FinVolution Group Q1 FY2021 Earnings Call

Hello, ladies and gentlemen. Thank you for participating in the First Quarter 2021 Earnings Conference Call for FinVolution 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 first quarter 2021 earnings conference call. The company results were issued via newswire services earlier and are posted online. You can download the earnings release and sign up for the company's email alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Feng Zhang, our Chief Executive Officer, and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&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 US 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company 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 US 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.

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 first quarter, while also achieving further improvement in risk metrics across the board. Notably, our total loan origination volume for the quarter reached a record high of RMB 26.8 billion, representing a year-over-year increase of 105%. Our loan origination volume for Mainland China increased 24% quarter-over-quarter to RMB 26 billion. Also, our international business is continuing its rapid growth, generating approximately RMB 760 million of loan origination volume during the quarter, up 42% from the fourth quarter of 2020. Our sequential quarterly growth in loan 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 continued to benefit from our successful transition toward higher quality borrowers. We improved our delinquencies to historical lows while achieving sequential growth. Our recent day one 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 days 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 around 90%. We further expect the vintage delinquency rate to fall to historical lows, around 2.5% in the first quarter, and the key risk metrics to remain stable for 2021. Going forward, we see continued opportunity for quality growth as we further build our strong technological capabilities and the credit risk management framework. Notably, our total number of newly acquired borrowers in the first quarter of 2021 exceeded one million 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 internal rate of return 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 their need for operational funds. In the first quarter, loan origination volume for small business owners grew rapidly to RMB 4.4 billion versus RMB 3.7 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 the total loan origination volume in 2021. Our international expansion strategy continues to be a key competitive differentiator for us as we remain optimistic and selective in penetrating Southeast Asia's emerging markets, where we have established a first-mover advantage. We currently have established operations in Indonesia, the Philippines, and Singapore. Apart from our online loan facilitation services, we have also been exploring other business concepts with different partners in the South Asian market, leveraging our expertise in online loan services and 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 pandemic-related economic conditions, our international expansion strategy will help diversify both our user base and revenue streams, thus bolstering our ability to generate 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, and product diversification, I believe FinVolution 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 Southeast 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 business strategy. We are confident in our ability to maximize our well-established position in China's consumer and micro enterprise 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 first quarter, we delivered a 45% increase in GAAP operating profit to RMB 671 million. We are affirming the successful transaction of our business model towards high quality borrowers. Our balance sheet remained strong with RMB 5.1 billion in unrestricted cash and short-term investments, empowering our strong technology and risk management capabilities. We will continue to explore new business models and tap into new opportunities, both domestically and internationally. Now, turning to the financial results for the first quarter. 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 first quarter of 2021 stabilized at around RMB 2.11 billion, primarily due to an increase in loan origination volume and partially offset by the decrease in guaranteed income, as a result of improved asset quality. Loan origination service fees increased by 103% to RMB 761 million for the first quarter of 2021 from RMB 375 million in the same period of 2020, primarily due to the increase in origination volume, which was partially offset by the decrease in the average rate of transaction fees. Post-facilitation service fees increased by 24% to RMB 226 million for the first quarter of 2021 from RMB 183 million in the same period of 2020, primarily due to the increase in outstanding loans serviced by the company and the rolling impact of the deferred transaction fees. Guarantee income was RMB 659 million for the first quarter of 2021 compared to RMB 1,150 million in the same period of 2020, as a result of improved asset quality. Net interest income decreased by 11% to RMB 280 million for the first quarter of 2021 from RMB 315 million in the same period of 2020, mainly due to the reduction in the outstanding loan balances of consolidated trusts, partially offset by the higher loan origination volume originated outside Mainland China. Other revenue increased by 121% to RMB 185 million for the first quarter of 2021 from RMB 84 million 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 RMB 671 million for the first quarter of 2021, representing an increase of 45% from RMB 464 million in the same period of 2020. Net profit was RMB 593 million for the first quarter of 2021, representing an increase of 41%, compared to RMB 420 million in the same period of 2020. We have a well-capitalized balance sheet and our leverage is conservative. If you divided the total outstanding loans of RMB 32.5 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 RMB 5.1 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 gives us significant flexibility. As China's economic environment gradually recovers from the aftermath of the COVID-19 outbreak, the company has been experiencing progressive improvements across numerous operational metrics. The company will continue to closely monitor the situation of global pandemic and remain agile in its business operations. As such, the company holds a cautiously optimistic view on its operations and anticipate a steady growth in loan origination volume in the second quarter of 2021, which is expected to be in the range of RMB 29 billion to RMB 30 billion. 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 US$131 million for buybacks and US$143 million 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. The first question comes from Thomas Chong with Jefferies. Please go ahead.

