWD 3,036 million for the first half of 2020, with China Life being the largest profit contributor.

Now please turn to Slide 9. China Life continues to deliver solid growth with net income of TWD 8 billion for the first half of 2020, up 7% on a Y-o-Y basis.

Please turn to Page 10. As China Life continues to promote traditional and regular premium products to enhance new business value, regular premium traditional products accounted for 37% of FYP for the first half of 2020, boosting VNB margin to 30%.

Now let's move on to Slide 13 for KGI Bank's net revenue. KGI Bank maintained steady growth of 5% in its core net revenue for the first half of 2020, while its loss from trading in the first quarter this year has turned into gains in the second quarter.

The chart on the left side on Slide 14 show that demand deposit increased to a 3-year high of 47% on a Y-o-Y basis to reduce the funding costs primarily due to the realignment of deposit structure with our cross-selling efforts and expanding product line to take advantage of the current ample liquidity, while the chart on the right show that the loan growth has been moderate, mainly due to KGI Bank's strategy to optimize its loan portfolio by focusing on yield enhancement rather than growth alone. SME is a fastest-growing section and would lay the foundation for cross-selling wealth management products to further increase fee income.

As a result, the chart on the left-hand side of Slide 15 shows that KGI Bank managed to improve both interest spread and NIM for the first half of 2020, while the chart on the right-hand side show that through prudent risk management, KGI Bank maintained a stable NPL ratio of 0.16% as of the end of the second quarter this year, much lower than the peer average of 0.25%.

As to KGI Securities, Slide 18 shows that brokerage business remain KGI Securities' major income source for the first half of this year, while net investment income rebounded significantly in the second quarter.

Please turn to Slide 23. It is worth mentioning that its subsidiary, KGI SITE, posted AUM of TWD 182.3 billion as of the end of July, up 42% on a Y-o-Y basis and ranking seventh among its peers.

Now let's move on to Slide 25 for CDIB Capital Group. Echoing CDF's strategy to monetize assets and reallocate capital, CDIB Capital Group's principal investments continued to decline to a TWD 27.8 billion as of the end of the second quarter this year, as shown on the page on the right-hand side. On the other hand, our PE fund AUM registered TWD 36.9 billion as of the end of the second quarter of 2020, with multiple forward-looking thematic funds in the pipeline to further increase AUM.

Next, Page 26 show that our asset management portfolio covers the entire spectrum of investing, including 4 NT dollar-denominated funds, 4 U.S. dollar-denominated funds and 3 renminbi-denominated funds already established to focus on different regions and investment stages. This table summarizes fund size, vintage year, our shareholding of the 11 funds under our management for your quick review.

This concludes my presentation session, and now we begin the question-and-answer session. [Operator Instructions]

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. And if you have any further questions, please feel free to contact our IR team.

You may now disconnect. Thank you again, and goodbye.