China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2021-Q2

[Richard Chang, executive]

[Audio Gap]

[Interpreted] Development Financial Corporation performance review. I am the representative of CDF. My name is Richard Chang.

We will start with our CEO, Mr. Steve Bertamini, to give you some of the performance highlights of the holdings. We will also have the CEO of different subsidiaries to give you the highlights of their operation execution. We will also invite our Chief Financial Officer to give an overview of the performance. Lastly, we will also go to the Q&A session.

Here, I would like to remind you, because we haven't announced the CPA-audited statements, therefore, here, the figures in the presentation will be for reference only. If there are any questions regarding to the description or the explanation of the presentation, you may leave your name, your company's name and your questions on the website. We will answer them one by one.

Now we will invite Mr. Steve Bertamini to give you the 1H '21 performance highlights.

[Steve Bertamini, executive]

[Foreign Language] Good afternoon, everyone, and good morning. Thank you very much for joining us today.

As you know, we had a very good start to 2021. We had record net income of TWD 17 billion, which is up 460% on the same period last year. We're also the first listed non-state institution to form a partnership with Microsoft to help us accelerate our digitization, including moving to a hybrid cloud and also working with agile teams. As you'll see in a moment, our ABC strategy (sic) [ ABCDE strategy ] execution is also underway, and we're tracking well on both financial and nonfinancial KPIs. [Foreign Language]

Fund net income was up 107% to TWD 16.5 billion. Also, they continue to maintain a positive spread and further saw a decrease in the cost of liabilities to below 3%. [Foreign Language]

We sell insurance through facial recognition, which is also one of the first in the industry. [Foreign Language]

In terms of KGI Bank, they also had a very good first half. Net income was up 27% up to $2.3 billion. [Foreign Language]

Also, the NIMs were up 17 basis points, and we saw growth in demand deposits of 24% year-on-year. [Foreign Language]

Wealth management fees also saw an increase of 13% year-on-year. [Foreign Language]

CDIB Capital also had a very good first half with net income up to $2.7 billion. [Foreign Language]

This was driven by recovering valuations and compared to a negative result last year. [Foreign Language]

We also expect the assets under management to reach $50 billion with Kunshan Taiwan Fund and also the InnoLux Fund that should be closed by the third quarter of this year. [Foreign Language]

And as you can see from our results, we also continued to reallocate capital to improve ROEs. And we have 2 new funds that are launching, private credit and our leveraged buyout fund, where fundraising is currently underway. [Foreign Language]

KGI Securities also had an excellent first half with net income up 195% to $7.1 billion and strong momentum across all business lines. [Foreign Language]

We also saw very strong growth in our overseas subsidiary, up almost 100%, driven by KGI Thailand record first half performance. [Foreign Language]

We maintained our #1 position in ECM and also achieved a 30% growth in our brokerage market share, reaching a record of 10.5%. [Foreign Language]

If you turn to the next page, I want to give you a brief update on our ABCDE strategy. [Foreign Language]

I'll only highlight a few comments in each because, today, you're going to get directly from our presidents on the progress we're making on the strategy in each one of their businesses. [Foreign Language]

As you know, for accelerate digital, our goal is to be the best in the market. [Foreign Language]

We continue to build partnerships and alliances to build our ecosystems and are also making very good progress on digitizing our journeys and leading in innovation. [Foreign Language]

One of the key areas on becoming employer of choice, besides ensuring we keep our staff safe, is to empower them to help them simplify processes. [Foreign Language]

We've made a lot of progress recently in digitizing our processes to make it a lot easier and more efficient for us to do approvals internally. [Foreign Language]

For customer focus, we've now installed NPS at both China Life and the bank. And also, securities is beginning to measure NPS from their customers. [Foreign Language]

Our goal in driving growth is to exceed the industry metrics. And I think as you'll see through our results, we did very well during the first half of the year. [Foreign Language]

We're making very good progress on enhancing our [ MIS ] to help us in acquisition, retention and customer engagement. [Foreign Language]

And in terms of execution excellence, our teams have continued to do a great job in ESG and also enhancing our IT infrastructure. [Foreign Language]

We have a very clear strategy in place and a great team. We're very excited about the future.

