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Chailease Holding Company Ltd
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Welcome to Chailease's First Quarter 2024 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Following management's prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is now being recorded. I would like to turn the call over to Vic Wang, Project Vice President of Chailease Holdings. Mr. Wang, please go ahead.
Hi. Good evening, everyone. I would like to welcome everyone to Chinese Holding First Quarter 2024 Earnings Conference Call. With me this evening is Ms. Sharon Fan, Head of IR, and she will open to your questions in Q&A period. I will walk you through this quarter's earnings presentation, which is available for download on our corporate website under the IR section.
As a reminder, please refer to the disclaimer regarding forward-looking statements at the front of the presentation. The agenda we are going to cover for today on Slide 3 includes management highlights, first quarter 2024 consolidated performance review followed by the segment review for our Taiwan, China and ASEAN operation.
Without further ado, I would like to start the presentation from Slide 4, highlights for overview of our first quarter operation results. First, the summary table here shows the credit portfolio growth for the quarter. On a year-over-year basis, Taiwan, China and ASEAN credit portfolio grew 10%, 8% and 9%, respectively. On a consolidated level, we achieved 9% year-over-year credit portfolio increase, which is on track with our yearly target.
As for sequential portfolio growth, Taiwan increased 1% and China increased 1%, ASEAN also increased 1% and 2% growth on a consolidated basis. The full year portfolio growth target for 2024 remains unchanged.
Second, although we see increasing delinquency ratio, given the interest spread we earned and from a historical perspective, the current delinquency ratio level is still within our expectation and remain in an accessible level. On the current macro and operating environment, it might take more time to see improvement of delinquency ratio.
Third, Chailease Holding Board of Directors approved the proposal of a cash dividend of TWD 6.5 per share and stock dividend of TWD 0.2 per share. The dividend proposal will be submitted for AGM approval, which will be held on May 22. Moving on to Slide 6. Consolidated credit portfolio reached TWD 808 billion at first quarter end 2024, with 9% year-over-year growth and 2% year-over-year increase as Taiwan and ASEAN contributed most growth for the quarter.
The next slide, Slide 7, show you the trend of consolidated average loan yield and cost of funds for the past 3 years. In recent quarters, we see stabilized funding costs, mainly due to funding costs slightly decreased in China and ASEAN. We will discuss the change of each operation reaching in the next section.
Next slide, Slide 8. On the left-hand side, the consolidated revenue for the first 3 months of 2024 reached TWD 25 billion, representing 8% growth compared to the same period last year, as Taiwan and ASEAN remained the growth driver this quarter. On the right-hand side, first quarter 2024 consolidated revenue remained flat from the previous quarter.
Moving on to Slide 9. On the left-hand side, the consolidated net profit for the first 3 months of 2024 totaled TWD 5.8 billion, and earnings per share was TWD 3.6. The decrease in net profit was mainly driven by more impairment losses was booked, and China tax rate base has not yet been received. On the right-hand side, first quarter consolidated net profit was up 1% quarter-over-quarter, but ASEAN net profit was up 38% for the quarter.
Turning to Slide 10. This slide shows you our credit portfolio mix and profit contribution in terms of operation region. On the left-hand side, we can see Taiwan credit portfolio still accounts for more than half which was 56% of group total credit portfolio. China is about 29%, and ASEAN remained at 15% at first quarter 2024. on the right-hand side, Taiwan net profit contribute -- net profit contribution accounts for 49% and China was 44%. ASEAN contributed 5% to the consolidated net profit.
Moving on to Slide 11. The chart on the left-hand side, cost-to-income ratio slightly improved to 27% for the first 3 months of 2024 compared to the same period last year. We expect the cost of income ratio may maintain at this level. The chart on the right-hand side, asset to equity slightly decreased to 5.6x for the quarter usually there is a dip of a leverage ratio at the first quarter end before annual dividend is declared.
Slide 12. The consolidated ROA on an annualized basis was 2.5% for the first quarter of 2024 decreased from 2.9% in 2023, mainly due to China tax rebate has not yet been received. The consolidated ROE on the right-hand side was 16% for the quarter. The calculation of ROE excludes preferred share.
