Chailease Holding Company Ltd
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Chailease Holding Company Ltd
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Welcome, everyone, to Chailease Second Quarter 2020 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And for your information, a webcast replay will be available within an hour after the conference ends.
Now I would like to turn the call over to Ms. Kimberly Lian, Project Manager of Chailease Holding. Ms. Lian, please go ahead.
Thank you. Hello, everyone. Thank you for joining us today for our second quarter 2020 result conference call. On our call this afternoon, I am joined by Ms. Sharon Fan, Head of IR Department, and she will be open to your questions after my presentation. The presentation I'm giving today will be available for download on our official website at www.chaileaseholding.com.tw.
As a reminder, please refer to the disclaimer on Page 2 regarding forward-looking statements. Our actual results may differ from such statements.
Let's begin the presentation. Please turn to Slide 3 for today's agenda. The agenda we are going to cover for today includes management highlights, providing you the highlight points of the second quarter 2020, followed by the performance review on the consolidated level and each segment in our main operation region, including Taiwan, China and ASEAN operation.
Now I'd like to turn to Slide 4 for highlights that summarize our performance of the second quarter of 2020. First of all, the summary table here shows you the loan portfolio growth of each of our main operation regions for the first half of 2020.
You can see in the middle column of the table, we achieved 14% year-over-year portfolio growth on the consolidated level. Our main operation regions, Taiwan, China and ASEAN's loan portfolio grew by 15%, 16% and 11% year-on-year. The consolidated portfolio shows a 3% increase for the first half.
Look into major operation regions. Taiwan has continued its business momentum in the second quarter. China's accumulation of loan portfolio is also accelerating compared to the first quarter.
Next, the second point we would like to highlight is that the overall asset quality remains stable. We will see each region's delinquency ratio later.
The third point is our capital-raising plan announcement, a total of TWD 15 billion of capital will be raised through preferred share issuance in September. The dividend of the preferred share is set at 3.8% per annum.
Let's move to the next section, performance review for the second quarter of 2020. As you see on Slide 6, the consolidated portfolio reached TWD 426.6 billion at the second quarter end of 2020, with 14% year-over-year growth and 3% growth for the first half of 2020. In the second quarter, China's business momentum picked up further compared to the first quarter.
Turning to Slide 7. The graph shows the trend of consolidated loan yield and the cost of funds for the past 12 quarters. As you can see, we managed to maintain stable spread within a narrow range for the past 3 years. This quarter, both the loan yield and funding costs are moving downward a little bit due to the overall decrease of interest rate for Taiwan and China. We will look at each operation region's yield and cost of fund in the next section.
Next slide, Slide 8. The graph in this slide shows you the trend of consolidated fee and commission income. The fee and commission income is driven by new business volumes during each quarter. We see a significant growing fee and commission income for China operations, reflecting the new business volume in the second quarter.
Next slide, Slide 9. On the left-hand side, the consolidated revenue for the first half of 2020 reached TWD 28.2 billion, representing 3% growth compared to the same period last year versus 14% of year-over-year portfolio growth. The slower year-over-year revenue growth rate compared to the portfolio growth is due to the change of sales revenue recognition starting this year. If we try to add back the sales revenue to assume the recognition method is unchanged, then the growth rate will be 17%, which is more in line with portfolio growth rate. On the right-hand side, the second quarter consolidated revenue was up 3% from the previous quarter. Revenue in this quarter shows a steady growth.
Moving on to Slide 10. On the left-hand side, the consolidated net profit for the first half of 2020 reached TWD 7.89 billion and the earning per share was TWD 5.71. The net profit amount increased by 4% compared to the same period of last year, which is slower than portfolio growth due to a few reasons. First is that the first quarter of 2019 and approximately TWD 250 million of income tax benefit for our U.S.A. operation was recognized, and this is a onetime event. Secondly, this year, China recognized more impairment losses expense during this pandemic. Therefore, the profit grew slower compared to portfolio growth. On the right-hand side, the 1% quarter-over-quarter profit growth rate was due to less tax benefit recognized in the second quarter than the first quarter.
