Chailease Holding Company Ltd
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Chailease Holding Company Ltd
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Welcome to this Chailease Third Quarter 2019 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 is finished.
Now I would like to turn the call over to [ Kimberly Lin ], Assistant Manager of Investor Relations. Please go ahead.
Hello, everyone. This is Kimberly from Chailease. Thank you for joining us today for Chailease Third Quarter 2019 Results Conference Call.
On our call this afternoon, I'm 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 company website at www.chaileaseholdings.com.tw.
As a reminder, please refer to the disclaimer on Slide 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 first 3 quarters of 2019, followed by the consolidated performance review and segment review for our main operation regions including Taiwan, China and ASEAN operation.
Now let's turn to Slide 4 for highlights that summarize our performance of the third quarter of 2019. First, the summary table here shows you the loan portfolio growth for the first 3 quarters. On the consolidated level, you can see in the middle column of the table, we achieved 17% year-over-year portfolio growth and 24 percent point including the Solar business net assets. In the third quarter, China, Taiwan and ASEAN all continued their business momentum from prior quarters.
To further look into our 3 main operation regions. Taiwan, China and ASEAN loan portfolio grew 8%, 26% and 33% year-on-year, respectively. If we include the Solar business net assets, Taiwan's portfolio growth was 20% year-over-year.
The right-hand side of the table shows you the accumulated portfolio growth of the first 3 quarters. Taiwan increased 2%, China increased 15% and ASEAN increased 25%. Again, if including the solar business net asset, Taiwan grew 14% year-to-date.
The next point is about the impact of fee income recognition change due to the new IFRS implementation, which we have been communicating from the beginning of the year. As expected, the bottom line impact from this change continued to be minimized when the deferred portion of the fee income was gradually realized in the book.
And for this third point, we would like to highlight that the overall asset quality remained stable, and we expect the delinquency ratio also to be stable going forward.
Next slide, Slide 5 shows you the summary of fee income recognition for the first 3 quarters. Overall, on a consolidated basis, 73% of fee income has been recognized for the first 3 quarters compared to 67% for the first half of 2019. This demonstrates the impact of fee income recognition becomes smaller and smaller over time.
Let's move to the next section. Performance review for the third quarter of 2019. As we see on Slide 7, the consolidated portfolio reached TWD 408.2 billion for the third quarter end of 2019 with 24% year-over-year growth and 16% year-to-date increase when including Solar business.
In the third quarter, all of the 3 main operating regions continued to keep their business momentum.
Turning to Slide 8. 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 in the past 3 years. This quarter, the year-end cost of fund is moving upward slightly, mainly due to RMB depreciation for the period when translated to our reporting currency, which is New Taiwan dollar.
We will look at each operating region's yield and cost of funds next section.
Next slide, Slide 9. 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 volume during each quarter due to the new IFRS implementation this year. So the year-over-year comparison is not representative. However, the quarter-over-quarter growth trend in this year still shows upward business momentum.
Next slide, Slide 10. On the left-hand side, the consolidated revenue for the first 3 quarters of 2019 reached TWD 42.8 billion, representing 16% growth compared to the same period last year.
On the right-hand side, the third quarter consolidated revenue was up 5% from the previous quarter.
Moving on to Slide 11. On the left-hand side, the consolidated net profit for the third quarter of 2019 reached TWD 11.5 billion and the retroactively adjusted earnings per share was TWD 8.65.
The net profit amount increased by 14% year-over-year and negative 4% quarter-over-quarter.
In the third quarter of 2019, there was an RMB 18 million tax rebate on China operation compared to RMB 68 million of tax rebate in the second quarter. Therefore, EPS quoted for the third quarter is a bit lower than the second quarter.
Moving on to Slide 12. This shows the cost-to-income ratio and leverage ratio for the group level. Our group level cost-to-income ratio was maintained relatively stable. This quarter, it's at 31%.
The leverage ratio was 6.6x at the third quarter end.
