Earnings Call: Q1 2021

Jun 1, 2021

Ladies and gentlemen, thank you for standing by and welcome to the Listing Fintech First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. I must advise you that this conference is being recorded today. I'd now like to hand the conference over to your first speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you, and please go ahead, sir. Thank you, operator. Hello, everyone, and welcome to Lexin's Q1 2021 earnings conference call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer Mr. Craig Zhen, our Chief Financial Officer Mr. Yang Chao, our Vice President Ms. Beryl He, our Senior Financial Director and other members of our team. For today's agenda, Mr. Shao will provide an overview of our recent performance and highlights, Mr. Zhen will discuss our core results and Mr. Cao will discuss our credit performance. Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make forward looking statements. Also, please note that this call includes discussions of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to our CEO, Mr. Shao, whom I will translate for. I'm pleased to announce to everyone that this quarter, we have once again achieved a record of high growth in our financial results. China has already become the world's largest consumption market and our new consumption strategy will allow us to seize the benefits from this opportunity. In the Q1, this strategy enabled us to grow both our user base and business scale rapidly. In the Q1, Lexin's newly registered users reached 14,000,000, continuing 7 straight quarters where our newly registered users increased by over 10,000,000, leading the industry. At the end of the quarter, Lexin's total registered users reached 132,000,000, an increase of 56.5 percent year on year. Users with credit lines reached 30,300,000, an increase of 46.5 percent year on year. And new active customers for the quarter reached 1,800,000, an increase of 88% year on year. In the Q1, Lexin's platform facilitated RMB53.8 billion in loans, an increase of 57.8%. The continued refinement of our risk management systems allowed our asset quality to continue to improve. At the end of the Q1, our 90 day plus delinquency is at 1.84% and FPD 30 for new loan originations has been below 1% for 8 months now, the lowest since the pandemic. Both our user base and our scale continues to grow rapidly and our risk continue to stabilize and decline. This dual rise and one decline allowed many of our core financial metrics to reach record highs. In the Q1, Lexin's revenues were 2,900,000,000, gross income was $1,370,000,000 and non GAAP net income reached $771,000,000 with EBIT non GAAP reaching $911,000,000 anticipate this positive trend will continue in the following quarters, and we are fully confident in our ability to reach our loan origination targets of 240,000,000,000 to 250,000,000,000. Next, I'd like to share with everyone several of our current strategies in our Financial Technology Services and New Consumption. On the Financial Technology Services side, we're in the process of diversifying our assets and specifically towards micro business owners. We have worked with multiple scenarios to develop a series of pure operating credit products. In the Q1, these products served nearly 200,000 customers, primarily from machinery equipment electronics and related manufacturing, light manufacturing and wholesale, generating RMB2.1 billion in transactions. At the same time, after analyzing our existing customer base, we discovered that over 15% of our customers fit within this category of operating and financing need. And in the future, we will increase efforts to fully uncover the potential of these assets. Currently, many banks, especially small and medium sized regional banks, face common challenges when it comes to traffic acquisition, operating models and other problems and have become overly reliant on outside channels or a single partner model, which is difficult to sustain. Creating a self operated product group, increasing operational self sufficiency, stability and compliance has become a real need. Lexin, through our past 7 years of solid Internet product experience, operating capabilities, financial technology capability, stands in a unique position to help financial institutions solve these problems. As a result, we've initiated our co development with regional banks plan and joint operations services to help banks create a self operated product group, enabling localized development. On May 13, we signed strategic cooperation agreements with the Bank of Nanjing, the Bank of Gansu, Zhongyuan Bank, the Bank of Kunlun, Jiangnan, Dongshu and Sanyue Bank, the Bank of Murumuji and 9 other banks. In addition, our financial technology output services has also achieved noteworthy growth. Our online micro loan credit product risk product, Leju Pro, already has over 30 participating institution, achieving tens of 1,000,000 in financial technology revenues. On our new consumption strategy, our buy now pay later BNPL product, Maya, is growing rapidly. In the Q1, Maya achieved over 60,000,000 And to date, MAIA has served over 510,000 customers and 1575 merchants, generating a total GMV of over 237,000,000. Maya is already established in the Shenzhen Etienne Mall, Excellence Mall and other core shopping and business areas, creating opportunities for merchants to grow their revenues and rapidly proving the viability of the operating model. Next, Maillard will also develop along 3 strategic directions, rapidly expanding the possible use cases. First, we will utilize our Finchela e commerce platform to target existing users to push the online Maya business. 2nd, we will continue to work with major consumer brands at malls and outlets. 