Yintech Investment Holdings Limited (YIN) CEO Wenbin Chen on Q1 2020 Results - Earnings Call Transcript

Yintech Investment Holdings Limited (NASDAQ:YIN) Q1 2020 Earnings Conference Call May 27, 2020 8:00 AM ET

Company Participants

Yvonne Young - Investor Relations Director

Wenbin Chen - Chairman & Chief Executive Officer

Raphael Qian - Chief Financial Officer

Conference Call Participants

Hunter Diamond - Diamond Equity Research

Operator

Good day, and welcome to the First Quarter 2020 Yintech Investment Holdings Ltd Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Yvonne Young, Investor Relations Director. Please go ahead.

Yvonne Young

Thank you and hello everyone. Welcome to Yintech's first quarter 2020 earnings conference call. Our earnings release was released earlier today and is now available on our IR website.

On the call today from Yintech are Mr. Wenbin Chen, Chairman and CEO; Mr. Raphael Qian, CFO; and myself Investor Relations Director. Mr. Chen will review business operations and company highlights, followed by Raphael Qian who will go through the financials and provide guidance for the second quarter. We will all be available to answer your questions during the Q&A session that follows. Questions can be asked in English or Mandarin. If you ask your questions in Mandarin, please translate it into English yourself afterwards or I may have to do the translation.

Before beginning, we would like to remind you that discussions during the call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yintech's filings with the U.S. Securities and Exchange Commission. Yintech does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

During the call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

I will now turn the call over to Mr. Wenbin Chen. Mr. Chen will give his remarks in Mandarin. I will translate for him.

Wenbin Chen

[Foreign Language] Thank you, Yvonne and thanks everybody for joining. First, I hope you and your family and colleagues remain safe and healthy during this unprecedented and challenging time.

[Foreign Language] May 18, 2020, marks the next anniversary of our company. The prevalence of the industry, we experienced in the past few years invited us to maintain acute insight on and accommodate with market trend and invest in business ahead of key micro trends that have positioned us well. This was especially true seen from the outstanding operating outcomes in the first quarter.

[Foreign Language] Despite the overwhelming impact to economies, business and investment and turbulence among financial markets caused by the COVID-19 pandemic along with fewer trading days due to the Chinese Lunar New Year and the virus, we posted solid operational results of our primary business.

Our customer trading volume reached RMB846.5 billion, an increase of 134.7% year-over-year and net commission and fees were RMB416 million, an increase of 68.8% from the same period last year. The numbers of our active account and tradable account both grew a testament to the resilience of our employees, the strength of our client relationships in a special period and the track of our capabilities.

[Foreign Language] As a result, our total revenues once again exceeded management's high-end guidance reaching RMB490.9 million represents an 8.1% increase year-over-year. We continued to improve operating leverage. If you do an apple-to-apple comparison on our primary business, our net commissions and fees increased by 68.8% versus our total expenses increased by nearly 22.6%. Our net income attributable to shareholders increased by 28% to RMB88.6 million.

With respect to operating leverage, if comparing with net income generated from commodities and securities or if excluding the investment gain to loss, which to a large extent was correlated to market conditions our bottom line improved even further.

[Foreign Language] The growth was attributable to a number of factors, which includes our key investment insights on the Chinese financial market, our investment analytics capabilities, our deep understanding to the Chinese individual investors, our completely digital engagement model and our unique organizational and operational agility. This places us in a strong position to manage through crisis and win.

[Foreign Language] As trusted partners to our customers, we have been highly engaged with servicing their evolving needs in any way necessary while intensely focusing on protecting our employees and working in a remote environment in a special period in the first quarter. Our daily market plus revenues and informed posting on equities and commodities developed by our in-house securities investment advisers and analysts from our spot and futures commodity research team have been particularly impactful.

As we responded to client area of interest, including investment implications of COVID-19, updates on global financial markets, government and regulatory implications for key investment strategies and products and public company research reports. We never stopped servicing our customers, as their companions for a single day, even during the most difficult time of the virus.

Wenbin Chen

[Foreign Language]

Yvonne Young

Our in-house securities advisers and research analysts working closely with the back-end team to engage clients on changes to the investment priorities and portfolios to seize the unprecedented opportunities in gold, is another example.

You may have observed that the spot gold in China extended its value in Q1, to see the highest a few days ago, in more than a year. We made proactive decisions before this trend to reapportion resources to focus more on these key areas and only interested customer in this asset class.

We were rewarded for the record trading volumes and commissions in our history. We believe that, supporting our clients as partners through all environments. And ensure client success will allow us to deepen this important relationship.

Wenbin Chen

[Foreign Language]

Yvonne Young

We begin maintaining financial flexibility building ample liquidity to further strengthen our balance sheet, through the uncertain environment like what we are facing now will allow us to continue to operate from a position of strength.