And I'm now going to turn it over to Stephanie to update you on the progress that we've made in China Life. [Foreign Language]

[Richard Chang, executive]

[Interpreted] Thank you, Steve. Now the CEO of China Life, Stephanie Hwang, will give you an overview of our highlights in the ABCDE strategy.

[Stephanie Hwang, executive]

[Interpreted] Please move to Slide 8. The 5 aspects are the key to our development as well as the ABCDE strategy also connects with our staff's KPIs.

First, the China Life has launched its facial recognition to purchase insurance. It is the first among the industry to launch this service and use facial recognition to verify customers' identity. Agent does not mean to face-to-face interact with the customers. Instead, they can do it remotely. Such way of operations could reduce the risk of contact. It can also help us very efficiently complete insurance purchasing. Our agents as well as our customers are giving positive feedback for this service.

Also, I would like to talk about the protection-based products. For a long time, China Life has been promoting protection-based products. And amid of the pandemic, actually, customers' risk awareness are rising. They are seeking more and more protection in terms of insurance. So China Life is solidifying its protection-based product line and its business. In the 2021, long-term life insurance and health insurance sales are continuing to grow. Comparing to Q1, Q2 grew 6 -- 56%.

And for execution excellence, we implement ESG. China Life pays extra attention to the risk of climate change. We have already become the supporter of TCFD. We disclosed the climate-related risks and opportunities in our governance report. We have also demonstrated such results by entrusting the British Standards Institution to do the third-party verification, and we have been granted with the highest level of approval in their assessment. China Life will continue to implement risk management and carbon reduction by upholding to this structure.

Now I will move on to KGI Bank.

[Amy Tsao, executive]

[Interpreted] Hello, everyone. I would like to share with you the bank's -- the ABCDE strategy on the bank side.

For accelerate digital, we have collaborated with Ruten and Pi Technology on a loan product. And we have been granted an award of best product innovation. I'm not sure if you remember, last year, we actually collaborated with Taiwan Taxi and won the same award. We are happy that our staff are able to break -- make a breakthrough on theirselves -- on themselves. And then this actually embody we have internalized the innovation in our gene.

And for becoming a best employer, in the past 2 months, when people are working from home, we have held a lot of online learning and sharing opportunities. A lot of staff gave a feedback about having a very fulfilling time, and they have -- their morale have also been boosted. And at the later stage, actually, a lot of the online learning are initiated by our own staff. Our training hour has increased 105% comparing to last year. And in July, we have already launched our straight-through system for credit. It has been 8 months since we devoted ourselves into the project. From customer interface to the verification and to draw-down, the entire process has been shortened with 50% of processing time. We hope that we can bring customers a more friendly and more flexible experience.

For China, the China Suyin KGI Consumer Finance has obtained its license in March. And because the policies in China will be favorable next year, we will increase capital and also enhance our operational abilities. And this is our achievement and breakthrough.

And in May, with the approval of the Taipei Exchange, we issued $700 million of CSR bonds. Andin 2017, we issued green bonds. And this year, we are committed to promoting CSR as a sustainable operation. And the funds will be used to aid medical resources and micro enterprises as well as provide microloans for financially disadvantaged groups as well as skilled technicians.

And this is ABCDE from the KGIB.

[William Ho, executive]

[Interpreted] I am William Ho from CDIB, and I will go through the ABCDE of CDIB in 2021.

For accelerate digital, we have automate the approval process, and all the process have been [ digital ].

For become employer of choice, we initiated investment with employees. And yes, most of our employees participated in the scheme. And this will increase the engagement of our employees. And we also help the company to improve corporate governance for our investees, and we always help them with talent recruitment and help their companies to grow.

To drive growth, we launched 2 funds, 1 in Kunshan and 1 in Linux (sic) [ InnoLux ]. And in the third quarter, the AUM will increase to TWD 5 billion. To improve returns, we optimize our asset allocation, and we want to improve ROE as well.

For ESG, ESG is one of the important factors when we are selecting investments. And we look at ESG investment factors when we are making investment decisions. And finally, we hope to increase our fund size to become one of the leading fund houses in Asia.

And I will pass the floor to KGI Securities.

[William Fang, executive]

[Interpreted] Ladies and gentlemen, good afternoon. I am William Fang from KGI Securities, and I'd like to share with you our progress on ABCDE's 5 strategies and the expectation of the strategies.