Turning to Slide 13. This page shows you our loan portfolio mix and profit contribution in terms of operating regions. On the left-hand side, we can see Taiwan business still accounts for 52% of group total loan portfolio. China is about 32%. And ASEAN slightly increased to 15% for the third quarter end of 2019.
On the right-hand side, Taiwan net profit contribution accounts for 48%, and China accounts for 44%. ASEAN, excluding minority, contributed 4% of the consolidated net profit.
Please turn to Slide 14. The consolidated return on assets on an annualized basis achieved 3.7% for the first 3 quarters of 2019, reflecting a slightly slower growth of net profit than 2018.
The consolidated return on equity, on the right-hand side, was 24% compared to 23% last year.
Slide 15. The consolidated delinquency ratio shows on the left-hand side. At the third quarter end, the overall delinquency ratio was 2.8% due to stable asset quality. In our main operating regions, both Taiwan and China's delinquency ratio was slightly decreased by 0.1 percentage point in this quarter as portfolio continued to accumulated at a healthy pace.
We will look at each region's delinquency ratio later.
Here in the graph, it shows 2 delinquency ratios: one, is without Solar business; and the other, including Solar business. Since there has been no default case for our Solar business, the ratio will be even lower when including the Solar portfolio in the denominator.
Looking at the right-hand side graph. The allowance to portfolio remains sufficient.
Moving on to segment review, let's look at our operating performance country by country.
On Slide 17, our Taiwan loan portfolio reached TWD 212 billion at the third quarter end of 2019, representing 8% year-over-year increase and year-to-date was up 2%. If we include the Solar's net assets, loan portfolio growth for year-over-year increased 20% and year-to-date increase was 14%.
Major growth drivers are still coming from overseas lending including aircraft, shipping financing, solar power business and microfinance business, et cetera. Product expansion into different niche market helped continue to drive growth for Taiwan business unit and continue to achieve double-digit growth every year.
Moving on to Slide 18. This page representing trend of our Taiwan loan yield and funding costs. We maintained steady interest spread within a narrow range.
Turning to Slide 19. The graph shows Taiwan's fee and commission income for the last 5 quarters with breakdown of fee from alliances with commercial banks and general fee income. As explained earlier, the fee income was impacted by the new IFRS standard starting from -- this year. So it is not comparable to last year's figure. However, it shows the sequential growth trend for this year.
Moving on to Slide 20. Revenue from our Taiwan operations for the first 9 months of 2019 reached TWD 18.7 billion, representing 17% year-over-year growth.
For the quarter-over-quarter comparison on the right-hand side, third quarter revenue was TWD 6.7 billion and grew by 6% quarter-over-quarter.
Turning to the next slide, Slide 21. Taiwan's net profit for the first 3 quarters of 2019 reached TWD 5.8 billion, which grew by 10% compared to the same period last year. This is slower than the year-over-year growth -- portfolio growth, mainly due to the impact of the deferral of fee income.
On Slide 22. The left-hand side shows Taiwan's delinquency ratio. Two ratios show here starting from this year, one without Solar business and the other including Solar business, indicate that our asset quality remains stable. Taiwan delinquency ratio at third quarter end was down 0.1 percentage point to 3.0%.
On the right-hand side, recovery from delinquency and write-offs both increased for the quarter.
Slide 23. The allowance to loan portfolio is at 2.1% for Taiwan and maintained at sufficient level.
Next, let's take a look of our China operation on Slide 24. China's total loan and receivable reached TWD 131.4 billion at the third quarter end, which grew by 26% year-over-year and 15% year-to-date. The year-over-year and year-to-date growth rate was 28% and 18% if calculated in RMB.
Turning to Slide 25. This slide shows you the loan yield and cost of fund trend for our China operation. As mentioned earlier, this quarter, the yield and cost of fund is moving upward slightly mainly due to RMB depreciation for the period when we translate to our reporting currency, which is New Taiwan dollar.
Next slide, Slide 26. This slide shows you the trend of fee income resulting from the new business volume in China. For the first 3 quarters of this year, new business model continued to trend up.