As of the end of Q1, our total cash and investment securities remained flattish at RMB2.08 billion. And we have no debt. Our free cash flow were significantly improved to RMB190 million from RMB140 million, a significant increase of 32% from the end of last year and total shareholders' equity increased to RMB2.85 billion.

Wenbin Chen

[Foreign Language]

Yvonne Young

It's clear that 2020 is turning out to be a much more challenging year, than any one of us ever would have anticipated. On a macro level, in addition to the impact from coronavirus, at business level, the new regulations for investment advisory business expected to be rolled out this year and more rigorous supervision will follow.

We believe that Yintech, as one of the leading companies in the industry that strictly enforce industry standards will continue to adhere to the concept of being a lifelong partner of customers' investment and wealth management and strictly abide by regulations in the new regulatory environment.

Meanwhile, we will invest in accelerating the upgrade of O&M; further strengthen out and improving customer service with focus on brand upgrades. These actions will lay a solid foundation and positions us well for a big move in a new environment after industry consolidation in the quarters to come.

Clearly at Yintech, we are committed to a sustainable growth and strength of our balance sheet with an eye towards improving our leverage profile and continuing to invest in new areas of business for greater growth. We are excited to see a strong start.

Throughout the year, we look to continue to return cash to our shareholders. This includes a consistent dividend payout. As market conditions and our profitability improve it allows us to create the financial flexibility for investment and growth in the future for our business. That might also provide us ample room to reward more to our shareholders such as a more generous dividend plan and plus additional share buybacks as the Board has just extended our share repurchase plan to 2021.

With that, I'll now turn the call over to Raphael Qian, our CFO to discuss our financial results for the first quarter of 2020 and provide guidance for the second quarter.

Raphael Qian

Thank you, Mr. Chen. Hello everyone. I'm glad to speak with you on today's call. While the first quarter was in line with or even better than our expectations, the COVID-19 crisis has changed things dramatically since early February in China including among other things; the high volatility in capital market and across all financial assets, the impact of the cost to businesses and individual assets.

I am proud of the speed and the decisiveness our team has shown in adapting and responding to this pandemic as well as most notably leveraging the opportunities it has brought to us to maintain top-tier services to our customers.

In addition to operating safely and our continuity in servicing our customers in this special quarter we have also taken actions to enhance and improve our liquidity position and financial performance.

We closed the first quarter with strong results from all key aspects. First the liquidity. Our financial position is strong. We ended the first quarter with RMB 2.1 billion of cash positions consisting of cash on hand of RMB 242 million and investment securities of RMB 1,841 million. We had no borrowings. We generated RMB 189 million of free cash flow a significant growth from RMB 143 million at year-end 2019.

The ample liquidity relative to the run rate cost help us to navigate through any uncertainty, we would probably be facing in the future. We also remain confident in our ability to continue to execute on our strategy and maintain healthy cash level on an ongoing basis.

Second our financial performance. We finished Q1 at RMB 490.9 million in total revenues up 8.1% from the same period last year seemingly not strong. However, as Mr. Chen mentioned in his remarks, the revenue related to our business, which comprises mainly of net commissions and fees increased to RMB429.5 million, up 65.4%. This is the most important indicator, and we split it from total revenues to show a clearer picture of the strength of our core businesses, starting from Q1 this year.

We continue to generate investment gains, which was RMB54.8 million, significantly lower than RMB187.1 million a year ago, as it is largely correlated to market volatility. Total customer trading volume was RMB846.5 billion, up 134.7% from the same period last year, primarily due to an increase in trading volume of spot commodities. Mr. Chen already shared a lot about our business priority in Q1, and I won't repeat. Effective fee rate for the quarter was slightly down at 0.037% compared with 0.041% last year.

Now turning to expenses, they were RMB375.6 million, up 22.6% from the same period last year, mainly because of the increase in advertising and promotion expenses. Obviously our operating leverage is improved as our revenue growth from net commissions and fees far outpaced the increase in expenses mainly due to the scale advantage when our business is more stabilized as well as the effective cost control measures we put in place.

As a result, the net income attributable to Yintech for the quarter was RMB88.6 million, representing an increase of 28% from the same period last year. This translates to diluted earnings per ADS of RMB1.18 compared with RMB0.92 from the same period last year and the non-GAAP diluted earnings per ADS was RMB1.25 compared with RMB1.14 in Q1 last year.

Finally, in light of the fact that our liquidity position has been built to be more than adequate to fund our operational requirements and the worst case, the economic downturn impacting our results, I mentioned a few minutes ago. We, therefore, view part of our liquidity as available to fund potential M&A in a consolidating industry, and we have seen in the past that such opportunities can come along at any time.

