Earnings Call: Q2 2021

Aug 23, 2021

Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2021 Earnings Conference Call for Finvolutions Group. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead. Hello everyone and welcome to our Q2 2021 earnings conference call. The company Results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company e mail alerts by visiting the IR section of our website at ir. Pmbgroup.com. Mr. Feng Zhang, our Chief Executive Officer and Mr. Jia Yuan Xu, our Chief or as a substitute for the financial information prepared and presented in accordance with US GAAP. For information about these non This discussion will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings with the U. S. Securities and Exchange Commission. The company does not assume any obligation to update any forward looking statements except as required under applicable law. Finally we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO Mr. Feng Zhang. Please go ahead sir. Thanks, Jinhee. Hello, everyone, and thank you so much for joining us today. We continue to provide value for both users and institutional partners in different aspects. Leveraging our cutting edge technology, we have been providing value for users across multiple segments such as consumer finance, small business owners and different types of financial institutions. Through our platform users are able to enjoy the convenience of finance at their fingertips access Credit lines in a timely and efficient manner. On the other hand, our institutional partners are able to access and evaluate quality borrowers with efficiency. Along with the value created, we are thrilled to be reporting another set of record breaking operational and financial results in the Q2. As we harness our technological capabilities effectively to acquire new better new and better quality borrowers and constantly increase our Our total number of new Borrowers acquired globally once again crossed the 1,000,000 mark to a new record high of 1,180,000, an increase of over 500 percent year over year and 18% quarter over quarter. More specifically, number of new borrowers acquired in China reached 812 representing an increase of over 3 80 percent year over year and 31% sequentially. The number of new borrowers acquired in the international markets reached 371,000 approximately 13 fold increase compared to the same quarter last year. Another clear indication that we are resuming high quality growth is that our total transaction volume for the quarter reached a new record high to RMB33.4 billion, a 153% jump year over year and a sequential increase of 25 Specifically, transaction volume in China climbed 148% year over year and 25% quarter over quarter to RMB32.5 billion, while transaction volume for international markets grew exponentially by 1780 percent year over year and 23% sequentially to RMB940 1,000,000. Simultaneously, our outstanding loan balance further expanded to RMB39.4 billion, representing year over year growth of 87% 21% sequentially increase. In order to better support the healthy growth of our facilitation operations, we have been making consistent investments In acquiring new better quality borrowers through an array of online and offline channels, We have diversified our online channels and have also established an offline team of over 600 employees covering around 80% of China's provinces. In the 2nd quarter, our offline channels Contributed around 10% of total new transaction volume. Offline acquisition is not only an alternative channel, but also validate our technologies can be seamlessly integrated in different scenarios to enhance efficiency. Going forward, we intend to off line team to beyond 1,000 employees in a year or so. Since 2020, we made our services available to small business Owners in China aiming to capitalize on the significant opportunity presented by this group's underserved needs for operational funds. In the Q2, growth momentum for our small business owner segment remained robust with transaction volume increasing 41% sequentially to RMB6.2 billion. Notably, the total number of small business owners served in the quarter exceeded 408,000 compared to just 220,000 in total for the full year 2020. We believe serving the needs of small business owners is in line with national policies and play a part in meeting the needs of this segment of the society. Going forward, We will maintain our strategic focus on serving this segment and expect this portion of our business to account for around 20% of total transaction volume in the second half of 2021. In line with regulatory directions, we preemptively continued to lower borrowing rates In the Q2 to 26.2 percent for our borrowers and more recently in August, The rate was further reduced to 25.4%. We are also pleased to share that the recent percentage of transaction volume With borrowing rates at or below 24% has risen to around 60%. We plan to continue acquiring to provide more attractive rates and terms for our borrowers, while maintaining a healthy take rate and operating margin. On the international front, with our state of the art technologies and swift execution, we have continued delivering strong performances. In particular, we successfully launched a pilot testing operation in Vietnam, which demonstrates encouraging growth prospects. More Sightingly, this marks the 4th country in our global roadmap in addition to our international presence Indonesia, Philippines and Singapore. We are very pleased with the accelerating pace in broadening our global footprint and thrilled that our recent entry is already demonstrating great potential with positive news feedbacks. We attribute our success in building out our 1st mover advantages in emerging markets to our fundamental capabilities, talented and efficient team with global perspective, Proprietary Technologies, operational expertise and deep rooted