Next slide, Slide 13. The consolidated delinquency ratio on the left-hand side, the first quarter end 2024 was increased to 3.4% from 3.2% in prior quarter Later in the presentation, I will talk about each region in more detail. Moving to the right-hand side, allowance to credit portfolio ratio was maintained at 2.4% compared to previous quarters.
Moving on to the segment review, let's look at our operation performance region by region. On Slide 15, Taiwan Credit portfolio reached TWD 454 billion at first quarter end 2024. Representing 10% year-over-year increase and quarter-over-quarter was up 1%.
Slide 16. This slide shows the change of Taiwan solar asset Taiwan Solar net asset reached TWD 54 billion at first quarter end 2024, representing 10% year-over-year increase and quarter-over-quarter was also up 2%.
Next slide, Slide 17. This page presents trend of our Taiwan average loan yield and funding cost. The slight decrease in loan yield for first quarter 2024 was mainly due to less interest income as a result of fewer calendar days in first quarter compared to fourth quarter 2023.
Moving on to Slide 18. Revenue for our Taiwan operation for the first 3 months of 2024 reached TWD 13.4 billion, representing 11% year-over-year growth. The solar revenue accounts 11% of Taiwan revenue for the first quarter of 2024. For the quarter-over-quarter comparison on the right-hand side, first quarter revenue was slightly down 0.5% quarter-over-quarter due to lower solar revenue.
Turning to next slide, Slide 19. Taiwan's profit for the first 3 months of 2024 decreased by 7% compared with the same period last year, mainly due to the increase in impairment losses. The first quarter Taiwan net profit was down 10% quarter-over-quarter, reflecting slightly higher cost-to-income ratio and less nonoperating income sequentially.
On Slide 20. On the left-hand side, Taiwan delinquency ratio at first quarter 2024 was up 0.5 percentage points to 2.8% for the quarter. We saw more new delinquent amount in micro business installment sales and in construction industry for the quarter. On the right-hand side, recovery from delinquency and write-off amount was down for the quarter.
Next slide, Slide 21. Allowance to loan portfolio for Taiwan maintained at 1.8% this quarter. Let's start China operation on Slide 22. China credit portfolio reached RMB 54 billion in first quarter end 2024, which grew by 8% year-over-year and 1% increase quarter-over-quarter. We maintained our China loan portfolio growth targeted around 10% for 2024 and will do semiannual review to see if any revision is needed as usual.
Turning to Slide 23. This page shows the loan yield and cost of fund trend for our China operation. We managed to maintain stable loan yield and spread over the quarter. The slightly lower benchmark rate of PR and expiration of higher cost of USD bond also helped lower funding costs for the recent 2 quarters.
Next slide, Slide 24. China revenue for the first 3 months of 2024 totaled TWD 8.2 billion increased 5%. On the right-hand side, first quarter revenue was up 1% quarter-over-quarter. Moving on to Slide 24. China for the first 3 months of 2024, net profit reached TWD 2.8 billion, decreased 25%. The decrease in profit was mainly driven by more expected credit loss and tax rebate has not yet been received for this year. On the right-hand side, China's first quarter 2024 net profit was flat sequentially.
Turning to next slide, Slide 26. On the left-hand side, China delinquency ratio in the first quarter was up 0.1 percentage points to 4%. On the right-hand side, write-off amount increased for the quarter.
Next slide, Slide 27. China allowance to portfolio ratio for the first quarter 2024 was maintained at 3%. Moving to ASEAN on Slide 28. The credit portfolio at first quarter end 2024 reached TWD 115 billion, up 9% year-over-year and 1% sequentially. Malaysia remained as the main growth driver for ASEAN.
Let's turn to next slide, Slide 29. The left-hand side, ASEAN revenue for first quarter 2024 totaled TWD 3.3 billion grew 6% compared to the same period last year. On the right-hand side, ASEAN first quarter revenue was down 2% sequentially.
Moving to Slide 30. ASEAN first 3 months of 2024 net profit reached TWD 0.5 billion decreased by 34% due to more interest expense and impairment losses was booked for the quarter. On the right-hand side, ASEAN's first quarter 2024 net profit was up 38% sequentially due to less impairment losses for the quarter.
The last slide, Slide 31. On the left-hand side, ASEAN delinquency ratio at first quarter increased 0.2 percentage points to 4.5%. Malaysia delinquency slightly improved for the past 2 quarters. However, Thailand and Vietnam delinquency both slightly trend up in this quarter. On the right-hand side, ASEAN loans to portfolio ratio for the first quarter 2024 was also increased to 3.5%.
