Earnings Call: Q4 2020

Mar 16, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the 360 Gtech 4th Quarter 2020 Earnings Conference Call. Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Mandy Do, IR Director. Please go ahead, Mandy. Thank you. Hello, everyone, and welcome to our 4th quarter full year 2020 earnings conference call. All results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wuhai Sheng, our CEO and Director Mr. Alex Zhu, our CFO and Director and Mr. Zheng Yan, our COO, before we begin the prepared remarks, I'd like to remind you of the company's Safe Harbor statements. Except for our historical information, the material discussed here may contain forward looking statements based on our current plans, estimates and projections. Therefore, we should not place undue reliance on them. Forward looking statements involve inherent risks and uncertainties. We caution that a number of important factors could cause actual results to differ materially from those in forward looking statements. For more information about potential risks Please refer to our earnings release for reconciliation between non GAAP and GAAP 1 that unless otherwise stated, all figure mentioned are in RMB. I will now turn the call over to our CEO, Mr. Hello, everyone. I'm very pleased to report another exciting quarter. We closed out the year with another set of record breaking results and continued the growth momentum since 2020 Q4. For Q4, total loan facilitation was CNY 69,000,000,000, up 29% year over year. Outstanding loan balance increased by 27% year over year to CNY 92,100,000,000. Total revenue was CNY 3,340,000,000, up 39% year over year. Non GAAP net income was CNY 1,310,000,000, up 155% year over year. For the full year, total loan facilitation was CNY246,800,000,000, exceeding the upper end of our guidance range, which was CNY242,000,000,000 to CNY 244,000,000,000 by CNY2.8 billion. Total revenue was RMB13.6 billion, up 47 percent year over year. Non GAAP net income was RMB3.8 billion, up 38% year over year. We delivered outstanding results despite a challenging year, partly by the COVID-nineteen pandemic. This is an important testament to the resilience of our risk management systems and the efficiency of our overall operations. We are more confident than ever that we will be able to maintain sustainable and solid growth. Meanwhile, this results The effectiveness of our strategy as we expand to diversify customer base and our leading channel, we are expecting accelerating growth in 2021. While achieving strong growth in Key operational and financial metrics, the quality of earnings and our overall business also improved meaningfully. Capital Life and other cash solutions had new milestones, contributing 34.1% of total loan facilitation in Q4. Recently, the risk ratio reached over 50% by 0% on a monthly basis. Moreover, The quality improvement of our earnings indicates that we have succeeded in our milestone state of tax driven strategy upgrade. Despite the rising contribution from Catalyte, We have successfully maintaining the auto royalty rate around 4% by optimizing the contractual terms with our partners and boosting operational efficiency. Going forward, we are more determined than ever to further advance this strategy to build our business on technology driven models. As we enter 2021, On the macro level, we are seeing tailwinds from both macroeconomy and industry policies. The macroeconomy recovery has continued and we saw strong demand at operational level. In particular, our business significantly outperformed normal seasonality During the Chinese New Year holiday, as the government's day food, increased business activities across On the regulatory front, we believe that the regulations rolled out recently either have minimal impact to our business or in some cases even created favorable environment for top platforms like us. As you may already know, The new ruling from the Zipurium Peoples Card removed the more restrictive lending rate cap for our business. The new guideline on George Lending And microlending has minimal impact on our business as our exposure to both is quite marginal. On the other hand, China's antitrust and the deleveraging push may squeeze some market share away from the industry giants, which will bring us speed over market opportunities. Next, let me share with you some of our trends for this year. With the pandemic well under control and economy expanding, We'll take a more proactive growth strategy this year. In the past, we deployed a large team of senior AI engineers to build our online marketing system, which builds the efficiency of our interaction with online channels to acquire target customers. We have also built an experienced offline team. Currently, this team has contributed roughly 15%, 15% Of the total transaction of new borrowers compared to 20223, BigPockets, our virtual credit card products, added over 620,000 new merchants and processed 4,000,000 transactions per month. Our customers use the pocket in high frequency consumption merchants such as Madonna, KFC, Lola, Meituan, We noticed that The embedded finance model has enhanced our competitiveness and provided strong growth. We are becoming the partner of the choice of this area for leading consumption traffic platforms in China for several reasons. 