Earnings Call: Q1 2021

May 25, 2021

Hello, ladies and gentlemen. Thank you for participating in the First Quarter 2021 Earnings Conference Call for FinFolution 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 Q1 2021 earnings conference call. The company results were issued via newswire services earlier and are posted online. You can download earnings release and sign up for the company's e mail alerts by visiting the IR section of our website at ir. Pnbgroup.com. Mr. Feng Zhang, our Chief Executive Officer and Mr. Jia Yuan Xu, our Chief Financial Officer will start the call with their prepared remarks and conclude with a Q and A session. During this call, we will be referring to several non GAAP financial measures to review and assess our operating performance. These non GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U. S. GAAP. For information about these non GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, Please note that today's 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 posted 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. Thank you, Jimmy. Hello, everyone, and thank you so much for joining us today. We are pleased to start 2021 with remarkable progress, delivering high quality growth across all aspects of our business in the Q1, while also achieving further improvement in risk metrics across the board. Notably, our total loan origination volume for the quarter reached a record high to RMB26.8 billion, representing a year over year increase of 105%. Our loan origination volume for Mainland China increased 24% quarter over quarter to RMB26 1,000,000,000. Also, our international business is continuing its rapid growth, generating approximately RMB 760,000,000 of loan origination volume during the quarter, up 42% from the Q4 of 2020. Our sequential quarterly growth in low volume following the continued economic recovery from the pandemic is a testament to the effectiveness of our strategies and our strong execution. Also in the quarter, we continue to benefit from our successful transition toward higher quality borrowers. We improved our delinquencies to historical lows while achieving sequential growth. Our recent day 1 delinquency rate in May was around 5.4% compared to 9.7% in the same period last year. Our vertical delinquency rate that was 15 to 89 days past due further improved to 1.24% from 1.38% in the previous quarter, while our 90 day plus delinquency rate was 1.13% compared to 7.25% in the same period last year. Our loan collection recovery rate continued to stabilize at 90% around. We further expect vintage delinquency rate to fall to historical lows around 2.5% the Q1 and a key risk metrics to remain stable for 2021. Going forward, We see continued opportunity for quality growth as we further build our strength, our strong technological capabilities and the credit risk management framework. Notably, our total number of new acquired borrowers in the Q1 of 2021 exceeded 1,000,000,000 compared to 373,000 new borrowers in the same period last year, representing a 169% increase. By continuing to improve our acquisition efficiency, we were able to reduce our acquisition cost from the previous quarter. As part of our efforts to pursue financial inclusion, our average IRR for this quarter stabilized at around 26.8%. Since 2020, we have been diversifying our loan facilitation services to serve small business owners in Mainland China as we continue to capitalize on this unique opportunity presented by the need for operational funds. In the Q1, loan origination volume for Small business owners grew rapidly to RMB4.4 billion versus RMB3.7 billion originated throughout the full year of 2020, accounting for 16% of total loan origination volume for the period. The total number of small business owners we served in the quarter reached around 305,000 compared to 220,000 for the full year 2020. We believe this segment of our business supports China's economic rebound and is in line with national policies. Going forward, we will remain focused on serving small business owners and we expect this portion of our business to account for around 20% of total loan origination volume in 2020 in 2021. Our international expansion strategy continued to be a key competitive differentiator for us as we remain optimistic and selective in penetrating Southeast Asia Emerging Markets, where we have established a first mover advantage. We currently have established operations in Indonesia, Philippines and Singapore. Apart from our online load facilitation services, we have also been following other business concepts with different partners in the South Asia market, leveraging expertise in online loan services and the localization strategy. We are confident in our globalization process and our long term mission to make financial services more accessible and inclusive for our borrowers. In light of the ongoing uncertainties stemming from and economic conditions, our international expansion strategy will help diversify both user base and revenue streams, thus bolstering our ability to generate a steady long term growth for the company. We remain focused on evolving our risk assessment and management framework with prudent principles enhancing top notch