For accelerate digital, we focus on digital transformation by introducing AI-powered chatbots in our online platform, offering 24/7 services to KGIS clients, especially the younger generations, so that we can provide answers to them as soon as possible and help them overcome investment difficulties. And we will launch 3-in-1 online account openings soon, enabling customers to open accounts online. They don't have to go to branches. They can open accounts for wealth management, [ TW ] stocks and the brokerage. It's very convenient and rapid.

And we also established a task force to optimize online customer experience to create a streamlined and intuitive interface to attract young clients. [ And then their accounts ] will be introduced to shorten the opening -- the time for opening an account down to 5 minutes.

For become employer of choice, we focus on prevention. We would like to reduce and prevent any risks that can cause occupation hazards. And we are certified by ISO 40001 (sic) [ ISO 45001 ] to become one of the companies that obtain the certification across the futures and securities business lines in Taiwan. Therefore, we are committed to ensuring the health and safety of customers actively.

For customer focus, we focus on providing quality products and services for customers and would like to meet their demand by providing HK stock and U.S. stock top picks reports. And our clients will be able to acquire professional insights into U.S.A. and Hong Kong stocks and see overseas opportunities. And also, they can -- we can seize opportunities by providing products for our clients. And KGI SITE has launched products of this nature, and we will continue to provide new products to enrich our product lines.

And to create a customer-focused corporate culture, we collect customer feedback and deepen our relations with customers. In May, we verified the concept of NPS, and the NPS will be introduced officially in the later half.

For drive growth, we are committed to increasing the return. And the AUM has increased to TWD 351 billion.

For execution excellence, we have continued to optimize our operational workflows and increase the efficiency at back end. The RPA will offer or increase the efficiency by 67%. And more RPAs will go live in the later half to optimize our operational efficiency.

And these are my updates. And I'll pass the floor to Jenny, our CFO.

[Jenny Huang, executive]

[Interpreted] Thank you, William. I'd like to share with you CDF's 1H 2021 financial performance.

Please look at Page 13. From this slide, you can see that China Life contributed TWD 7.6 billion to CDF net profit, followed by KGI Securities accounting for 31%; and by TWD 2.2 billion by KGI Bank. And from the lower chart, you can see that compared to the same period last year, we had a significant growth from investment income from China Life due to its profit growth. And also in February, we completed the tender offer of China Life. So our shareholding has increased to 56%. And from other subsidiaries also contributed more compared to the same period last year.

Page 14. This slide shows the total asset and liability. From the upper chart, you can see the total aggregate assets increased by 9% to $3.5 trillion. And this is reflected in the following presentation by the presidents of subsidiaries, where financial assets increased by 4.5%, 3% for discounts and loans, 4.8% for deposits and remittances and 7.1% for provisions.

Page 15. This slide shows that CDF has been accelerating recapitalization to improve returns. From the upper left, we can see over the past 5 years the total assets increased by 40% and from the low -- upper right, the leverage ratio increased to 11.3x. And from the lower right, you can see the ROAE remained approximately 7%, but the number in the first half increased to 15.8%.

Page 16. You can see from this slide that CDF and its subsidiaries remained very good capital position in terms of leverage ratio and RBC. KGIB, here, I would like to bring your attention to, by the end of June, its number increased to 249% -- 245% due to [ a turn in market ] and higher transaction volume. And they also contribute [ dividend ] to CDF. [ This can ] have some impact. However, that remains very robust.

This is my presentation, and I'd like to pass the floor to Stephanie Hwang, President of China Life.

[Stephanie Hwang, executive]

[Interpreted] Thank you, Jenny.

Please turn to Page 18. China Life, I will update you the China Life profitability in the first half. Due to our well management of investment, our net income reached $16.5 billion, up from -- 107% year-on-year. And the total net worth increased to $107.6 billion (sic) [ $170.6 billion ].

Let's look at interest rates. The yield of U.S. 10-year bonds increased from 0.92% to [ 1.647% ]. And due to the increase in the yield, the valuation have been impacted, so the net worth decreased. And the RBC of China Life, we've maintained at more than 300%, so it's quite robust.

[ And due to our focus on profitability, ] the ROE of the first half reached 18.88%. And the EPS reached $3.49.

