Chailease Holding Company Ltd
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Chailease Holding Company Ltd
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Welcome to Chailease Second Quarter 2023 Earnings Release Conference Call. [Operator Instructions]
As a reminder, this conference is being recorded. For your information, a webcast replay will be available within an hour after the conference has finished.
And now I would like to turn the call over to Kimberly Lian, Project Manager of the Chailease Holdings. Ms. Lian, please go ahead.
Hello, everyone. Thank you for joining us today for our second quarter 2023 results conference call. With me this afternoon is Mrs. Sharon Fan, Head of IR, and she will open to your questions in Q&A section. The presentation I'm giving today will be available for download on our official website at www.chaileaseholding.com.pw. And as a reminder, please refer to the disclaimer in Slide 2 regarding forward-looking statements.
Our actual results may differ from such statements. Today's agenda, including management highlights for the second quarter 2023, followed by the consolidated performance review and segment review for our major operations in Taiwan, China and ASEAN. Now let's begin the presentation by turning to Slide 4.
Highlights for an overview of our second quarter 2023 operating results. First, the summary table here shows the loan portfolio growth for the quarter. On a year-over-year basis, Taiwan, China and ASEAN loan portfolio grew 18%, 4% and 23%, respectively. On the consolidated level, we achieved 14% year-over-year loan portfolio increase which we see business momentum continued to build up in the second quarter of our major regions. As for the first half portfolio growth rate, Taiwan increased 7%. China decreased 2% due to the depreciation of RMB against Taiwan dollar.
If we use China local currency [ Yuan ], it actually increased 1% in RMB, for our ASEAN operations, ASEAN increased 7% for the first half, an overall 4% portfolio growth on a consolidated basis. In the second quarter, we see business momentum and consolidated loan portfolio growth continues. Given the slower-than-expected recovery in China market, the company revised our China portfolio growth target to 10 to -- 5% to 10% for this year. And the growth target for Taiwan and ASEAN remains the same, which is 10% to 15% for Taiwan and 15% to 20% for ASEAN. Second highlight is that we see interest spread for our business to stabilize. With Taiwan and some ASEAN countries are putting a pause on the tightening cycle in the second quarter, we see stabilizing cost of funds along with our price adjustment upward to the new disbursement, especially for our Taiwan operations so the spread has gradually stabilized.
Third point is our asset quality. The delinquency ratio has been rising in all 3 main regions in the second quarter. This is more related to the current weak macro situation. If we look backward for more historical data, we can see the current delinquency ratio level is still maintained within the historical average range. The consolidated delinquency ratio is now at 3%.
Moving on to Slide 6. Consolidated loan portfolio reached TWD 698 billion at second quarter end of 2023, with 14% year-over-year growth and a 4% increase for the first half. Thailand and ASEAN continue to contribute more for this quarter.
The next slide, Slide 7, shows you the trend of consolidated average loan yield and cost of funds for the past 3 years. In the second quarter, we see funding cost has been stabilized. Furthermore, the increase of funding costs has gradually reflected to the new price for the new disbursement. Therefore, we see some increase in the yield for the second quarter as well. The yield reached to 10.43% which is up 0.1 percentage points. We will discuss the change of each operation region in the next section.
Next slide, Slide 8. On the left-hand side, the consolidated revenue for the first 6 months of 2023 reached TWD 47.3 billion, representing 15% growth compared to the same period last year as Taiwan and ASEAN remains the growth driver this quarter. On the right-hand side, second quarter 2023 consolidated revenue grew 4% compared to previous quarter. We see increased business volume in the second quarter, along with more recognition of solar income from Taiwan operation.
Moving to Slide 9 on the left-hand side, the consolidated net profit for the first 6 months of 2023 totaled TWD 13.1 billion, and earnings per share was TWD 7.74. The year-over-year decrease in net profit was mainly due to higher interest expense and more impairment losses were booked. On the right-hand side, second quarter consolidated net profit was down 10% quarter-over-quarter as China recognized less tax rebate in the second quarter compared to the first quarter. In China, first quarter around RMB 250 million tax rebate received compared to a RMB 150 million tax rebate in the second quarter.
