Earnings Call: Q1 2021

May 28, 2021

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to the 260 Digitech First Quarter 2021 Earnings Conference Call. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Mandy Dong, IR Director, please go ahead, Mandy. Thank you. Hello, everyone, and welcome to our Q1 Our 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 Mr. Zhong Yang, our COO. Before we begin the prepared remarks, I'd like to remind you of the company's Safe Harbor statement. Except for historical information, the material Looking statements involving current risk and uncertainty, we caution that a number of important factors could cause actual results to differ materially. For information about potential risks and uncertainties, please refer to company's SEC filings. Also, this call includes discussion of certain non GAAP measures. Please refer Our earnings release for reconciliation between non GAAP and GAAP 1. Unless otherwise stated, all figures mentioned are in RMB. I will now turn the call over to Mr. Wu Hai Sheng, CEO of our company. Hello, everyone. I'm very happy to report that our quarter, therefore, exceeded our expectation across the board. The strong growth momentum that we have seen since 2020 Q2 continued in the Q1 and we had another set of record breaking operational results. During the quarter, total loan facilitation was RMB74.1 billion, up 40% year over year. Outstanding loan balance increased by 38% year over year to RMB101.9 billion, exceeding RMB100 1,000,000,000 for the first time. Total revenue was RMB3.6 billion, up 13% year over year. Non GAAP net income was RMB1.4 billion, up 4 52% year over year. As we execute on our various strategy initiatives and the overall market demand continues to recover, we expect to maintain this robust growth momentum in 2021. Turning strong growth, we made significant progress in our technology driven strategy upgrading and transition. Loan Facilitation under the CapEx line model and other CapEx solution models exceeded 50% of total for the first time. This ratio increased further to 55% in recent months. This marks a fundamental to the nature of our business. In addition, our tech empowered business line advanced on multiple fronts. Our smart marketing service product, intelligence credit engine, ICE, delivered rapid growth. In April, key monthly operating metrics of ICE, such as users with accrued credit lines, transaction The transaction volume in April went up by an impressive 200% from the 2020 year end levels. Moreover, our risk management RM SaaS products expanded rapidly. We have now Established collaboration with 29 financial institutions under this model and with another 9 in the pipeline. In terms of strategy growth drivers, we are very pleased to report remarkable progress in key initiatives, such embedded finance, API model, SME Finance and the collaboration with Kingturn Bank of Tianjin, in short, KCB. We We believe we have successfully upgraded our core growth engines with more comprehensive and diversified operations. Our embedded finance API model remains very popular among our business partners and connect further diversified our customer acquisition channels. As of now, embedded finance model has already contributed over 35% of our new customer acquisition, Z Pocket, our virtual credit card products, added Around 1,140,000 new merchants during the quarter with over RMB 1,500,000,000 monthly transaction volume. This We launched Our SME Finance business last year and the segment delivered a significant growth in Q1, leveraging Our risk management RM expertise in consumer finance, we developed a unique owner Fast SME Dual Core I'm Model. Under this model, an SME is evaluated both as and Entrepreneur, him or herself and the business enterprise. This substantially improves our risk management capability and Most of our SME borrowers are engaged in retail, wholesale, hotel, F and B Food and Beverage and Manufacturing. In the Q1, the total amount of new approved credit line in SME segment increased 67% on a sequential basis. In addition, our own I and offline borrower acquisition channels expanded rapidly. So far, we have established a cooperation with 28 leading partners. These puts us among top SME platforms with the broadest channel coverage. And our SME loan products quickly became one of the favorites among partners. Pricing of SME products is generally below 24% with better risk in higher take rate around roughly 8%. With huge market potential, more supportive regulatory environment and attractive economy returns, we believe SME presents a very promising opportunity for our long term growth. Our Within just a few months, total accumulated loan facilitation volume from KCB reached around RMB18 1,000,000,000 with the loan balance at around RMB13 1,000,000,000. KCB now has become our largest partner in terms of volume. Yet our strong strategy partnership is more than just the scale of the business. More importantly, this trusted partnership has boosted operational efficiency for both parties. And It in turn such as a showcase and help us to improve efficiency when we work with other financial institutions. We have Seeing positive demonstration effects that have led to notable improvements in our overall efficiency. We continued to improve funding efficiency and Our overall funding cost has been on a gradual downward trend over the last few quarters as we Key number 4 in the market with an average coupon rate of 5.6%. Key Leading indicators of asset quality further improved and reached a new set of best record in our history. To 4.9%, the best ever. Last, let me share a few thoughts regarding current regulatory environment. A basic regulatory framework for loan facilitation business. It sets some very specific practice examples of the loan We have always conducted our business in strict compliance with this framework. That It's one of the reasons why our loan facilitation