X Financial achieves 71.4% loan volume growth in Q2 2025, prioritizing asset quality amidst regulatory challenges

OPERATOR - (00:02:26)

Hello and welcome to the X Financial second quarter 2025 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.

Victoria Yu - (00:03:07)

Thank you, Operator. Hello everyone and thank you for joining today's call. The Company's financial results were released earlier today and are available on our investor relations website@ir.xfinancial.com on the call today from X Financial are Mr. Ken Lee, President, Mr. Frank Fuya Zheng, Chief Financial Officer and Mr. Noah Kaufman, Chief Financial Strategy Officer. Mr. Lee will start with a brief overview of our business progress and financial performance. Then Mr. Kaufman will go over some key Q2 metrics and highlights. After that, Mr. Zheng will share updates on financials, regulatory insights and our 2025 outlook. Afterward, Mr. Li, Mr. Zheng and Mr. Kaufman will be available to answer your questions during the Q and A session. I remind you that this call may contain forward looking statements under the safe harbor provisions of the Private Securities Litigation Reform act of 1995. Such statements are based on management's current expectations and involve known or unknown risks, uncertainties and other factors. These factors are difficult to predict and many are beyond the Company's control, which may cause actual results, performance and achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our SEC filings. The Company undertakes no obligation to update any forward looking statements as a result of new information, future events or otherwise, except as required by law. It is now my pleasure to introduce Mr. Ken Lee.

Ken Lee - President - (00:04:58)

Thank you, Victoria and hello everyone. We are very pleased with our continued momentum in 2025. In the second quarter, we facilitated RMB 38.99 billion in loans, a 10.9% sequential increase and a strong 71.4% compared year over year. This was another standout quarter for originations supported by robust borrower demand and continued advance in risk management. Our team remained committed to expanding market opportunities through both new partnerships and the deepening of existing relationships, further strengthening our technology platform and underwriting models to drive profitability and scalability, carefully balancing growth opportunities with prudent risk management as we increase access to qualified borrowers, we also continue improving borrower experience by speeding up decision making. Streamlining applications and enhancing transparency. Simultaneously, we have made meaningful enhancements to platform reliability and borrower-facing tools, empowering users to make informed credit decisions and managing repayments confidently. Despite the ongoing regulatory environment and macroeconomic uncertainty, we delivered significant sequential growth in loan volume and revenue. Total revenue reached RMB 2.27 billion, up 17.3% sequentially and notably higher at 65.6% growth year over year. These results reflected disciplined execution and ongoing expansion of our platform and capabilities, operational and credit Quality Update we also continued making positive strides in asset quality. As of June 30, our 31 to 60 day delinquency rate improved to 1.16%, down from 1.29% a year ago, reflecting nearly a 10% improvement year over year. The 91 to 180 days delinquency rate was 2.91%, substantially lower than the 4.38% in Q2 2024, demonstrating a meaningful 33% reduction year over year. These improvements highlight our continued commitment to disciplined borrower screening and rigorous underwriting practices. We have also proactively improved borrower engagement, leveraging timely communication and customized repayment assistance programs. These initiatives continue to drive better borrower behavior, significantly contributing to the stability and the quality of our portfolio. With that, I'll now turn it over to Noah, who will walk through additional financial and operational highlights from the second quarter.

Noah Kaufman - Chief Financial Strategy Officer - (00:08:10)

Great. Thank you. Hello everyone. It's great to speak with you today. Let me highlight some key points from our Q2 operational and financial results. On operational metrics, we facilitated approximately 38.99 billion RMB and loan originations up significantly by 71.4% year over year. Our total outstanding loan balance, excluding loans delinquent for more than 60 days reached 64.91 billion RMB, representing an increase of 55.3% from Q2 2024. Total number of loans facilitated increased substantially to approximately 3.72 million, reflecting a growth of 70.8% year over year. With an average loan size of 10,476 RMB, our active borrower base grew meaningfully, reaching approximately 2.85 million, a notable 73.7% increase year over year. On the financial highlights, our total net revenue reached 2.27 billion RMB, reflecting strong sequential growth of 17.3% and impressive 65.6% year over year growth driven by increased loan origination volumes and continued expansion of our loan facilitation services. Income from operations increased meaningfully to 675.1 million RMB rising by 45.8% year over year, underscoring our continued focus on operating leverage and disciplined expense management. We reported non GAAP adjusted net income of 593.2 million RMB, reflecting robust year over year growth of 58.3%, demonstrating continued profitability momentum as we scale our business. Importantly, we delivered this bottom line growth while maintaining operating margins near 30% even as we increase borrower acquisition spending, reflecting strong unit economics and platform efficiency. In addition, the weighted average number of basic shares outstanding declined approximately 14.4% year over year, contributing to meaningful growth in earnings per ADS, alongside strong net income performance. This reflects our ongoing commitment to capital return through our share repurchase program, which Frank will speak on more in a moment. At the same time, with net income up 27% year over year and only modest growth in total equity, our implied return on equity expanded significantly, affirming the strength and efficiency of our earnings model and our ability to generate high returns on capital while maintaining a conservative balance sheet. Our strong Q2 results reflect consistent execution, improved operational efficiency and resilient asset quality amidst a challenging regulatory and market environment. I'll now hand it over to our CFO Frank, who will dive deeper into these financial results, provide an update on our capital return strategy and share insights on regulation and growth outlook for the remainder of 2025. Thank you. Go ahead, Frank.