Please look at Page 19. Let's look at FYP in the later -- in the first half. It increased by 30% year-on-year after May due to the pandemic. We did suffer a slight decrease in the momentum for FYP. And we -- however, we are glad to report to you that in the second quarter, the percentage of regular-pay products increased to 20%. And the premium of that renewal, compared to the same period of last year, the renewal premium decreased in the industry. And also, that is reflected in the number of China Life due to the fact that, from 2017 to 2019, the short term -- the policy is going to mature soon. So China Life is going through transformation to promote long-term regular-pay products to increase the contribution of this product are [ valued ].

Let's look at asset and liabilities. We maintain positive spread. The cost of life, OL -- COL, stands at 2.99%. And the distribution channel, we maintain a balanced development, and we are committed to promoting regular-pay products for FYP product mix. In response to customers' demand, we increased the sales of our unit-linked products. For our product strategy, high-margin regular-pay products remain the core of our strategy.

Next, we move on to Amy from KGIB.

[Amy Tsao, executive]

[Interpreted] The net income from KGIB has grown 27% year-on-year. And the peer average growth is 10%. Our profit majorly come from lowering the cost of funds and increasing our revenue. And you can see it reflected in our net income -- net interest income. And our demand deposit is also -- has also grown compared to last year. Although this year, the wealth management fee has been impacted by the pandemic, but we have still grown 13% compared to last year.

Looking forward, we hope that the pandemic will be eased, and we will also prepare ourselves to adjust to any fluctuation in the market.

[William Ho, executive]

[Interpreted] I will now talk about the profitability of CDIB Capital. For net income, we have grown drastically this year. This is because the great performance of Taiwan and U.S. stock markets because of the situation of COVID has improved. If we look at the upper left chart, we have gained more than $1 billion. And in the first half, our net income has achieved $2.7 billion. And from the upper right chart, it also show a very decent ROE in the last 2 quarters, much higher than the previous quarters and our targeted returns.

And for the lower-left chart, it show us our gradually increasing total assets. We have been divesting our legacy assets and also realized some good gains in some recent exits. At the same time, we also booked several new investments in leveraged buyouts and private credit. These new investments, we hope, through them, we can warehouse to help us in raising new funds in the coming years.

And the lower-right chart, you can see our ROE also increased slightly. This is also mainly from the gains we booked in the last 2 quarters.

Now we can look at Page 27. As CDIB has transitioned itself into an asset management model, we have lowered our principal investment and monetized our legacy portfolio. And we are accelerating the monetization. Since 2017, CDIB Capital has become a cash cow for the group and have upstreamed $31.5 billion to CDF.

On the upper chart, it show us the AUM. It has increased from $35 billion to $44.7 billion. By the end of this year, we will reach $50 billion. We hope that next year, we can launch the leveraged buyout and the 2 funds we launched. We shall continue to also grow the AUM overseas.

From the upper chart and our -- in the first half of the year, because of the good performance of the listed companies and we have also gained good achievement in leveraged buyout and credit, that was the result.

And now I will pass it over to William Fang from KGI Securities.

[William Fang, executive]

[Interpreted] Now I will go through very quickly over the profitability of KGIS.

From Page 29, from the upper-left chart, we can see the performance in the first -- in the previous 5 quarters. And by this quarter, the net income is TWD 2.97 billion (sic) [ TWD 2.907 billion ], up 24%. And the net profit in 1H '21 was TWD 7.1 billion with a year-on-year growth of 195%. And for the overseas profit, which takes up around 12.8%, it has contributed TWD 900 million to our profit. And for our ROE performance, the first half of the year is 19.8%, which is the highest in the past 5 years. And the trend is still going upward.

And comparing to our peers, the KGIS ROE is actually greater than that of our peers. And for customer AUM, we have reached TWD 351 billion in Q2. It is a 29% increase quarter-on-quarter.

And for this stage, you can see our net operating revenue was TWD 5.1 billion, which is an increase of 47%. And for the lower left, our -- the increase from the same quarter last year was mainly attributable to the hot market and the increase in trading volume and brokerage market share in 2Q '21. Net operating revenue of brokerage business has grown significantly. And because in Q2, the Taiwanese market is being impacted by the outbreak of the pandemic, we are seeing that the net investment income has decreased due to such volatility.