corporate value. Our technologies support in successfully navigating our business transition in China and also plays a crucial role in our expansion across different international markets. We are confident in our global roadmap and remain firmly committed in our mission to make financial services more accessible and inclusive for borrowers around the world. Going forward, we will continue to advance our technological capabilities and solidify our operations in these countries, While working with our local partners to explore new opportunities that will enable us to diversify our business models, Leveraging our technologies, operational expertise and in-depth understanding of our institutional partners, We are able to provide diversified products and solutions for them in multiple scenarios. In particular, through cooperation with 8 different institutional partners, we increased a portion of capital light model on our platform from 2.3% in the previous quarter to 13% in this quarter. All these achievements are further testament to the solid trust and the confidence that our funding partners have in Finvolutions as we remain committed to building Credibility and a strong corporate reputation amid ever evolving market dynamics. Supported by our enhanced credit management model Built on targeting higher quality borrowers, our delinquencies have shown improvement have shown Further improvement across the multiple risk metrics. For example, our day 1 delinquency rate remained stable at 5.4% in August, compared with 7.5% in the same period last year. We expect vintage delinquency rates to continue improving to a level below 2.3% in the 2nd quarter, While our 90 days plus delinquency ratio reached a historical low of 1.01% from 7.13% in the same period last year, Our loan collection recovery rate also stabilized at around 91%. As we look ahead, our primary objectives for 2021 and beyond And diversify our business models, continue empowering financial institutions through Business as a Service solutions and empower a variety of businesses globally through our digitalization capabilities to create long term value for our stakeholders. During the past several years, we have encountered and overcome many difficult challenges such as exiting the P2P business, Shifting our funding sources, moving towards better quality borrowers and many more. We have the technological know how capabilities and the resources to deliver better results and achievements in this rapidly evolving environment. Our dynamic business model and operating strength coupled with our strategic investments in multiple sectors will drive our success with a sustainable growth, Last but not least, I would also like to report our progress During the past several years, we have consistently fulfilled our duties as a responsible corporate citizen. For example, during the recent flood in Henan, we have donated RMB10 1,000,000 as Post last aid and activated our local employees to distribute food supplies for those in need. Together with our institutional partners, a low interest loan program for small business owners has also been introduced. In summary, leveraging our technologies and digitalization capabilities to create long term value for our stakeholders, we are confident Our ability to maintain our position as the leading financial as the leading FinTech platform in China, while capturing tremendous growth opportunities ahead globally. With that, I will now turn the call over to Jiayun Xu, who will discuss our financial results for the quarter. Thank you, Peng, and hello, everyone. With continued improvement across multiple operations metrics in the Q2, we delivered our non GAAP operating income of RMB 726,000,000 an increase of 26% year over year and a sequential increase of 8%. Further validating the viability of our business model, our robust balance sheet with RMB4.9 billion in Unrestricted cash and short term investments coupled with our strong technology capabilities positions us well to explore opportunities both in domestic and international markets. Now turning to the financial results for the Q2. In the interest of time, I will not walk through each item line by line, but on this call. Please refer to our earnings release for more details. Net revenue increased by 32 percent to RMB2.4 billion for the Q2 of 2021 from RMB1.8 billion in the same period of 2020, primarily due to increase in transaction volume and partially offset by the decrease in guarantee income as a result of improved asset quality. Loan facilitation service fees increased by 135 percent to RMB952 1,000,000 for the Q2 of 2021 from RMB 405 1,000,000 in the same period of 2020, primarily due to the increase in transaction volume which was partially offset by the decrease in average rate of transaction fees. Post facilitation service fees increased by 96 percent to RMB300 1,000,000 for the Q2 of 2021 from RMB153 1,000,000 in the same period of 2020, primarily due to the increase in outstanding loans serviced by the company and the low impact of deferred transaction fees. Guarantee income was RMB666 1,000,000 for the Q2 of 2021 compared to RMB821 1,000,000 in the same period of 2020 as a result of improved asset quality. Net interest income decreased by 7% to RMB309 1,000,000 for the Q2 of 2021 for RMB333 1,000,000 in the same period of 2020, mainly due to the reduction in outstanding loan balance of consolidated trust, partially offset by the higher transaction volume in the international markets. Other revenue increased by 61 percent to RMB158 1,000,000 for the Q2 of 2021 for RMB98 1,000,000 in the same period of net 2020, mainly due to increased customer referral fees to other third party platforms. Non GAAP adjusted operating income, which excludes share based compensation expenses before tax, was RMB 726,000,000 for the Q2 of 2021, representing an increase of 26% from RMB576 1,000,000 in the