Chailease Holding Company Ltd
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Chailease Holding Company Ltd
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Welcome to this Chailease First Quarter 2019 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being record. For your information, a webcast replay will be available within 1 hour after the conference is finished.
I now like to turn over the call to Ms. [ Kimberly Lian ], Assistant Manager of Investor Relations. Please go ahead.
Hello, everyone. Thank you for joining us today for our first quarter 2019 results conference call. On the call this afternoon, I'm joined by Mrs. Sharon Fan, Head of IR Department, and she will be open to your question after my presentation -- on our official website at www.chaileaseholding.com.tw. As a reminder, please refer to the disclaimer on Page 2 regarding forward-looking statement. Our actual result may differ from such statement.
Let's begin the presentation. Please turn to Slide 3 for today's agenda. The agenda we are going to cover for today including management highlights, followed by consolidated performance review and segment review for our main operation regions, including Taiwan, China and ASEAN operations.
Now I'd like to turn to Slide 4 for highlights that summarize our performance for the first quarter of 2019. Firstly, the summary table here shows you the loan portfolio growth for each of our main operation regions for 2019.
Before we go into details, we need to highlight first that starting from January 1, 2019, we adopt new IFRS standards that affect our accounting treatment for operating lease business, solar power station business and fee income recognition. We will go into details later in the presentation, but the major impact is that we will have to recognize both assets and liabilities for the operating leases and solar power stations. So in terms of the portfolio, solar power station will be no longer recognized as accounts receivable and should be booked as fixed asset. Therefore, on the summary table on Slide 4, we have shown 2 growth rates. Especially for Taiwan, we can see the growth rate excluding the solar business and the growth rate including the solar business.
On a consolidated level, you can see on the right-hand side of the table, we achieved 20% year-over-year portfolio growth and 26% when including solar business, thanks for the continuously healthy business momentum in our 3 main operating regions. On a year-over-year basis, our main regions, Taiwan, China and ASEAN's loan portfolio grew by 12%, 31% and 25%, respectively. All 3 of our main operating regions grew with a pace that is in line with our business plan for 2019. Taiwan achieved growth rate of 23% when including the solar business in the first quarter, mainly because of a low base for the previous year. On a quarter-over-quarter basis, the consolidated portfolio and Taiwan's growth rate show an increase of 5% and 4%, respectively, when including the solar business.
Next the second point is although the business momentum in the first quarter is in line with our expectation and business plan, deposit growth is slower due to the adoption of IFRS, mainly due to the change of fee income recognition. We will explain the details later.
And for the third point, we would like to highlight that the overall asset quality remains stable and we expect the delinquency ratio to be stable going forward throughout the year. And the least -- and the last, but not the least, for the coming up AGM on 24th, the board has proposed to the AGM dividend of TWD 4.5 per share composed of TWD 4.2 cash dividend and TWD 0.3 stock dividend.
Before we go into the performance review of 2019, let's first quickly look at the impact of new IFRS standards we adopt for 2019. First, for the operating leases and solar power station business, that the new standard requires the lessee to recognize lease on balance sheet. Therefore, the right-to-use asset and the lease liability increased by TWD 1,720 million and TWD 1,724 million, respectively, and the difference we book as decrease of retained earnings by TWD 4.7 million on January 1, 2019.
As for the solar power business, in terms of accounting agreement, the definition we -- was changed from finance lease business to service contract. So the solar power business that's used to be recognized as accounts receivable now must be switched to fixed assets, the impact of about TWD 16 billion. Also, there is a decrease in retained earnings by TWD 203 million on January 1, 2019.
The other major change is related to fee income recognition. In terms of pricing, fee income is a part of interest to be charged when we calculated IRR. Before we adopting the new IFRS standard in 2019, fee income was recognized in the whole upfront. The fee charge was about 1% of the total pricing on average in Taiwan and was about 3% in China. Starting from January 1, 2019, the fee income is required to be amortized over the contract period. Although this change will hit our P&L in the first year of adoption, especially for the first 2 quarters, the impact will be gradually minimized when the deferred portion of the fee income is gradually recognized over the time. As you can see in the table, it shows that for our Taiwan business, we estimated 73% of the fee we charge for the whole year of 2019 will be realized in the first year and gradually increase to 100% in the third year. As for our China operation, there will be 53% in the first year, 84% in the second year and increase to 97% in the third year.