1st, compared with other platforms that Only serve a specific customer base within a narrow price range. We have been serving broader based customers with Low, medium and high price options. This has allowed us to build capacity to operate under a wide spectrum of product setting. 2nd, the fact that we do not operate a scenario based consumption platform by ourselves allow us to work with other consumption platforms without potential conflicts of interest. 3rd, those traffic typically has strong need for monetization. Our outstanding risk management capabilities can generate superior returns for them. This also makes us an ideal partner. We believe the need for embedded finance service will increase among consumption traffic platform in the future, And we are very optimistic about the growth prospects of this business and our competitive edge. So far, we have cooperated with 18 won 8 leading platforms, including Wuban Finance, FaBank and Sima Solution, with a few more in the pipeline such as JD, China Telecom and China Unicom. Monthly transaction volume under this model reached RMB 1,000,000,000 recently with 150,000 new borrowers with approved credit lines. Both operational metrics showed about 100 growth compared with the number in October 2020. In addition to consumer finance, SME loans have gradually become a new growth engine for leading senior platforms. This is a blue sea market with estimated 90, 90,000,000,000,000,000 market size and nearly 50% 50% of demand is on net. Serving the SME market is also consistent with the government's policy of promoting financial services and accessibility to the SMEs. Alibaba back to MyBank and Tencent back to WeBank have developed some best practice in this market already and created considerable barriers of entry. Leveraging our deep rooted partnership with KCB, We become one of the very few players that are capable of serving this market in a large scale. In addition to outstanding risk management Our robust capacity in funding, customer acquisition allow us to quickly establish a competitive edge in this market. For SME lending, we have developed 3 customer acquisition channels, including through self-service partners, Offline customer reach and online traffic position. So far, we have covered around 20 2.0 leading the service provider, including Yongyou, Dai Wang and Jingdian. For Off line channel, we now have a sales team about 1,000 and plan to expand it around 2,000 this year. As you can see, we have established a set of diversified customer acquisition channels in SME Business. Currently, we are pilot running this channel and monitoring the loan performance through the process. Once the pilot completes, We will rapidly scale up the business with our well designed products and readily available funding. So far, a total of 540,000 borrowers received the credit lines for SME loans, with total accumulated loan facilitation over CNY 27,300,000,000. Our outstanding SME loan balance increased by about 200% from October 2020 to CNY 7.4 billion. In addition, as we mentioned earlier, there might be some spillover market opportunities for us as a result of the ongoing antitrust and the leverage push by the regulator this year. Currently, our team is exploring some new products catering to our broader customer group. We hope to share more updates with you later this year. So this is our growth strategy for 2021 and now into our long term business model upgrading. Our region was an Internet company, and our transition into a tech empowered credit platform where we take little credit risk is a natural evolution in our corporate development. Under the capital light model, we are currently working with 39 execution and have another 22 in the pipeline. In Q4, loan facilitation within this model accounted for 34% of the total. And recently, this ratio exceeds 50%, five-zero. We expect this trending capitalized ratio to continue throughout this year. Meanwhile, we also aim to keep our tick rate at around 4% Even with the mix change, Intelligent Credit Engine, iCE, our smart marketing service product for financial institutions, Also experienced a rapid growth in terms of numbers, customers and transaction volume. Our RMSaaS product provides smart risk management service, and we have already signed contracts with 19 institutions, supporting accumulated transaction volume about CNY 16,700,000,000. As this service grew, Our income from non financial service exceeded 50%, 50% out of the total. With regard to our strategy partnership with KCB, we believe there are significant synergies in key areas of our operations. 3rd, through the partnership, KCD may help us expand the reach of the Capital Lite model. This will not only increase the overall scale capitalize, but also help us attend better contractual terms with other partners. 2nd, Our RM SaaS may provide much needed risk management capability to KCB in their non Q1 related business. Currently, KCB is applying our R and M staff and they are working with a couple of major platforms. The success of RMBS at KCB will not only drive the growth of our Tech Freedom volume and income, but also sets a good example attracting other potential R and S clients. 