Chailease Holding Company Ltd
TWSE:5871
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Chailease Holding Company Ltd
Earnings Call Analysis
Q3-2023 Analysis
Chailease Holding Company Ltd
In the ASEAN region, revenue for the first nine months of 2023 soared to TWD 9.9 billion, marking a significant 31% increase from the same period last year. Although Q3 net profit dipped by 10% due to higher interest expenses and booked expected credit losses, it registered a 9% sequential uptick as expected credit loss for the quarter diminished. Delinquency ratios in Q3 held steady at 3.9%, echoing the previous quarter's performance. Similarly, the ratio of allowance to loan portfolio in ASEAN maintained its Q3 level.
Taiwan witnessed a modest spread improvement of 10 basis points quarter-on-quarter. With interest rate hikes enacted from the prior March, the full effect will gradually materialize as older contracts expire and new pricings take effect. A meaningful increase in spread may depend on a pivot in interest rate trends. Meanwhile, Mainland China's delinquency rate indicated an increase, but when accounting for foreign exchange impact, the uptick appears less alarming—up from RMB 6.9 billion in Q2 to RMB 7.8 billion in Q3, which is within the standard range of variation. Despite a higher delinquency amount this quarter, the stability of other metrics, such as the account receivable collection rate, supports an expectation of stable credit costs throughout the year.
Fluctuations in currency exchange rates can significantly affect financial reporting. For instance, Mainland China's previous quarter delinquency amount was TWD 7.426 billion, influenced by the exchange rates at the end of the second quarter. The rise in reported delinquency from RMB terms becomes more modest after adjusting for these currency impacts, highlighting the importance of considering foreign exchange when evaluating international business segments.
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Welcome to the Chailease's Third 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 is finished.And now I would like to turn the call over to Vic Wang, Vice President of the Chailease Holdings. Mr. Wang, please go ahead.
Thank you, Jason. Hi. Good evening, everyone. I would like to welcome everyone to Chailease Holdings Third Quarter 2023 Earnings Conference Call. With me this evening is Sharon Fan, Head of IR, and she will open to your questions in Q&A period.I will walk you through this quarter's earnings presentation, which is available for download on our corporate website under the IR section. As a reminder, please refer to the disclaimer regarding forward-looking statements at the front of the presentation.The agenda we are going to cover for today on Slide 3 includes management highlights, third quarter 2023 consolidated performance review, followed by the segment review for our Taiwan, China, and ASEAN operation.With no more delay, I would like to start the presentation from Slide 4. Highlights for overview of our third quarter 2023 operation 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 14%, 8% and 18%, respectively.On a consolidated level, we achieved 12% year-over-year loan portfolio increase, which is in line with our yearly target. As for year-to-date portfolio growth, Taiwan increased 10%, China increased 4%, ASEAN increased 10%, and 8% growth on a consolidated basis. The business momentum and loan portfolio growth continued for the quarter.Second, Taiwan loan yield has gradually reflected the increase of funding costs with interest spread improvement. This year, Taiwan interest spread was impacted by the continued interest rate hike since year 2022. The company already reflects the increase of funding cost to the new contracts and expects the interest spread for Taiwan will gradually return to or close to prior level as old contracts expires.Third, we see continued increase of delinquency ratio, on the other hand, we also maintain stable credit cost for Taiwan and China and slightly decreased for ASEAN this quarter.Moving on to Slide 6. Consolidated loan portfolio reached TWD 725 billion at third quarter end 2023, with 12% year-over-year growth and 8% year-to-date increase as Taiwan, China, and ASEAN continued the growth momentum for the 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 recent quarters, we see a slight increase of loan yield as we gradually reflect the new prices for increased funding costs. 