Moving on to Slide 11. This slide shows you the loan portfolio mix and the profit contribution in terms of our major operation regions in the first half of 2020. On the left-hand side, we can see Taiwan business still accounts for the half of the group's total portfolio, which is 49%; China is about 34%; and ASEAN 15%. On the right-hand side, Taiwan's net profit accounts 51%; China, 45%; and ASEAN 5%.
Moving on to Slide 12. It shows the cost-to-income ratio and leverage ratio for the group level. Our group level cost-to-income ratio lowered to 29% in the first half of this year as less head count-related operating expenses are spent, such as traveling expense due to temporary operation disturbance because of this pandemic. The leverage was 7.1x at the second quarter end, which is up from the previous quarter of 6.7x. We expect this ratio to be lowered down to 6x or under, after we complete the issuance of preferred share in September.
Please turn to Slide 13. The consolidated return on assets on an annual basis achieved 3.2% for the first half of 2020, reflecting a slightly slower growth of net profit than 2019. The consolidated return on equity on the right-hand side was 23% for the second quarter end, which is still above our long-term goal of 20%.
Next slide, Slide 14. The consolidated delinquency ratio is shown on the left-hand side. At the second quarter end, delinquency ratio from all 3 major operation remains stable. Therefore, the consolidated delinquency shows an improved growth rate of 2.9% as portfolio continues to build up. Later in the presentation, I will talk about each region in more detail.
Moving on to the segment review. Let's look at our operation performance country by country.
On Slide 16, our Taiwan loan portfolio reached TWD 210.6 billion at the second quarter end of 2020, representing 15% year-over-year increase and 5% for the first half of 2020. Major growth drivers are coming from micro financing and car financing. During this COVID pandemic, the growth rate for service industry was a bit lower due to risk concern and slower demand.
Moving on to Slide 17. It shows the trend of our Taiwan loan yield and funding costs. Both Taiwan's branded loan yield and funding costs decreased a bit in second quarter. However, the spread remains stable.
Turning to Slide 18. The graph shows Taiwan's fee and commission income for the last 5 quarters. Fee and commission income shows a slightly decrease in the second quarter due to slower business volume growth in second quarter versus first quarter.
Moving on to Slide 19. Revenue from our Taiwan operations for the first half of 2020 reached TWD 14.4 billion, representing 19% year-over-year growth. For the quarter-over-quarter comparison, the revenue was up 4% as business momentum in Taiwan remained quite stable.
Turning to next slide, Slide 20. Taiwan's net profit for the second quarter end of 2020 reached TWD 4.4 billion, which grew by 21% compared to the same period last year. The second quarter net profit for Taiwan grew 5% compared to the first quarter, which is quite in line with portfolio growth.
On Slide 21, the left-hand side shows Taiwan's second quarter delinquency ratio stay at 2.9%. New delinquent amount in the second quarter decreased from the prior quarter.
Slide 22. The loan -- the allowance to loan portfolio in Taiwan remained stable at 2.1% in this quarter.
Next, let's take a look at our China operations on Slide 23. China's total loan receivable reached TWD 147.8 billion at the second quarter end, which grew by 16% year-over-year and 23% if we use local currency of RMB. For the first half, portfolio grew 4% in the local currency of RMB. China's business volume was affected by the COVID lockdown in the first quarter and has gradually regained its growth in the second quarter.
Turning to Slide 24. This slide shows you the loan yield and cost of fund trend for our China operation. China continued to maintain stable spread for this quarter.
Next slide, Slide 25. This slide shows you the trend of fee income resulting from the new business volume in China, plus the deferred portion of the fee income from previous year since the company started to amortize the upfront fee income over the leasing contract period in 2019. In addition, according to the new accounting treatment for trade finance businesses starting from this year, the gross margin portion of the trade finance business will now be recognized in the fee and commission income instead. The second quarter's fee and commission income added to TWD 859 million.