Moreover, as Mr. Chen mentioned, our Board is evaluating the plan to reward our shareholders. We would consider more aggressive 2020 dividend plan. It will also help to improve our capital structure and eventually our return on equity.

All in all, Q1 put us in a strong position to grow further in this year despite all the negatives caused by COVID-19. And that gives us -- deliver better operational and financial targets we set for the year.

As we move to Q2 given the anticipated strong demand in our commodities and securities services continues, we expect total revenues will be in the range of RMB590 million to RMB610 million representing an increase of 104.2% to 111.1% compared to the same period last year. This includes revenue related to business of RMB570 million to RMB590 million, representing an increase of 77.6% to 83.8% compared to the same period last year.

This concludes our prepared remarks for today. Operator, we will now open the call to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Hunter Diamond with Diamond Equity Research. Please go ahead.

Hunter Diamond

Hi, Yvonne and team. Firstly congratulations on the very strong results in a very difficult economic environment. So my first question in terms of the potential recession that we could maybe see due to the pandemic, how is Yintech planning to respond to the fluctuations abnormalities in the domestic and international markets in terms of risk control and product optimization?

Yvonne Young

Risk control and then what's the next?

Hunter Diamond

Product optimization.

Yvonne Young

Product commercialization?

Hunter Diamond

Optimization. Looking at new different products.

Yvonne Young

Optimization.

Hunter Diamond

So gold trading. Yes.

Yvonne Young

Okay. [Foreign Language]

Wenbin Chen

[Foreign Language]

Yvonne Young

Okay. First, yes. Well, similarly, it seems that people are more pessimistic about the global economic outlook. But if you look at specifically to the business we are involved in and which is commodities and securities services, the situation might not be true in our case.

As you can see from the Q1 result that the Q1 market and the market going forward will continue to experience high volatility for most of the financial insights, including commodities and capital markets. Well this high volatility or turbulence in the financial markets actually help our business, as you know that investors trade on volatilities.

If there's no volatility, the investor is not going to make any profit from that. So virtually that's why you see that we delivered very strong Q1 result and we expect that situation will continue.

And more specifically if you look at gold product, which is actually hedged to the current negative market situation, so that will be – investor will invest to preserve their assets by investing in gold. So overall we see – we are very optimistic to our business outlook in the small commodities and securities segment that we engage in.

Hunter Diamond

Right. Now it makes sense. I think the gold is very well positioned in this market. And obviously something that investors are going to be using more of to preserve value like you said. My next question this is a very timely topic. As you know with Luckin Coffee in NASDAQ, they're considering many more regulations.

Now my view as an analyst is I think this could be very good for Chinese-listed companies like Yintech, because they're going to regulate them more and companies like Yintech that are very well positioned and capitalized may actually get more U.S. investors because there are more strict requirements.

So I wanted to know, is Yintech prepared for sort of NASDAQ's new rules that are likely coming in terms of I guess auditing shareholder requirements, whatever they may be? Has that been something that NASDAQ has reached out or something that you feel well prepared for?

Yvonne Young

Okay. Yes, that's a good question. Thank you. Let me translate. [Foreign Language]

Wenbin Chen

[Foreign Language]

Yvonne Young

Well, first of all -- and then I will add some following points after Mr. Chen's point. First of all, Mr. Chen thinks that -- well this is more than a company level, but national level relationships. So well we have discussed very intensively with the auditors that review our -- audit our financial results. And according to their feedback in their research as everybody they cannot discuss this, not cover this so they have made some intensive analysis on the situation as well. So they share your view with us. They think that point one this is more on a national level as I just now mentioned. And it's hardly to predict how the situation will evolve given the relationship between China and the U.S. is uncertain.

So -- and then secondly, we think that in the past these two countries have some co-operations in the history on some of the review to provide a review to the audit book to the regulators. So this is more related to the confidential entity from a national level. So both points are actually beyond our control so as particularly -- for a particular company at this point, we cannot do much on a company level, but of course that we are prepared for any potential changes on the policy on regulatory level.

And then we think that at present, it's not passed by the House yet. It's only passed by the Senate. It's now passed by the House of Republic. And it finally need to be passed by the President so that it can be litigate and ICC need to take some efforts to roll-out some more specific regulation rules on that.

So we think that at present it's still too much early to discuss the potential results and the -- and then the preparation from a company level. But as a company we are fully compliant with the U.S. and ICC laws and regulations. We welcome any policy or regulation change and we make sure that we are fully compliant as always.