3rd, KCB provides us a unique competitive edge in SME loans with the access of certain proprietary data. To sum up, our synergy with KCB We are bringing significant value in the areas of capitalized model, R and SaaS and SME lending. Since we began working together, the outstanding loan balance under our partnership has reached CNY 4,250,000,000 And accumulated loan volume reached RMB 5,650,000,000. We are actively advancing collaboration on other brands as well. 2020 was a highly unusual year. After year long extreme threat path, we emerged even stronger than before. Our partner trust us more than ever, and our relationships have expanded. We are now in a stronger market position than ever. Looking ahead to 2021, We will capitalize on the unprecedented market opportunities and then return our shareholders with better business scale and quality. Next, I will hand over to our CFO, Ed Xu. Thank you, Haixin. Good morning and good evening, everyone. Welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details. Strong business momentum continued in Q4 and into the New Year as consumer confidence and economic activities remained on a steady upward trend. We have experienced robust consumer demand for credit along with a further improvement in asset quality. Total net revenue for Q4 was $3,340,000,000 versus $3,700,000,000 in Q3 and $2,400,000,000 a year ago. Revenue for credit driven service, cap heavy, was $2,560,000,000 compared to $2,960,000,000 in Q3. The sequential decline was in part due to facilitation volume mix changed as Tech Life contribution increased significantly and the decline in take rate as we lowered our average interest rate in Q4 to 25.3% from 25.9% in Q3 following the Supreme Court ruling in late August. However, we are expecting interest rates to gradually recover somewhat throughout 2021 As the four time LPR rate cap is no longer applicable to institutional lending according to the Supreme Court latest judicial interpretation. Revenue from credit driven service was also negatively impacted by a one off reassessment of early repayment discount. Revenue from platform service, Techlight, was $782,000,000 compared to $748,000,000 in Q3. If you recall, in Q3, there was a $150,000,000 onetime reversal of previous charges related to certain loans, risk performance versus performance benchmark set by the revenue sharing agreement between us and our partners. Aside from this reverse of the charge in Q3, for apple to apple comparison, The sequential growth of platform service revenue in Q4 was approximately 33%. The growth was mainly due to higher volume under cat light model as well as better contribution from the ICE model Under the underlying take rate for the platform service also improved in Q4. For the full year 2020, platform service revenue grew about 80% as capitalized percentage contribution to total volume nearly doubled. Total non GAAP operating expenses, excluding provisions, were up 5.6% Q on Q and essentially flat year over year. The sequential increase was mainly due to increase in facilitation volume and sales and marketing expenses. Average customer acquisition cost per user with proven credit line was about RMB198 in Q4 compared to RMB172 in Q3. As the micro economy recovered, demand for online traffic increased significantly and Q4 was a seasonally high demand period for online traffic, particularly around intense online shopping events such as Double 11. For the full year, average customer acquisition cost was about RMB175. We will continue to use Lifecycle ROI as a key metric to determine the pace and scope of our customer acquisition process. This approach has enabled us to generate satisfied return and mitigate major potential risks. Non GAAP net income was $1,310,000,000 in Q4 versus $1,290,000,000 in Q3 and $516,000,000 a year ago. We once again set a new record in quarterly profitability, driven by higher facilitation volume and a noticeable improvement in asset quality and the subsequent write back of the previous provisions. For the full year, non GAAP net income was RMB3.8 billion, up 38% from 2019. We are very proud of the achievement, particularly given the challenging market conditions in early 2020. This further demonstrates the resilience our business model, the effectiveness of our risk management and the consistency of our execution. Please note, as we transition towards a more technology driven business model, the structure of our financial model will also gradually change. With increasing contribution from Capital Light and other technology solutions. Total revenue growth may be not as fast as the facilitation volume growth given the different revenue working methodology between Cap Light and Cap Heavy. However, the quality of the revenue will improve And operating margin should gradually expand along the way. As such, overall profitability growth should be more or less keep pace with the facilitation volume growth. With strong operational results And increased contribution from Capline model in Q4, our leverage ratio, which is defined as risk bearing loan balance divided by shareholders' equity further declined to 6.6 times from 7.4 times in Q3 and 9.5 times in early 2020. We expect to see continued deleveraging in our business driven by accelerating movement to our top line model and solid operating results. Meanwhile, our provision coverage ratio reached 4 70% in Q4 compared to 436 36% in Q3 and the 4 0 1 percent in early 2020. This was the highest provision coverage ratio in our corporate history, reflecting significant