X Financial's Q2 2025 Earnings Call: Contradictions Emerge in Loan Strategy, Regulatory Compliance, AI Integration, and Capital Returns

Date of Call: August 19, 2025

Financials Results

• Revenue: RMB 2.27 billion, up 17.3% sequentially and 65.6% year-over-year
• EPS: RMB 14.6 per ADS (USD 1.98), up 85.8% year-over-year (non-GAAP adjusted net income per ADS)
• Operating Margin: Approximately 30%, maintained near 30% while increasing borrower acquisition spending (no prior-period percentage provided)

Guidance:

• Q3 total facilitated and originated amount expected to be RMB 32 billion to RMB 34 billion.
• Management will moderate volume from record Q2 levels to prioritize asset quality and profitability over pure growth.
• Company expects resilient borrower demand and disciplined execution despite evolving regulation.
• Board approved semiannual cash dividend of USD 0.28 per ADS (record date Sept 26, 2025; expected payment around Oct 15, 2025).
• Share repurchase: USD 100M program active with ~USD 68.2M remaining through Nov 30, 2026.

Business Commentary:

* Strong Loan Origination and Revenue Growth: - X Financial facilitated RMB 38.99 billion in loans in Q2 2025, marking a 10.9% sequential increase and 71.4% year-over-year growth. - Total revenue reached RMB 2.27 billion, rising by 17.3% sequentially and 65.6% year-over-year, driven by increased loan origination volumes and platform expansion.

• Improved Asset Quality and Borrower Engagement:
• The 31- to 60-day delinquency rate improved to 1.16%, down from 1.29% a year ago, and the 91 to 180 days delinquency rate was 2.91%, down from 4.38% last year.

• This improvement is attributed to disciplined borrower screening, rigorous underwriting practices, and proactive engagement with borrowers through timely communication and customized repayment assistance programs.

• Profitability and Capital Return:

• The company reported non-GAAP adjusted net income of RMB 593.2 million, reflecting 58.3% year-over-year growth, with a non-GAAP adjusted net income per ADS of RMB 14.6, up 85.8% year-over-year.

• This growth is supported by prudent expense control, high-quality loan growth, and capital efficiency, as demonstrated by the ongoing share repurchase program, with 16.7 million shares repurchased for USD 47.7 million.

• AI Integration and Cost Efficiency:

• X Financial is leveraging AI in client management and has already replaced some live agents, contributing to ongoing operational efficiencies and cost reduction.
• The company is committed to developing AI capabilities further to support profitability goals, alignment with the strategic focus on asset quality and sustainable growth.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We are very pleased with our continued momentum in 2025." Reported results: "Total revenue reached RMB 2.27 billion, up 17.3% sequentially and 65.6% YOY." Operational strength: originations RMB 38.99 billion (+71.4% YOY), improved delinquencies (31-60 days 1.16% vs 1.29 a year ago), and operating margins maintained near 30% while scaling.

Q&A:

• Question from Randy Balaton (NPS Trading): Can you provide some color on the pivot that you've had from providing loan growth at the beginning of the year to switching to asset quality as your prioritization?
  Response: Asset quality remains the top priority; management will not grow the portfolio for its own sake and expects to achieve full-year scale targets while emphasizing credit quality.

• Question from Randy Balaton (NPS Trading): Do you see opportunity to run the company leaner through artificial intelligence?
  Response: AI is already used in collections and customer service; the company will continue developing AI capabilities to reduce costs and improve efficiency.

Contradiction Point 1

Loan Growth Strategy and Asset Quality Focus

It highlights a shift in the company's strategic focus from loan growth to asset quality, which has implications for financial performance and investor expectations.

Can you explain the shift from focusing on loan growth at the beginning of the year to emphasizing asset quality? - Unidentified Analyst (NPS Trading)

2025Q2: Asset quality has always been our priority. At the beginning of the year, we expected a 30% increase in scale. Although we are now paying more attention to keeping the quality high, we still aim to meet our original growth expectations. - Kan Li(CFO)

Do you like the current macroeconomic environment and loan market? - Kenning from Norton Andrews

2025Q1: X Financial has not been trying to grow its portfolio for the sake of growth but based on its assessment of the future environment. The current environment is good for portfolio growth, and the company is focused on growth. - Kent Li(CEO)

Contradiction Point 2

Regulatory Compliance and Impact on Growth

It involves the company's approach to regulatory compliance and the potential impact on growth prospects, which are crucial for investors and strategic planning.

Do you see opportunities to run the company more efficiently using artificial intelligence? - Unidentified Analyst (NPS Trading)

2025Q2: We are confident in our compliance with new regulations by October 1. Growth prospects will not change despite new regulations. - Kent Li(CEO)

What is driving the loan growth guidance for the next quarter? - Alex Ye with UBS

2025Q1: The company is prepared for regulatory changes and has a high run rate. They have no plans to increase growth forecasts yet as Q4 is uncertain due to regulatory impacts. The company is prepared and expects 30% volume growth for the year. - Frank Fuya Zheng(CFO)

Contradiction Point 3

Loan Growth Strategy

It demonstrates a shift in the company's strategic approach towards loan growth and asset quality, which impacts investor expectations and operational priorities.

Can you explain the shift in strategy from prioritizing loan growth at the beginning of the year to focusing on asset quality? - Unidentified Analyst (NPS Trading)

2025Q2: Asset quality has always been our priority. At the beginning of the year, we expected a 30% increase in scale. Although we are now paying more attention to keeping the quality high, we still aim to meet our original growth expectations. - Kan Li(CIO)

What are the drivers of 2025's loan growth, and how will it affect this year's profitability? - Mason Bourne (AWH Capital)

2024Q4: The 30% loan volume increase is driven by better customer acquisition and partnerships with platforms. We expect profitability to increase at the same pace as the loan volume. - Kent Li(CEO)

Contradiction Point 4

AI Integration and Operational Efficiency

It highlights differing perspectives on the role and impact of AI integration in the company's operations, which affects expectations for cost reduction and operational efficiency.

Do you see opportunities to run the company leaner using AI? - Unidentified Analyst (NPS Trading)

2025Q2: We are already leveraging AI in client management, like collections and customer service. AI will continue to be an area of growth to reduce costs and align with our profitability goal. - Kan Li(CIO)

How do you plan to allocate capital going forward, particularly regarding dividends and buybacks? - Mason Bourne (AWH Capital)

2024Q4: Due to the stock price appreciation and current undervalued situation, more weight will be given to share buybacks in 2025. The company aims for a higher payout percentage, with a significant portion allocated to buybacks, as the stock remains cheap relative to its earnings. - Frank Fuya Zheng(CFO)

Contradiction Point 5

Capital Return and Dividend Strategy

It highlights a shift in the company's capital return strategy, specifically regarding dividends and share repurchases, which are critical for investor expectations.

Can you update us on the capital return program and clarify if there's a plan for its relation to company net income? - Unknown Analyst

2025Q2: We plan to continue with semi-annual dividend payouts. By the end of the year, we hope to exceed the usual capital return percentage. - Fuya Zheng(CFO)

Frank, can you elaborate on the dividend? - Mason Bourne (AWH Capital)

2024Q3: We want to do more share repurchases, but currency exchange issues limit current activity. We'll continue paying above the industry average dividend yield of around 6%. - Fuya Zheng(CFO)