3rd, we will work with offline fitness, health and beauty, educational and other businesses to use MAIA as a business solution. Towards this goal, we are diligently building our business development team, integrating service providers, creating an online and offline joint development model for MAIA. In the Q2, we anticipate achieving $300,000,000 in GMV. Through Maia, we look forward to creating for China's vast online and offline merchants a completely new sales tool, enabling merchants to improve their operating capabilities and driving the real economy. Our local service and lifestyle products, LeCards and Yuehui has also established relationships with leading nationwide vendors to provide benefits and privileges, increasing and gathering benefits and advantages to transfer to financial institution partners and also increasing the stickiness of our consumers. In high frequency consumption scenarios, LeCard and Yuehui are already exhibiting good growth potential. Current numbers indicated that in May, after rolling out the Yuehui model in participating movie theaters, 3,650,000 in GMV was generated in a single month. In the future, these new consumption products connecting both online and offline consumption scenarios will expand nationally to every city and district. And not only will it contribute revenues to us, but can also help financial institutions, especially local financial institutions to acquire customers more cheaply and to more effectively manage high quality local customers, creating a new driver of growth for Lexin's businesses. I believe that these new initiatives will enable us to further diversify, open new areas of even greater growth and create stable growth for the future. Thank you, Jay. As mentioned, we are very proud to announce our best quarter ever. In addition to achieving our highest loan origination ever, with numerous other all time highs, we are also pleased to announce that our highest adjusted net income ever, as non GAAP adjusted net income reached RMB771 1,000,000. Key to our success in the quarter is the improvement of our credit statistics. The recovery and stability of which we had already indicated back in January, which is now being reflected in our financials, a trend which we expect to continue for the year. Our loan origination trends continue to be strong, and we fully expect to reach our guidance of RMB240 1,000,000,000 to RMB250 1,000,000,000 in the loan origination for the year. In addition, our cost of capital declined to 7.46% from 7.7% as we are once again lowering our funding costs, a trend which we also expect to continue over the course of the year. For the quarter, the profit sharing portion of our revenue remained relatively flat as we have decided to focus more on profitability and cash flow from this core part of our business. We already have the industry leading position when it comes to profit sharing and as we can choose to increase the portion of our funding from profit sharing based on the market conditions. This year, with our increasing scale, we will further refine our risk management operations by simultaneously improving our operating efficiency, enabling our profitability to further improve. At the same time, we will continue to invest in our new initiatives and technology to ensure our long term growth. As a core of our strong profitability for the quarter, the increasing strong performance of our credit team. So next, I would like to turn the call over to Jason to discuss our credit performance. Thank you, Craig. As previously mentioned, we have continued our stable credit performance in the Q1, and we expect this trend to continue. Our 90 days plus delinquency ratio is now at 1.84% in the Q1 and our credit performance continues to be stable as our lifetime charge off ratio has stabilized at between 3.5% to 4%, a rate which we expect to continue for the year. Our 30 day delinquency is at 3.6%. In addition, as you can see from the graphs disclosed with our latest earnings release, our first payment default rate, 30 day plus for new loan originations, have been at well under 1% and continues to improve. Through continuous improvements and refinements of our risk management systems, we have been able to work continuously with financial institutions to enable them to tap into their preferred customer segments for new loans to further differentiate the risk levels for these high quality borrowers, thereby optimizing the overall asset mix. Whether in terms of risk assessment, loan pricing or loan size, we have made additional improvements in efficiency in all areas, reducing the expected delinquency rates. In terms of portfolio management, we have developed more accurate and differentiated strategies to manage overdue borrowers, while enhancing collection rates through high efficiency and intelligent tools and more refined business management policies, enabling us to keep our overall collection rates and delinquency levels at a consistently healthy and stable level. As a result, I fully expect our strong credit performance to continue throughout the year. With that, I conclude our prepared remarks. Operator, please proceed with the question and answer session. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Jacky Tuo from China Renaissance. Please ask your question. So thanks, management, and congrats for the strong results. I have 3 questions. Number 1 is about our Up Check Pay business, Maia. I observed that management gave CNY300 million target GMV for 2nd quarter. Can you give us a breakdown in terms of online, offline channels? What is the current unique economics for Maia? And who is bearing this credit risk? And what is our long term target for this business? And second question is about regulation. We know that the regulators sold 13 team type platforms end of April and require loan facilitation business to go through licensed credit bureau. So how will that impact our loan facilitation business going forward? And last question is about our SME business. So just want to understand what is our SME loan target for this year? Thank you. Yes. So Jackie, on your first two questions. First, with regards to the BNP L, our MYA product, I think, obviously, we started in the Q1, and there is a big difference between what this product does and what we've done traditionally, not the least of which, of course, is that it's a 0% interest product to the customers, and we collect the fee from the merchant. Now when we created this product and we set out on these goals, we had a few principles in mind that this is not going to be in any way like traditional consumer finance. It will require a new type of funding model. But that said, we have to say that all these things right now are very early. Now we were able to achieve CNY 60,000,000 in terms of GMV in the Q1, which was primarily driven by online and online transactions. In the second quarter, we can see that the offline has been growing very, very rapidly. And we believe that most of growth in the future that we can see is probably likely going to come from offline as opposed to online. That said, we're hesitant to say a very specific percentage right now or breakdown because it is early. It is a little bit unstable. Now similarly for the asset quality, it's probably too early to say. That said, based on what we can see right now, it's clear that the customer quality is far better than what we've seen before. And in fact, it's better by a substantial level, and it's definitely much lower. Our goal here is to try to keep the losses down to, say, under 1% or so. Now also, I'd like to emphasize that for the BNPL, this is very, very early on in terms of the model. So when it comes to the definitive model, growth and otherwise, it's still early. But what we can see and it depends on the sector or industry, if, for example, we offer a 3 month product, charging 4% is no problem at all. Longer term, charging a higher percent wouldn't be too much of a problem. Now that said, though, the revenue model and exact percentage will no doubt depend on the sector. But we'd like to hold off until later before giving everyone more details on the numbers and otherwise, essentially the things that you would need to build a financial model. So that's on the BNPL product. Now on the regulation, we have to emphasize that our loan facilitation model was developed in a very stable manner under the regulators have seen within a regulatory framework that is actually fairly mature. So we're very confident in our model. What we do at the core is we give the banks a few services, including customer acquisition service and the ability to pay customers. The banks then provide the customers with your traditional financial service. So we have not provided credit scoring services, and we have not provided credit services. So hence, while we'll have to see how things develop on the regulators on the credit scoring and the credit bureau front, Overall, we're definitely very, very positive on the outlook on the regulatory side. And we would also like to comment about the event where 13 institutions or 13 companies got called in Beijing. I think based on our knowledge, it was mainly about, if you will, the post ant regulatory situation and having a fair regulation and in particular targeting those businesses that are much more complicated with more platforms integrated. And as an independent company, hence, we don't fall under, if you will, that level of regulatory risk or scrutiny. Yes. And on the SMEs, right now, I'd like to say that it's pretty early. That said, as mentioned on the call, there's definitely a lot of customers and users on our platform that are either SME business owners or have similar backgrounds. So hence, we feel that this could become a real good new growth engine for our business. But right now, it's probably too early to talk about some of the details of the numbers or to give guidance for this business. Thank you. Our next question comes from Yvonne Wang from CLSA. Please ask your question. I have two questions. The first is about the percentage of platform based services out of the total platform based loan origination out of the total loan origination volume in the Q1? And my second question is on take rates. Just wondering what is the level, what is the first quarter's take rate for credit rented and platform based business model respectively? Thank you. Yes. So, Ethan, I think when you look at the Q1, the profit sharing, we mentioned earlier in the prepared remarks, for the Q1, it was 47%. This is compared to the 50% in the previous quarter. So overall, it's pretty stable. Now of course, it's notable that this is a market, and this is a, shall we say, a form of funding that we develop. And we're in the process of getting more and more banks to assess taking on the risk and also improving the potential take that we get on it. So it's a combination of more and more financial institutions accepting this model and accepting, shall we say, to give us a higher take rate on it. Now until that time, if you will, in the meantime, we may focus a little bit more on keeping more of the profitability for ourselves until such time as the market, the financial institutions is willing to give us a higher take rate. On the take rate itself, you can see actually based on some of the math that the take rates, depending on how you do the math, would be the highest in the past 5 quarters for a variety of reasons, including risk. But we can talk about the details of this offline in the future. Thank you. Our next question comes from Stephen Chan from Haitong International. Please ask your question. Let me translate that. Two questions. First of all, from the follow-up question on MYA. From the accounting point of view, I