Next slide, Slide 26. China revenue for the first half of 2020 totaled TWD 10.5 billion, decreased by 14% year-over-year and increased by 4% as compared second quarter to the first quarter last year. Apart from the coronavirus impact, year-over-year revenue grew slower than portfolio growth was also due to trade finance definition method change starting this year. If we add that, the trade finance fee of TWD 3.48 billion. And since the recognition method of sales revenue on trade finance business remains the same as last year, then the revenue growth rate will then turn out to be 14% year-over-year increase.
Moving on to Slide 27. China's net profit in the second quarter end of 2020 was TWD 3.9 billion, increased by 10% year-over-year. The growth rate is slower than portfolio growth rate is due to more impairment expenses recognized in the first half of this year. On the right-hand side, China's second quarter net profit was down 1% quarter-over-quarter. And this negative growth rate was due to more tax rebate being recognized in the first quarter compared to the second quarter. For tax rebate of the second quarter of 2020, we recognized approximately RMB 28 million compared to RMB 90 million recognized in the first quarter of 2020.
Turning to next slide, Slide 28. On the left-hand side, tariff delinquency ratio at the second quarter end remains the same as previous quarter at 2.4%. We see stabilization for China's asset quality.
Next slide, Slide 29. China's allowance to loan portfolio ratio for the second quarter was remain 2.6%, which remains sufficient.
Moving to ASEAN regions on Slide 30. The total portfolio of our ASEAN operation at the second quarter end of 2020 reached TWD 63.6 billion and was up by 11% year-over-year and 0.3% for the first half of this year. The lower accumulation of the loan portfolio growth year-over-year was due to the impact of the coronavirus lockdown in some of our ASEAN regions.
Let's turn to Slide 31. The left-hand side shows the revenue of our ASEAN operation. It was TWD 3.22 billion, which grew by 7% year-over-year. However, for apple-to-apple comparison, the revenue growth rate will be 18% if the sales revenue for Vietnam's trade finance business will book using growth method as last year. On the right-hand side, the revenue for the second quarter was about TWD 1.56 billion, which was down 7% quarter-over-quarter. Business overall in our ASEAN operation is impact by the COVID-19 outbreak.
Last slide, Slide 32. The total net profit for the first 6 months of 2020 was TWD 678 million, representing 18% year-over-year growth and negative 5% quarter-over-quarter growth. The better growth of profit and revenue growth was due to less impairment expenses recognized in 2020 compared to 2019 for Thailand operation. For Thailand, there are more impairment expenses recognized last year due to adopting IFRS.
This is all for my presentation today. Thank you for your attention. And now I would like to turn the call back to operator to start our Q&A section. Thank you.
[Operator Instructions] The first to ask question is Edwin Liu from HSBC.
I have several questions. The first one is on Taiwan. Obviously, Taiwan's lending yield has decreased a bit quarter-on-quarter. I think -- last quarter, I think you mentioned that, on a full year basis, you could revert back to the previous level due to your more normalized business mix, but it didn't happen in second quarter. Just wonder, has management guidance changed? Or how should we look at the lending for Taiwan region in the second half?
My second question is on China. So China's borrowing costs accelerated the decrease. May I get a latest update on your borrowing structure in terms of how much percentage is on loan prime rate basis, which means it could -- it is floating borrowing costs? And the other question on China is that there has been rumor regarding a legal cap on the maximum interest rate that you can charge in China. I just wonder, would that affect Chailease business in China?
My final question is on Thailand. Given the recent political situation in Thailand, do you see any disruption to your business? That's it for me.
Okay. Let me answer your question one by one. First one is regarding the Taiwan lending yield. Actually, if you look at the difference between the yield and the funding costs, you can see our Taiwan were actually increased a little bit from -- I think it's from 6.56% previous quarter to 6.59% this quarter. So actually, we already tried to like go back to our normal spread level. That's for Taiwan.