Turning to Slide 10. This slide shows you the loan portfolio mix and the profit contribution in terms of our operating regions. On the left-hand side, we can see Taiwan loan portfolio still account for more than half which is 53% of group's total loan portfolio. China is 31% and ASEAN slightly increased to 16% this year. On the right-hand side, Taiwan net profit contribution accounts for 47% and China increased a little bit to 47% as more tax rebate for this year. ASEAN contributed 6% for the consolidated net profit, which remained the same portion as last year.
Moving to Slide 11. The chart on the left-hand side shows cost to income ratio remained the same as the first quarter, 28% for the first 6 months of 2023. The higher cost-to-income ratio compared to same period last year, mainly due to slower growth of gross profit. The chart on the right-hand side, asset to equity also slightly increased to 6x at the end of second quarter.
Slide 12. The consolidated [ ROE ] was 3.1% for the second quarter of 2023, decreased from 3.6% in 2022. And this is mainly due to the decrease in profit for this year. The consolidated return on equity on the right-hand side was 20% for the first half. The calculation of ROE is excluding preferred shares.
Next slide, Slide 13. The consolidated delinquency ratio on the left-hand side at second quarter end was increased to 3% from 2.7% in prior quarter. There is no specific concentration in any specific industry but more related towards the overall weak macro situation. Later in the presentation, I will talk about each region in more detail. Moving to the right-hand side, allowance to loan portfolio ratio was slightly up 0.1 percentage point to 2.3% to cope with the current situation.
Moving on to the segment review, let's look at operation performance region by region. On Slide 15. Power loan portfolio reached TWD 370 billion [indiscernible] at the second quarter end of 2023 representing 18% year-over-year increase and 7% growth for the first half. Taiwan's business momentum continued this quarter. Major growth drivers are from the new disbursement for used car, heavy vehicle financing and lending in micro business.
Slide 16. This slide shows the trend of Taiwan Solar Asset. Taiwan's Solar net asset reached TWD 50.4 billion at the second quarter end of 2023, representing 22% year-over-year increase and 7% growth rate for the first half of this year.
Next slide, Slide 17. This page represents trend of our Taiwan loan yield and funding costs. The increase in funding cost reflect the interest rate increase in Taiwan starting from March last year. The slightly increase in loan yield for the second quarter 2023 was mainly reflecting the gradually adjust of the price to the new disbursement. Since Taiwan Central Bank has paused the rate hike after this March, which should be helpful to stable the spread in Taiwan.
Moving to Slide 18. Revenue for our Taiwan operation for the first 6 months of 2023 reached TWD 25.1 billion, representing 16% year-over-year growth rate. The Solar revenue accounts 15% of Taiwan's revenue for the second quarter. For the quarter-over-quarter comparison on the right-hand side, second quarter revenue was up 8% quarter-over-quarter due to higher business volume and higher Solar income because of more sunshine in the summer time.
Turning to next slide, Slide 19. Taiwan's profit for the first 6 months of 2023 decreased by 5% compared with the same period last year mainly due to the increase in interest expense and slightly higher in impairment losses. The second quarter of Taiwan net profit was up 4% quarter-over-quarter, reflecting sequential increase in business volumes.
On Slide 20. On the left-hand side, Taiwan delinquency ratio at second quarter 2023 was up 0.2 percentage points to 2.3% for the quarter. There is no specific concentration of the delinquency in any specific industry but more related to what the overall macro situation. GDP of Taiwan this year is expected to be weaker and achieved less than 2% growth. On the right-hand side, there is more recovery from delinquency and write-off amount for the quarter.
Next slide, Slide 21. Allowance to loan portfolio for Taiwan increased a bit in terms of absolute amount and maintained at 1.7% this quarter, which remains sufficient.