would like to understand that when the business of MYA grows, are we going to are you going to see some expected credit loss to be booked as some part of like provision charge in the P and L account. And so we also expect something like guarantee income for the MYA business. And secondly, if we take a look at the vintage chart off curve chart, what we find that is for those loan originated in Q1 and Q2 2020, the shape of these vintage charge offs is different from the previous quarter's rate. Especially, we are seeing the vintage start to see a sharp rise starting from the 6 months onward. So I'd like to understand the reason behind. Is it related to the risk management model, borrowers, character or macro economy? And unfortunately, I am not able to identify the Q3 curve. So did you see a similar shape for the Q3 vintage charge off bands? Yes. So for the first question, Stephen, I think it's important to emphasize the product, the MAIA is very new. The scale right now is not large. So on these things, it's fair to say that we still have to figure out exactly how the accounting will work. Now that said, of course, everybody can look at, for example, Afterpay globally and how their accounting works for a consideration. But as a whole, in terms of what it would be, it would actually be more like receivables and receivables risk associated with that. So importantly, this is not a loan product, and it will probably not be accounted for in that way. Now overall, it's still early, but very, very clear that the risk for this product is very low. So Steven, maybe I'll jump to the end first. It's not an indication of the risk performance, but rather it's an indicator of how the charge off works, basically the charge off time, for example, in the 7th month. So as it goes out, it would actually be consistent with the 30 day numbers. And while there have been early charge offs in the past, again, I don't think you can read actually too much into the curves in that way, if you will. All right. Thank you. Our next question comes from Alex Yair from UBS. Please ask your question. So I have two questions. First one is on regulatory forms. So given there are still some uncertainties around the regulatory developments, I'm just wondering whether the management is considering to apply for a national online micro loan license so as to as a hedge to the regulatory risk. So I'm wondering if you have heard of any new regulatory developments on this front, given that this particular license is still on kind of a transition draft stage? The second question is on the Mylar product. So I'm wondering whether we should expect some synergies between this product and our major installment loan products going forward. So basically that should have resulted in lower customer acquisition cost if we see more synergies going forward. I'm just wondering if you have seen any early trends on such conversion of customers. Thank you. So Alex, we did mention the regulatory situation a little bit earlier. But I think what we want to emphasize here that, well, the regulations, as we all know, around loan facilitation is out and has been established. We would say that, in fact, it's stable and the regulatory environment around the loan facilitation model is also stable. And the associated risk with the model and also with the environment have actually decreased and been reduced over time. So that's the first thing we would like to emphasize about this. Now with regards to what you asked about the National Micro Loan License, well, we do have micro loan licenses. For example, we have the Jiangxi micro loan license. Now when we look at the underlying model involved with a national micro loan license, We think that the leverage levels are too low. It's not consistent with the type of business and the business model that we would like to operate. So actually, we will not be pursuing that particular license. Now with regards to your second question on Maia, shall we say, whether or not it can lead to other conversions or positive externalities. It's clear that for the BNPL clients, for the customers, these are very, very good customers, and there's a very good and open space and opportunity here. Obviously, potentially, a most obvious solution would be consumer loans that are of lower interest, and we can see a very strong potential market for offering these things to the BNPL customers. Now it's also interesting to note that there's a lot of potential for customer acquisition. So what we're finding is because BNPL is so new and it is an open space and a space of tremendous potential growth, The customer acquisition costs are also quite low. So I'll give an example. When we did a promotion with the Yitian Outlets here in Shenzhen, we spent only something like RMB 50,000, RMB 60,000, and we got over 1,000 new customers. So literally, the customer acquisition cost was like tens of RMB. So hence, we can see the tremendous potential here given how BNPL is a completely new space and hence the potential for many fronts, including on the customer acquisition side. Thank you. Our next question comes from Cindy Wang from DBS. Please go ahead. My first question is related to the SMB loan. Can because this type of the loan has been growing very strongly and achieved the RMB2.1 billion loan balance in Q1. And could you provide some colors on what's the loan tenure and the size of the loan as well as the APR for this new SMB loan? My second question is related to the small and mid co develop with the small and medium size of banks for the joint operation services. Could you provide what type of the product you are going to work with these banks and what's the profit model looks like going forward? The third question is related to the asset quality trend. Could you give us some colors on what the trend looks like in the Q2 