Earnings Call: Q1 2021

Jun 15, 2021

Hello, ladies and gentlemen. Thank you for standing by for Quidius Incorporated's First Quarter 2021 Earnings Conference Call. At this time, all participants are in 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 our host from Qdian. Please go ahead. Hello, everyone, and welcome to Qudian's Q1 2021 earnings conference call. The company's results were issued to their newswire services earlier today and were posted online. You can download the earnings press release and sign up for the company's distribution list by visiting our website at ir.qidian.com. Mr. Min Luo, our Founder, Chairman and Chief Executive Officer and Ms. C. Zu, our VP of Investor Relations, will start the call with prepared remarks, and then we will open the call to Q and A. 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 is included in the company's 20 F as filed 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. Please also note that Xidian's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non GAAP financial measures. Qudian's press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IR website providing details on our results in the quarter. We will reference those results in our prepared remarks, but we will not refer to specific slides during our discussion. I will now turn the call over to our CEO, Ming Luo. Please go ahead. Hello, everyone. I would like to thank you all for joining us on today's call. We kicked off 2021 with a solid Q1. We greatly improved the quality of our assets, while maintaining prudent operations of our cash credit business in light of ongoing shift in online lending regulations. Notably, we record a net profit of RMB478 1, 000, 000 for the Q1 compared to a loss in the Q1 last year. Our net assets increased to RMB12.4 billion, and we had approximately RMB7.3 billion of cash and cash equivalent and short term investments at the end of the Q1. Our strong balance sheet allows us enough funding to invest in new business initiative, which we believe will increase long term shareholder value. We are very excited about the meaningful progress we have made with our early childhood education business, Wanimu. In January, we launched our first our very first Wanimu Kids Center in Xiamen, where our company is headquartered. This center occupies approximately 4, 600 square meters. Early feedback has been positive, and we are foregoing ahead with our plans to expand our national wide footprint in China's large underserved early childhood lifestyle curricular enrichment market. Our mission for Wani Mu Kids Club is to help Chinese kids grow up happy and healthy. We hope to help kids explore their potential in sports, art and music, cheerfully and freely, while also helping children build healthy bodies and mind parallelizing. We firmly believe in the great potential of we estimate that there are currently about 160, 000, 000 kids between the age of 0 9 in China, and we expect the penetration rate of teacher, clinical enrichment services as well as household spending in this area will grow. Huami Mu Kids Business in the well to redefine kids' special curricular education, we consistently strive to differentiate ourselves from others and we believe value proposition for parents and kids is very clear. Firstly, we guarantee a hassle a hands free refund policy as observed to non refundable lump sum prepayment required by many other institutions. Secondly, we provide comprehensive program offerings in 1 case to optimal prices, saving parents the time and money spent in talking and taking kids to different places. Thirdly, we have a well trained instructor in each of our centers with standardized teaching procedure. And we also have a centralized teaching, research and development team. Last but not least, we provide state of the art high-tech facilities to create a safe comfortable environment in each center. With our 1st mover advantages, we built strong entry barriers in 2 aspects, location and talent. There are limited goods and locations near core urban residential areas. And once we secure the right of use at these locations, others cannot easily find a similar location there. On the other hand, as talents are at the core of this business, We have attracted over 50 excellent entry premiers who have run education business with annual revenue of over RMB 100, 000, 000 to join us at 60 as equity partners. Specifically, our equity partners will actively participate in our frontline business operations. Our senior management team has employed a highly motivated and share the same vision, adding critical value to the success of this new business. In conclusion, as we venture further into 2021, we remain cautious in our credit loan business operations, striving to develop our early childhood education business. I'm also happy to share with you that we have our internal kickoff meeting today attended by over 800 employees and the core management teams, Marketing Wale Mooki's official move to the national stage for Xiamen. Backed by our shared vision, we look forward to joining hands with our core management team and employees to build a nationwide extra curricular platform in China to help tens of millions of kids grow up happy and healthy. Now, I would like to turn the call over to Citi for more detail on our results. Thank you, Min, and good morning and good evening, everyone. As Min mentioned, in order to mitigate evolving market dynamics, we maintained our conservative approach to operate our loan business by rigorously assessing credit risks of new transactions. Consequently, we experienced an 8.4% decrease in transaction volume for our loan book business for the Q1 of 2021 compared with the previous quarter. Our strict credit approval standards continued to pay off during the Q1 with a further sequential decrease in our delinquencies. In particular, our D1 delinquency rate for loan book business fell to less than 5% at the end of Q1 of 2021, a normal level in our operating history. Moreover, our balance sheet remains strong and healthy, enabling us to safeguard the interest of our shareholders. Additionally, more than 98% of our outstanding loans were funded by our own balance sheet loan transactions, and