And for the China, about the funding costs, I think -- because since last year, we already tried to renew our borrowing contract with those banks with the LPR rate, so right now, we are more in line with the market rate level. So I think going forward, if the overall market rate is a downtrend, I think we will also -- you will see that our borrowing costs were gradually factoring those sector.
And the legal rate, the -- about the news. I think so far, it didn't change our pricing strategy and we haven't seen any potential impact so far. We still remain the same pricing and maintain our spread targets.
And about the Thailand business momentum, actually, as we communicated this year, we set a very conservative growth target for the whole ASEAN operation and especially for Thailand. So we still believe this COVID-19 impact still is -- it's ongoing. So far, we remain a very slow business growth in Thailand. For this year, we still try to maintain a flat growth rate for most of our ASEAN operation.
Okay. May I just follow up quickly on another question? I think management mentioned in Chinese call about a recovery ratio after 3 months, which was 99.7%. Could you give us more color in terms of what does it -- this recovery ratio mean? Is it recovery from delinquency? I think, usually, the ratio is around 50% to 70%, so that means there's a significant improvement in terms of the delinquency recovery.
It's 2 different thing. The ratio that in the Chinese session our Chairman provided actually is the monthly account receivable collection rate. For every month, for the total outstanding monthly receivable which we need to collect back, this is the collection rate, already improved to 99% in July for the past -- for the previous mark, which is for June. For the whole June month, account receivable, when we calculated in after 1 month of execution, then this collection rate in July 15, we already reached 99% compared to this number in -- like in February, which we tried to collect that January monthly account receivable. During that time, this collection rate was 94.8%. So it shows a very significant improvement. I think this is the monthly receivable collection rate. It's different from the recovery rate, which is we recover from the delinquency per month.
[Operator Instructions] Next, we're taking questions from Gurpreet Sahi, Goldman Sachs Hong Kong.
Two questions, please. First is on the growth outlook. Seems you are highlighting that the growth picked up in the second quarter. Can you give us some guidance as to how second half will be? Should we look at quarter-on-quarter growth as a good indicator of what we can expect going forward?
And then second one is on credit quality, seems quite stable. At the first quarter, you had around 5% of loans in China which had some sort of restructuring or grace period allowed at the end of April. Can you update on that number? And in general, the behavior of those borrowers toward the repayment.
Okay. In terms of growth outlook, usually, we -- our growth -- the second half will grow better than the first half. So so far for the first half, we already achieved like a 3% accumulated growth for the first half. So so far, I think it's very likely that we can achieve what we guided for like 5% to 10% of the overall growth. So it's still possible that we can accelerate the growth rate in the second half a little bit. But still, our growth guidance for the whole year still remains the same, which is 5% to 10% for the overall.
And regarding the credit quality, the program under restructuring still accounts for about 5% of the China portfolio so far. And if -- for the first quarter, there's some program under the grace period already like -- put into the restructuring so -- and if they cannot fulfill the new payment terms, it will be fall into the delinquency pool. And it's also reflected in our China delinquency ratio in the second quarter. So so far, as you can see, our China delinquency ratio remains very stable at around 2.4%. So far -- and these are -- this pool also maintain roughly 5% of the whole China portfolio. So we are quite confident that asset quality should quite stabilize already.
Can I have a follow-up as to when does this grace period end for these Mainland Chinese clients? Which month or which quarter?
It's already -- this grace period program already ended at this June end, as we communicated before. But for those clients, they have been applied for this grace period, we still keep watching and put it in a special pool that we will continue to monitor this portion of the clients.
[Operator Instructions] Next one, we are having Anupam Mathur from Goldman Sachs.
This is Anupam here. Actually, I have a few questions, so I'll go one by one. So firstly, on this follow-up to the legal cap question. So I just wanted to understand what kind of legal cap is being proposed? And what is the yield compared to that?