And this also bring us to the end of my presentation for today. Thank you for your time and listening. Now I would like to turn the call to operator to open the line to questions. Operator?
Thank you Vic. [Operator Instructions] The first one to ask questions Gurpreet Sahi from Goldman Sachs.
A few questions. First is asset quality. On Taiwan, what drove this big pickup? I see it's installment in construction. But what was different Tell us in this quarter versus the last few quarters, because it's a very big jump. And also there was some talk regarding regulation change for Taiwan to grow in the auto area. So what is this regulation change? And how is it impacting growth and asset quality. So that's the first question. And maybe I'll let you answer that and maybe then later on.
Okay. Actually, for this quarter, Taiwan delinquency ratio was 2.8% and the major -- across the board, we see every BU has slightly increase of the delinquency ratio. However, the major driver for this 2.8% of the delinquency is more from our micro business, financing business and construction equipment leasing BU. But the good thing is for that too, part of the BU, the LGD is relatively lower compared to traditional around 30% of the loss ratio to the traditional SME equipment leasing, the micro business financing and construction equipment financing BU actually, the LGD is much lower, like less than 20%. Because for that part of the customer segment, we require some real estate as collateral.
So that part is still from the credit cost point of view, still quite under control. So we can see for this quarter, the overall Taiwan credit costs still remain similar level compared to last year -- last -- fourth quarter last year.
And so that's for the Taiwan asset quality. And regarding the regulation environment for like Taiwan, auto financing, I think probably you already are aware that for the major -- the 3 major leasing player in Taiwan, actually, we already established this self-discipline kind of rules and already will be followed by all the leasing association members and -- starting from April.
So I think the regulator seems quite satisfied with this kind of in improvement. And I think right now, probably in the short term, it will have some temporary impact to our used car financing business. For this year, probably the growth rate will be impacted a little bit for this year. However, I think from the portfolio balance point of view, probably it won't be -- have too much of the impact.
So that's the reason why for this year, I think management already guided a more moderate growth target for our Taiwan business, around 10%. Because in the past, those are -- used car financing can generate better than the average Taiwan growth rate, yes, more than 10%. So this year, probably it will have slowed down, yes.
Okay. The second question is regarding the spread. We -- I note the comment regarding fewer calendar days. But then in general, take a big picture view, that interest rates went up in Taiwan, and we started to pass it on to our borrowers -- so customers. So then how come the spread is not an improving trend, broadly speaking, if you take last 2, 3 quarters, you -- and will we see that in the second quarter and beyond for Taiwan, in particular, expect to improve?
I think in terms of the spread for Taiwan, actually, we've been trying to enhance the overall spread for the past 1 year. right? Because the increase of the interest rate hike, the impact started from early last year, and we gradually try to reflect in the new pricing for the Taiwan business. So for the past year, we already try to increase the spread to a certain level.
And going forward, I think probably there's still some marginal -- I mean, some room to improve this, but I think probably it's already reflect like 70%, 80% of the -- because most of the funding costs already factor in, funding cost increase. And the repricing, we only use the new price for the new business deals. So with a little bit slowdown of the new business volume this year, I think probably it will take a little bit longer from our original estimate.
Okay. Understood. And then final question is regarding capital. Then if we want to look at capital raising, in what form can we do it? Is it GDR, but then I hear on the Chinese call that the GDR was not -- was ruled out. So then is it share issuance in Taipei or some other route?
As you know, management always make a general proposal of this fundraising -- long-term fundraising plans for the AGM. So we have this kind of flexibility and availability if we need to do the fundraising. And in terms of the tools, what kind of financing tool we are using. Actually we haven't finalized -- we haven't decided yet. But for this year, probably the GDR is not the first priority that we -- first option that we considered for this year. However, still under discussion yes.
Next one to ask questions Edwin Liu from CLSA.
Two questions. Firstly, the portfolio growth guidance is unchanged, but first quarter seems to be a little bit slow. So I guess management may still expect some growth acceleration in the following quarters.
Just wanted to get the thoughts behind this unchanged growth guidance because we have seen rising delinquency and new delinquency in the first quarter but still maintain the similar growth rate guidance. So just hope you can give more color on this. And secondly, I think on the group level, your credit cost in the first quarter is quite similar to the fourth quarter last year. But I guess the new delinquency information this quarter is larger than the previous quarter.