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 9 months of 2023 reached TWD 72.5 billion, representing 14% growth compared to the same period last year as Taiwan and ASEAN remained the growth driver this year. On the right-hand side, third quarter 2023 consolidated revenue was up 4% from the previous quarter as Taiwan increased 6% sequentially.Moving on to Slide 9. On the left-hand side, the consolidated net profit for the first 9 months of 2023 totaled TWD 19.3 billion, and earnings per share was TWD 11.6. The decrease in net profit was mainly driven by higher interest spread in Taiwan and more expected credit loss was booked for China. On the right-hand side, third quarter consolidated net profit was up 1% quarter-over-quarter.Turning to Slide 10. This slide shows you our loan portfolio mix and profit contribution in terms of operating region. On the left-hand side, we can see Taiwan loan portfolio still accounts for 52% of group total loan portfolio, China is about 31% and ASEAN maintained at 15% at third quarter end 2023. On the right-hand side, Taiwan net profit contribution accounts for 48%, and China was 45%. ASEAN contributes 6% to the consolidated net profit.Moving on to Slide 11. The chart on left-hand side, cost-to-income ratio, increased to 28% for the first 9 months of 2023 compared to the same period last year, mainly due to slower growth of gross profit this year. The chart on the right-hand side, asset to equity, slightly decreased to 5.8x from 6x in second quarter.Slide 12. The consolidated ROA on an annualized basis was 3% for third quarter of 2023, decreased from 3.6% in 2022, mainly due to decrease in profit this year. The consolidated ROE, on the right-hand side, was 19% for the quarter. In the mid-to-long term, we maintain our ROE target of 20% or above. The calculation of ROE excludes preferred shares.Next slide, Slide 13. The consolidated delinquency ratio on the left-hand side at the third quarter end 2023 was up to 3.1% from 3% in prior quarter. 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 also slightly up 0.1 percentage points to 2.4% compared to the previous quarter.Moving on to the segment review. Let's look at our operation performance region by region. On Slide 15, Taiwan's loan portfolio reached TWD 381 billion at third quarter end 2023, representing 14% year-over-year increase and quarter-over-quarter was up 3%. The micro business installment sales, used car financing and offshore USD business remained the main growth driver for this year.Slide 16. This slide shows the change of Taiwan Solar Asset. Taiwan solar net asset reached TWD 52 billion at third quarter end 2023, representing 20% year-over-year increase and quarter-over-quarter was also up 2.5%.Next slide, Slide 17. This page presents trend of our Taiwan loan yield and funding costs. Starting from the year 2022, the increase of funding costs reflects continued interest rate hike. The gradual increase in loan yield for recent quarter reflects the new prices for the increased funding costs.Moving on to Slide 18. Revenue for our Taiwan operation for the first 9 months of 2023 reached TWD 39 billion, representing 16% year-over-year growth. The solar revenue accounts 13% of Taiwan's revenue for the first 9 months of 2023. For the quarter-over-quarter comparison on the right-hand side, third quarter revenue was also up 6%.Turning to next slide, Slide 19. Taiwan's profit for the first 9 months of 2023 decreased by 8% compared with the same period last year, mainly due to increase in interest expense and higher expected credit loss. The third quarter Taiwan net profit was up 2% quarter-over-quarter.On Slide 20, on the left-hand side, Taiwan delinquency ratio at third quarter 2023 was up 0.1 percentage points to 2.4% for the quarter. As for the new delinquent amount this quarter, it slightly decreased from the prior quarter. On the right-hand side, recovery from delinquency was up for the quarter, while write-off amount remained.Next slide, Slide 21. Allowance to loan portfolio for Taiwan was slightly up to 1.8%, reflecting increase in delinquent amount for the quarter.Let's start with China operation on Slide 22. China total loan and receivables reached RMB 52 billion at third quarter end 2023, which grew by 8% year-over-year and 3% increase quarter-over-quarter. For China, third quarter shows picked up business momentum, and we maintain our China loan portfolio growth target of 5% to 10% this year.Turning to Slide 23. This page shows the loan yield and cost of fund trend for our China operation. We managed to maintain stable spread over the quarters. Although slightly lower the benchmark rate LPR this year, it takes time to gradually reflect to the funding cost.Next slide, Slide 24. China revenue for the first 9 months of 2023 totaled TWD 23 billion, increased 6% compared with the same period last year. On the right-hand side, third quarter revenue was up 1% sequentially.Moving on to Slide 25. China for the first 9 months of 2023 net profit reached TWD 10 billion, decreased 1% compared with the same period last year. The decrease in profit was mainly driven by more expected credit loss booked this year. On the right-hand side, China's third quarter 2023 net profit was down 13% sequentially. Whereas, RMB 28% -- RMB 28 million of tax rebate was recognized for the quarter compared to RMB 150 million in second quarter 2023.Turning to next slide, Slide 26. On the left-hand side, China delinquency ratio in the third quarter was up 0.4 percentage points to 3.8%, reflecting China uncertainty outlook and weakening economy. On the right-hand side, recovery and write-off amount remained for the quarter compared to the prior quarter.Next slide, Slide 