Chailease Holding Company Ltd
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Chailease Holding Company Ltd
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Welcome to the Chailease Fourth Quarter 2018 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 call is finished.
Now I would like to turn the call over to [ Kimberly Liang ], Assistant Manager of Investor Relations.
Please go ahead.
Hello, everyone. Thank you for joining us today for our Full Year 2018 Result Conference Call.
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 am giving today will be available for download on our official website at www.chaileaseholding.com.tw. And as a reminder, please refer to the disclaimer in Slide 2 regarding forward-looking statements. Our actual result may differ from such statements.
Now let's begin the presentation by turning to Slide 3. Today's agenda includes management highlights for the full year of 2018; followed by the consolidated performance review and segment review for our major operations, including Taiwan, China and ASEAN operations.
Now let's turn to Slide 4 for highlights that summarize our performance of 2018.
First of all, the summary table here shows you the loan portfolio growth for each of our main operating regions for the year 2018. In 2018, Chailease Holding once again had an outstanding performance. On a consolidated level, you can see on the right-hand side of the table we achieved 24% year-over-year portfolio growth, thanks to the continued strong business momentum in our 3 main operation regions. Our year-over-year basis, our main regions Taiwan, China and ASEAN's loan portfolio grew by 20%, 32% and 22%, respectively. All of our 3 main operating regions achieved our 2018 planned target of portfolio growth rate.
Secondly, the delinquency ratio continued to decrease in 2018 as a result of improved asset quality, and we expect the ratio to be stable going forward. We will see detailed figures in a later part of the slide. Moving to the third point: the company's return on equity has been maintained above 20% with healthy leverage ratio of 6.2x for 2018.
Looking into 2019, the company will continue to pursue healthy growth in all of our major operation regions. In terms of portfolio growth target in year 2019, the company is looking for 10% for Taiwan as a mid- to long-term sustainable growth rate; around 20% for China, which is a little bit slower than last year's 32% portfolio growth; and above 20% in ASEAN, giving a small base and newly developed market.
Let's move to the next section, performance review for the full year of 2018.
As we see on Slide 6, the consolidated loan portfolio reached TWD 352.7 billion for the fourth quarter end of 2018 with 24% year-over-year growth and 7% sequential increase. Strong growth momentum continued in the fourth quarter for all of our 3 main operating regions. Especially, China's portfolio grew 10% quarter-over-quarter.
Turn to Slide 7. The graph shows the trend of consolidated loan yield and cost of funds for the past 12 quarters. As you can see, we managed to maintain stable spread within a narrow range of 7% to 7.3% in the last 3 years. This quarter, the yield is moving upward to reflect the slight increase of cost of funds since April 2018. We will look at each operating region's yield and cost of funds in the next section.
Now turn to Slide 8. Fee income is TWD 1.68 billion for the fourth quarter, similar to previous quarter.
Next, Slide 9. On the left-hand side, the consolidated revenue for 2018 reached TWD 50.5 billion, representing 22% growth compared to 2017 which is quite aligned with portfolio year-over-year growth of 24%. On the right-hand side, fourth quarter consolidated revenue was TWD 13.5 billion, up 6% from the previous quarter which was also aligned with the portfolio growth.
Moving on to Slide 10. On the left-hand side, the consolidated net profit for 2018 reached TWD 13.4 billion, and the retroactively adjusted earning per share for 2018 was TWD 10.37. Net profit, the amount increased by 38% year-over-year and decreased by 2% quarter-over-quarter. Net profit's significant outgrowth top line in 2018 was mainly due to significant asset quality improvement, with lower impairment loss compared to the same period of last year. For quarter-over-quarter comparison, the slower profit growth is because of small operating expenses was accrued at the year-end as usual.
Turning to Slide 11. This page shows you our loan portfolio mix and profit contribution in terms of our operating regions. On the left-hand side, we can see Taiwan's business account for 53% of the group's total portfolio. China is about 1/3, account 32%; and ASEAN 14%. On the right-hand side, in 2018, Taiwan's net profit contribution account for 50%, and China accounts for 44%. And ASEAN contributed 4.8% to the consolidated profit, excluding minority interest. As our China business continued to grow steadily and outperforms the other operating regions, its contribution to the group is expected to gradually increase for the next few years.
