Edited Transcript of YIN.OQ earnings conference call or presentation 27-May-20 12:00pm GMT

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [5]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [6]

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[Interpreted] 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [7]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [8]

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[Interpreted] 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 RMB 846.5 billion, an increase of 134.7% year-over-year and net commission and fees were RMB 416 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 relationship in a special period and the track of our capabilities.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [9]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [10]

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[Interpreted] As a result, our total revenues once again exceeded management’s high-end guidance, reaching RMB 490.9 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 RMB 88.6 million. With better 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [11]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [12]

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[Interpreted] 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [13]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [14]

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[Interpreted] 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 webinars 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 dealer companions for a single day, even during the most difficult time of the virus.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [15]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [16]

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[Interpreted] 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 trends 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [17]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [18]

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[Interpreted] We begin maintaining financial flexibility, building ample liquidity to further strengthen our balance sheet through the uncertain environments 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 RMB 2.08 billion, and we have no debt. Our free cash flow were significantly improved to RMB 190 million from RMB 140 million, a significant increase of 32% from the end of last year, and total shareholders’ equity increased to RMB 2.85 billion.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [19]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [20]

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[Interpreted] 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [21]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [22]

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[Interpreted] 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [23]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [24]

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[Interpreted] 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.

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [25]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [26]

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[Interpreted] 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.

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Di Qian, Yintech Investment Holdings Limited – CFO [27]

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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 the 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 RMB 429.5 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 RMB 54.8 million, significantly lower than RMB 187.1 million a year ago, as it is largely correlated to market volatility.

Total customer trading volume was RMB 846.5 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 RMB 375.6 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 RMB 88.6 million, representing an increase of 28% from the same period last year. This translates to diluted earnings per ADS of RMB 1.18 compared with RMB 0.92 from the same period last year, and the non-GAAP diluted earnings per ADS was RMB 1.25 compared with RMB 1.14 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 in 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 RMB 590 million to RMB 610 million, representing an increase of 104.2% to 111.1% compared to the same period last year. This includes revenue related to business of RMB 570 million to RMB 590 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question today comes from Hunter Diamond with Diamond Equity Research.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [2]

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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?

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [3]

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Risk control and then, what’s the next?

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [4]

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Product optimization.

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [5]

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Product commercialization?

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [6]

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Optimization. Looking at new different products.

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [7]

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Oh, optimization.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [8]

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So gold trading. Yes.

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [9]

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Oh, okay. (foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [10]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [11]

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[Interpreted] 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 spot commodities and securities segment that we engage in.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [12]

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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?

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [13]

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Okay. Yes, that’s a good question. Thank you. Let me translate. (foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [14]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [15]

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[Interpreted] 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.

And then secondly, we think that in the past, these 2 countries have some cooperations 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 or 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.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [16]

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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 may be overall good despite being maybe additional expenses temporarily. Okay. So my next question is just in terms of…

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [17]

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That’s right. Okay. I’m sorry, let me translate for the team. (foreign language). Okay.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [18]

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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. So — 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?

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [19]

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Yes. Got you. Thank you. (foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [20]

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(foreign language) Okay.

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [21]

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[Interpreted]. 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.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [22]

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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 or higher dividends. 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 — 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?

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [23]

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(foreign language)

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Wenbin Chen, Yintech Investment Holdings Limited – Co-Founder, Chairman & CEO [24]

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(foreign language)

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [25]

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[Interpreted] 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 5 product lines, and after 2 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 5 product lines and the 2 category of products. After 2 or 3 years transformation, we think that we have established a very solid business growth after the 2-year testament. So we will continue going forward, focusing on these 2 product lines. And specific to the Board area, even though we have ample cash position and we have a lot of cash to invest in the R&D area as you 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 2, 3 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.

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Hunter Louis Diamond, Diamond Equity Research LLC – CEO & Founder [26]

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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.

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [27]

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

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Operator [28]

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(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.

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Yvonne Young, Yintech Investment Holdings Limited – IR Director [29]

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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.

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Operator [30]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]