27. China's allowance to loan portfolio ratio for the third quarter 2023 was up 0.1 percentage points to 2.9%, reflecting the increase of delinquency amount.Moving to ASEAN on Slide 28. The total loan and receivable at third quarter end 2023 reached TWD 112 billion, up 18% year-over-year and 3% sequentially. Malaysia and Thailand remain as the main growth driver for ASEAN this year.Let's turn to the next slide, Slide 29. The left-hand side, ASEAN revenue for the first 9 months of 2023 totaled TWD 9.9 billion, grew 31% compared to the same period last year. On the right-hand side, ASEAN's third quarter revenue was also up 2% sequentially.Moving to Slide 30. ASEAN's first 9 months of 2023 net profit reached TWD 1.9 billion, decreased by 10% due to more interest expense and expected credit loss was booked this year. On the right-hand side, ASEAN's third quarter 2023 net profit was up 9% sequentially as expected credit loss decreased for the quarter.The last slide, Slide 31. On the left-hand side, ASEAN delinquency ratio at third quarter remained at 3.9% compared to prior quarter. On the right-hand side, ASEAN allowance to loan portfolio ratio for the third quarter was also maintained.And this also brings to the end of my presentation for today. Thank you for your time. Now I would like to turn the call to operator to open the line to questions. Operator?
[Operator Instructions] Now we'll have our first question, which is from Gurpreet Sahi of Goldman Sachs.
First question is on this Taiwan spread improvement, nearly 10 basis points Q-on-Q. So going back -- like with the repricing that has started and we are seeing the effect, how many more quarters are we expecting to see it? I know you're expecting the spread to go back to original levels. Just how fast we can go back there?And then the second question is Mainland China delinquency formation. It seems like the gross new delinquency formation rate has increased again. Second quarter it seems like we are coming out of it and it is no longer increasing. And third quarter anything?So on the ground, talking to your managers in China, is it like it's only in the numbers and business continued to -- was quietly normal third quarter versus second quarter? Or would you say third quarter things deteriorated more because of the macro?
Okay. To answer your first question about the Taiwan spread improvement, I think during the Chinese session, our CFO mentioned, because this interest rate hike for Taiwan actually is several times starting from last March till, I think, this March. And so I think although we can reflect the new price in new contracts, however, it will take time to gradually wait for the old contract to expire so we can fully factor in our spread improvement.The more meaningful increase of the spread probably need to see like the interest rate start to like turn around. We start to see some sign of this interest rate cut back. So I think it's still some quarters to go. And especially in Taiwan, we have other business products. It's not traditional SME financing business. I think the pricing power probably is not as strong as we are doing business with SME like in the consumer segment, the used car financing.In Taiwan, we are facing a little bit more competitive environment, so it will take more time to gradually fine-tune the pricing. So -- but anyway, I think that the trend is a uptrend. So we will continue to try to bring back our normal spread target for Taiwan.And the second question about the new delinquency formation for China in this quarter. Because we are reporting this number in NT dollar, so -- I think in recent quarter there is some depreciation of the Taiwan dollar. So if we take out the FX impact, actually, the increase is not that significant.In RMB terms, for the third quarter, the new delinquency amount is about RMB 7.8 billion versus last quarter. Second quarter is about RMB 6.9 billion. So the increase rate is about 15%. Actually, this is quite within the normal variation range. And I think this higher new formation of the delinquency ratio also -- delinquency amount also related to probably the business volume back to probably around the corresponding quarter, probably like 1 year ago.Remember, last year in the second quarter we had this Shanghai lockdown, and first quarter, second quarter the new business momentum is still very slow. And versus -- we start to have some meaningful like ramp-up in the third quarter last year, so the new volume is bigger. So I think this is quite normal from our observation.So yes, the delinquency ratio -- amount formation is a little bit higher in this quarter. However, we still believe it's kind of stable from other indicators like the monthly account receivable collection rate. And also, we monitor the most recent months about the new formation delinquency amounts. Like in October compared to September also quite stable. So that's the reason why we think for the provision expense, the credit cost level should remain quite stable throughout this year till the end of the year. So yes, that's about this new delinquency amount.