technology advancement capabilities, while pursuing a healthy approach to diversifying our customer base as well as expanding funding sources both domestically and internationally. With all that being said, as we drive our industry leading position further with these initiatives in technology, overseas markets the product diversification. I believe Finvolutions will establish a significant presence in some of these new territories over the next several years. Based on our track record with our successful business transition in Mainland China and our expansion in East Asia. We believe our digitalization and operational capabilities can empower a variety of businesses across multiple scenarios in different industries. In conclusion, we are excited to get the year off to a strong start as we successfully execute our strategy. We are confident in our ability to maximize our well established position in China's consumer and microenterprise markets as well as South Asia's booming digital finance market, which will unlock tremendous value for all of our shareholders. With that, I will now turn the call over to Jiayuan Xu, who will discuss our financial results for the quarter. Thank you, Feng, and hello, everyone. With a strong and steady recovery across multiple operational fronts in the Q1, We delivered a 45% increase in the GAAP operating profit to RMB671 1,000,000. Reaffirming the successful transaction of our business model towards high quality borrowers. Our balance sheet remained strong with RMB 5,100,000,000 in unrestricted cash and short term investments. Empowering our strong technology and risk management capabilities. We will continue to explore new business models and tapping to new opportunities both domestically and internationally. Now Turning to the financial results for the Q1. In the interest of time, I will not go through each item line by line on this call. Please refer to our earnings release for more details. Net revenue for the Q4 of 2021 stabilized at around RMB2.11 billion, primarily due to increase in origination volume and partially offset by the decrease in guarantee income as a result of improved asset quality. Loan origination service fees increased by 100 and 3% to RMB 761,000,000 for the Q4 of 2021 from RMB 375,000,000 in the same period of 2020, primarily due to the increase in lower origination volume, which is partially offset by the decrease in average rate of transaction fees. Post facilitation service fees increased by 24% to RMB226 1,000,000 for the Q1 of 2021 from RMB 183 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 the deferred transaction fees. Guarantee income was RMB659 1,000,000 for the Q4 of 2021 compared to RMB11 the RMB15 1,000,000 in the same period of 2020 as a result of improved asset quality. Net interest income decreased by 11% to RMB280 1,000,000 for the Q4 of 2021 for RMB315 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 loan origination volume originated outside Mainland China. Other revenue increased by 121 percent to RMB185 1,000,000 for the Q4 of 2021 from RMB84 1,000,000 in the same period of 2020, mainly due to increased customer referral fees to other third party platforms. Non GAAP adjusted operating profit, which excludes share based compensation expenses before tax, was RMB671 1,000,000 for quarter of 2021, representing an increase of 45% from RMB464 1,000,000 in the same period of 2020. Net profit was RMB593 1,000,000 for the Q4 of 2021, representing an increase of 41% compared to RMB420 1,000,000 in the same period of 2020. We have a well capitalized balance sheet and our leverage is conservative. If you divide the total outstanding loans of RMB32.5 billion on our platform by our shareholder equity. The leverage ratio across our business was only 3.7 times. And our liquidity position remains strong with RMB5.1 billion of unrestricted cash and short term investments as at the end of March 2021. Our strong balance sheet positions us well in the current operating environment and it gives us significant flexibility. As China's economic environment gradually recovers from the aftermath of the COVID-nineteen outbreak. The company has been experiencing progressive improvements across numerous operational metrics. The company will continue to closely monitor the situation of globally pandemic and the remaining ENGIE in its business operations. As such, the company holds our cautiously optimistic view on its operations and anticipates a steady growth in ethanol origination volume in the Q2 of 2021, which is expected to be in the range of RMB29 1,000,000,000 to RMB13 1,000,000,000 Last but not least, we continue to return value to our shareholders through dividends and share buybacks. As of March 31, 2021, we have cumulatively deployed US131 million fee for buybacks and USD143 1,000,000 for dividend distributions. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue. We will now begin the question and answer session. Before pressing the star then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, we ask that you please kindly repeat your question in English. At this time, we will pause momentarily The first question comes from Thomas Chong with Jefferies. Please go ahead. Thanks management for taking my questions. Can you comment about the beauty economics as well as the trend in coming quarters? Thanks. Thomas Niha. Okay. Let me do the translation for Mr. Alexis. The competition for our unit economics is pretty straightforward. Our IRR on average is between 26% to 20% and our funding cost is about 7.5% and our vintage delinquency rate is 2.5% on an annualized basis is around 7%. So on average, the IRR is around 12% and when we convert to a take rate of 4% is in line with what we have been guiding with the market along the past few quarters. Okay. Our next will elaborate more on our development phase. We will We extend in 2 different stages. Our loan facilitation business in China has shown in all our key metrics in our loan facilitation business in China has been showing a healthy side. For example, our risk metrics has continued to improve and in the second quarter, our Expected loan origination volume is expected to be in the range of $29,000,000,000 to $30,000,000,000 And we are continuing to have shown healthy growth in all key metrics going forward. In the Q1, our total number of new customer exit 1,000,000 and in the domestic market alone, our new customers exceed 600,000 and all these increase in new customers actually provide engines of growth for the future. And based on the current situation and the current performance of our key operation metrics, we are confident to deliver our full year loan guidance of $100,000,000,000 to $120,000,000,000 Okay. For the Southeast Asia market, we are still maintaining very rapid growth, although there has been some impact by the rebounding of the pandemic in Southeast Asia. In terms of new customers and loan origination volume, we are still seeing very rapid growth in both of these metrics. And beside Indonesia, we have also penetrate into a new country Philippines and we have also begun operations in Philippines. Okay. Was there a follow-up, Mr. Chuang? Okay, continuing to the next question. The next questioner is Yurun Zhong with Credit Suisse. Please go ahead. Thank you management for taking my questions and congratulations on the strong results. I have 2 sets of questions. One is on the loan facilitation. It seems the exposure to the on balance sheet lending and lending by trust structures have been rapidly reducing. And so wonder what's latest split between the on balance sheet and off balance sheet origination volume. And related to loan facilitation, What's your assessment of the regulation over the loan facilitation business model going forward? Would it be regulated under your license regime, for example, under the personal credit reference law? Any feedback you can share from the funding partners or regulators would be appreciated. And secondly, regarding the overseas business, following up on your earlier comments, can you share more details on the Southeast Asia expansion? What's the economics there? Any guidance on What do you expect the volume to make up when the volume would make up a meaningful contribution of your volume going forward? Thank you. Okay. On the balance sheet, the trust contribution that is on the balance sheet is currently less than 10%. Our loan facilitation model mainly cooperate with the banks and consumer finance companies which is off balance sheet. Okay, let's try to understand the regulators' intentions. In the process of building a comprehensive network framework and over the last 1 year plus, the regulators is in the process of establishing From our observation, the regulator is in the process of establishing a comprehensive framework, past many different aspects such as data protection, funding restriction, customer privacy are being reviewed. And based on our observation from March 2021 onwards, the regulatory environment seems to be much more stable and it is less likely for any new regulatory framework to be introduced. In the future, it is less likely for any new regulatory framework introduced. However, modifications on the current regulations will still continue. We think the credit scoring consultation coverage is very broad. Our business is based on the loan facilitation model providing comprehensive solutions on multiple aspects such as customer acquisition, risk management, after loan management and loan matching, etcetera. For the loan facilitation model, we do not of a standalone credit scoring services of point scores. We refer the customers to our financial institution partners Whether a loan is being approved or not is dependent on their independent assessment. And from this view and our current assessment, we believe we are not within the of the current credit scoring consultation paper. Okay. As the Southeast Asia business contribution is still very small relatively to our overall business, we intend to share more The next question comes from Hye Young with 86 Research. Please go ahead. So let me translate my question. Thanks management for taking my questions. The congratulations on another great quarter. My first question is regarding on the privacy protection. So recent days, some smartphone makers changed its privacy policies, for example, like the new IDSA policy by Apple. So where this policy change as our advertising effectiveness and the borrower