model has well accepted by almost 100 Financial Institutions Partners, we have little exposure in joint lending and student lending and stick to our role as a tech empowered loan facilitator. We also make sure we do not issue ABS over the leverage limit. As you may know, we were among the 13 major fintech Internet platforms that the regulator invited to meet recently. At the meeting, The regulator acknowledged the importance of our role in improving the efficiency of financial service, providing with unmet demand and reducing transaction costs. We believe the meeting was a necessary step to apply Strengthening supervision of the leading players will increase clarity to the regulatory direction of the industry, reduce Regulatory overhead and promote a healthy and more consolidated market space compared to the other fintech companies at the meeting. Our with the compliance standards. Therefore, we are very confident we can meet any regulatory requirements applied to this industry. Is a historical era of growth. Overall, we are very excited that we are off to a very strong start in 2021. For the First time, loan balance topped over RMB 100,000,000,000 and the capital line model contributed more than half of our loan book. Our All of This gives us full confidence for our development in 2021 and beyond. Now Let me turn it over to our CFO, Alex, to run through more detail info. Okay. Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. For the interest I will not go over all the financial line items on the call. Please refer to our earnings release for the details. As As Hansheng mentioned, we had experienced robust consumers' demand for credit along with further improvement in asset quality in Q1. As the Chinese economy continued on a steady upward trend and the Chinese New Year related seasonality was Total net revenue for Q1 was RMB3.6 billion versus RMB3.34 billion in Q4 and RMB3.18 billion a year ago. Revenue from credit driven service, Capital was $2,450,000,000 compared to $2,560,000,000 in Q4 and $2,810,000,000 a year The sequential and year on year decline was in part due to the facilitation volume mix change as cap Going forward, we are expecting a relatively stable pricing environment throughout 2021. Revenue From platform service, kept light was RMB1.15 billion compared to RMB780 1,000,000 in Q4 RMB473 1,000,000 a year ago. The robust growth was mainly driven by A 58% sequential growth in facilitation volume from Caplight, ICE and other technology solutions. While the Underlying take rate for the platform service were relatively stable. We expect capitalized Contribution percentage to continue increase throughout 2021 and eventually account for a clear majority of our total volume by the year end. As microeconomic activities We have experienced some uptick in sales and marketing expenses. Average customer acquisition cost per user was Per user with pooled credit line was RMB217 in Q1 compared RMB198 in Q4. Meanwhile, we also noticed a clear pickup in customers' drawdown activity during the quarter. As a result, we were able to maintain a stable and a satisfied ROI despite increases in customer acquisition cost. We will continue to use lifecycle ROI as a key metrics to determine the pace and the scope of our customer acquisition strategy. For 2021, at this point in time, we believe current market conditions support a more proactive approach to accelerate the growth of our business. Non GAAP net was RMB1.41 billion in Q1 versus RMB1.31 billion in Q4 and RMB2.55 RMB5 1,000,000 a year ago. We once again set a new record in quarterly profitability, driven by higher facilitation volume and The structure of our financial model has gradually changed. For Q1, we have seen Significant improvement in operating margins as increasing contribution from Techlight and other technology solutions will generally lead to higher margin structure. We continue to expect the overall profitability growth to be more or less hit pace with the facilitation volume growth for 2021. With strong operating results and increased contribution from a capital light model in Q1, our leverage ratio, which is defined as a At the risk bearing loan balance divided by shareholders' equity further declined to 5.4 times from 6.6 times in Q4 and 9.5 times a year ago. We expect to see continued deleveraging in our business, driven by accelerating movement towards capitalized model and solid operating results. Meanwhile, our provision coverage ratio reached and 4 0 1 percent a year ago. This was the highest provision coverage ratio in our corporate history, reflecting significant improvement in asset quality and our conservative approach in estimating However, as Captain Light become a clear majority of our operations in the future and we reflect the nature of our business in the future. Total cash and cash equivalents increased to $9,200,000,000 in Q1 from $7,700,000,000 in Q4. Non restricted cash was approximately $6,000,000,000 in Q1 versus $4,400,000,000 in Q4. Portion of our cash was allocated to security deposit with our institutional partners and the registered capitals of different entities to support our daily operations. While we continue to generate strong cash flows Through operation, we will also proactively deploy cash to expand our business, invest in key technologies and satisfies potential regulatory requirements. We believe that sufficient cash position will not only enable us to compete in this ever Let me give you some update about our outlook for 2021. While overall business trends have been stronger than we expected so far this year, We intend to keep our tradition of conservative approach in providing forward guidance. As As such, for now, we would like to maintain our 2021 total volume guidance of between RMB310 1,000,000,000 to of RMB330 1,000,000,000 representing year on year growth of 26% to 34%. Meanwhile, we expect total facilitation volume for Q2 should be in the range of RMB 85,000,000,000 to RMB 80 RMB7 1,000,000,000 representing 15% to 17% sequential growth. We will reevaluate full year guidance when we report our Q2 results. As always, This forecast reflects the company's current and preliminary views, which is subject to material changes. 