our M1 plus delinquency coverage ratio remained at 2.7 times. Echoing Ming on our early childhood quality education business, we are actively progressing towards our goal of becoming a comprehensive 1 stop service provider for early childhood extracurricular enrichment progress. Our Wanimu Kids project offers numerous top quality sports, arts, music enrichment programs for children from ages 0 to 9, such as swimming, basketball, football and dancing, etcetera. Following the effective opening and operation of the 7 Taijuhui Activity Center, our first endeavor in the early childhood education market. We are designing more than 80 additional activity centers to replicate its success. Both in solid financial strength and a superior team of education industry veterans, we plan to broaden our early childhood education services across the country with a mission to help Chinese children grow up happy and healthy. The incremental spending in our WaniMo Kids business may put pressure on our profitability in the near term, but we believe we are well equipped to tap into the opportunities in the fast growing extracurricular enrichment market in China. Following the completion of loss making ramp up period, we anticipate that the unit economics or UE for the Wailinuke's club business will be very attractive. The UE will be superior to that of many other offline businesses because number 1, being large long term traffic generating tenants, we can enjoy lower rents compared with smaller institutions. Number 2, we can enjoy lower user acquisition costs due to the variety of SKUs being offered and because of strong word-of-mouth referrals, as evidenced by the fact that over 50% of our traffic for the 1st center were from referrals and natural walk ins. Having said that, we have a concrete plan to expand across China this year and hope our investors could stay with us and enjoy the great journey ahead. Going forward, we will keep a close eye on regulations in the online lending industry and proactively take adaptive measures in a rapidly changing environment. Supported by our adequate cash resources and strong financial position, we believe we can continue to grow our overall business and deliver sustainable value to our shareholders over the long term. Now let me share with you some key financial results. In the interest of time, I will not go over them line by line. For a more detailed discussion of our Q1 2021 results, please refer to our earnings press release. Our total revenues were CNY515.7 million or US78.7 million dollars representing a decrease from US958 million dollars for the Q1 of 2020. Our financing income totaled RMB362 1, 000, 000, representing a decrease from the RMB623 1, 000, 000 for the Q1 last year as a result of the decrease in the average owned balance sheet loan balance. Loan facilitation income and other related income decreased by 97% to RMB12 1, 000, 000 from RMB422 1, 000, 000 for the Q1 of 2020 as a result of the reduction in transaction volume of all balance sheet loans during this quarter. Our transaction services fee and other related income increased to RMB RMB50.6 million from a loss of RMB150 1, 000, 000 for the Q1 last year, mainly as a result of the reassessment of a lot of variable consideration. Sales income and others increased to RMB62.5 million from RMB7.1 million for the Q1 of 2020, mainly due to the sales related to the Oneinu e commerce platform. Our sales commission fee decreased by 68 percent to RMB10.7 million from RMB33.7 million for the Q1 of 2020 due to the decrease in the amount of merchandise credit transactions. Our total operating cost expenses also decreased by 97% to RMB63.3 million from RMB2 1, 000, 000, 000 for the Q1 last year. Our cost of revenues decreased by 4.8 percent to RMB91 1, 000, 000 from RMB95, 600, 000 for the Q1 last year, primarily due to the decrease in funding costs associated with the own balance sheet loan book business, partially offset by the increase in cost of goods sold related to Wanyu e commerce platform. Sales and marketing expenses decreased by 36% to RMB37.6 million from RMB58.8 million for the Q1 last year, primarily due to the decrease in third party service fees and marketing promotional expenses. General and administrative expenses decreased by 12.9 percent to RMB66.7 million from RMB76.6 million for the Q1 of 2020 as a result of the decrease in staff salaries. Research and development expenses decreased by 28.4 percent to RMB39.2 million from RMB54.7 million for the Q1 of 2020 as a result of the decrease in staff salaries. Our provision for receivables and other assets was a reversal of RMB106.8 million compared to a loss of RMB1.1 billion for the Q1 last year, mainly due to the decrease in past due on balance sheet outstanding principal receivables compared to the Q1 last year. Our income from operations was RMB464.8 million as compared to a loss of RMB961.1 million for the Q1 of 2020. Our net income attributable to Q3'an's shareholders was RMB478.4 million or RMB1.81 per diluted ADS. Our non GAAP net income attributable to Qudian's shareholders was RMB488.3 million or RMB1.85 per diluted ADS. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue. Thanks, Annie. Thank you. Thank you. Our first question is from the line of Jacky Zuo of China Renaissance. Your line is open. Please go ahead. So let me translate my questions. So thanks for taking my questions and congrats for the solid results. I have 2 questions. Number 1 is about our credit business. We observed that our risk level continued to decrease year to date. So just want to check what is our loan balance outlook for this year. And in terms of the credit business model, my understanding is we continue to use the entrusted lending model for our on balance sheet loans. Do we see any regulatory pressure for this type of model? Are we planning to switch to, let's say, license lending, for example, using the micro loan license? And second question is about our new business, 1, the new kit. So just trying to also we mentioned we will increase the spending for this new business in terms of the nationwide expansion. So what will be the investment scale and pace going forward? Thank you. Thank you, Jackie. I'm happy