acquisition cost. And in addition, regulators Clarify some necessary personal information for online learning apps, so where it adversely impacted our data collection and risk assessment model. My second question is on our technical service. We launched the bus service last month. Can you share more color on how many institutions have adopted the service and how we charge them? Thank you. It actually belongs to the same question. The regulators have increased the barrier on data privacy and customer protection. From the current results, the impact is minimum. As we are a technology company, we are using our technology capabilities to solve all these problems. And also compliance is our top priority for us. As you know, compliance is of a top priority of us. And if you actually notice on many NIM lease. Our company is actually not of those NIMs highlighted by the regulators. Regarding our past progress with our 14 years of digitalization capabilities, we are helping our financial institution partners in terms of increasing their efficiency and Our partners actually agree with our views on the bus services, and we are currently working with 3 of them to introduce the various stage of the bus services. We are actually providing services such as after loan management, lease related services and the fees collected will be based on the actual results of the performance. Okay. The bus is a 2B business model and during this process of promoting the bus services, We will our intention is to allow us to have more time to enhance our products before sharing it with more of our institutional partners. Thanks. Very helpful. Thank you, John. The next question comes from Alex Ye with UBS. Please go ahead. So I have two questions. The first one is on any update on the earlier the national monoclonal license? Is there any update on that front? And earlier one of your peers had mentioned that they might be doing some further preparation work on applying such a license? 2nd question is on your international business. I'm wondering would you have any specific guidance in terms of the full year loan volume contribution from that business? And also as you ramp your international business, what's the implications on your sales and marketing expense? And in particular, wondering if you could share with us some color on the customer acquisition cost for your international business? Thank you. Okay. With regards to the nationwide micro lending license programs, we are still in the process evaluation and understanding the regulators requirement as there has been no update from the regulators since the previous consultation paper. We will share more details of the market when there is more information from the regulators. Okay. Although the pandemic is rebounding in the Southeast Asia, we are still confident to achieve 3 to 4 times growth on a year on year basis in Southeast Asia this year. Okay. As we have disclosed, we have acquired over 100,000 new customer in Indonesia and our lending app is known as Adakami. Our ad in Indonesia is very popular and between the last 6 months ranging from 1st October to 31st March. In terms of FinTech lending that we are ranked number 1 in terms of download. Okay. The cost of customer acquisition in Southeast Asia is relatively lower, but as the business and situation change, the cost of acquisition is expected to change as well. In the Q1, the cost of a successful new borrower in Mainland China is about RMB 450 and this has shown improvement compared to the previous quarter. As you know, we have also become an important partner with many leading information fee standards. And our cooperation with these partners has come closer and leading to a more strategic partnership. As our risk metrics have been constantly improved, this has also leads to a decrease in our customer acquisition costs. And this is a follow-up. Thank The next question comes from Eric Lu with China Renaissance. Please go ahead. So my question is, we saw the asset quality has been largely improved. So just want to know if there's any change to our current client profile. Thank you. Okay. Our customer profile has actually changed a lot. During the P2P era, only about 15% of our borrowers has PBOC records and today over 95% of our borrowers has PBOC records. And we would also like to share more color on how we are able to gain such a significant change in our asset quality. Okay. The reasons for the improvement are largely due to 2 of our is number 1, our digitalization capabilities and number 2, constant data accumulation enabling us to upgrade Our digitalization capabilities can be proven in many situations. For example, during the last 14 years, we have track record in customer acquisitions, risk management and after loans management, etcetera. These capabilities have been proven during our P2P era and after our swift transition to better quality borrowers, we have also seen multiple improvement across operational metrics as we leverage on our digitalization capabilities. And these capabilities have also been leveraged onto our Southeast Asia business, where our business is expanding rapidly. And in the future, we believe our digitalization capabilities can also be leveraged in non finance industry