Moving on to Slide 12. It shows the cost-to-income ratio and leverage ratio for the group level. On the left-hand side, cost-to-income ratio is 32% for 2018, which was improved from the previous 2 years. The chart on the right shows asset-to-equity ratio. The leverage was brought down to 5.8x after GDR issuance in October 2017 and increased to 6.2x in 2018.
Please turn to Slide 13. The consolidated return on assets on an annualized basis achieved 3.8% for 2018 compared to 3.3% in 2017 and 2.7% in 2016, reflects higher growth of net profit for 2018. The consolidated return on equity, on the right-hand side, also achieved an outstanding level of 23%.
Next slide, Slide 14. The consolidated delinquency ratio shows on the left-hand side. At fourth quarter end, the delinquency ratio further decreased to 2.7% because of improvement of Taiwan and China's asset quality. Later in the presentation, we will look at each region's asset quality in a segment review section. Looking at the right graph: Allowance-to-portfolio rate is at 2.8% and remains sufficient.
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 186.1 billion at the end of 2018, representing 20% year-over-year increase and 6% quarter-over-quarter growth rate. Major growth drivers are from the business segment of aircraft, helicopter financing and service industry. Our Taiwan operation, as the innovative center for the group, it continues to develop new products for market expansion. Diversified products and services in different niche market helped continue to drive growth in Taiwan and achieved 20% of Taiwan's portfolio growth in 2018.
Moving on to Slide 17, it presents the trend of our Taiwan loan yield and funding costs. As you can see, we maintained steady loan spread of around 6.6% to 6.9% for the past few years and a stable funding cost in 2018.
Turning to Slide 18. The graph shows Taiwan's fee income for the last 5 quarters. Fee income in Taiwan is composed of fees from alliances with commercial banks and general fee income. For the fourth quarter of 2018, the fee income performed better than the previous 3 quarters, reflecting high new disbursement for the fourth quarter.
Moving on to Slide 19. Revenue from our Taiwan operations for 2018 reached TWD 22 billion, representing 13% year-over-year growth. The revenue's year-over-year growth rate is lower than the portfolio growth because of less trade finance in 2018 compared to 2017. And also, for the quarter-over-quarter comparison, the revenue growth was 6%, in line with portfolio growth in the fourth quarter.
Turning to next slide, Slide 20. Taiwan's net profit for 2018 reached TWD 7.12 billion, which grew by 20% year-over-year and which is in line with the portfolio growth. For the quarter-over-quarter comparison, profit was down 2% in comparing to previous quarter due to a higher recognition of operating expenses in the fourth quarter.
On Slide 21, the left-hand side shows Taiwan's fourth quarter delinquency ratio of 2.8%, which is down by 0.2 percentage points from the previous quarter, reflects that asset quality has been continuously improved. In the fourth quarter, both new delinquency amount and write-off amount increased compared to the previous quarter due to closure of 2 big delinquent cases. However, the full year new delinquency amount for 2018 was decreased by more than 10% on the previous year.
Slide 22. The allowance-to-loan portfolio in Taiwan was 2% at the fourth quarter, which remains sufficient.
Next, let's take a look at our China operation on Slide 23. China's total loan and receivable reached TWD 113.9 billion at year-end, which grew by 35% year-over-year and grew 9% quarter-over-quarter in local currency. Business momentum has been strong since the beginning of 2018 and continued throughout the year-end.
Turning to Slide 24. We still managed to maintain the stable interest spread in China. This slide shows you the loan yield and cost of fund trends for our China operation. Funding costs remain stable, and yield shows an increasing trend to reflect the repricing of the new deals for the increase in the funding in April 2018.
Next slide, Slide 25. China fee income was TWD 701 million for the fourth quarter, indicating business momentum continues.
Next slide, Slide 26. China's revenue from -- for 2018 totaled TWD 23.3 billion, increased by 29% year-over-year, and by 6% if compared fourth quarter to the third quarter. Year-over-year revenues grew slower than portfolio growth due to less trade finance business in 2018. We can see this more clearly by looking at the revenue breakdown on Slide 27. Revenues generated from trade finance business in 2018 totaled TWD 9.1 billion have a -- have a lower growth rate pace than other revenues, therefore causing a lower year-over-year in revenue growth.
Moving on to Slide 28. China's net profit in 2018 was TWD 6.26 billion, increased by 59% year-over-year. The strong profit growth was attributed to strong business growth plus lower impairment loss on loan and receivable as a result of improved asset quality. On the right-hand side: China's fourth quarter net profit was up 1% quarter-over-quarter. And the slower than revenue growth rate in fourth quarter is because of some tax rebate. RMB 20 million was recognized in the third quarter.