Frank Fuya Zheng - Chief Financial Officer - (00:11:25)

Thank you, Noah. It's great to speak with everyone today. Let me provide additional highlights of our profitability metrics, liquidity position, strategic capital allocation and the regulatory environment for the second quarter of 2025. Financial and profitability measures Non GAAP adjusted net income for Q2 reached RMB 593.2 million US dollar 82.8 million, up significantly by 58.3% year over year, reflecting strong core profitability driven by prudent expense control and high quality loan growth. Non GAAP adjusted net income per ADS basically improved significantly to RMB 14.16 US$1.98, representing 85.8% increase year over year, underscoring the effectiveness of operational leverage and the enhanced profitability per share. Return on equity further improved to approximately 27.9% in Q2, increased both sequentially and year over year. As Noah mentioned, our improved ROE reflects both core earnings growth and capital efficiency supported by disciplined equity management and reinvestment. This demonstrates our continued financial discipline and increased operation efficiency as we scale. Our liquidity remains robust, giving us the flexibility to fund strategic growth initiatives, invest in technology and borrow acquisition and return capital to shareholders primarily through our ongoing Share Repurchase Program Share Repurchase Plan From January 1, 2025 through August 15, 2025, Exfinancial purchased an aggregate of approximately 16.7 million Class A owner shares, including approximately 2.3 million ADS for a total consideration about approximately $47.7 million under its share of repurchase plans. The company's previous $15 million repurchase authorization has been fully utilized. The Company NOW has approximately $68.2 million remaining under its new $100 million share repurchase programs, which is effective through November 30, 2026. This ongoing share repurchase activity underscores our confidence in the Company's long term growth perspectives and demonstrates our continued commitment to enhance shareholder value. Further repurchase under this program remain subject to market conditions and regulatory guidelines and our discretion regarding capital allocation, profit priorities Dividend Update as part of a semiannual dividend policy, the Board has approved a cash dividend of US $0.28 per ADS, which is equivalent to approximately US 0.0467 per ordinary shares. Shareholders of record as of September 26, 2025 will be entitled to receive the dividend and the payments are expected to be distributed on and around October 15, 2025. ADS holders will receive their dividend payments through our depository, the bank of New York Nellard, shortly thereafter, with the timing subject to brokerage processing. Regulatory Environment Update the regulatory environment in China continues evolved and we remain fully committed to compliance and alignment with the government's policy goals. Recent regulatory guidance from the National Financial Regulatory Administration emphasize that responsible lending practice, consumer protection and financial stability areas where we remain fully aligned. While involving regulations may introduce incremental compliance obligations for industry participants, we view these changes positively as they support a sustainable industry landscape and encourage responsible innovation. We will continue proactively engage with regulatory authorities ensuring our operations adhere strictly to involving standards and we believe our platform is well positioned to navigate those changes while continue to create long term value 2025 growth outlook based on current trends ex financial aspects the total return amount of facilities and originate in the third quarter of 2025 to be the range of RMB32 billion to RMB 34 billion. This represents a deliberate moderation from record Q2 levels as management place great emphasis on asset quality and probability over Pew volume growth. The Company remains attentive to the challenges and uncertainty from the involving regulatory environment while maintaining confidence in resilient borrow demand and discipline execution. With that, I will hand the call back to our President Ken Lee for closing remarks.

Ken Lee - President - (00:17:33)

Thank You Frank. As we move further into 2025, we remain confident in our strategic path rooted in robust underwriting practices, prudent risk controls and continued operational enhancements. Our strong financial position and unwavering commitment to long term value creation give us confidence in our ability to deliver sustained and profitable ventures.

OPERATOR - (00:18:02)

This concludes our prepared remarks. We will now open the call for questions. Operator, please go ahead. We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. Again, it is Star then one to ask a question. The first question comes from Randy Bellington with NPS Trading. Please go ahead.

Randy Bellington - (00:18:50)

Hi there. Congratulations on a good quarter and thank you for the call. I do have two questions. The first one is can you provide some insight on the pivot that you've made on providing loan growth at the beginning of the year to switching to asset quality? And then the second question is, do you see opportunity to run the company leaner through artificial intelligence? Thank you.

UNKNOWN - (00:19:24)

Sorry, I didn't hear your first question clearly. Can you repeat that please?

Randy Bellington - (00:19:29)

Yes, yes. Can you provide some information or some color on the pivot that you guys have had from providing loan growth or going from loan growth at the beginning of the year and switching over to asset quality as your prioritization?

UNKNOWN - (00:19:50)

Okay. I think asset quality has always been our priority no matter what. So I think at the beginning of the year that we provide roughly 30% increase in our scale. I think we maintain our expectation on that. I don't see any significant change from our original expectation. That being said, that asset quality of various reasons have always been our top priority. So based on the environment that we are seeing right now, I think we are paying even more attention to making sure that our, we are not growing our portfolio just for the sake of growth. But that being said, I still don't see we still maintain our expectation that we will likely finish out the whole year by reaching that goal. I think that's your first question. The second one is about the AI application. We have already been leveraging AI largely in our client management space like the collections, the customer service. So we have already been utilizing AI to replace some of the, some of the live agents before. This is, this will be a continued growth and I don't see that we will reach an end stage and this will be an ongoing development from our side. Obviously we are very interested in developing our AI capability in order to reduce the future cost and this certainly align with our goals. With our profitability goal.

Randy Bellington - (00:21:41)

I see. Thank you.

UNKNOWN - (00:21:42)

I think if I just add one thing, Randy, is we have a deck that's been released this last that highlights all the AI capabilities that we're testing internally. That may be helpful.

Randy Bellington - (00:21:59)

Okay, thank you.

OPERATOR - (00:22:06)

Again. If you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Victoria Yu - (00:22:25)

Thank you everyone for joining us today. If you have additional questions, please reach out to our investor relations team directly. We appreciate your interest and look forward to speaking with you again soon. Operator, back to you.

OPERATOR - (00:22:40)

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