Let's move to the next section, performance review for the first quarter of 2019. As we see on Slide 9, the consolidated portfolio reached TWD 370.1 billion for the first quarter end of 2019 with 26% year-over-year growth and 5% sequential increase when including solar business. In the first quarter, all of our 3 main operating regions continued to keep their business momentum, especially in China and other regions.
Turn to Slide 10. The graph shows the trend of consolidated loan yield and cost of funds for the past 12 quarters. As you can see, we managed to maintain stable spread within a narrow range of 7% to 7.4% in the last 3 years. This quarter, the yield is moving upward to reflect China's increasing yield. We will look at each operation regions' yield and cost of fund in the next section.
Next slide, Slide 11. The graph in this slide shows you the trend of consolidated fee and commission income. The fee and commission income is driven by the new business volume during each quarter. However, due to new IFRS implementation this year, fee income of some type of business needs to be amortized. So we see a significant drop in fee income this quarter. If we include the unrealized fee income, we can more clearly see a business momentum in this quarter. This shows that new business volume continue to grow compared to the fourth quarter of last year.
Next slide, Slide 12. On the left-hand side, the consolidated revenue for the first quarter of 2019 reached TWD 12.9 billion, representing 12% growth compared to the same period in last year versus 26% year-over-year portfolio growth. On the right-hand side, the first quarter consolidated revenue was down 4% from previous quarter versus 5% of sequential portfolio growth. As we mentioned earlier, slower revenue growth rate compared to portfolio growth is due to the change of fee income recognition starting from 2019.
Moving on to Slide 13. On the left-hand side, the consolidated net profit for the first quarter of 2019 reached TWD 3.58 billion and the retroactively adjusted earning per share was TWD 2.78. The net profit amount increased by 18% year-over-year and 7% quarter-over-quarter. In the first quarter of 2019, there was an in-contract benefit from net operating losses carry forward from our U.S. operation, which was USD 8.9 million and reduced the effective income tax rate to 23% in the first quarter versus 26% for the year of 2018. In additional, RMB 40 million of tax rebate on China was received and recognized in the first quarter. So both item contributed positively to the year-over-year growth and quarter-over-quarter growth for the net profit.
Moving on Slide 14, it shows the cost-to-income ratio and leverage ratio for the group level. Our group level's cost-to-income ratio was maintained at 32%. The leverage was held at 6.2x at the first quarter end, which is the same as the previous quarter.
Please turn to Slide 15. The consolidated return on assets on an annual basis achieved 3.6% for the first quarter of 2019, reflecting a slightly slow growth of net profits than 2018. The consolidated return on equity on the right-hand side maintained an outstanding level of 23%.
Next slide, Slide 16. The consolidated delinquency ratio is shown on the left-hand side. At the first quarter end, the asset quality is very stable in our main operation regions. The delinquency ratio shows 2 ratios; one is without solar business and the other includes solar business. Since there has been no default cases for our solar business, the ratio will be slightly up when taking out the solar portfolio from the denominator. Looking at the right-hand side of the graph. The allowance to portfolio ratio remained sufficient for the 2 ratio, one ratio is with the solar business and the other is without.
Moving on to the segment review. Let's look at our operation performance country by country. On Slide 18, our Taiwan portfolio reached TWD 193.3 billion at the first quarter of 2019 if we include account receivable plus the solar power net assets, which represent 23% year-over-year increase and 4% quarter-over-quarter growth rate. The major growth driver are still coming from oversea aircraft financing, solar power and used car financing business, et cetera. Diversified product and services in different niche markets help continue to drive growth in Taiwan and continue to achieve double-digit growth every year.
Moving on to Slide 19. We can see the trend of our Taiwan loan yield and funding costs. Taiwan's funding costs has slightly increased due to the increase of U.S. dollar cost of funding. In the first quarter, Taiwan's yield is down by 24 bps compared to the previous quarter, mainly because it exclude higher yield solar power business for the calculation when performing accounting reclassification starting from this quarter. Overall, the spread of all our business lines remain within a stable range.
Turning to Slide 20. The graph shows Taiwan's fee and commission income for the last 5 quarters. The bar on the far right shows the first quarter, which include a fee from alliances with commercial banks, general fee income and unrealized fee income. Due to the new IFRS standard implementation, we need to amortize the fee income from some business type. So if we add back the unrealized fee income, we can see clearly that the volume of new business disbursement is actually growing in the first quarter.
