Executive Summary / Key Takeaways

• CNFinance Holdings Limited ($CNF) is undergoing a significant strategic pivot, prioritizing asset quality and risk mitigation over loan origination volume in a challenging Chinese macroeconomic and real estate market. This "survival first, victory first" principle is central to its long-term stability.
• The company's recent financial performance reflects this strategic shift, with a substantial reduction in loan origination and balance in the first half of 2025, leading to a net loss, but also demonstrating strong cost control and effective non-performing loan (NPL) recovery.
• Technological investments in property rating and big data risk control models are foundational to CNFinance's ability to enhance credit assessment, manage risk exposure, and improve operational efficiency, directly contributing to asset quality improvements.
• The Commercial Bank Partnership Model is a key growth driver, offering a high-quality borrower base and lower financing costs, with a target of contributing 30-35% of total loan originations in 2024.
• Investors should monitor CNFinance's continued execution on NPL reduction, stabilization of funding channels, and successful expansion into new business areas, alongside its ability to adapt to evolving market dynamics and competitive pressures from agile fintech platforms.

A Calculated Retreat: CNFinance's Pivot in a Volatile Market

CNFinance Holdings Limited, a long-standing provider of home equity loan services in China since 1999, finds itself at a critical juncture. Operating within the complex and often unpredictable landscape of China's macroeconomic environment and fluctuating real estate market, the company has embarked on a strategic reset. This pivot, encapsulated by its "survival first, victory first" guiding principle, underscores a deliberate shift from aggressive growth to an intense focus on asset quality and risk mitigation. This foundational strategy is crucial for understanding CNFinance's recent performance and its path forward.

The company's business model is bifurcated into the Trust Lending Model, which often involves sales partners introducing borrowers, and the Commercial Bank Partnership Model, a collaboration with commercial banks designed to attract a high-quality borrower base with lower financing costs. This dual approach allows CNFinance to serve a broad spectrum of micro and small-enterprise owners, offering micro credit, home equity loans, and bridge loan products. Its extensive branch network, particularly in first-tier and new first-tier cities, provides a localized, relationship-driven service that differentiates it from purely digital competitors.

Technological Edge in Risk Management

A cornerstone of CNFinance's strategic response to market volatility is its investment in technological differentiation. The company has developed and deployed a sophisticated property rating system for more accurate collateral evaluation. This system is complemented by a big data risk control model, designed in collaboration with a commercial bank partner, which incorporates a wider array of variables for a more thorough analysis of loan applicants. These technological advancements are not merely operational enhancements; they are critical components of CNFinance's competitive moat.

The tangible benefits of these technologies are evident in the company's improved risk metrics. For instance, the delinquency ratio for loans originated by CNFinance decreased from 19.2% at the end of 2022 to 15.6% by the end of 2023, a direct outcome of more precise collateral assessments and borrower evaluations. The company maintained its non-performing loan (NPL) ratio at approximately 1.2% as of June 30, 2024, further highlighting the effectiveness of these systems. Looking ahead, CNFinance plans to continue investing in technology in 2024, using practical operational data to refine these models. The stated goal is to achieve a more standardized, systematized, and intelligent credit approval process, reducing human intervention and significantly improving overall efficiency. This technological leadership is vital for selecting better-quality borrowers and managing risk exposure, directly bolstering financial performance through reduced credit losses and enhanced margins.

Competitive Landscape and Strategic Positioning

CNFinance operates in a dynamic lending market, facing competition from both agile fintech platforms and established commercial banks. Direct competitors like LexinFintech Holdings (LX) and Qifu Technology (QFIN) leverage digital-first approaches, offering faster loan processing and broader reach through mobile platforms. Ant Group, a dominant fintech player, presents a formidable challenge with its vast ecosystem and data-driven lending capabilities. On the traditional banking front, institutions like China CITIC Bank (0998.HK) offer diversified services and regulatory backing.

CNFinance's competitive strength lies in its extensive branch network and specialized focus on secured lending, particularly home equity loans. This localized presence fosters stronger customer loyalty and potentially more reliable revenue streams in underserved areas, a qualitative advantage over the digital efficiency of LexinFintech or Qifu. While CNFinance may lag in the speed of innovation and overall market expansion compared to its tech-heavy rivals, its conservative lending approach and established relationships provide a stable foundation. The company's strategic shift to core first-tier and new first-tier cities, where over 90% of its loans were originated in the first half of 2024, further solidifies its positioning in high-quality collateral markets. The Commercial Bank Partnership Model, which accounted for 30% of total loan originations in 2023 and is targeted to reach 30-35% in 2024, is a strategic response to leverage the high-quality borrower base and lower financing costs associated with traditional banking partners, effectively mitigating some of the scale disadvantages against larger banks.