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 English translation yourself. In addition, in order to have enough time to address everyone on the call, please keep to one question and follow-up Our first question is Jackie Zhou from China Horizon. Please go ahead. So thanks for taking my questions and congrats for the strong results. I have two questions. Number 1 is about our SME loan products. I saw we had very strong Q1 growth in our SME financing. So So just want to understand what is the APR, loan size, unique economies about So SME financing product and what is our loan volume target for SME this year. And I think Mr. Wu, also our CEO mentioned that the take rate is now about 8 So how compare 58% with our overall loan take rates? And Secondly, it's about our tech export business, which is the ICE. So just want to understand what is the difference between ICE and our other capital light loan facilitation products? What is the And what are the bank partners for this product? So I observed that our reported Loan volume definition changed a bit this year this quarter, I think, start to include this ICE loan volume. So Just want to check what is the IC loan volume for this quarter and last quarter? Thank you. Sure, Jackie. Let me handle your first question. Well, you are absolutely right. We see a Unique kind of growth in our SME business in the Q1. As you know, there are 2 actually 2 types of SME product in the market. The first part, actually, we view it more related to consumer finance product. Most of A lot of peers, they extended the existing consumer finance product to anyone to who are the management or the owner of SME. This actually has some Quite similar unit economy with consumer finance products. This is not we are pursuing. The second part is actually what we are pursuing now. It's more actually more directly related to SME Enterprise itself. We focus on the operational metrics of SME Companies. By doing this risk management of SME products, we leverage our existing In consumer finance, a uniquely developed dual core risk management model. That means we evaluate this SME Both as owner itself, also as the SME Enterprise. This shows much better unit economy than the general consumer products. Sure. As we focus on the second half, we say it's more directly related or the truly SME loans. BKFCs have larger The average APR of this product is 20% if For those more related to the tax related SME loan or the invoice related, the average ACR is around 16%. Ticket size of SME loan is RMB 210,000. As we In the prepared remarks, the take rate is around 8%, which is almost twice double the size of the consumer finance As for your second question about ICE products, as you can see its full name is Intelligent Credit Engine Products. It's focused more on the smart marketing service. As you see, we have accumulated around 100 Financial Institutions, due to the very long term cooperation with them, we know their preference and their ability very well and Their risk management probability or they already have very strong risk management capability. We will deliver the ICE product to them, which Just focused on we've just focused on the customer acquisition service. Therefore, as we compare to capital line model, the iCE model just As we incorporate various Financial institution like consumer finance, corporate bank, etcetera. We there are not much difference among the loan assets that we allocated to them. As we mentioned in The last quarter, this volume of ICE reached RMB 2,400,000,000 compared with double digitized from last quarter. Thank you, Jackie. Next question Basically, two Questions. One is in terms of the funding partners. We're certainly increasing our cooperation with Xinjiang Bank. But going forward, How do we allocate the loan allocation among different funding partners and any major differences on the take rate? Secondly is In terms of that volume allocation between ICE product and other product, certainly take rate is different. So what will Long term strategic thinking on the loan allocations. Thank you. Sure, Rachel. Let me address your funding question. First of all, the diversification of funding source is always a goal With KCB, it's very it's better that KCB has a showcase and to demonstrate it to other financial institutions. In addition, as you see, we Carryout a lot of strategy initiatives this year, it's easier for us to explore the new products with the Yes, due to our relationship with KCT, there might be short term difference compared to the As a financial institution, but it will take a longer term view. We are definitely working with All the partners on our sale business terms. The fundamental reason is our loan product is very competitive in the market. Even there are short term difference between the KCB business terms with other financial institution business terms, KCB can be as a showcase. And in the long term, other financial institutions will catch up with the equal terms. As we always Spend no effort becoming the top clearing fintech that covered every process or every function of the whole business operations. Therefore, as for your question, how we allocate different Assets or products among these 100 financial institutions, so actually We look at the business needs from the funding partners. For example, if the funding partner, they need a comprehensive Product, then we provide capitalized product. If the funding partners, they are very strong in risk management, then we only provide a smart Marketing product, if they already have very strong source of customers, then we provide RMSaaS product to them. All in all, we provide a service