improvement in asset quality and our prudent approach in estimating provisions. During the Q4, We continue to generate strong cash flow from operations at approximately $1,400,000,000 Also during the quarter, we deployed Approximately $1,700,000,000 cash to fund loan origination under our micro lending operation and additional pre ABS assets. As such, total cash and cash equivalents declined slightly to $7,700,000,000 in Q4 from $7,800,000,000 in Q3. Non restricted cash was approximately $4,400,000,000 in Q4 versus $4,800,000,000 in Q3. As you know, a significant portion of our cash was allocated to security deposit with our institutional partners and the registered capital of different entities to support our daily operation. While we continue to generate strong cash flow through operations, we will also proactively deploy cash to expand our business, invest in key technologies and satisfy potential regulatory requirements. We believe that sufficient cash position will not only enable us to compete in ever changing market, but also position us to capture potential growth opportunity in the market recovery. Finally, let me give you some color about our outlook for 2021. Well, we intend to keep our tradition of prudent decision making and the business planning. We are encouraged by continued strong business momentum so far in 2021 as microeconomic Economy continues on a steady growth path along with some regulatory clarity emerges. As such, We now expect total loan facilitation volume for 2021 to be between RMB 310,000,000,000 and RMB330 1,000,000,000 representing year on year growth of 26% to 34%. As always, this forecast reflects the company's current and preliminary view, which is subject to change. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions. Thank you. We will now begin the question and answer session. For those who can speak Chinese, please kindly ask your question in Chinese first, followed by the English translation yourself. In addition, in order to have enough time to address everyone on the call, please keep to one question and a follow-up And then return to the queue if you have more questions. Thank you. First, we have Jackie from China Renaissance. Jackie, your question please. So let me translate my questions. So congrats on the strong results. I have three questions To ask, number 1 is about our loan guidance. So we gave a very strong full year guidance. I just want to try to understand the rationale behind the guidance. Do we expect Larger for sales and marketing, how much contribution was from the MSE Lending and what is the run rate for the Q1 so far? Second question is about the customer acquisition channels. Trying to understand in terms of the channels, how much will from Will be from the cooperation with leading Internet platforms as well as the offline sales And also the traditional online traffic channels. And third question is about our take rate. I'm certain that the capital heavy model, Our take rate was a bit lower in the 4th quarter. So I saw probably the impact is from a lower APR and also pretty Payment impact. I just want to understand the rationale about the lower take rate and what's the outlook for this year 2021? Thank you. Thank you, Jackie, for your question, for the 3 questions. I will handle the first We are building this guidance on considering in the past few years, we have successfully achieved A decent growth and considering the macro environment and the industry quality hoteling for the whole industry development, That's how we divide this 24% to 36% year loan origination guidance. Well, for number first point, for our For the existing customer physician channel, which is online traffic channels, this year, we will increase largely in terms of scale, while maintaining stable customer acquisition cost. If you benchmark across the whole market, As some of our peers disclose the CTS cost, we have very strong competitive edge on this front. 2nd point, as we mentioned in my remarks that we will spend more assets On embedded finance customer acquisition channel this year, thanks to our input last year, we will We expect rapid growth on this channel in this year. We expect the customer new customer Well, new customers on this channel will contribute 30% this year. The 3rd driver for our growth strategy this year is SME loans. There are 2 parts of the growth. So number 1 is our transition from existing high quality individual consumers from our existing customer base. 2nd part is the newly acquired SME entrepreneurs. In total, these 2 parts adding up will contribute around 10% of total loan book this year. The 4th growth driver comes from the RMSaaS service products. As we mentioned in the remarks, We are expanding the cooperation with KCB and ramping up this kind of smart Risk management service to more and more financial institutions. As for the customer our diversified Customer acquisition channels, number 1 is the online traffic customer acquisition. Number 2 is the embedded FinTech, our embedded finance customer acquisition, we expect these 2 contribute 30% this year. Number 3 is the offline team. Currently, this offline team contributes 15%, 1.5% of new customer acquisition. Besides that, the SME consumption scenario will be additional channel. Our CFO, F3, will address your third question. Okay. Thank you, Hejian. I just want to add one