So I guess is this possibility that the credit cost will gradually increase in the following quarter? Or do you expect the new delinquency formation to increase in the following quarter Yes.
Okay. Regarding the growth plan, I think so far, we try -- we still maintain our yearly growth targets remain unchanged. because usually, management will -- we will have a semiannual review of the business and to see whether there's any fine tune of this target needed. So, so far, the management didn't see any significant change of this kind of target we've been set at the earlier this year. And so yes, so far, we still maintain -- although I think especially for China and ASEAN, nothing big has been changed. So we maintain our target, whole year target.
And for the time on, probably there is some headwind for this used car financing business. However, as you can see, we always have a second half. The momentum will be better than the first half because first half, we have this traditionally quite slow first quarter. So we still maintain our full year growth target as a guidance. If there's any update, then we will make you updated in next quarter result call. And regarding the credit cost, in general, overall, I think for Taiwan, China, even ASEAN still remain quite stable credit cost -- overall credit cost level. Like for Taiwan, although the delinquency ratio was up from 2.3% last previous quarter to 2.8% this quarter.
However, our overall credit cost for this quarter is still around 1.8%, 1.9%, which is quite similar to last year. So from the credit cost point of view, I think still quite under control. And this new delinquency formation, I think it's more about China. China's new delinquency formation compared to fourth quarter last year, was up again, but still within the -- I mean the third quarter kind of level. from RMB if we compare with local currency.
So that echo our China CFO's comment about China asset quality. I think we see still need some more time to monitor it isn't getting worse, and it isn't start to show improvement signals yet. So -- but at least it's quite stable yes, from our view.
[Operator Instructions] Next one, we are having Anupam Mathur Goldman Sachs. Go ahead, please.
Can you hear me?
Yes.
I had a few questions. So maybe I'll go one by one. Firstly, on the Taiwan NPLs. So how much of the increase was micro? And how much was construction? And within construction, what is driving it? Like I was under the impression that macro might be improving in Taiwan. The outlook is better. So what exactly is causing this issue? So if you could just help me with the NPLs for Taiwan.
The construction equipment leasing, we are more serving a very relatively smaller like business development project kind of developer or some kind of very small business. They are providing these services to the construction project. So mainly using their construction equipment as a collateral to borrow from us.
So just like we are serving SME compared to those big corporates, during this kind of weaker macro, I think the delinquency ratio will be increased and so it's still more related to the macro situation. However, because for those are credit profile, a little bit marginal kind of customer segment, we usually request for the collateral like the real estate or property as a collateral. So from our internal like data shows, that kind of loss given people is smaller. So still within the credit cost, the tolerance -- our tolerance range of the reasonable credit cost, yes.
Right. But my question is how much was it from the construction? Because our portfolio is 1.8% of Taiwan, right? So in construction, if I look at the slide. So how much of the increase came from construction. And is it 1 client? Or is it multiple clients?
No, no, no. We never have such a concentration of the customer. I think if we look at roughly from the new delinquency amount, probably this increase like 30%, from this construct -- 30%, 20% from construction or the micro business financing. And for the rest, it's across the board. For the order, every BU, every business line has slightly increased of the delinquency.
Sorry. 30% each or 30% total?
Yes, each for the micro business, micro financing and construction. So those 2 major sectors accounts for probably like 50%.
Okay. And is it 1 customer? Or is it multiple customers?
No, no, no. It's very -- I mean, no customer concentration.
Okay. And in micro, what is typically the collateral?
What?
In micro segment, what is typically the collateral?
Collection?
Collateral.
Collateral, oh. It really depends on what the credit profile of that specific customer yes. So basically, the basic collateral will be the construction equipment like the crane, the -- what...
My question is more on the micro side, micro for the micro business. Yes.
For the inventory?
Yes.
Like for the micro financing, we are more serving the nonmanufacturing customer with a smaller business size, smaller ticket size, so most of them are nonmanufacturing the service industry clients. So yes.
And this trend of delinquency do we expect to increase further? Or like what is our expectation in the coming quarters? Are we seeing more deterioration or what exactly in Taiwan are we seeing?