same period of 2020. Net profit was RMB620,000,000 for the Q2 of 2021, representing an increase of 37% compared RMB454 1,000,000 in the same period of 2020. We have a well capitalized balance sheet And our leverage ratio remains low. Leverage ratio across our business was only 3.8 times and our strong liquidity position consisting RMB4.9 billion of cash and short term investments as at the end of June 2021, positions us well in the evolving environment and gives us significant flexibility. With the COVID-nineteen recent resurgence in China and other regions around the world, the company will continue to closely monitor the situation of the And they remain vigilant in its business operations. As such, the company holds a cautious view on its Operations anticipates steady growth in its transaction volume for the Q3 of 2021, which is expected to be in the range of RMB35 1,000,000,000 to RMB37 1,000,000,000. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue. Thank you. We will now begin the question and answer session. If you wish to ask your question to the management in Chinese, we ask that you please kindly repeat your question in English. And our first question comes from Thomas Chong with Jefferies. Please go ahead. Hi, management. Thanks for taking my question. Congratulations on the strong results. So first, I have two questions here. So first, could you please share some updates about the regulatory environment And how much of our loans already have an APR below 24%? And how should we think about the trend in APR going forward? And my second question is what about our outlook on loan origination volume in the second half and twenty twenty two? Thank you. Okay. Let me do the translate for Mr. Xu. From our understanding the cap on IRR 24% is a window guidance from the CBIC for consumer finance companies, thus it is not evenly implemented across the country as there are different timelines for different institutions. For example some determined that the outstanding loan balance of all loans above 24% will be reduced to 0 by the end of next Whereas for some institutions will follow the guidelines that there will be no new originations above 24% by the end of next June. This is actually something within our expectation and we have been preemptively been reducing interest rate for our borrowers. For example in the call earlier Our CEO, Mr. Feng Zhang has mentioned that in the Q1 our borrowing rate was 26.2 and in the 2nd quarter this Borrowing rate was reduced to 26.2 I mean in the Q1 was 26.8 and it has been further reduced to 25.4 in August and also the proportion of loans facilitated at or below 24% has reached 60% in August. Okay. We have been meeting the preparations and we believe we are close to shifting our loans to under 24% And based on the static assumptions stress test we believe the impact will be around 0.5% to 1% and our take rate will be reduced to Around 3.5 percent from the current level of 4.4% in the 2nd quarter when the cap has been fully implemented. And do note that this is based on a static assumption and we are confident to further improve our funding cost delinquency rates and operating efficiency going forward and all these will actually help to make an improvement in our take rate going forward. We believe there is a grace period involved over here and based on these assumptions we are very confident in achieving our full year guidance that we have given out at The next question comes from Alex Yee with UBS. Please go ahead. Hi, management. Thanks for taking my questions. I have a few questions. First one on also on the margin outlook, the impact from the price cutting. So after you have implemented a lower price recently in August, So how has that affect your take rate so far? And how is the outlook for the next year? And then second question is on your sales So I saw that it has continued to go up quite substantially and outpace your overall loan growth. I'm wondering, can you share more color on what's the drivers behind your sales and marketing trend? And When could we sort of start to expect some sort of stabilized trend in terms of the That's asset marketing as a percentage of your loan volume. And then, third question is about your overseas market Strategy is quite encouraging to see further progress on that front and it currently accounts for around 3 So I'm wondering if you could share with us if you have any like Your targeted loan volume contribution from overseas market like in the next 2 to 3 years? Thanks. Okay. This question is due related to the earlier question of interest rate being kept at 24%. Our current take rate is around 4.4% and based on the static stress that we believe our take rate will be reduced by 0.5% to 1% to around 3.5% and As for the pace of the reduction, we will still need to discuss with our partners in order to determine the right pace for this reduction. Okay, although there are challenges in the take rate in the future, I would also like to We have achieved significant progress in our ABS application and in the future we believe that ABS will diversify our funding sources. Okay in the Q2 our customer acquisition cost was around 400. The CPS in was about RMB470 in the 2nd quarter versus RMB450 in the 1st quarter and for our CPS in internet for the international market it was around RMB230 RMB230 in the second quarter. And in the future we believe this trend will be stable. In China we expect our customer acquisition cost to be in the range of 400 to RMB450 for the international market it will be around the range of RMB200 plus. Okay. I would also like to update on my different customer acquisition channels. For example our information peak channels consist about 60% to 70% of new customer acquisition. Our app stores have about 15% and our off My customer acquisition team has been making very fast progress and consists of about 10% of our new customer