Turning to next slide, Slide 29. On the left-hand side, China's delinquency ratio at the fourth quarter end further decreased to 2.1% from 2.3% in the previous quarter. China's asset quality start to show improvement since 2016 and continued throughout the past 2 years, and it is expected to be stable going forward.
Next slide, Slide 30. As China's asset quality continued to improve, China's allowance-to-portfolio ratio continues to trend down and reached to 3.7% at the fourth quarter end. It's likely for the ratio to gradually decrease going forward if China's asset quality continues to maintain at this level.
Moving to ASEAN regions on Slide 31. Right now our ASEAN operation includes Taiwan, Vietnam, Malaysia, Cambodia and the Philippines. The Thailand still accounts for majority of our ASEAN operations in terms of portfolio breakdown. The company still -- is still looking for business opportunity in Indonesia to complete our footprint in ASEAN region, and we'll keep investors updated if there is any concrete plan.
The total loan and receivable at the fourth quarter end of 2018 was TWD 48.72 billion and was up by 22% year-over-year and 6% for quarter-over-quarter growth. The main growth for ASEAN regions continued to be driven by Vietnam and Malaysia operations for 2018.
Let's turn to our next slide, Slide 32. The left-hand side shows the revenue of ASEAN operations. It was TWD 4.65 billion, which grew by 32% year-over-year. On the right-hand side: The revenue for the fourth quarter was TWD 1.34 billion, which grew 12% quarter-over-quarter. Business momentum overall is good for 2018 for ASEAN. And the higher revenue growth and portfolio growth for year-over-year comparison and quarter-over-quarter comparison is both due to more trade finance business generated in 2018 in Vietnam.
On the right-hand (sic) [ left-hand ] side. Total net profit for 2018 was TWD 1.2 billion, representing 47% year-over-year growth. For year-over-year comparison, ASEAN's net profit outgrew portfolio is due to the lower impairment loss on loan and receivable compared to the same period of last year as a result of improved asset quality. The strong quarter-over-quarter profit growth was also driven by less impairment loss on loan and receivables on our Thailand subsidiaries as a result of improved asset quality.
This brings to the end of my presentations. 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] Our first question comes from Gurpreet Sahi of Goldman Sachs.
This is Gurpreet from Goldman. My questions, can I have 2 questions, please? First is on the spread. As you noted, the spread is towards the high end of where you targeted to be. For the quarter, it was 7.32%, so where do you expect that to go? And with some color on how you see the loan yield and would the cost of funds pan out over the next few quarters, that would be helpful. And then the second one, on growth. So can you talk about Taiwan very strong growth, especially in 2018? And how come still you are guiding at around 10% growth for 2019? I mean, if you manage to do more than 20% and still in an underpenetrated leasing market, can you do more than 10%? I mean, is 10% just a rough number out there for Taiwan?
So the first question is about our loan yield and spread. Is that right?
Yes.
I think, as you know, the first priority for the management is to manage to have a very stable spread for each operating market. So actually, we still believe this is our first priority, and going forward, I think -- because this -- in this chart, presentation chart, it's more the historical number. If we look at the forward-looking figures, like for the existing pricing for the new deals and our current funding costs, actually this spread still maintain very stable. So I think, yes, as we continue to emphasize, we will continue to maintain the same stable spread. Like, for example, in China right now is about like 10% spread, and Taiwan is about 8% blended rate. And for the growth target, 10% of the growth target for Taiwan this year, 2019. I think management is looking for more mid- to longer term, like, sustainable growth rate because Taiwan is more mature. The traditional SME equipment leasing market penetration rate already reached to more a little bit higher level compared to the other new markets like China or ASEAN, so -- although we try to develop some new niche markets like private jets or service industry segment. But I think 10% kind of growth rate is, so far, our this year's plan. But we will see whether -- the first quarter result to see whether we -- there's any room for adjustments. But so far, management has guided for, like, 10% portfolio growth in Taiwan for this year.
Okay. Can I have a small follow-up on the cost-to-income ratio? It improved a lot for the last couple of years, so given that now maybe a bit slower growth in revenue going forward, how do you want to manage the cost? And where do you see the cost-to-income ratio going forward?
I think cost-to-income ratio already reached to a very efficient level and very productive level, so, so far, we are looking forward to maintain at this [ efficient ] cost-to-income ratio level.