Okay. Quick follow-up for the China delinquency ratio, 3.8%. Previously, we have said that the 5.5 peak in 2015, '16 will not be repeated because it's a bigger book and now we know the business better. So are we still confident that around 4% peak will be there this cycle?
Yes. I think from our current observation for the current situation, probably this ratio will continue to increase by 0.1% or so for the next 1 quarter or so because we still need some time to absorb like the accumulated delinquency balance a month. However, I think, yes, still probably the range we still expect it will be like below 4% or around 4%, yes.
[Operator Instructions] Next, we'll have Anupam Mathur of Goldman Sachs for questions.
Just a few clarification questions. Firstly, on this -- when we are saying that the local RMB increase was only 15%. So what was -- sorry, just to double check what is the Taiwan new delinquency in by one currency in China?
If we come -- you mean the Taiwan new delinquency amount in new Taiwan dollars?
No, China new delinquency amount in Taiwan dollars.
In Taiwan dollar, it's like TWD 3.7 billion versus TWD 2.7 billion. The increased ratio is like so big, but actually, it's not.
So sorry, what is the currency -- how are we calculating the currency assumptions because that seems quite a major difference?
Because we are preparing the consolidated financial statement, so our accounting department will use the month-end FX rate to do the reporting.
For formation?
No. For the balance sheet account. Because this delinquency amount is the total delinquent cases outstanding portfolio, yes. So if you take the third quarter end delinquency amount, which is TWD 8.712 billion, right, in the presentation Slide 26...
Yes.
The left-hand side chart, the ending balance at the third quarter end, the ending balance of the delinquency amount is TWD 8.7 billion. And this is using the FX rate at the quarter end -- third quarter end. However, for the previous quarter, delinquency amount actually is TWD 7.426 billion delinquency amount. We were using the second quarter end FX rates. So there are some FX, like, impact.
Understood. Okay. So just -- sorry, just to clarify. So what was the RMB delinquency amount in second quarter and third quarter?
RMB, yes. Second quarter is RMB 6.9 billion. The third quarter is RMB 7.8 billion.
Okay. Understood. Then the second question which I had was...
Million -- RMB 780 million versus RMB 690 million, RMB 0.69 billion, RMB 0.78 billion.
So this is the formation, right?
Yes. Formation, yes.
And how about the balance, the [indiscernible] balance?
The balance -- so roughly divide it by 4.3 for this quarter end, yes.
Got it. So the other question I had was, previously, we were guiding to less than 3.5% peaking and now we are guiding around 4% peaking. Now for the past 3, 4 quarters, I think our monthly collection rate, the pre-indicator has been stable, and the delinquency continues to go up. So what is giving us confidence that it is going to just stabilize at 4% and not keep on increasing? Like what is giving us confidence? Because the monthly collection rate is not giving any indication at all.
Yes. I think from the delinquency ratio is just one of the total indicator for this asset quality. However, internally well, so look at this account receivable collection rate, right, because this account receivable collection rate actually has been quite stable throughout the past 6 months for 2 quarters. So there's no deterioration in terms of the account receivable collection. And this increase of the ratio, I think in the recent quarter, it's more because of the slower growth of this balanced -- portfolio balance. Of course, there is also some impact by the -- a little bit higher new formation. However, yes, also because of the slower growth of the denominator.
Right. But I'm saying this collection rate has been stable, but the formation even in absolute is increasing, right? So what is giving you confidence...
So that's the reason why we are saying that this delinquency ratio probably will continue to trend up a little bit. But there are 2 major reasons. One is probably a little bit higher delinquency. The other is a lower growth of the portfolio balance. And in response to these higher delinquency, we already adjust up our provision. So -- but still within the normal, even we can maintain quite good spreads.