of this year? And how do we expect in the second half of this year? Is there any possibility that the vintage charge off rate is going to improve to 3% to 3.5% instead of your early guidance of 3.5% to 4% this year? Thank you. Yes. So Cindy, for your first two questions, on the SME loans, the typical size these days would be about RMB 100,000 to RMB 150,000. The pricing would be typically 18% to 24% in terms of interest and the tenor would be 12 months. But it's fair to say that there is a high variation in terms of the different SMEs and potential customers out there. So in the future, as we do more of the business and we get into, if you will, more detailed calculations, we will have indications in the products as well. Now on your second question, with regards to the, cooperation with the smaller and medium sized banks and what products we would cooperate on. Well, we'll first start with working with a select group for deeper cooperation. And what we do see, of course, right now is a situation where for a lot of the financial institutions, the credit, the money can't leave the province. And also their operations on several levels has room for improvement. So what we would aim to do is actually to work with them and cooperate with them on a 1 on 1 basis and on a side by side basis effectively to help them develop new and more innovative products targeting their customers to help them run their operations better, especially when it comes to managing their existing customers and to look more closely at their portfolio and their customers as well. And what we would make on this would effectively be like a commission on the business. So obviously, under this model, we won't be taking on any risk. So Cindy, I think as mentioned earlier, everything that we see from the Q1 is going in a positive direction, and this continues in the 2nd quarter. And we will definitely continue to further refine our risk control models and to improve it. So we certainly hope to improve the numbers and to continue to see the asset quality continue to improve. But also taking into this and of course, we continue to grow. So overall, we want to be cautiously optimistic about the general asset quality trends. So I think what we would like to do is maintain the outlook at 3.5% to 4%. Great. Thank you. We're now closing on the end of the call. Your final question comes from the line of Yudao Li from CICC. Please ask your question. Okay. I'll translate my question. I have 2 brief questions. The first one is about our funding partners. So could you please share more information with us on how many funding partners we have in total by the end of 1Q 2021? And besides how many partners do we have under the profit sharing model? The second question is regarding our new joint operation service model. And I noticed that so I was wondering if you could help us understand what's the actual difference between the new joint operation service model and what we've been doing before. Thanks so much. Yes. So I think with regards to the first question, well, our asset quality and the attractiveness of our assets has always been high. So we've consistently had over 100 funding partners, and certainly, we continue to increase the number. It's perhaps worth noting and highlighting that of late, there's been a series of local regulations or guidelines targeting towards more, shall we say, local type banks. So hence, as a result, some of our operations and our goals have targeted the local banks in light of the type of guidance that they've received. And we've signed up over 10 regional banks recently, but we don't have the definitive exact number on that particular initiative to give you on the call right now. So that's on the first question. Now on the second question, there's actually a very, very obvious difference in terms of the cooperation and how it works. At a high level or at the customer acquisition level, the traditional model is our customers and it's our traffic and it's our customers and our traffic getting directed to the financial institution. Under the new cooperation model, it will no longer be using actually our particular customers' traffic or actually our current products. It would be working with the financial institutions themselves to develop local products and to help with their local operations and based on their local environment and conditions to develop the appropriate set of products targeting their local customers. So again, at a high level and a very key thing is, this is not our customers being diverted there. It's rather developing a capability not only to serve well the local bank customers, but also actually to help with the local customer acquisition. So we would be able to, for example, help direct their online advertising and marketing, something that we certainly have expertise in. Now ultimately, interestingly, once the product is developed and we have these revenue drivers, In terms of the revenue and the profit and the split, it may actually be very similar to our existing products. So hence, in that sense, it's similar. But again, the underlying model is very, very different. Now also, I think it's important to emphasize that, for example, we see a lot of banks, they have many depositors, they have many customers, but they don't necessarily know how to develop the right type of financial products and loan products to target or serve these depositors and customers. So that's what we aim to do, and we aim to help with a complete model. So this would involve actually a dedicated team, and in fact, dedicated teams that would live and breathe and actually work at the banks, if you will, side by side. So hence, you can see that this would actually be a very different product than what our existing products are. All right. Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.