Next slide, Slide 27. China's revenue for the first 3 quarter of 2019 totaled TWD 19 billion, increased by 10% year-over-year. And revenue for the third quarter was up 3% compared to the second quarter. Year-over-year revenue grew slower than the portfolio growth due to fee income recognition method change and less trade finance business in the first 3 quarters.
We can see this more clearly by looking at the revenue breakdown on Slide 28. Revenue generated from trade finance business in the first 3 quarters totaled TWD 6.6 billion, which decreased a bit from last year. Having said that, revenue from the core leasing business is still nicely growing for the first 3 quarters.
Moving on to Slide 29. China, for the first 9 months of 2019, net profit reached TWD 5.4 billion, increased by 14% year-over-year. The profit growth was lower than the portfolio growth because it was affected by net fee income being recognized starting from this year.
On the right-hand side, China's third quarter net profit was down 6% sequentially, which was partly due to less tax rebate being recognized in the third quarter. In the third quarter, there was an RMB 18 million tax rebate from China operations compared to RMB 68 million of tax rebate in the second quarter. Overall, the tax rebate we recognized for the first 9 months of this year totaled RMB 130 million compared to RMB 120 million last year.
Turning to next slide, Slide 30. On the left-hand side, China's delinquency ratio at the third quarter was 1.9%, slightly decreased from prior quarter due to good portfolio growth, giving stable asset quality.
On the right-hand side, write-off amount increased a little bit for this quarter compared to the prior quarter.
Next slide, Slide 31. China's allowance-to-portfolio ratio continued to trend down gradually as asset quality improved and reached to 2.9% at the end of the third quarter.
Moving to ASEAN on Slide 32. The total loan and receivable at third quarter end of 2019 reached TWD 60.7 billion, up 33% year-over-year and 25% year-to-date growth, which is a little bit better than our guidance. Major growth driver comes from our Vietnam and Malaysia operations.
Let's turn to next slide, Slide 33. The left-hand side, ASEAN's revenue for third quarter totaled TWD 4.7 billion, grew 42% compared to the same period last year. The better top line growth was driven by good business momentum as well as more sales revenue from the trade finance business for Vietnam this year.
On the right-hand side, ASEAN's third quarter revenue was up 7% sequentially.
Moving to the last slide, Slide 34. ASEAN's first 9 months of 2019 net profit reached TWD 902 million, increased by 14% year-over-year.
On the right-hand side, ASEAN's third quarter net profit was up 10% sequentially, driven by the top line growth.
And 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. Hi, operator?
[Operator Instructions] The first question is from Yafei Tian with Citi in Hong Kong. The first question is from Yafei.
So the first question is around asset quality. I was looking at asset quality trends, just wanted to get an understanding of what's going on in Taiwan and China, respectively. On Page 12 (sic) [ Page 22 ], the asset quality slide on Taiwan, we can see a bit of pickup in the write-off amount. I just wanted to understand what's driving that increase in write-off? And also, at the same time, why is the recovery is also offsetting the write-off?
So the next question is really around the China business. We started to see China's asset quality under continuous improvement. Delinquency continued to fall. So -- and we also started to see that the allowance is also falling. Just wanted to understand when -- what sort of level in terms of allowance ratio you expect the China allowance to fall to.
Okay. Regarding the write-off and the new delinquency amount increase for Taiwan this quarter, I think it's because we have our standard write-off schedule. So every quarter, probably, they will have some variation in terms of absolute write-off amount. But actually, if you look at the average -- the year average number, I think this new delinquency amount and also write-off recovery amount shifts, we think, that average level. So I think it's just some quarter-over-quarter variation. There's no specific reason. No significant change of any asset quality issue.
And in terms of the China delinquency ratio and also the provision ratio, I think because, although for this quarter, the China delinquency ratio decreased a little bit by 0.1 percentage point, this is mainly driven by the portfolio growth. I think the asset quality already achieved at a very good level. And we -- from our observation, I think the asset quality should be very stable now. A little bit decrease of the delinquency ratio should be because we still have a nice growth, portfolio growth, for this quarter.