small color to the early questions regarding customer acquisition costs. Some of the peers discussed the CPS cost and we look at it at the same logic and the same methodology to calculate it. We are running roughly 40% below that number. So that's just a small color on that customer acquisition cost. In terms of take rate For Q4, yes, the Q4 take rate, particularly on the tech heavy side was impacted by basically 3 or maybe 2 major items. One is really the interest rate cap causing the lower rate, As I mentioned in the prepared remarks, we lowered to 25.3% versus 25.9% in Q3. So that's heard the take rate on the CapEx side. The other one is more like a one off item. If you recall, around November of 2019, the regulator put out a ruling or requirement basically Allow customers to make early repayment without any meaningful penalty in there. So we start to change our practice along with other companies in the industry to adopt that. But at the time, when we get into the like Q1 and Q2 of this of 2020, we don't know exactly how Many or how much of the impact this early repayment will be. So from a financial Kind of a planning or accounting perspective, we have to put out a best estimate in there. Back then, the estimate was about early repayment discount ratio, we put in as about 12%. And we need to wait for the full long cycle finish for dispatch of particular customer To fully understand what the real impact of the discount will be, once we get into the Q4, keep in mind, our average Long term is somewhere around 9 months. So once we get the 4th quarter, we saw the whole Performance of the entire batch of customer. And back then, we realized the actual Early repayment ratio or discount ratio was higher than the our estimate in the previous quarters. So from accounting perspective, we need to basically kind of take almost like a take a charge To reflect the actual repayment discount ratio, this charge amount in Q4 account for roughly RMB RMB 170,000,000 to RMB 180,000,000. So that's a I would say it's a one off hit to the top line there. And then the 3rd overall impact to the top line is really the mix change, meaning like the increased contribution From Cap Light and the decreased contribution from Cap Heavy. We do a back to analog kind of a calculation. For every $10 we facilitate under cap heavy model, we roughly can make about $3 in the bottom But if we want to make the same $3 in the bottom line, we only need $6 in capitalized facilitation. If you do the quick calculation, if you can get, let's say, 30% earnings growth for 2021, We only need 10% revenue growth to reach that. It's just because the mix change will continue throughout this year and actually pretty fast. So that's why in my prepared remarks, I asked all the analysts as well as investors to change your financial model It's gradually moved toward a kind of more capitalized driven model with relatively Slower revenue growth versus the loan volume growth, but improving margin that drives the comparable Earnings growth versus the volume growth. Thank you, Jackie. Next we have Shu from Morgan Stanley. Shu, your question please. Basically, two questions. Basically, with the clear clarity on the interest rate environment, I just want to know whether The interest rates and how much the interest rates will rebound? What will be the proper level for the interest rates given there's still some window guidance and stuff like that? Secondly, on the loan volume growth, what will be the long term thinking? There's also some, I guess, regulatory Focused on the pace of consumer credit growth, what will be the, I guess, more sustainable proper pace for the longer term? Thank you. Thank you, Richard, for your question. I will answer your first question. Yes. After new ruling from Supreme Court at the end of last year 2020, we did see some A little bit rebound of the interest rate on our product level. However, as you mentioned, considering the whole regulatory environment And as a company with social society responsibility, we will intend to carry out a long term downward Yes. We it can be showed on our Several new business initiatives, for example, we are exploring products covering more better quality prime clients As well as we are tapping into the SME loan business, both new products have lower interest rate compared to the existing products we are operating. Yes. We will take a comprehensive consideration while operating our business. The price is just one brand. Actually, we take more focus on the lifetime value of our customers. Yes. Considering the diversification Of geography range and different attitude of local regulators across China, We, as a loan facilitation platform, our purpose is to facilitate the demand and need between the borrowers and financial institutions. There are some financial institutions, they have the demand for higher pricing rent. That's why we all cover more Well, as for your second question, compared to the industry giant who has already trillion loan balance, We are still at a very at a comparatively early development stage compared to them. Therefore, in the view of regulators, we are not the target they will regulate in terms of the antitrust progress. As we mentioned in the remarks, SME loans are very important business driver for this year. This is very consistent with the government's promoting policy to provide the accessibility and financial service to SMEs. Thank you. Thank you. Thank you. Next on the line we have Stephen Che from Haitong. My question focus on 2 things. 