to see you on the call. So let me answer your questions 1 by 1. Regarding our credit business, as we also observed that our D1 delinquency rate and as well as our vintage charge have been improving over the past quarters. But in the long term future, we believe although the demand for small credit will always exist, however, in China, such demand in the long term, we believe, will be highly likely served by large financial institutions as opposed to non government backed technology companies like us. So the regulation risk in this sector should not be ignored. As we observe that the tones from regulators have been on the tightening side. So in our point of view, including things like interest rate cap, leverage restriction, information disclosure requirements, credit guarantee restrictions, etcetera, There were not many positive updates in the regulation in the Q1 or the Q2. As such, we chose to maintain our prudent strategy and which means we will maintain our similar credit assessment rigorously credit assessment rules and similar volumes. However, our loan balance for our loan book business will still be decreasing in the second quarter. With regard to the own balance sheet loan channels from the interested loan model to other regulated models, licensed models, yes, we have already changed that to licensed trust. So, the risks pending the interest to loan model is not with us. Regarding your second question on our UEs, we expect the UEs to be superior to that of many of other offline businesses. Although it is our company's policy not to give guidance since 2019, We surely will incur some CapEx for the renovation of activity centers and operational expenses for staff costs and rents. The unit economics, although I couldn't give out concrete guidance, I could help guide the market to think and make reference to other offline businesses. RUE will be superior to many traditional education businesses as we do not need to incur abnormally high user acquisition costs or high rents. And also, RUI could be a bit similar to that of offline catering business as well, just need to take out the large amount of food and consumable expenses of the offline catering business. So the Yiyi will be very attractive. And with regards to our CapEx and ramp up speed, as we mentioned in the call and in our presentation, we currently have over 80 centers in the designing process and renovation process. So we expect to do a big ramp up and expansion nationwide this year. There will be certainly CapEx expenditures, but we expect in the steady state, our EU will be very attractive. Thank you, Jackie. Thank you, B. C. It's clear. Thank you. Our next question is from the line of Steve Chan of Haitong International. Please go ahead. Your line is open. Let me translate it into English. I have 2 questions. First of all, I think C. C. Just mentioned about the loan balance of the credit business will likely to be reduced in Q2, and we will maintain a conservative approach in the credit business. So does that imply that in the medium term, Qudan likely to gradually transform from a loan facilitation or credit lending business to you was more like an early education company? That's the first question. And secondly, could you give us some secondly, 2 sub questions. 1, from the accounting point of view, where did you push the revenue and expenses of 1 in new kits in the P and L accounts? And do you any target revenue or target return for this business, say, in 3 years' time? Thanks. Thank you, Stephen. Happy to meet you over the line again. So let me address your questions 1 by 1. First of all, our balance swapping and rate. So as a matter of fact, the unique dynamics of our credit business is still very profitable. We charge at 36% annual interest rate, and our delinquency of our annualized delinquency default rate is less than 10%. So this business is still very lucrative. So as long as we're making profit on this business, we will keep a similar level of loan volume and similar level of risk assessment procedures. In the mid to long term, if from an investment point of view, as we assume, Qudian is the investor who invests in both credit business and Wimal Kids business, if the payoff from 1 animal kids business is better than our cash credit business, we will allocate more resources into 1 animal kids business for sure. So and from the regulatory standpoint, we believe the 1 and MUKI's quality education business is more safer from the regulatory point of view. Although it is still there is more at this stage, we only have a full quarter of 1 school, 1 center only in the 1st center. So relating back to your second question, in accounting terms, our revenues and costs for the first 1, center, is quite minimal, and it is inside the sales income as well as the cost of goods sold. In 2 to 3 years, the return on Wai Ling Markets business, we expect that the unit economics of this business after the ramp up period will be very attractive. If we look at the offline catering business, the unit economics of net profits will be around 10% net profit margin. And for some other offline education business, the UEE for net profit will be around 10% to 20%. So as we have experimented our strategy in our first and second school, we expect we anticipate that the UE of our kids business will be superior to that of the offline catering and traditional offline education business. Hope that answers your question. Thank you, Steven. Very clear. Thanks, Cixin. Our next question is from All right. Thank you. There are no further questions now. I'd like to turn the call back over to the company for closing remarks. Please continue. So thank you all once again for joining today's conference call. We warmly invite investors to visit us in Xiamen and they're still in other major cities in China as well. If you come to you in person, you see that our centers in person, I'm sure you'll be impressed by the new species of children's core education that we're developing. And if you have any further questions, please don't hesitate to contact our IR team and visit our IR website. So thank you once again very much. Thank you. This concludes the conference call. You may now disconnect your lines. Thank you.