So -- and about the allowance ratio trending down gradually, I think we have been explaining this because our China delinquency ratio has been improved significantly, starting from like 2 years ago. And those data were gradually factored into our model to reflect the reasonable provision that we should set aside. So we already expect this provision ratio will be gradually decreased. But again, our provision policy still remain the same. We want to cover like roughly 2x of the estimated loss. So this is the policy, and we didn't change the policy.
[Operator Instructions] And next question comes from Gurpreet Sahi with Goldman Sachs in Hong Kong.
First is on the spread, it seems that the loan yield continued to move up, especially in China, although cost of funds was higher. But then, overall, I think for the group level, still spreads are at the top end of what you would expect them to be.
And then the second question is regarding leverage and how do you think about capital raising, if any, in the foreseeable future? And what more you would think about doing the capital raising for?
This kind of small variation about the spread we present here, regarded as stable. I think there is some slight variation quarter-over-quarter. And also, in Taiwan, we introduced some of the new products. The yield will be slightly changed -- or different from the traditional leasing business. So overall, I think our ultimate goal is still to maintain the same return, which is my ROA and ROE. So I think this kind of spread, small variation, we still think is stable because we didn't change our pricing strategy so far.
And regarding the equity fund-raising plans, I think the guidance is still the same because when we -- right now, our debt-to-total asset -- to equity is 6.6x. And we will start to do the preparation when we reach 7x. So probably, the timing will be around end of next year or early 2021. So yes, that's roughly the timing.
And then can I have a follow-up? How do you think about raising this money? Will it be GDR or some other form of capital issuance?
I think for the past 2 times, we issued GDR. But this time, we have some time to do more research studies, so not just GDR. We also can consider in the other tools like preferred stock or common shares or like ECB. So we haven't made a decision yet.
The next question is from [ Evan Lu ] of HSBC in Hong Kong.
I have 2 questions. First, on delinquency. I think the overall delinquency is stable, but in China and in Taiwan, delinquency improved a bit. So that implies that there might be slight uptick in the delinquency ratio in the ASEAN region? Can management comment a bit on that and give us more color?
Second question on the sales revenue. I think if we look at the sales revenue, it increased a lot, but the corresponding item in the expense side has remained stable. So I think that's partly because of the Solar business. Can you remind me of the accounting treatment? I think there's some change in this year.
Okay. Regarding the in -- because both our Taiwan and China delinquency ratio actually decreased a little bit, but the overall delinquency ratio maintained the same, which means our ASEAN delinquency ratio also -- I mean increased a little bit. Yes, by calculation, you are right. But I think, ASEAN, for some region, the delinquency ratio increased a little bit, but still within a reasonable range. So we didn't see it's a big change. So far, still okay.
And for the sales revenue, yes, it's related to the Solar business. As we mentioned earlier, the Solar business, starting from this year, we make some accounting treatment change. So starting from this year, for the Solar asset, we put into the fixed asset. And the revenue generated from sales of solar energy, we book as revenue on the top line instead of increased revenue to be recognized in the past. Yes. So if you do the year-over-year comparison, the revenue increased quite a bit.
Okay. Can I follow up with one additional question on China. Given the current economic situation in China, do you still maintain your usual expansion pace in Mainland China in terms of the number of branches that you will open every year?
Yes. Because I think, regarding the geographical expansion plan, we didn't have major change, still with the pace of adding 3 to 5 new branches every year and starting with a smaller scale like around 10% to 12%, that kind of scale. So this has remained the same. But this has nothing to do with how much the sales revenue that we want to put as a target. So -- because this expansion of the branch is a longer-term plan. So yes, you are right, we didn't change the growth expansion plan.
[Operator Instructions] Next question is from Yafei Tian with Citi in Hong Kong.