[Operator Instructions] And the next question comes from Yafei of Citi.
I have 2 questions around loan growth and asset quality. On the loan growth, very briefly, on China, we all know that China's economy had a bit of challenge in the fourth quarter and second half of 2018, but China still maintained a very strong loan growth in China, plus 10% Q-on-Q. Could you please explain, how did you manage to achieve that? And then the second one, on asset quality both in China and Taiwan. When I look at the slide, for instance, 29, with the recovery and write-off, there is a small tick-up in the fourth quarter. How much do we read into the trends of that, the underlying NPL formation? And the write-off is actually increasing in China and Taiwan. And along the same line, the allowance number, you mentioned in the call that you expect this to continue to decline. If 3.7% is a bit high, where do you think this coverage allowance ratio would decline to in coming year?
Okay, so first question, about our China growth target for this year, 2019. I think management has guided for, like, 20% portfolio growth in China for this year. We think -- although this is challenging, but still we got quite a good chance to achieve it. I actually answered your question about 2018, of this 30-something-percent portfolio growth in China. Actually, I think, as usual, we have a stronger business growth momentum in the second half. So it also shows in our third quarter and fourth quarter growth rate in China like 9%, 10% each quarter, but I think this "better than we originally planned" growth in China is more because we actually had a better growth in the first half, especially in the first quarter, last year. I think it also benefited from liquidity tightening in the first half of 2018 in China. So really drummed up the market demand and we also grabbed this opportunity. So this also helped us to achieve a better than original planned growth target. And so this year, given the -- probably there are some people that worry about some macro slowdown in China and also the U.S.-China trade war, we -- so we just take the -- all those situations into consideration. Management set up this target of 20% portfolio growth for this year, which is a little bit lower, slower than last year of 32%. But actually you are still quite -- still we believe we can manage to deliver profitable growth and healthy growth with the 20% portfolio growth. And the second question, about delinquency: new delinquency amounts in China and Taiwan -- actually in terms of a delinquency amount, of course, it will increase a little bit because the asset base, the portfolio asset base, already grew to like bigger. Especially, we have delivered like double-digit portfolio growth for the past 2, 3 years. So it didn't mean that our asset quality has any significant change or getting worse, so I think this new formation of delinquency is still at a normal level. And regarding the allowance, because -- actually the company allowance provisioning policy is that we always want to cover the estimated loss by 2x. And so with continued improved asset quality, which means that we don't need to like maintain 3.7%, this level of allowance, for China going forward if we can maintain the same asset quality, like around 2.1%, 2% of the delinquency ratio in China portfolio. So actually, that's how -- we think these allowance ratios will be gradually like adjust down, but it -- still remains sufficient. And yes, that's according to our provision policy.
Just to follow up on your final comments that the allowance policy is to cover 2x expected loss. And I guess expected loss in China would be somewhere between 1.5% to 2%?
So far, I think our -- in terms of the loss ratio, it's about like 45% to 50% of the outstanding delinquency amount. So right now it's 2.1% delinquency, which means just a little bit more than 1% is the [ average ] loss, yes.
Yes. So over a longer term, I guess that 2.1% is a bit low, so let's just hypothetically assume that sustainably it's about 3%, and then the loss will be half of that, I mean. So does that mean that these allowance could reduce from 3.7% to about 3% sustainably?
I think it depends on how our asset quality evolves, so we will continue to monitor. But of course, you can see we already demonstrate that our asset quality in China becomes more and more stable compared to like 5, 6 years ago. So hopefully, I think we can reach to similar levels to our, like, Taiwan -- Taiwan asset quality.
The next question comes from Jacky of Deutsche Bank.
My question is about China outlook. And so from a top-down policy, we've heard that China is encouraging the SME financing. Do you think that policy will benefit you? While at the same time, the commercial bank in China also encouraged to lend more to those SMEs in China. And also, with easing policies, the SMEs probably will enjoy better credit access from commercial bank as well. So net-net, how do you see the regulatory environment to affect your China outlook and China operation?
Okay, I think that there are 2 different things because we set up our growth target. It's more to grow at our own plan pace because we have our own pricing strategy with appetite. So -- and also we need to consider our funding availability, et cetera to set up our growth plans. And regarding this more favorable regulation policy, yes, it's good. We are always welcome, but actually it won't, like, significantly impact our growth plan, our business plan because we still need to like really focus on that very specialized market segment where we are focusing. So -- and yes. So I think it won't significantly change our view on our planned growth.