Financial Performance Reflecting a Strategic Shift

The first half of 2025 marked a period of significant operational adjustments for CNFinance, directly impacting its financial results. In a deliberate move to manage existing portfolio quality, the company proactively controlled new loan issuance. This led to a substantial 78.1% year-on-year decrease in loan transactions and an 85.4% drop in total loan origination. Consequently, the loan balance as of June 30, 2025, stood at RMB 11.2 billion, a 29.6% decrease from the previous year. Interest income for the period declined by 55% year-on-year to RMB 416 million.

Despite the revenue pressure, CNFinance demonstrated strong cost control capabilities, with financing costs decreasing by 32% and operating expenses falling by 74% in the first half of 2025. However, the period concluded with a net loss of RMB 40.4 million, primarily driven by an impairment loss provision of RMB 31.3 million. While the nonperforming loan (NPL) ratio rose to 16.9% as of June 30, 2025, the company effectively contained the increase of new NPLs and achieved a robust 103% NPL recovery rate through diversified measures.

This recent performance contrasts with the first half of 2024, where the company originated RMB 6.9 billion in loans, and the outstanding loan principal grew by approximately 10% year-over-year to RMB 16 billion. Interest income in H1 2024 was RMB 930 million, a 5% increase. Net income for that period was RMB 48 million, impacted by an increase in provision for credit losses to RMB 172 million. For the full fiscal year 2023, CNFinance facilitated RMB 17.3 billion in loans, an 18% year-on-year growth, and reported a net income of RMB 165 million, a 21% increase. This growth was supported by an 8% lower interest expense and a 23% decrease in provision for credit losses, partly due to eased sales partner liquidity and stronger loan protection from the commercial bank partnership. The delinquency ratio also saw a notable improvement, dropping from 19.2% at the end of 2022 to 15.6% at the end of 2023.

Liquidity remains a focus, with CNFinance stabilizing funding sources in the first half of 2025 by attracting new institutional investors, predominantly local Asset Management Companies (AMCs). As of June 30, 2024, the company held RMB 1.6 billion in cash and cash equivalents and restricted cash, including RMB 1 billion specifically for new loans. The company's ability to reduce its average financing rate by approximately 4% year-over-year in H1 2024, passing on a 1 percentage point decrease in end-user interest rates, highlights its effective funding optimization strategy.

Outlook and Key Risks

CNFinance's forward-looking strategy is firmly rooted in its "survival first, victory first" principle, with a clear emphasis on containing nonperforming loans and optimizing new growth. The company's core priorities include dedicating resources to NPL reduction, ensuring stable funding channels, and supporting new business development. Management aims to rigorously manage credit approval standards for new loans, enhance delinquent loan recovery efficiency through settlement recoveries, and deepen cooperation with third-party asset management companies.

For 2024, CNFinance has set a projected loan origination target of RMB 20 billion, with the Commercial Bank Partnership Model expected to account for 30% to 35% of this volume. The company also aims to continue lowering the financing cost for its borrowers. Product innovation, including expanding offerings to meet diverse borrower needs and targeting high-quality collaterals, is a key strategic initiative, supported by ongoing optimization of the sales system and credit approval policies. Furthermore, strengthening compliance efforts through internal control mechanisms, regular training, and inspections remains a critical task for sustainable growth. The company's CFO also indicated plans to seek an extension of the share repurchase plan, signaling a commitment to shareholder value.

Despite these strategic measures, CNFinance faces significant risks. The ongoing uncertainty in China's macroeconomic environment and the adjustments in the real estate market pose continuous challenges to loan demand and asset quality. While the company has demonstrated effective NPL management, a sustained downturn could pressure recovery rates and necessitate higher impairment provisions. Competition from technologically advanced fintech players could also erode market share if CNFinance's digital transformation efforts do not keep pace. Regulatory changes in China's financial sector also present an inherent risk, potentially impacting business models and profitability.

Conclusion

CNFinance Holdings Limited is executing a deliberate and necessary strategic pivot, prioritizing asset quality and risk management amidst a challenging market backdrop. The company's "survival first, victory first" approach, underpinned by significant investments in technological differentiators for credit assessment and a robust Commercial Bank Partnership Model, is designed to build a solid foundation for long-term value. While the short-term financial performance, as seen in the first half of 2025, reflects the immediate costs of this strategic reset, the underlying operational improvements in cost control and NPL recovery are encouraging.

The company's ability to maintain asset quality, optimize funding, and expand its high-quality commercial bank partnerships will be crucial determinants of its future success. Investors should recognize that CNFinance is not merely reacting to market pressures but proactively reshaping its business model to thrive in a more selective and risk-aware lending environment. The integration of technology for enhanced risk control and the strategic focus on core urban markets position CNFinance to potentially emerge stronger, offering a compelling investment thesis for those with a long-term perspective on China's inclusive finance sector.