I just wanted to -- perhaps you wouldn't give guidance for next year yet, I just wanted to get a bit of understanding of how you expect -- how you think about your growth in China and ASEAN countries given that you have exceeded the guidance at the beginning of the year, so how you think about for the remainder of the year? And any thoughts yet on what kind of growth you can achieve in next year?
Okay. For this year, for the first 3 quarters, I think we probably -- for each region, we can like outperform the original growth targets like, originally, we set the target for Taiwan to grow 10% and China 20% and ASEAN more than 20%. So probably, yes, we can outperform that target for this year.
But for next year, I think we will have a more official growth guidance in our fourth quarter results conference because we are still doing the annual planning task. So haven't finalized the number yet.
I guess my question into fourth quarter like you're obviously quite ahead of your plan, are you going to keep the momentum going into fourth quarter? Or you're going to slow down a little bit, given the target is already being achieved?
No. Because, usually, the fourth quarter in terms of business momentum, the new business volume, usually, it's a peak season either equal to the third quarter or a little bit higher. But this didn't mean our bottom line growth will be at the same pace because in the year-end there will have some more expense to be recognized on the book. So if you are talking about the business volume, I think we expect to continue the current business momentum going forward.
Okay. Can you also comment a little bit on the funding situation in China? It looks like liquidity situation has improved. Just want to think -- pick your brain on how you see the funding cost for yourself trending in China? And as a result, would you reprice down? The lending side looks like for quite a number of quarters the loan yield has been trending up. Just wondering for your SME customer base, in such a tough economic environment, are there any pushback in that rising loan yield?
So far, I think the easy -- I mean, the better liquidity in China compared to last year, it really helped us to maintain the stable cost of funding. And -- but because we are continuing to have double-digit growth, so with more and more funding needed, I think we need to utilize more other funding source. So overall, management still expects probably we will maintain quite stable overall funding cost in China. As we mentioned there, we want to do the securitization, the ABN. I think the overall funding is still probably a little bit more expensive, but we will manage that we can maintain similar overall funding costs going forward. So then our pricing also will be maintained similar.
[Operator Instructions] Next question is from Ben Huang with Mizuho in Hong Kong.
I have 2 questions. So the first one is a quick one. So in China, I want to confirm, so if our new loans are all priced with the benchmark to the LPR? Or are we still -- but based on the benchmark interest rate? And so far, how do you feel about the impact after the implementation of the LPR?
And then the second question is about the asset quality. So as we noticed, the macroeconomy and/or the GDP growth in China has been slowing down. So I want to ask what, I mean, made you -- I mean, what drive this very stable asset quality in your China business so? Or do you see any signal of like the deterioration of asset quality or something like that?
Okay. Regarding the benchmark rate and LPR rate, so from our current observation according to our China CFO, although this is 2 different benchmarks, but actually it turned out to be the same number. So yes, so probably they will use the new formula -- new LPR. But actually still -- I think banks still will use the old pricing level as a benchmark. So it didn't change our funding cost much.
Okay. So how about on the lending side, are we required to use the LPR as well?
Because -- well, although the officially announcement saying that banks should use the LPR as the base for the pricing, but actually, when we renew the new credit line or there's new borrowing cost to be decided, basically, it's still quite close to the existing borrowing costs we borrow from the banks. They're just using the new LPR as a formula to calculate. Yes. So there's no real change for our funding cost so far. That's what we observed.
And for the asset quality, because you know our leasing asset mostly are for 3 years. So currently, it's mainly reflect on the past 2 years delinquency. And for the new under return assets, this year, probably we need to wait for probably 10 to 11 months to better reflect the asset quality. But there is an early indicator that internally we monitor very closely is monthly payment collection rate. So, so far, this monthly payment collection rate still remain quite stable. So we didn't expect there will have any big change of the asset quality in the near term. Thank you.
[Operator Instructions] [ Kimberly ], there are currently no questions.
Thank you. Okay, we can end the call, operator. Thank you.
Thank you for your participation in today's conference. You may now disconnect. Goodbye.