Now let's start China operation on Slide 22. China total loan and receivable reached TWD 215 billion at second quarter end which grew by 4% year-over-year and negative 2% quarter-over-quarter as China's Yuan is keep depreciating this year. If we use local currency RMB to see the actual growth momentum, we see 8% year-over-year portfolio growth and 1% for the first half growth. For China, we see second quarter business to build up [indiscernible] accelerating due to the current sluggish economic situation.
Turn to Slide 23. This page shows the loan yield and cost of fund trend for our China operations. We see cost of funding has been lower this quarter due to the cut of the loan prime rate. We managed to maintain stable spread over the quarters.
Next slide, Slide 24. China's revenue for the first 6 months of 2023 totaled TWD 15.5 billion, increased 7%. On the right-hand side, second quarter revenue was down 1% quarter-over-quarter. If we take out the RMB depreciation factor, the second quarter revenue was flat versus the first quarter instead of increase -- a decrease.
Moving on to Slide 25. China for the first 6 months of 2023 net profit reached TWD 7.1 billion increased 0.1%. The lower growth rate in profit compared to revenue and portfolio was mainly due to more expected credit loss for this year. On the right-hand side, China's second quarter 2022 net profit was down 12% sequentially as only RMB 150 million tax rebate recognized for the quarter compared to more tax rebate of RMB 250 million in the first quarter.
Turning to next slide, Slide 26, on the left-hand side, China delinquency ratio at second quarter was up 0.2 percentage points to 3.4%, reflecting the impact and uncertainty of the current sluggish macro situation. However, we see new delinquency formation stabilized in the second quarter. On the right-hand side, write-off amount and recovery from delinquency amount increased for the quarter compared to prior few quarters.
Next slide, Slide 27. China's allowance to portfolio ratio for the second quarter 2023 was up 0.1 percentage points to 2.8%, reflecting the increase of delinquency amount.
Moving to ASEAN on Slide 28. The total loan and receivable at second quarter end 2023 reached TWD 109 billion, up 23% year-over-year and 7% for the first half. Malaysia, Vietnam and Thailand remain the main growth driver for ASEAN this year.
Let's turn to next slide, Slide 29. The left-hand side, ASEAN revenue for the second quarter totaled TWD 6.47 billion grew 35% compared to the same period of last year. Business momentum continued to be good this quarter. On the right-hand side, ASEAN second quarter revenue was also up 5% sequentially.
Moving to Slide 30. ASEAN's first 6 months of 2023 net profit reached TWD 1.26 billion, decreased by 10% due to more interest expense and impairment loss were booked for the second quarter. On the right-hand side, ASEAN second quarter 2023 net profit was down 18% sequentially, and this is also due to more interest expense and impairment loss were booked for the second quarter.
Last slide on the left hand side, ASEAN delinquency ratio in second quarter increased 0.4 percentage points to 3.9%. On the right-hand side, ASEAN's allowance to portfolio ratio for the second quarter 2023 increased to 3%, reflecting the increase of delinquency amount. And this also brings us to the end of our presentation for today. Thank you for your time and listening. Now I would like to turn the call to Jason to start Q&A. Jason?
[Operator Instructions] And our first question will be coming from Gurpreet Sahi of Goldman Sachs.
Sharon, Kimberly and Vic. so first question is regarding coverage. I see that coverage in other words, the allowance to delinquency is now between 70% to 80% for most of the regions and also at the group level. How comfortable are we with that -- are we taking a view that delinquencies are stabilizing here and hence because remember, we always used to be targeting 2x coverage. So assuming 50% loss given default allowance to delinquent should be around 100%. So first question is regarding that, how comfortable is the management?