Thank you to management for addressing my question. Can you discuss unit economics and the trends we might expect in the coming quarters? Thank you.

Hi, Thomas. The unit economics for our business are quite clear. Our average internal rate of return ranges from 20% to 26%, with our funding cost at approximately 7.5% and a vintage delinquency rate of 2.5%, which annualizes to about 7%. Overall, the internal rate of return averages around 12%. When we apply a take rate of 4%, it aligns well with our market guidance from recent quarters. I will now provide more details on our development phase, which we’ll discuss in two stages. Our loan facilitation business in China has demonstrated strong performance across key metrics, with ongoing improvement in our risk metrics. In the second quarter, we anticipate loan origination volume to be between RMB 29 billion and RMB 30 billion, indicating continued healthy growth. In the first quarter, we gained over one million new customers, with more than 600,000 of these from the domestic market alone, providing a solid basis for future growth. Given the current conditions and our operational performance, we are confident in our full year loan guidance of RMB 100 billion to RMB 120 billion. For the Southeast Asian market, we continue to experience rapid growth, despite some impacts from the pandemic's resurgence. Our new customers and loan origination volume are both growing quickly. Additionally, we have expanded into the Philippines alongside our ongoing efforts in Indonesia.

Hey, was there a follow-up Mr. Chong? Okay. Continuing to the next question. The next questioner is Yiran Zhong with Credit Suisse. Please go ahead.

Hi, thank you management for taking my questions and congratulations on the strong results. I have two sets of questions. One is about loan facilitation; it seems exposure to on-balance sheet lending and lending by trust structures has been rapidly decreasing. I'm curious about the latest split between on-balance sheet and off-balance sheet origination volume. Additionally, what's your assessment of the regulatory environment for the loan facilitation business model going forward? Will it be regulated under a license regime, for example, under the personal credit reference law? Any insights you can share from funding partners or regulators would be appreciated. Secondly, regarding the overseas business, could you provide more details on the Southeast Asia expansion? What are the economics there? Any guidance on when you expect the volume to make a meaningful contribution going forward? Thank you.

Okay. On the balance sheet, the trust contribution is currently less than 10%. Our loan facilitation model mainly works with banks and consumer finance companies, which is off-balance sheet. Let's further understand the regulator's intentions. The regulators are working on building a comprehensive network framework. Over the last year, they have been establishing this framework. From our observation, the regulator is focusing on establishing a comprehensive framework while reviewing various aspects such as data protection, funding restrictions, and customer privacy. Based on our observations from March 2021 onwards, the regulatory environment appears to be much more stable, and it seems less likely that any new regulatory framework will be introduced in the future. However, modifications to the current regulations will continue. The credit scoring consultation coverage is quite broad. Our business is based on the loan facilitation model, providing comprehensive solutions across various aspects including customer acquisition, risk management, after loan management, and loan maturation, among others. For the loan facilitation model, we do not offer stand-alone credit scoring services or point scores. We refer customers to our financial institution partners, and whether a loan is approved or not depends on their independent assessment. From our view and current assessment, we believe we are not within the scope of the current credit scoring consultation paper. As the Southeast Asia business contribution is still very small relative to our overall business, we plan to share more updates with you when this part of the business grows larger in the future.

The next question comes from Henyang with 86Research. Please go ahead.

So, let me translate my questions. Thank you, management, for taking my questions, and congratulations on another great quarter. My first question is about privacy protection. Recently, some smartphone makers have updated their privacy policies, such as the new IDSA policy by Apple. Will this policy change affect our advertising effectiveness and borrower acquisition costs? Additionally, regulators have clarified some necessary personal information for online lending apps. Will this negatively impact our data collection and risk assessment model? My second question is regarding our technical service. We launched the bus service last month. Can you provide more details on how many institutions have adopted the service and how we charge them? Thank you.