Hunter Diamond

Right. Now it makes perfect sense, Yvonne. And I actually think it could be a good thing for the capital markets because smaller Chinese equities that maybe there's some fear because there's been a few major frauds in the U.S. markets. I think if they maybe implement these changes then maybe U.S. investors will feel more interested in, sort of, Chinese public equities because they'll feel that they're more audited and they'll feel more confident that all the numbers are correct right, if they're listed. So I actually think, our clients and other ones, we talk to it maybe overall good despite being maybe additional expenses temporarily. Okay. So my next question is just in terms of…

Yvonne Young

That's right. Okay. I'm sorry let me translate for the team. [Foreign Language]. Okay.

Hunter Diamond

Okay. Great. So my next question relates to – you mentioned potentially changing the dividend. There's a few things you guys have to create shareholder value. You have the repurchase plan, which I see you just extended. You are maybe going to increase the dividends, which is another way as well. And then the other thing, which potentially could happen and I wanted to ask more about this is you're well capitalized. And maybe there's other smaller fintech companies that in this COVID environment are struggling and that could potentially be acquired right at very good prices, because they need capital, they need infrastructure, and you can offer that right as you have with other businesses for licenses or their technology. So I'm wondering, are you seeing – in terms of shareholder value, are you seeing a lot of M&A opportunities right now maybe smaller start-ups or companies that you could get for cheap and sort of integrate, or do you think more – the company is looking more like you said at the dividend share buybacks to increase shareholder value, or are they more focused you think on M&A and seeing maybe interesting things that they could acquire?

Yvonne Young

Yes. Got you. Thank you. [Foreign Language]

Wenbin Chen

[Foreign Language]

Yvonne Young

Well, first of all, I'd like to share my views on the M&A opportunities, you just now mentioned. Well, in terms of these initiatives, we are -- yes, we are looking at any potential to expand our business either on M&A or any possible forms of business expansion. But as far as we know that according to the statistics of our research on the market there are very few companies that can be successful in the merger and acquisition, because of a number of reasons.

So we see that it has a very low chance for us to succeed to have a very good merge when we acquire the company first of all. So we will not consider this M&A as a major possibility of business expansion. But we do -- if we consider, we will only consider to acquire those companies with the business within our capabilities, or we have the knowledge or capacity or capabilities to merge with that company and their business is complementary to our existing one, so that we can help them to grow and that also help us to achieve a greater growth. So this will be the potential target that we are looking for all the time.

Hunter Diamond

Right. That makes perfect sense. And generally, I would agree with you. The only reason I bring it up is because I know we talked to a few companies and their strategy right now is they're looking at very distressed companies, right? Because given COVID, there's the potential to maybe buy companies at almost asset sale prices. So that maybe changes the math, but I completely agree that generally acquisitions they've shown in university studies that they generally are not accretive and it's better to just do like you're doing a repurchase if the shares are lower it's a higher dividend. Okay. Perfect.

My last question and then I'll open the line for other investors. Just in terms of areas I know you have a significant or somewhat significant R&D budget. What areas -- obviously the gold trading and the spot trading is a very high-growth area and where you're seeing a lot of trading volume. What are the most exciting areas that management is investing in or seeing potential for new products?

Yvonne Young

[Foreign Language]

Wenbin Chen

[Foreign Language]

Yvonne Young

[Foreign Language] Well I just now actually mentioned that we'll be very much focused on the primary business we are doing now including the spot commodities services. We are not looking around to see any business that's beyond our abilities or beyond our expertise. So we are still -- we have formed five product lines and after two years of transformation -- these are some of the points Mr. Chen mentioned in the earlier question I think I forget to translate. So now, I will translate at this point. We have formed five product lines and the two category of products. After two or three years transformation, we think that we have established a very solid business growth after the two year testament. So we will continue going forward focusing on these two product lines.

And specific to the Board area, even though in our area, we have ample cash position and we have a lot of cash to invest in the R&D area as we just now mentioned. But we still would like not to be too distracted. We're still looking at the core capabilities we have and the knowledge and the capability circle we have. So compared to the market size of the spot gold, we are very, very minimal compared to the very huge market potential that our business is in. So we think that even this spot gold trading business can give us tremendous room to grow and to pursue market share and to grow market share. So we are at this stage only after two, three years transformation, we are now looking at something else. We'll be very much focused and very, very, very attentive to the things we are doing now.

Hunter Diamond

Okay. Great. Now that makes a lot of sense, Yvonne. And again, congratulations on the great results in a very difficult environment and stay safe in the meantime.

Yvonne Young

Yes. Thank you very much and stay safe to you and to your team.

Operator

[Operator Instructions] Since there appears to be no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Yvonne Young for any closing remarks.

Yvonne Young

Thank you everyone for joining today's call. And in this very difficult and challenging times, we do appreciate your efforts and I appreciate your accompany with us for this transformation period. And we wish you and your families, colleagues, safe and healthy, okay? Thank you. Bye.

Operator

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.