Yes. I think for our provision coverage ratio, actually, it depends on our loss given default, which is the loss ratio performance. So if we look at our historical number for Taiwan, actually usually fall into like around 70% to 80%. I mean, this coverage rate. So for China for the past like more than 15 years, we continue to improve the loss ratio and so currently, it's around 80-something percent. I think it's still regarded adequate during the current loss given default level and the delinquency ratio. So yes, basically, we still want to maintain like around 2x of the estimated loss. And I think especially during the current kind of slower business growth, we can -- we are able to put more resources to continue to improve the collection performance as an internal like major KPI for this year. So yes, that's about the provision coverage.
Okay. And then for the delinquency, I heard -- the mention that it is stabilizing the formation rate in China. So can we expect that below 4% overall delinquency number for China can be stabilized? And then for ASEAN separately, it's good -- it's rising. So what are our views on the ASEAN delinquency ratio?
Yes. I think below 4% is quite achievable so far as we can see the recent involvement of this China asset quality. And because we are still seeing probably, they will have some increase for the next few months because of the slower growth of the portfolio. But the growth of the new delinquency already stabilized and even like have some quarter-on-quarter decrease in terms of absolute amount so below 4% of the delinquency ratio should be quite achievable for China. And for ASEAN, I think it's still mainly because of the weak macro for most of the ASEAN countries. So with the slower higher default rate and a slower portfolio growth than before. So I think yes. So far, it's still a little bit too early to say whether -- when we will see more stabilization of ASEAN delinquency ratio. Yes.
Okay. And then final question is regarding growth. At the group level, I know you -- the management references growth target at the different geographies. I'm more looking at the consolidated number. We know second half is better than the first half on growth for the underlying business. And YTD, we did 4%. So can we assume that 10% will be the group number for growth, roughly speaking, that's target for this year?
Yes, we still have like 2 quarters to go, right? And if we do see gradually warm-up of the macroeconomy business momentum for the next 2 quarters, usually, in the normal year, I think we can grow like 4% to 5% each quarter in the second half. So I think, yes, should be able to achieve like double-digit kind of growth on the consolidated level. .
So group 10% to 15% should still be the guidance, is it?
On the consolidated level. Yes.
Next question, Jemmy Huang of JPMorgan.
Three questions from me. I think the first one is for China, we pretty much finished 2/3 of the third quarter already. So just trying to understand, are you still seeing some kind of seasonality for portfolio growth as second half loaded? As you will see in the previous cycle over this year, there is not much seasonality for growth this time around? Second question is for Taiwan. I think we do see some asset quality deterioration and new [ bidding ] confirmation is still trending up. Just curious because if we look at in the previous cycle, when you face some asset quality deterioration, you also tend to slow down the portfolio growth as well, just like what we have seen in China.
But Taiwan, I think the portfolio is still growing at a pretty nice levels. Just trying to understand what's the reasons behind and you still feel comfortable to grow at like high teens this year. Final question is on Taiwan's funding cost. Assuming we don't really get further rate hikes for the rest of the year. If we look at your cost of fund in Taiwan. What's the ending level we should expect and when we will reach that because currently, we are probably looking at around 2% cost of fund? And how much of your existing funding portfolio -- funding pool already being repriced up to the latest levels already?
Okay. The first question about the China growth prospect for the next 2 quarters. I think, yes, we still remain positive about a better second half than the first half as usual, like in the past because you can see from like recent months, July or August, we already see some improved new business volume already. So there's still quite a good chance that we will have a better second half in -- compared to the first half.
And the second question about the Taiwan delinquency ratio. Actually, currently, 3.2% of the delinquency ratio given our quite good spread level, I think this is still quite normal -- at the normal range. And we don't -- we won't say it's deterioration. It's within the normal like range. And because in the past, like 1.9% or 2% is really low. And as long as our CEO mentioned in the Chailease session, as long as we are able to factor in the reasonable credit cost in our new pricing. I think we still want to pursue the healthy growth. So the current growth target like 10% to 15%, management team still believes is quite acceptable. And that's about the Taiwan is the quality. And about the Taiwan funding cost, I think because Taiwan CBC already kind of passed the interest rate hike after this March and the interest rate increase starting from the March of last year.