acquisition today. In the Q2 our loan origination for our international markets was about RMB940 1,000,000 On a quarter on quarter growth it has increased by about 24% and we have also penetrated and began operations in our 4th country Vietnam. There has been some Research of the COVID-nineteen in the Southeast Asia recently and we believe we are still confident to be able to achieve about 4 times growth Compared to last year which is about RMB4 1,000,000,000 of loan volume in Southeast Asia market. This is Fang. I would just add that Southeastern Asian market In terms of total population size, it's roughly half of Mainland China. But in terms of GDP growth and financial market is at an early stage. So our business there is also at a much earlier stage compared to where we In Mainland China, so we if you look at a 3 to 5 years horizon, we definitely expect Our growth rate in Southeast Asia market to be faster than the domestic market. So it's hard to predict because it also depends on how much growth we get in the domestic market, which does have Given the regulatory environment, but we would certainly hope that within 5 to 5 3 to 5 years our international business can account for And the next question is from Eric Liu with China Renaissance. Please go ahead. Thanks, management, for giving me this chance to ask And congrats for the great performance in the Q2. So I got 2 questions. The first question is about overseas explanation. So we know the company has expanded in 4 countries in Southeast Asia. So can you please provide more color about the low to mid teens model in each Country, for example, the funding source, the asset quality and the product nature. And the second question is about the capitalized Loan facilitation model. So can you please provide some color about the future plan of adopting capitalized business model? Thanks. The unit economics for our international business is actually very different from our We have actually achieved the breakeven point for our international business But at the moment our priority is not in turning a profit but instead our focus is on acquiring more customers to have a faster growth. Our CEO has actually mentioned that we have made significant progress Our capital light progress from 2.3% in the previous quarter to 13% in this quarter and contribute about RMB4.3 RMB3 1,000,000,000. And for the quarter we have worked with 8 different institutions under the Capital Light model and in our potential pipelines we have another 6 More institutional partners waiting to work with us on the capital light model. If you compare the capital light model to the capital heavy model there is a 1% additional And for the rest of the year our focus on the capital light model is actually on the quality of the cooperation model of the capital light model meaning that we will continue to work with more partners on this model and as you know our leverage ratio is also The next question is from Hans Fan with CLSA. Please go ahead. Thank you, management, for giving me this opportunity to ask questions. I have two questions. One is about regulation, another one is about asset quality. So about regulation wise, I think some other colleagues asked about the APR. I want to ask about the loan facilitation in terms of Breaking up the link between the Fintech platform and the banks, once in the end, right? So there was a regulation asking the yes, There was a regulation ask the Fintech platforms pass data through the licensed credit scoring company first who can in turn Pat, thanks. So based on this regulation, how do we plan to be compliant? And what are the impacts on our business, especially on the take rates and what are the potential sort of change in the model? That's number 1. Number 2 is on the ad quality. We noticed that our ad quality trend was very good. So just wondering, looking into the most recent 2 months, what are the trends there? Do we expect continuous improvement in The regulators view on data collection is actually based on minimum required standard. And our company has been working along in this direction and based on the past We believe we have fulfilled the requirements. Our app has actually received the app security certification and app information security certification from the China National Computer Virus Emergency Response Center. I would also like to stress that our core capabilities is actually based on the data utilization and not based on the amount of data collected and thus The regulation's direction of the minimum required standard will not actually affect us a lot. And based on our understanding on breaking up the Lien all credit related activities needs to be supervised under licensed regulatory bodies. This means that such activities needs to go through a licensed institution and credit bureau agency is actually one of the channels. And going forward we will strengthen our cooperation with the credit bureau agency. We have been working with BaiHang since 2018 and we have been developing products together with their teams. As mentioned earlier all credit related activities needs to be supervised under a licensed regulatory bodies and We are also exploring the possibilities of using our current licenses such as our micro lending license and financial guaranteed license to process the data. And we will also actively explore the possibilities of participating in a stake in one of the credit bureau agencies. In conclusion, we think that indirect data transfer only changed the protocol of the process and it will add some cost but The cost is not going to be material and it doesn't impact the outcome of the business and the risk assessment results. As data management becomes more standardized and transparent we believe we have the opportunity to secure higher and better data quality sources to further improve our operation efficiency. And throughout the year our asset