Sorry. Can you repeat your question?
Yes. Sorry about that. So I just wanted to understand what sort of the legal cap in China is being proposed? And what is the yield compared to that?
The lending rate which -- I cannot follow you. Sorry.
Yes, yes. Again, I'm sorry. I'll just repeat again. So this is just a follow-up to Edwin's question that there is a legal cap on lending rate being proposed in China. So my question is, what is the proposal like? And what is the current yield?
As we are aware, probably there's a potential proposal to cap this legal rate at around 15%. But I think it's only a discussion, not finalized yet. So yes. Are you asking about this legal lending rate cap, which seems around 15%?
What is yield? What is the yield?
What's our yield?
Yes, your yield.
Currently, our China total lending yield is about 17%. But actually, it's including the fee we charge, so the fee is not booked as interest rate. But actually, this 15% is not finalized yet.
Okay. Understood, understood. My second question is, what is our loan growth guidance now? Like, has it changed? Or is it still 5% to 10%?
Yes. I think we remain the same guidance of our loan growth for this year, which we have been communicating in the first quarter earnings call, which is like 5% to 10% for the consolidated level and also for China and Taiwan. But probably, it's very possible that we can achieve at the higher end of this range for Taiwan.
Okay. And how about on the new disbursement side, like what sort of levels are we seeing versus pre-COVID levels, like in terms of disbursement?
If we are looking at the new disbursement volume, especially for China because I think it's more impacted for our China operation compared to Taiwan, Taiwan is less impacted. If we compare the first quarter to -- second quarter to the first quarter, I think our new disbursement volume already picked up, almost doubled in the second quarter compared to the first quarter.
And how does it compare to the pre-COVID level?
So if -- I think it almost reached to the normal level, but still not to the full speed yet. Probably like 18 -- 80% of the normal level.
Understood, understood. And on the provision, we had talked about some general provisions of around 1.3% previously. So does the guidance still hold? Or are we -- can you do better versus our original expectations?
As you know, our China's -- our CFO has been communicating in the Chinese session, which are -- because we set aside some for the special -- kind of special reserve for -- provision reserve for those under the special program, restructuring program, so -- which is like RMB 90 million for the first quarter and RMB 50 million for the second quarter. So all together, we -- in the first half, we already set aside the loss ratio about 2.4% for the first half and -- but I think for the second half, we are confident. According to the current asset quality data situation, management believes that in the second half, we don't need -- probably the provision expense will be lower than the first half in terms of ratio.
Okay, okay. And just one last question. The OpEx has been like the cost to income had been much lower than last year. So do we expect cost to income to catch up in the second half or OpEx to increase significantly from first half?
I think the OpEx decrease for this first half for this year is more related to head count-related expense, especially like traveling because people don't travel nowadays. So it really depends on the pandemic situation. If we can go back -- gradually go back to the normal operation, I think it will go back to the normal level.
Next question, Gurpreet Sahi from Goldman Sachs Hong Kong.
I just had that follow-up which is regarding cost. So the cost-to-income ratio for this year is tracking much better, right, at 29%. As you said, people can't travel. And in the first half of last year, it was 32%. And then given the stronger second half, you ended up full year being 31%. So normally, full year ratio is better than the first half ratio. So that means shouldn't this year be lower than 29% or at best 29% cost-to-income ratio?
In the past, usually, we have a higher cost OpEx in the fourth quarter because some of the accrual expenses, especially for the head count related like travel, that kind of expenses will be accrued by year-end. So you will see higher cost OpEx occur in the fourth quarter. But I think this year, if we still remain this low travel frequency, probably it won't have this kind of variance. So I mean probably, it will maintain around 29% cost-to-income ratio through the year.
[Operator Instructions] There are currently no questions. Kimberly, can we end the conference call now?
Yes, yes. We can end the call. Thank you.
Okay. We thank you for your participation in Chailease conference. You may now disconnect. Thank you and so long.