I think probably most of the funding costs already reflect the increase of the benchmark rate increase. So -- but when -- what the ending level is difficult to say because in Taiwan, we have quite diversified business mix because we have some USD nominee -- USD-denominated business. And because U.S. dollar still continue to increase the interest rate. So it's difficult to say what the level will be. But actually, as you know, for USD lending business, we are using floating rate. So it won't impact our spread too much. And you already can see from our presentation slide that we already gradually factor in the new funding costs to our new price and gradually increase the average yield already. So yes, that's about the answer for your question.
So is it fair to say that further spread in Taiwan to further contract in the following quarters, the trend is relatively low nowadays?
Yes, you can say that.
[Operator Instructions] Next question is from Alex [indiscernible] of UBS.
Sharon. I have 2 questions. The first one on the cost line. So we have noticed the -- both the employee expense and the other operating costs has go -- gone up quite fast in the past 2 quarters. Can you give us some color on which regions that come from? And what were driving that? Because the employee cost seems to be outpacing your portfolio growth. And the other OpEx, I'm guessing some of it might be related to your traveling expense picking up, but I just want to confirm whether that is all of it or there is other -- any another cost item that is responsible for it and whether it's purely coming from China or other regions as well? And how do you think about the outlook for the second half? That's number one.
Second question is about the repricing on the funding -- on the asset side, given that most of your portfolio in ASEAN is consumer credit and in your past meetings, you mentioned around 20% of your Thailand portfolio is related to consumer credit, including used car financing. So I'm wondering for the full of consumer credit, would they be relatively more difficult to price up in this [indiscernible] cycle. Or are they just the same as the SME lending, so you are very pretty easy to price it up?
Okay. The first question about our OpEx-related items. I think because as you know, our business plan is about this head count plan is more for mid- to long term. So we still continue to increase the head count for the long-term growth purpose. So I think the headcount-related expense increase is across the board for all the major operating regions. And in addition to headcount-related expense, as you know, starting from this year, after out of this COVID impact, every operating region, we start to ramp up the business activities. So sales and marketing-related expenses, including the travel-related expenses to increase quite a bit. Yes. That's for the cost.
And the second question about the repricing capability. Yes, you are right. Compared to the SME business for the consumer business unit, the repricing capability probably cannot match 100% of the increased funding cost. Probably we can only pass through like 50% to 70%, and we need to gradually to factor in and to see the market reaction. So yes, I think your observation is right. So that's the reason why for ASEAN, I think the spread contraction is a bit more challenging compared to our China or Taiwan operation.
If I can have a follow-up for your Taiwan portfolio on the asset yield, actually, last quarter, you saw Q-on-Q decline of over 20 basis points. I'm not sure whether we covered that in previous earnings call or not, but can you remind us what drove that because if you are repricing your portfolio gradually up, why is there a sudden decline last quarter?
Which number you referred to?
I'm on the Page 17, the Taiwan portfolio, the loan yield was 8.72% in last quarter, and it was down by over 20 basis points, Q-on-Q.
I think we are only using very simple calculation for this yield line. We're just using the total interest income divided by the simple average of the beginning and ending balance of the portfolio. And in Taiwan, we have very diversified business mix. We have some foreign currency business, lending business. But probably you better to focus on the spread. The difference between the yield line and the cost of fund line, you can see actually for the -- last quarter, the spread is like 6.5% -- 6.8% of the spread and the discrete even increased to 6.62%.
[Operator Instructions] And next one, Gurpreet Sahi of Goldman Sachs.
Two quick follow-ups. First is, remember, Sharon, we used to get the Taiwan -- sorry, the China collection efficiency. Can you remind us of the latest number you've seen for that? And then for Taiwan spread, a quick follow-up. So this 4 basis points Q-on-Q increase in spread. So we should expect more of such increases in the coming quarters and with a higher number? So 4 is not enough because we lost a lot of spread in Taiwan, right? It should at least be coming back up 10 basis points Q-on-Q or something like that. So yes.