And you can look at the lower right. The net operating revenue in 1H '21 is TWD 10.26 billion, which is up 120% year-on-year, which -- it shows that we have grown in brokerage onto underwriting, interest and investment income.

And I would also like to tell you KGI Securities maintains its top-2 market position in the industry. Our underwriting market share is #1. And for our equity underwriting is #2, and market -- SBL market share is also #2. And the SITE market fund AUM is TWD 188.6 billion, which is ranked #8.

Okay. That's it for my part. I will now pass it over to our representative.

[Richard Chang, executive]

[Interpreted] That is a brief overview of all of the profitability of all our subsidiaries.

[Richard Chang, executive]

[Interpreted] [Operator Instructions] We have received several questions. I think everyone is interested in our new building and have asked about relative questions. One of the question asks about the moving schedule to the new building as well as the settlement schedule for the old building. There is also a question about the recognition of the amount sold. Is it going to be the same? And there's also -- is there any impact from the recognition of such revenue to next year's dividend?

So I will hand over the -- hand over to Jenny for the answer regarding to the new building. There has also been a question about the acquisition time line for China Life. This part, I will also ask Jenny to help us explain.

[Jenny Huang, executive]

[Interpreted] For the CDF building, the relative schedule is actually the same. We plan to disclose the amount of the -- both from the new -- old building in Q3.

For China Life, the next phase, because the regulator has gave us a goal, it helps us to complete the acquisition by the end of next June. We hope that this can be done in accordance to the mandate from the regulator. We will look into the shareholders' rights for both CDF and China Life as well as a robust financial performance to fund the acquisition for the next phase.

As for the dividend, I think China Life -- CDF is maintaining a very stable dividend policy. Under such circumstances, we also need to look into possible capital required for future business development. So that's it for my answer.

[Richard Chang, executive]

[Interpreted] And next question from our investor, are there any ROE targets in the midterm as earnings at China Life, KGI and CDIB Capital could be very volatile subject to market conditions? How could we improve the earnings stabilities to reward shareholders with more steady returns? What is the reason behind the material increase in operating expenses at FHC level in Slide 13?

[Steve Bertamini, executive]

Our goal is to become a top-5 financial services company in Taiwan in terms of ROE. And as you can see, at least during the first half of this year, we managed to stay in line with that. Obviously, the returns this year were boosted pretty much across the industry by high volatility and high volume in the market, but we've managed to position ourselves and capitalize well on that.

Our goal is obviously also to maintain steady earnings growth. And as hopefully you can see, we continue to do a good job of allocating our capital where we think we can use it the most efficiently and also for the best returns. [Foreign Language]

Regarding the reason for the higher expenses during the first half of this year versus last year, that's driven primarily by 2 things. The first is we are investing at a much higher pace than we did in the past in areas such as digital analytics, systems and marketing. [Foreign Language]

And also in terms of the much better performance this year versus last year, that drives a higher compensation driven by higher [ bonus accruals ]. [Foreign Language]

There's also a question regarding how to adapt or help some of the foreign managers that have come into the firm to do well. The first comment I'll make is that this is a very experienced team that has worked in many countries and has multinational experience. [Foreign Language]

We also have very good teams in place, which they joined. And obviously, I work with them. That makes that transition also a lot smoother. [Foreign Language]

And also, as you're aware, we have an excellent team of translators, and some of them, including myself, have been taking some lessons as well in Mandarin. [Foreign Language]

I think that answers the question you asked, Richard.

[Richard Chang, executive]

Yes. Thank you, Steve.

[Interpreted] The following question goes to bank. People are concerned about the situation in China. And we have updated you the situation. And the question is more detailed asking whether we have plans to increase capital. And what's the contribution to KGIB? And also, there are questions about provision for bank and this year's business focus and prospects, such as loans and net interest spread and the net fees.

So I will ask Amy to answer the questions.

[Amy Tsao, executive]

[Interpreted] The injection of capital will be approved by the BOD, and the amount is planned to be [ $2 billion, up from $6 billion ]. And in China, there are some policies, and the economic scale is beneficial to the establishment of new companies. And we hope to increase [ $740 million ]. And the license is granted in March this year. So in the next 3 years, it's going into a growth phase. So we haven't expected any contribution to KGIB from the Suyin Consumer Finance in China.