quality has been improving progressively and in the second quarter we And in the future we have the confidence to maintain Our delinquencies at this level as you know lowering the pricing will also help to improve the risk level like what we have experienced from our P2P transition. The next question comes from Henry Liang with Gold Dragon. Please go ahead. Good. Congrats on the very strong results. Just two very quick Questions to follow-up. The first one is, can you provide some more color on the breakdown for your international Like loan facilitation volume for different countries. And the second thing is like, I know that we just talked about like the test of your profitability on the 24%. Just like you've been, do you have A concrete guidance of rough earnings estimate like how much earnings downside, upside we have next Thanks, Henry. This is Feng. Yes, just quickly, in terms of Country international market, country breakdown, our Indonesia market accounts for about 3 quarters Of our volume roughly and the Philippines and Vinay in total account for the rest. And Vinay is just a study, so at a very early stage. Now in terms of the profit impact For the price regulatory change shift, I would just do it I think we can just do a quick math. As we mentioned, currently our average is about 25.4 percent And we have the loans that are facilitated by us outstanding is about RMB40 1,000,000,000. So if we do the math, 40,000,000,000 times, let's say like if we reduce to 24%, That's a drop of roughly 1.5 percent. So that's RMB6 1,000,000,000. That's like sorry, RMB600 1,000,000 Pre tax profit impact. Now in reality, we may maintain some of our Volumes at a rate below 24%, so the impact may be a little bit more than that. But again, that's the Static version, as we mentioned. No, in reality, what we think will happen is We will continue to drive down our loss rate and we think there's a great There's a big opportunity with now with the market, we'll have much more limited asset supply For this sector, that lots of players, they operate between 24% 36%, in fact, Very close to 36%. It's going to be very, very difficult for them to adjust their business to 24% to get to 24% without a Well, either we'll not be able to do that or they will do that, but with a huge impact on their volume. So the asset supply For this sector is going to be very limited. And with that, I think there's a great opportunity For us to further improve our funding costs with better negotiation power with our funding partners, with our institutional partners. And then lastly, as we increase our business volume, the size of our business, The fixed cost component, which is a big chunk of our total cost as we are such a research heavy company, We spend a lot of it's really a lot of like human capital cost is going to be The efficiency is going to be higher. It's going to the fixed cost is going to be a smaller percentage of our total revenue. So with all these Improvement opportunity ahead of us, we actually think we can limit the profit impact to a Yes. So basically under that math, it looks like we will still have a very material growth, Like if everything holds constant, we'll still have a material growth of earnings at 2022 From like last year, from last year's level. So this year is still like about 24, but Yes. So next year versus last year is still material growth? Always doesn't hope so. But I think a few may have Different understanding of the material. So, yes, I do think that the 24% cap 24% cap is going to have some impact In the short term, in terms of profitability. But I think that the key message here is From all these aspects, we believe the impact is going to be fairly manageable for the short term. And we If we look at the medium to long term, it's going to be a good thing for the industry and for our company. Just one very quick follow-up. On the international business, have we like been considering U. S. As a potential area to enter because given like how strong upstart has been doing both on their business on the share price In that market, are we like under any future plan of answering that and share some of the economics there? Yes. I think we have been like paying some attention, but as As of now, we don't have concrete plan to enter U. S. Market. I think we mostly are focusing on developing world. I understand Upstart has a very high valuation, but It's still something we're trying to figure out. But I think when we look at the like medium to long term, we are pretty happy with The mainland market and the developing world, particularly Southeast Asian market, we think it's big enough for us to play for the years to come. The next question comes from Harry Wu with China Securities. Please go ahead. Thank you. Will there be any further changes to the Regulatory policies on user privacy, especially user data collection and what kind of response Okay. Last Friday there was an introduction paper on the scope of personal data protection and also On the personal data protection front there hasn't been much changes. The focus is always on the minimum required standard and we have also received The App Security Certification and App Information Security Certification with Level 3 rating from China National Computer Virus On cross border data transfer, we have maintained all the information collected in China to remain in China whereas all the information collected in the international markets remains in their respective countries. This regulation is still relatively new and still evolving and we will continue to closely monitor the developments of the regulations. Now I would like to turn the conference back over to the company for any closing remarks. Thank you once again for joining us today. If you have further questions please feel free to contact our IR team. Have a nice day, good night. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.