Understood. Understood. And the next question is on the formation you were seeing as a result of the last like October or third quarter '22, right? But I thought that delinquency definition is more than 30 days. So after 1 year, they're becoming a problem. Can you just please help me understand what were you saying?
The delinquency ratio for the SME leasing is very standard. It's like in China, it's 30 days overdue. No other definition.
No, but you're saying the current increase we are seeing is because of the growth we had seen last year, right?
I'm trying to explain. Because from our experience usually the peak of being in default, the possibility happened like 1 year ago for the new underwriting cases. So roughly, if we compare last year, the second quarter business volume versus the third quarter business volume, there's a different level of the new disbursement.So after -- like 1 year after, then the absolute amount of the new delinquency amount will be different level, given -- even if we have the same default rate.
Understood. Okay. Understood. And just one last question. This new delinquency formation, have we done any granular analysis, like what is driving this? Any particular sectors, any particular regions? Like what's the feedback on the ground?
No. We still maintain our diversification strategy policy. So -- and right now, we have good enough like coverage within different cities among these 59 branch offices. So in different province has different focus industry we are serving our SME clients. So actually from our internal numbers, there is no concentration on -- yes.
Next one, Gurpreet Sahi of Goldman Sachs.
So on the growth outlook, can you please remind us that this year portfolio growth target is how much at the group level? And then for next year, is there any initial read we can give as to how we would target the portfolio growth, like what magnitude?
For this year, we -- our growth target for Taiwan is 10% to 15%. And China is 5% to 10%, and ASEAN is like 15% to 20%. So we revised down this China growth target last quarter. And so far, we still maintain the same target for this year, yes.
So overall group will be around 10%, I would guess, 10-plus or around that?
The group, yes, so probably 5% to 10%, around 10%, around 10%.
Yes. And then next year, will the growth at the portfolio level -- group portfolio level will be higher because China can contribute more?
I think right now, it's a little bit early to say about next year. We are preparing for our annual business plan for next year, then probably around year-end, we will have the first version of our full year forecast. So yes, I don't know yet.
[Operator Instructions] Next one, Alex [ Leung ], UBS.
So I have a follow-up on -- in the Chinese session, management comment that one of the reasons driving the increase in the China's new delinquency amount is that the local court seem to asking you not to trade with your borrowers aggressively to pay back the money. Can you give us some color of what's the background of that? What does it mean? How does that affect your business?And so you also just mentioned that your new delinquency amount in China in terms of RMB term is like up 15% Q-on-Q. So to what extent does that instant or this practice caused the 15% Q-on-Q increase? Was that the major reason? And lastly, is it just a temporary issue? Or is it something that is going to structurally change in trying do business?
Regarding -- our CFO mentioned in the Chinese session about probably -- in Chinese about a slowdown a little bit of our delinquency like [indiscernible] activities for some cases because the government wants to give us a little bit more grace period to some of the SMEs and industries in China. I think it's not related to the new delinquency formation [indiscernible].The increase of the delinquency ratio can be -- probably we kind of slowed the collection process because of this consideration. So the delinquency amount will stay on the book for a little bit longer time. Yes, it's more to explain why this delinquency ratio cannot see more significant improve or stop at the current level. So we do expect it will increase a little, like 0.1% or so.And about this 2% increase of the new delinquency amount, I think it's quite normal. If you look back at our historical data, this kind of quarter-over-quarter variation of the new delinquency formation actually is quite normal, within the normal range, depending on what's the business momentum for the corresponding like quarters, like, as I explained previously, like 1 year ago.So yes, I think it's -- we just -- from our observation, this 6-point-something -- RMB 700 million delinquency ratio is quite normal given our past year's kind of new business growth volume, this kind of growth rate, yes.
Okay. So can I confirm what you mean is that the government asked you to collect the loans lower than per -- so it may affect the speed that you recover your delinquent loan, right? So it has nothing to do with the new delinquency in theory?
Yes, yes.
[Operator Instructions] Okay. Then Vic, there are currently no questions at the moment. Thank you.
Okay. Jason, we can end the call, please.
Thank you, Vic. And ladies and gentlemen, we thank you for your participation in Chailease conference. You may now disconnect. Thank you, and goodbye.