Another very important factor is the constant data accumulation. Constant data accumulations coupled with the digitalization capabilities doubled the results as more data are being collected will lead to a more accurate model hence increasing our capabilities as you can see from our transition to higher quality borrowers driven by the increasing number of new customers and resulting in higher loan origination volume. As the number of new quality borrowers increase of the platform with higher loan origination volume. All these will become a positive impact. And we are confident that with all these capabilities as our key operational metrics such as our risk improve, We are able to have a healthy growth for the business. Thank you. The next question comes from Henry Leung with Gold Dragon. Please go ahead. So just congrats on such a strong results. And as we see, Simvolution has been doing very well in Southeast Asia market, especially Indonesia and like outperforming all the local players after COVID and like even for our peers who have been like doing a better and larger business in Mainland China, like none of them has been as successful in overseas market as our company. Can you please share like what kind of core mode or competitiveness we have to be able to lead in the Southeast Asia market? And would you please also share your plan on the overseas expansion and the total addressable market over the long term? Thank you. Thanks, Harry. This is Feng. I'll try to give a Brief view on your question, I think it's a really good question. I think our core capability, cost strength of the company are really twofold. One is, after so many years, we are really good at leveraging data and technology to improve efficiencies in your business process. And particularly, I think in the past, our main business has been on this Loan Tech business in our view. And secondly, I think the company has a really strong value system and reflecting in our business, I think it has We have a very strong risk culture and we really respect risk and we treated it very seriously. We don't sacrifice risk for achieving short term growth. And we look at really look at things in a very long term way. So I think these are the 2 core strengths of the company. And I think The company has experienced up and downs. I think before we went IPO, we We had a period of rapid growth. And after IPO, due to very severe regulatory environment and external environment shift, we had a couple of tough years. But I think what's inside the company, the fundamentals of the company really were able to enable us to go through that tough period. And I think our track record during good years and tough years has said I really says a lot about our fundamentals. And to the second part of your question, I think we are really bullish about the Southeast Asian market, I think roughly it's half the size of Mainland China. So I think even for Indonesia, Philippines, these two countries combined, we are very small. We are very early stage, though we are developing very fast, but we think the market is huge. So we think Just like in this market, we have a lot of opportunities there. We're very bullish about that. And I think I will also add, We will continue to explore getting into other markets when opportunity presents. But I also want to like to take a step back, coming back to what we believe is the cost strength, the fundamentals of the company. And I want to call out that It's actually not limited to only loan facilitation model or loan tech. Think about that, it's really leveraging data and the technology to improve efficiencies, right? And our long term base value system, we believe there's a lot of opportunity for us to leverage the cost strength of the company to improve efficiency. And so we are also exploring how do we leveraging this core capability to enter different markets and different businesses. And we will share with the market I'll share with you guys when they are more meaningful processes, but there are a bunch of things like in the incubation stage in the company. Thank you, Henry. Yes. Just a very quick follow-up. Shall investors, shall we that sort of to share meaningful like update of the overseas business, both on their top line contribution and also the bottom line contribution towards the end of this year and the next? Yes. Possibly. Yes. I think as the business size continue to some of our new businesses, namely like particularly like the international business. And we are very careful because For example, this is the first time we disclosed the international business. But internally, within the company, we started the business several years ago, right? So but like we decide like until we feel fairly comfortable and we will start to share some information. And I think as the business become more meaningful. We're very bullish about the business. The business is in a very healthy stage, very healthy like in both of growth as well as unit economics. And as it becomes a more meaningful part of our entire business, We will share more color, more insight and more numbers with the team. Thank you. Thanks. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact the Fusion Investor Relations team. Good night.