based on the business needs of our founding partners. Thank you, Richard. Next question is Yada Li from CICC. Please go ahead. Okay. Then I will translate my question. Hello, management. Thanks for taking my question and congrats to our So today, I have two brief questions. And the first one is regarding our strategic partnership with KCB. So I will note KCB has become the largest institution partner in terms of the loan facilitation volume. So could you please share with us more information on The question is about our progress on the SME loan business. So given our SME loan business has been well on track, so could you please elaborate more How much contribution comes from the SME loan in terms of the loan origination in 1Q 2021? And how much Contribution will be by the end of this year. Thank you so much. Mandy? Yes. You are right. As you can see in terms of business Volume, KCB already become our largest partner. As mentioned in the prepared remarks in Q1, GMV, cooperated with KCD, totaled RMB 18,000,000,000 with loan balance RMB 13.3 As we further advance the business initiative with KCBU, we expect to see About SME loans, we mentioned that there are 2 definitions about SME. For the broader definition that is Consumer finance loan related to SME Owner Own Bank. In the last quarter, this part contributes around 30 to 40%, and we expect to see this number rising up to around 60% to 80% at year end. For the second And more strict definition of SME. That is definitely the goal we are pursuing. That is more related to the SME enterprise So we target to reach RMB 10,000,000,000 loan balance at year end. If you recall, our Guidance of loan total volume is KRW 300,000,000,000 to KRW 330 Last, let me add more color about SME. Although it's at a very early stage of this product, we are trying Multiple direction to further develop this product. For example, for a very premium SME enterprise borrower, We may we're granting around 1,000,000 ticket sized products and we expect to share more when we see more results coming out. I'll probably add a couple of details to your questions. First of all, regarding the KCB's volume, as Hanshong mentioned, after the month of April, the accumulated volume from KCB is about RMB18 1,000,000,000. But I guess your question is about Q1. For Q1, KCB's volume is roughly RMB10.8 RMB8 billion roughly speaking. So you can use that 10.8 to calculate the percentage ratio there. And then regarding the SME there, because as Hanxin mentioned, there is 2 definitions. 1 is more narrowly defined. The other one is More kind of a broad definition. We use the most sort of a restrictive definition for SME, meaning for those enterprises with also the loans issued to the enterprise with The with actual operation, with sales receipt, with taxation information, those kind of things, that's the narrowest definition for SME. For that, the total sort of loan volume up to April, it's It's already at that is 5.8. Yes, sorry, It's not too able to. The Q1 is RMB5.8 billion and the loan balance For this restricted definition, it's roughly RMB7.5 billion at the end of the Q1. Keep in mind, this sort of a narrowly defined SME Loans typically has a much longer duration than the consumer loans, so which will result in a pretty fast Build up of the balance as time goes. That's my sort of add a couple of points there. Thank you. Thank you, Yedali. Next question is Steven from Haitong International. Please go ahead. I'll translate it. Two questions. One is about Follow-up question on the SME Loan Facilitation business. I would like to understand the share of Secured the share of SME loans with collateral or secured SME loans and unsecured SME loan so far up to maybe April. And how do you compare the asset quality of SME loans relative to the consumer finance loans we have done in, say, different Asset quality indicators. That's the first question. Then second question is, could you share with us why we have arise in customer acquisition cost in Q1 on a Q o Q basis and what will be our outlook on So in fact, the ratio of our SME customer is lower than the overall market, about 70 to 80% overall level. And we use door call engine to control this SME product, which means that the enterprise car is in its owner and the use of the Zohr engine can match the As we shared with Margie before that When we actually conduct our real operations, it's not the basic cost we are looking at. It's the ROI, Return on the investment of customers we look at. As for in the Q1, we believe we successfully conducted better customer acquisition strategy. Is demonstrated by higher customer approval rate and the larger ticket size, which in turn improved the ROI. As we expand the SME business, if we purely look at CAC metrics, since SME, they have the larger Ticket size, longer turner and the lower APR on the safety level, it will push up this number. However, in actual business operation, we believe expanding SME is a much better business Decision for us as the quality is better and higher ROI and better unit in economy. Stephen, this is Alex. I just want to add one follow-up point from Haiqing's point. As Haiqing mentioned that as we Which also associated with a much higher per ticket customer acquisition cost, okay? And so that because we are kind of a growing SME business in Q1 More, I guess, proactively. That mix change also results in a little bit higher Per credit line customer acquisition cost as we reported. So if you sort of get rid of SME portion, just Look at the consumer portion, the change was not as high as the well reported number. So just one add up to the point. Thank you. Thank you, Stephen. Due to the current conference, I will now hand the session back to management for closing debrief. Please go ahead. Okay. Thank you everyone for joining us for the conference call. If you have additional questions, Please feel free to contact us. And that's it for the call. Thank you.