For the later half -- there are questions about bank's prospects for the later half. In the later half, we hope to maintain our momentum and maintain the growth rate compared to the same period last year. The bank is a steadily growing industry, so we would like to maintain the fee income and the loans. And particularly, we hope to increase the fee income and the net interest spread.

For the provision of the first half, it's quite stable because we maintain a stable lending practice.

[Richard Chang, executive]

[Interpreted] Thank you, Amy. There are questions directly to China Life about the numbers, and I'd like to pass them over to Stephanie. Here are the questions: The first, what's the current recurring yield? And what's the hedge cost of China Life? And what's the prospects this year for China Life? And what's the -- what are the asset/liability duration and aging -- hedging costs?

So I'd like to pass the floor to Stephanie for the answers.

[Stephanie Hwang, executive]

[Interpreted] With these questions, I will give you some numbers and explanation. For the first half, recurring investment yield of China Life is 3.3%, and the cost of hedge is 1.5%. For the annualized number, I think recurring investment yield will go up to 3.5% and maintain 1.5% for cost of hedge.

And there are also question about cash dividend. For cash dividends, we maintain the same number. That's approximately about $7 billion. And there are questions about asset/liability management and asset/liability duration. Our duration for assets and liabilities maintained at 15 to 16 years as they are quite similar. And these are my answers to the questions.

[Richard Chang, executive]

[Interpreted] And also, there are questions about our practices and responses to pandemic and the impact of the pandemic. And she asked, from the perspective of the CEO of the company as a foreigner, what's the impact of the pandemic on Taiwan compared to the situation in the U.S. and Europe?

How our Taiwan, I think, handled this compared with the U.S. and Europe.

[Steve Bertamini, executive]

Well, I think the first thing is that Taiwan has, since the beginning, managed the pandemic extremely well. Obviously, the impact of the last few months was unfortunate and, I'd say, a little bit unexpected. But I think, for example, in our case, we reacted very quickly. Literally within 2 weeks, we had over 80% of our staff working from home. We put measures in place to ensure that we kept everyone safe. And I think the country has done the same thing.

What's very good to see is that the vaccination rate is beginning to increase. I think the last number I saw was around 28%, 29%. And I think that's been proven to be the best overall protection that most countries can put in place. So I think this is one that we have to continue to watch and track closely. Again, I think that the country has done a good job, and we will continue to support any direction that's given to us and obviously continue to focus on maintaining our staff safe. Thank you, Richard. [Foreign Language]

I would also like to add that one of the things that we've seen, which is consistent with what's occurred in other countries, is there's been a significant increase in the adoption and use of digital. This has really been, I think, an opportunity for the country to accelerate its adoption. And I think we've seen this provide a real benefit to customers while keeping them safe. So we hope that this will continue in the future even when things are better because it will make it easier for people to do business, make them more convenient and help make things more efficient. [Foreign Language]

[Richard Chang, executive]

[Interpreted] Thank you. Next question is about remote application of insurance. Some people have noted that China Life is promoting remote applications, and it's doing piloting. So how -- when the remote application will go live? And what's the goal of China Life in this business line? Stephanie mentioned the -- some of the answers was not delivered during the past question, so she will provide the answer again.

[Stephanie Hwang, executive]

[Interpreted] Thank you. And I'll recite -- present you again with the whole year recurring yield. It will stand at 3.5%. And the hedging cost will remain at 1.5%.

And I would like to answer the questions about remote application and our progress. The insurance bureau approved the pilot in July, and we immediately did the pilot in July. We select 360 agents. As of the Friday of last week, there are more than 6,000 cases applied through this channel, which is better than our expectations. We told the IB that we hope to increase the number to -- that number in -- by mid-August, and we have -- we are ahead of that. And the result was good. And we would like to expand the pilot to all of our agencies across Taiwan so that all of the agents will be able to use that feature.

And in the future, I'd like -- we'd like to expand that to the broker channel so that both external and internal channels will be using such safe and secured and convenient tools.

[Richard Chang, executive]

[Interpreted] We would like to extend our appreciation to all of you for attending this online conference. In the next quarter, we will organize such an event again and extend our invitation. Thank you again.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]