Moving on to Slide 21. Revenue from our Taiwan operation for the first quarter of 2019 reached $5.8 billion, representing 15% year-over-year growth. For the quarter-over-quarter comparison, the revenue growth was minus 3% as a result of less fee income ratio -- income recognized and seasonality factor.
Turning to next slide, Slide 22. Taiwan's net profit for the first quarter of 2019 reached TWD 1.8 billion, which grew by 7% compared to the same period last year. This is lower than the portfolio growth because Taiwan's [ proper ] income tax rate was changed from 70% to 20% in 2018. For the quarter-over-quarter comparison, profit was down 5% mainly due to the less fee income and low season for the first quarter.
On Slide 23, the left-hand side shows Taiwan's first quarter delinquency ratio. Two ratios are shown here, one without solar business and the other including solar business, indicating that asset quality remains stable.
Slide 24. The allowance to loan portfolio in Taiwan maintained the same sufficient level as the previous quarter.
Next, let's take a look at our China operations on Slide 25th. China's total loan and receivable reached TWD 120.4 billion at the first quarter end, which grew by 31% year-over-year, 6% quarter-over-quarter. Business momentum continued in the first quarter.
Turning to Slide 26. This slide shows you the loan yield and cost of funds trend for our China operation. The yield shows the increasing trend, which was resulted for the repricing of new deals to reflect the increased funding cost in 2018 last year. The cost of funds remained stable.
Next slide, Slide 27. This slide shows you the trend of fee income resulting from the new business volume in China compared to the same period last year. Fee and commission income, plus the unrealized fee income, show an increase of 16% year-over-year. This indicate a good business momentum for this quarter despite the first quarter usually being the low season for the year.
Next slide, Slide 28. China's revenue for the first quarter of 2019 totaled TWD 5.6 billion, increased by 4% year-over-year and decreased by 8% when comparing the first quarter to the fourth quarter last year. Year-over-year revenue grew slower than portfolio growth due to the fee income recognition method change and also less trade finance business in the first quarter.
We can see this more clearly by looking at the revenue breakdown on Slide 29. Revenue generated from trade finance business in first quarter totaled TWD 1.8 billion, which has a slower growth rate pace than the other revenues. There is no specific reason for the slower trade finance business in the first quarter because trade finance business is for short-term working capital financing need. Therefore, the market demand is more volatile quarter-over-quarter.
Moving on to Slide 30. China's net profit for the first quarter of 2019 was TWD 1.62 billion, increased by 16% year-over-year. The profit growth was affected by less fee income being recognized starting this year. On the right-hand side, China's first quarter net profit was up 4% quarter-over-quarter, which was partially contributed by about RMB 40 million tax rebate being recognized.
Turning to next slide, Slide 31. On the left-hand side, China's delinquency ratio at the first quarter end remained at 2.1%, which is the same as the previous quarter. So far, we haven't seen any signs of significant change in our China asset quality.
Next slide, Slide 32. China's allowance to portfolio ratio continued to trend down and reached to 3.4% at the end of the first quarter. It's likely that the ratio will further decrease by a couple of bps going forward if China's asset quality continue to remain at this group level.
Moving to the ASEAN regions on Slide 33. The total portfolio for our ASEAN operation at the first quarter end of 2019 reached TWD 52.2 billion and was up by 25% year-over-year and 7% quarter-over-quarter growth, which is in line with our internal targets. Major growth driver of our ASEAN operation still come from Vietnam and Malaysia, which grew by more than 40%. Thailand also achieved double-digit year-over-year growth rate at around 12%.
Let's turn to next slide, Slide 34. The left-hand side shows the revenue of our ASEAN operation. It was TWD 1.4 billion, which grew by 44% year-over-year. The higher year-over-year revenue growth rate than portfolio growth was due to increased trade finance business in the first quarter of this year. On the right-hand side, the revenue for the fourth quarter was TWD 1.41 billion, which grew 5% quarter-over-quarter. This business momentum overall was good for first quarter for the ASEAN operation. In particular, Malaysia and Vietnam operations still generate higher growth rate than other ASEAN regions.