1 is about That could be postponed. So a big increase in cash position, especially now we're moving towards capital light. I believe that Probably the demand for restricted cash may likely to reduce. And if that's the case, with increasing balance of Cash position, what will be our plan in the coming years? We can see that you pay out some of the cash as Dividends like what like our peers did. That's the first question. And second question is, what is your Current plan of returning back to Hong Kong for leasing. Thanks. I'll answer your first question. In terms of the use of the cash, the number one very important aspect, As we are still growing our business aggressively, we will invest in the new business areas, for example, the product Development and New Customer Acquisition. Well, in the long term, we expect there will be a balanced mix For the FinTech players, there are the the mix will be majority Loan book comes from the capital line model. There will be a portion of the transitional loan facilitation model. And as well, there will be a portion for the There are a few reasons To increase the online street business, number 1, it returns with very high ROE, about 40%. The 3rd important use of cash is some major equity investments. For example, one of our Bele, the Internet Insurance company with revenue growth and promising prospects. Secondly, we are actively looking at Some target investment target with great potential synergy. The 3rd aspect of cash use is some is regarding to the license. There might be capital rejection into our micro lending license or guarantor license as well as we may consider to purchase more license. Basically, Tanjun has already covered the cash usage throughout this year, supporting our business growth, Get the proper license, get the sufficient register capital under certain license and also some Potential M and A, although mostly looks like a relatively smaller size. And With all these considered, of course, we're also looking at the operations because we're expecting operations continue Generally, the very strong cash flow throughout this year. And at some point, At some time, when we look at the cash position, when we satisfy all these needs, if there's still kind of free cash available to us, We're not ruling out any other sort of return to shareholders kind of activity down the road. But right now, the priority, like we always said, is focused on expand our operation, get ourselves ready for this market. And then in terms of the Hong Kong listing, we are still in the process Dealing with some technical kind of problem solving. As you know, the requirements by Hong Kong Exchange on VIE structure, Voting power and everything is slightly different than the U. S. So we need to make some Changes, in some cases, some small disruptions under these new requirements. We are doing it as we're speaking. And those process take time because some of them need government time to sign off on that. Once we finish this Technical issues will be more kind of sort of push The official push for the listing. Right now, it's still in the what they call the pre A1 stage there. I think we're almost running out of time. We can take One more question. Thank you. We will be taking our last question from Ethan from CLSA. And your question, please? So my question is on the 90 days of the equity ratio. It will be helpful if management can help us to get down into capture heavy and can't sell models, I will hand this question to our COO, Zheng Yan. Sorry, this is Alex. We heard a little bit breakdown of the voice. I'll just do the translation again for the audience. So basically, our D1 delinquency at this point is standard about 4.8 This is obviously the best level in our corporate history. And then the 30 day kind of a collection rate In the Q4, we were above 90%. Right now, we're continuing to improve slightly from that level. The difference between Capite and Cap Heavy, by definition, the Capite, we try to Kind of offloading relatively lower kind of quality assets out. So the Capite delinquencies It was slightly worse than the cap heavy, but not a huge difference there basically. Well, I just want to add some color to our asset quality. Yes, the market or the investor will look at the With the management metrics, for example, the day 1 delinquency or the M1 delinquency rate. However, I want to point out that maybe you better look at the whole picture of a business together with the As a quality operating metrics, considering how much customer we acquire from customer acquisition channel, Then how much how many customers got approved the credit line then plus considering the asset quality metrics? In short, we acquire more customers and we have a higher approval rate And then we still maintain very stable, superior risk management Performance compared to some of other peers because they acquire less customer and they have lower Right. That's in logic. In logic, naturally, they have better risk management performance. Thank you. Thank you for everyone joining us for the conference call. If you have additional questions, please feel free to contact us Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.