So far, I think we haven't seen like a very significant change month-over-month. So -- but we still need to continue to monitor yes.
Okay. Understood. My second question is on China. So again, what's the outlook? Because it's again increased, right? The delinquency, even though the headline delinquency ratio is stable, but if you adjust for write-offs, it's quite high. similar to third quarter. So are we seeing worsening or like what are we -- what trends do we expect in the coming quarters? And what is the expectation of credit cost?
As our CFO mentioned in the Chinese result call session, he still believe our China asset quality remained quite stable. Those delinquency formation, although from this quarter is higher than previous quarter. However, it's quite similar to like 2 quarters before, like Q3 last year. So he still believe are still quite under control.
And from the credit cost point of view, probably this year, the credit cost from the first quarter, you can see it's a little bit higher than last year for the full year. But we already expect this year's full year credit cost will be higher than last year.
However, I think still relates -- depends on what's the second half, the macro economy develop. So if the macro situation is getting improved more significantly, then I think our credit cost overall still can remain quite similar to last year or even slightly improved. It's still more related to the macro performance.
But for now, are we seeing improvement? Or is it still weak?
For now No. We still need to see what the delinquency ratio evolve.
Okay. Understood. And maybe just 1 last question from my side is, if I look at the charts, the long-term delinquency ratio charts. So for the consolidated Taiwan and China. So I'm just wondering, like we are already close to the 2015, '16 peak. So what have we learned actually like if we are already reaching that level, I mean, I thought we had changed the business model and became more asset quality focused. But it seems like it continues to increase is almost back to the 2015, '16 levels for almost all the regions, so I'm just wondering like what exactly have we learned? And is it working for us?
But we didn't reach to 2015, '16 levels currently China delinquency ratio is like 4%, but the previous peak is 5.5%. So there's still quite a distance. And as you know, right now, we are in this downturn -- macro downturn cycle. So it's quite normal that we will experience a relatively higher delinquency ratio or higher delinquent -- credit cost.
However, I think the key is that as long as we are confident we are able to maintain this delinquency ratio and the credit cost within the range, which we think is already in our risk justified pricing, and we are able to maintain the satisfactory spread level. or stable spread level. We still need to pursue some reasonable growth. So yes. I don't think we already like 2015, '16, we still learn some lessons from the previous cycles.
And especially our China local team, both credit team, sales team also continue to accumulate more local experience and the risk model continued to factor in new data we collect from our operational -- I mean, the operational data. So continue to enhance the effectiveness of our like risk model and credit screening, like method.
So yes, we still learn something and still have some fundamental improvement.
Next one to ask questions Michael Zhang from Citi.
Management I have 2 questions. So the first one is on the asset quality? And I could see that although the NPL increase, but the credit cost has been largely stable, but the current credit cost of around 1.8% still quite high compared to historical levels. So like going into the next few quarters. So how should we think about the credit cost? And do you expect credit costs to improve going forward?
And then the second question is on cost. I think we -- this is probably one of the quarters that we are seeing a decline in cash expenses and a very slower special growth of OpEx. So should we stick as a run rate for OpEx growth going forward? And how should we think about cost growth across business?
Okay. Regarding the Taiwan credit cost, actually, 1% -- 1.8% of the credit cost given we're still able to maintain around like 8% -- 7% to 8% of the spread and with our very good productivity level, cost efficiency, OpEx cost efficiency level, I think -- this is not -- it's still quite reasonable, 1.8% of the credit cost. And in the near term, probably we need to see whether we can see the delinquency ratio to improve in the next quarter or 2 quarters.
So that before the delinquency ratio coming down, I think probably the Taiwan credit costs will remain around this level for the coming quarters. And regarding the OpEx cost-to-income ratio, I think 27% is probably -- we can -- we are able to maintain about this level going for this year. And this ratio, I think, for the recent quarters is more impacted by the denominator -- the numerator -- or the denominator, the revenue -- the gross margin side.
Yes, especially starting from last year, Taiwan because of the funding cost increase due to the interest rate hike. So yes, Otherwise, our overall OpEx actually remain quite stable. And head count productivity also remains at a very good level Yes.
There are currently no questions now.
We can end the call, please.
Thank you. Yes, ladies and gentlemen, we thank you for your participation in Chailease conference call now. You may disconnect. Thank you, and goodbye.