Last slide, Slide 34 (sic) [ 35 ]. The total net profit for the first 3 months of 2019 was TWD 277 million, representing 4% year-over-year growth and negative 33% quarter-over-quarter. Compared to the first quarter of last year, the profit growth rate was much slower than revenue growth in this year's first quarter due to high base for the first quarter of last year because last -- impairment loss on loan and receivable for Thailand operations was booked in first quarter 2018. For quarter-over-quarter comparison, the variance was mainly due to an accounting adjustment for impairment loss for our Thailand subsidiary in fourth quarter last year. Overall speaking, the asset quality actually remained stable in ASEAN for the recent 2 quarters.
And that's all my presentation today. Thank you for your attention, and now I would like to turn the call back to operation -- operator to start our Q&A section. Thank you.
[Operator Instructions] The first question is from Yafei from Citi, Hong Kong.
A couple of questions. The first one is around the dividend payout ratio this year. The cash payout ratio seems to be around 40% or ballpark. That looks a little bit lower than what you used to pay over the past couple of years. Just wanted to understand what's the rationale behind that. Are you building up capital for future faster-than-expected growth? That's first question.
And second question is really around Taiwan. So why is the delinquency tick up a little bit in Taiwan? Is there anything we should be reading into this or it's just one of few specific defaults? And then also in Taiwan, the spread, you mentioned, is broadly stable. If you were to adjust the accounting changes, can you just give us a like-for-like spread for this quarter and the previous quarter? That's all the question from my side.
Okay. Regarding the first question, our dividend policy. Actually, our dividend policy remained the same, that the company would like to maintain 30% to 50% of the cash payout. And in the past, like 2, 3 years, we reached to the high end, about 50% payout, especially during year 2015 because we have a slower growth. And now actually we are still in the phase of expansion. So we probably will like -- we don't need to like maintain at this high-end payout ratio, but still within this 30% to 50% kind of payout policy. So that's the answer. And...
Follow up on that.
Sorry?
Can I follow up on that question?
Okay.
So let's say if you reduce the payout to keep capital for the growth, does that mean that you are able to meet the future growth using organically generated capital and you wouldn't need to seek capital from the market to support the growth?
Okay. It really depends, because our goal is to like maintain 20% of the return on equity. So if we pay out like 50%, we can only self-fund it for about -- like 10% of the growth rate organically. And so if we generate higher than like 15%, 20%, that kind of growth, annual growth, so probably for some period of time, we still need to -- seeking for some capital injection. So it really depends. But yes, I think right now that shows our management team is still quite confident that for the next few years, there's still a lot of growth potential for all the major operating region. And if we can continue to generate like more than 15% or around 15% to 20% of the growth rate, probably even with the 40% or 30% of payout, still cannot sufficiently support our growth.
Understand. That's very fair.
Yes. And regarding the Taiwan delinquency ratio, actually, there are 2 lines. If you look at the Slide 23, the solid line 3% delinquency ratio in the first quarter end compared to the previous quarter end is 2.8%. That's mainly because of -- we take out the solar business. So if you apple -- if we make it apple-to-apple comparison, the delinquency ratio actually remained the same as 2.8%. So there's no increase of the delinquency.
Help me to understand -- sorry. Help me to understand because solar is 0 delinquency, right? So when you include solar, your delinquency should be lower, right? So your actual delinquency, excluding solar actually come up, right?
So we only start to take out this solar from this quarter. So last -- for previous quarters' number, it's still include in those portfolio numbers.
Okay. Okay. Understand.
Okay. And about the spread, in general, because for every business line -- the first priority for us is to manage the stable spread. And so far, we didn't change any of our pricing for every business line, and also -- the funding cost also remain quite stable. So in general, we still maintaining similar spread level. For this number you see here in the presentation is -- there is some variation mainly because of the calculation method because we are using the simple method to calculate the spread.
So on the last point. Because the spread would directly feed into our model, if we just take 8% and 1.4% and the spread actually narrowed quite materially quarter-on-quarter, so how do we then adjust for that in our numbers and our thinking? I just wanted to understand what kind of calculation methodology, yes, for Taiwan.
Only for Taiwan because it's a little bit more complicated. Because in Taiwan, our business mix continue to evolving. As you know, we have some business line has a higher growth rate, like private jet, aircraft financing, solar business or the consumer used car financing. So for those kind of business line has a higher growth. And for the traditional equipment leasing, they have a more average growth rate. So -- but internally, when we look at the blended spread, actually it's maintained around 8%.