To answer your last question first, and yes, because our repricing activity continued because the last fund -- interest rate increase was this March. So there's still some time lagging we need to gradually factor in. So I believe there is still some improvement for this spread for the next few quarters. And for the China account receivable collection rate actually is kind of maintained flat. So yes, that's the reason why we still -- we only see the stabilization of the new delinquency formation. We haven't really seen the decrease of this delinquency ratio yet.
[Operator Instructions ] Next one is from Anupam Mathur, Goldman Sachs.
I have 2, 3 questions. Firstly, on Taiwan. So just to understand, like which are the segments which are driving this asset quality pressure? Can you name which are the key drivers of this asset quality issues? Secondly, you mentioned that we are okay with the current sort of provisioning we are seeing and delinquency ratio we are seeing. So I noticed that our first half -- credit cost has been quite high versus previous years. So is this first half credit cost is a reflection of the true normalized credit cost for us in Taiwan, like how to think about provisioning on a long-term basis?
And lastly on ASEAN, I understand we are facing macro uncertainty and issues around delinquency. So why are we not slowing our portfolio growth? Why are we still growing so fast? Like it is supposed to grow the highest among all our regions but ideally, shouldn't we be slowing growth and working on the asset quality, just to understand like how are we looking at this region?
The first question about the Taiwan delinquency ratio. As we mentioned in the presentation, actually, it's kind of across the board. There's no concentration in any sectors because you can see for the first half, Taiwan GDP, the macro growth still kind of slow. And -- but having said that, I think 2 points -- that's 2.3% of the delinquency ratio for Taiwan still very, very healthy. I mean, It's still -- if you look at our historical numbers, and given there's only like 30% of the loss ratio for the -- out of the delinquency, and we still maintain quite good spread. And it's fairly risk justified. And so it should be still within the normal range.
And for the long-term provisioning level, if you look at our longer-term historical data for Taiwan, usually, the coverage about this provision to the delinquency ranging from like 70-something percent to 100%. And I think right now, we have almost 90% of the coverage ratio, given the quite normal delinquency ratio current level at 2.3%. I think -- we still think this is quite sufficient. And if we roughly calculated the 2.3% of the 30% loss ratio, I think it's only -- it's less than 1% of the loss. So I think this 1.8% of the coverage -- 1.7% of the Taiwan -- 1.7% of the provision ratio is quite efficient from our estimate.
And about ASEAN, as you know for ASEAN there's still the slower performance of this bottom line half of the reason is the spread contraction. It's not all related to the asset quality issue although the delinquency ratio seems high. But as we continue to communicate our Thailand loss ratio, out of the delinquency actually is quite low, even lower than Taiwan. So the credit cost, I think, still remain acceptable for the management team continue -- try to explore the growth opportunity in ASEAN region. So we still want to keep our growth target like 15% to 20% of the growth for this year. And we will see whether with better momentum, better macro performance that we can see more stabilization of the asset quality.
Understood. Just one follow-up on Taiwan. So do we expect this is the peak level of delinquency? Or do we expect higher levels because we seem to be provisioning quite high, especially in second quarter. And as you mentioned, we have ample buffer. So I'm just trying to understand, like, is it like an early cycle of Taiwan delinquency or are we already close to the peak? Like what is our expectation?
On delinquency ratio, always remain at a quite narrow range of the variation. So it should be around 2% to like 2.5% range? Yes.
Okay. So we don't see a big blowout like we saw in China. We don't expect sort of Taiwan delinquency to be reaching closer to 3 year higher. That is not our base case, right?
No, probably not because the difference is Taiwan will still maintain quite good portfolio growth momentum compared to China.
Okay then, Kimberly. There are currently no questions at the moment.
Okay. Jason, we can end the call. Thank you.
Thank you. And ladies and gentlemen, we thank you for your participation in Chailease conference. You may now disconnect. Thank you, and goodbye.