Our next question comes from Gurpreet of Goldman.
It's regarding the -- your comments around the China asset quality. So you mentioned that maybe half of the delinquent is loss in China. Can you give a similar figure for Taiwan? So what I'm thinking is, let's say China stabilizes at a relatively low level of delinquency. Let's not get into argument where that level is, but let's say now you are over-allowing because your experience in China was not so great, if you take a 5 year view. So then if we can get to the same kind of loss rates as in Taiwan and also the same kind of delinquencies as in Taiwan, can we then benchmark Taiwan portfolio, where you have a longer history, as allowance how much you can keep in China in future also?
Actually, the Taiwan loss ratio is lower, which is about 30% of the delinquencies. So we can recover that 70% in Taiwan because we have a much longer operation history experience in Taiwan. So -- but I think this is a benchmark, the target, there for our China to work for. Hopefully, we can gradually improve the recovery rate and lower the loss ratios going forward. So right now Taiwan loss ratio is only 30%.
Okay, understood. And then one follow-up. During the worst point in time for you in China over the last 6-odd years, say from 2012, what was the bad point of the loss ratios? Compared to now 50% to -- was it much higher back then?
In China?
In China.
For 2000 -- I think China's loss ratio continued to improve to this -- to the current level less than 50%, 45%, around. I think, like, in year 2014, '15, during that time, it's still slightly more than 15%.
Okay, understood. And then your allowance-to-delinquent ratio that I have made out, it seems like in China your allowance, divided by delinquent loans, is around 170%. So if your loss on these delinquent loans is only 50%, then you are roughly 3.5x covered, right, rough. So if you want to make it to 2x, then allowance can fall a lot.
Yes. If you just take a snapshot view, it means that we are over-provisioned for China, but this -- because we do this evaluation using our risk models, so we need to gradually factor in our delinquencies. I mean historical delinquency data, gradually. So this kind of adjustment will be gradual.
Okay, can I ask one final question on this? How long does the model see the data? Like, how long a history is important? so that we get some [ sense on that ]?
I think we do this evaluation every quarter when our accountants -- to review, to audit our quarterly financial results. And yes, this will be quarterly reevaluate.
But history is how long that they model that?
History like 3 to 4 years.
[Operator Instructions] [ Kimberly ], there's no other questions at this point in time.
Okay, we can end the call. Thank you.
Actually, we've just come up a follow-up question. Is that okay?
Yes.
It comes from Yafei of Citi.
Just wanted to follow up on the cost side. Is the 4Q more of a seasonality that you see the Taiwan operating expenses going up? Or should we read that along with your comment that cost-income ratio is likely to be stable around the current level, the areas that you are planning to invest? So that's the first question. And then second question is that on the Taiwan growth I noticed that the ASEAN has been a key driver, but I know that Chinese is also going into solar, all these areas. Can you also help us to understand how they venture into solar? What's the plan? And how is that going to drive the growth in Taiwan?
Yes, the higher OpEx, operating expense, in Q4 is kind of seasonality because at year-end usually you need to accrue some expenses. So this is a more seasonal event. And for solar and private jet, actually it's just like all the other new business segments that our Taiwan -- or our company continue to develop and venture into. So because this is relatively new compared to the traditional core business like SME [ finance ] leasing. So it can generate higher than the average growth rate in Taiwan. And this private jet actually -- although if -- the portfolio is booked -- in Taiwan booked. But actually we are focused on the overseas markets like ASEAN countries. And yes. So is -- does this answer your question?
Can you just also help me to understand the solar bit? You'll remember there was a Bloomberg article where the management commented about the target for how big that Chinese can grow in the solar space. Do you have any concrete number around that?
I think solar right now accounts for 8% of the Taiwan portfolio. And I think -- because we still want to keep the diversification of our business mix -- and so this solar business will continue to like have a little bit higher growth rate compared to the average Taiwan growth rate, which means Taiwan this year we intend to grow like 10%. Probably solar business will grow by like 15% or 20%, but overall it will account no more than like 10% to 15% of the Taiwan portfolio.
[Operator Instructions] [ Kimberly ], we do not have other questions at this time.
Okay, we can end the call. Thank you.
Thank you. Thank you for everyone's participation in Chailease conference. You may now disconnect. Goodbye.