Are you saying that in the future because of the mix change, the reported spread would be trending down?
Not necessary. Because for -- probably for the aircraft financing, the spread will be lower. But for the consumer used car financing, the spread is higher. So, so far at this point, I think the blended spread still around 8%.
The next question is from Gurpreet Sahi from -- with Goldman Sachs Hong Kong.
It's regarding the fee income. So you gave us the top line impact. Is it the same that the TWD 640 million should also be the impact on the bottom line? Is there any operating expense related to it, the change in accounting standard and fee not being recognized? So that's the first question.
And then second is -- sorry, I missed. You mentioned something regarding the ASEAN quarter-on-quarter profits being lower. So why is that? Can you please explain again?
Okay. In ASEAN, I think for last year 2018, we have some big variation quarter-over-quarter of the profit result mainly because of our Thailand operation adopting some new risk model to estimate the impairment loss, and that's because Thailand also prepared to comply with IFRS, which will be effective next year.
So in last year, in the first quarter, we have a more optimistic estimate. So we booked less impairment loss for Thailand operation. But in the second and third quarter and we gradually adjusted to the normal level. And also in the fourth quarter, there's a reverse entry. So it's all about the accounting adjustment.
But actually, what we are -- what we want to emphasize is that from business point of view, the asset quality actually didn't change much for the recent 2 or 3 quarters. So right now for -- at this year, the first quarter, the impairment loss actually is more reflecting the asset quality. And the quarter-over-quarter decrease is mainly because of the high base for the previous quarter, which is the fourth quarter of last year, and we have some major accounting adjustment entry. So starting from this year, the first quarter will be a more reasonable base.
Okay. And then the first question regarding the fee income impact, the TWD 640 million quarter-on-quarter for the accounting change. Is it the same that the bottom line impact is also that much?
You mean for which...
For consolidated, on Slide 11, you showed that around TWD 640 million fees you cannot recognize this quarter because of the accounting change, right? So how much of this then went into the profit before tax being lower quarter-on-quarter? Is it the same amount?
Yes. That's -- this TWD 6-4-0 million, that part will be the unrealized portion of the fee income we charged -- we received from customer, and they will be gradually realized over the time.
Okay. So just to be very clear. So your reported profit before tax this quarter was TWD 4.8 billion, right? So if I want to get an underlying profit before tax not impacted by the accounting change, then it would be around TWD 5.5 billion roughly. Is that correct?
If we are talking about this fee income recognition impact, they both have impact on China and the Taiwan. Taiwan impact is smaller because the -- on average, the fee income only account for about 1% of the total pricing but -- in Taiwan. But it accounts for like 3% in China. So overall impact for Taiwan is much, much smaller, the unrealized part.
Okay. Okay. My question is more at the group level. At the group, you had TWD 640 million negative impact, right? So your reported profit before tax is lower by TWD 640 million because of this quarter-on-quarter?
Yes. Yes. If you compare to the previous accounting treatment.
[Operator Instructions] The next question is from [ Dan Lu ] from [ Vigos ] Singapore.
And just for the first quarter, as we see the Thailand growth and the China loan growth is exceeding our full year guidance of 312 -- sorry, 2% and 20% respectively, just wondering if you have update on the full year outlook, especially given the uncertainties within U.S.-China? And how should management think about this?
And my second question is regarding the dividend payout. We also have a stock dividend payout. How should we think about this, please, and the total payout ratio?
Okay. Let me answer the dividend payout first. I think management will consider to like pay out more amount of the dividend payout. And just like this year, we pay out $0.3. And I remember in -- before we also used -- had some stock dividend payout around $0.2. So if we are considered to pay stock dividend, it will be account for very small portion, and because it will save some regional earning tax if we increase the payout ratio, not just the cash payout.
And regarding the growth guidance. Actually, we -- management didn't change our growth guidance. I think in the last results conference, our CEO, they give out the guidance about 20% of the portfolio growth for our China business and also ASEAN and 10 -- around 10% for Taiwan business. But if you look at our Taiwan year-over-year portfolio growth, it's roughly the same, like low teens, that kind of growth rate. And for China, because we still want to closely monitor how the U.S.-China trade war will continue to develop, so, so far, we didn't change our growth plan.
Thank you. There are currently no questions.
Okay. We can end the call.
Thank you for your participation in Chailease conference. We will now disconnect. Goodbye.