It actually pertains to the same question. The regulators have raised the standards on data privacy and customer protection. Therefore, from our current results, the impact is minimal. As a technology company, we are leveraging our technological capabilities to address these issues, and compliance remains our highest priority. As you may know, compliance is a key focus for us, and if you look at many media sources, our company is not frequently mentioned by the regulators in a negative light. In relation to our bus progress, our 14 years of digitalization experience allows us to assist our financial institution partners in boosting their efficiency. Our partners share our views on the bus services, and we are currently collaborating with three of them to roll out various stages of these services. We are offering services such as post-loan management and risk-related services, with fees being determined by actual performance results. The bus model is designed for our business. During the approval process for the bus services, our aim is to gain additional time to enhance our products before introducing them to more of our institutional partners.

Thanks. Very helpful.

The next question comes from Alex Ye with UBS. Please go ahead.

I have two questions. First, are there any updates on the nationwide micro loan license? Earlier, one of your peers mentioned they might be preparing to apply for that license. Second, regarding your international business, do you have any specific guidance on the full year loan volume contribution from that segment? Also, as you grow your international business, what impact will that have on your sales and marketing expenses? Specifically, could you provide some insight into the customer acquisition cost for your international business? Thank you.

Okay. With regards to the nationwide micro-lending license programs, we are still evaluating and understanding the regulators' requirements as there has been no update from them since the previous consultation paper. We will share more details with the market once we have more information from the regulators. Although the pandemic is rebounding in Southeast Asia, we remain confident in achieving three to four times growth on a year-on-year basis in the region this year. As we have disclosed, we have acquired over 300,000 new customers in Indonesia. Our lending app, AdaKami, is very popular there. In the past six months, from October 1 to March 31, we ranked number one in terms of downloads for fintech lending apps. The cost of customer acquisition in Southeast Asia is relatively lower, but as the business environment changes, we expect the cost of acquisition to change as well. In the first quarter, the cost for acquiring a successful new borrower in Mainland China was about RMB 450, which is an improvement compared to the previous quarter. Additionally, we have formed important partnerships with leading information feed standards, which have strengthened our strategic cooperation. Our constant improvement in risk metrics has also led to a decrease in our customer acquisition costs.

Thank you. The next question comes from Eric Lu with China Renaissance. Please go ahead.

So my question is, we thought the asset quality has improved significantly. I would like to know if there have been any changes to our current client profile. Thank you.

Our customer profile has changed significantly. During the P2P era, only about 15% of our borrowers had PBOC records, but today, over 95% of our borrowers do. We want to explain how we achieved such a notable improvement in our asset quality. The reasons for this enhancement primarily stem from two main capabilities: our digitalization capabilities and our ongoing data accumulation, which allows us to enhance the effectiveness of our model. Our digitalization capabilities have been demonstrated in various situations. For instance, over the last 14 years, we have established a solid track record in customer acquisitions, risk management, and post-loan management. These skills were evident during our P2P era. Following our strategic shift toward higher-quality borrowers, we've observed several improvements in our operational metrics by leveraging our digitalization capabilities. These capabilities are also being applied to our Southeast Asia business, which is growing rapidly. Looking ahead, we believe our digitalization skills can be utilized in non-financial sectors across various scenarios. Another crucial element is our continuous data accumulation. This ongoing collection of data, combined with our digitalization capabilities, significantly enhances our outcomes by creating a more precise model and, thus, increasing our overall efficiency. Our focus on attracting higher-quality borrowers has led to an increase in new customers, which in turn has boosted our loan origination volumes. As the number of new quality borrowers on our platform grows, along with an increase in loan origination volume, we expect this to have a positive impact. We are confident that with these capabilities and the improvement of our key operational metrics, we will achieve healthy growth for the business.

Thank you.

Thank you. The next question comes from Henry Liang with Gold Dragon. Please go ahead.

Congratulations on such a strong result. FinVolution has been performing exceptionally well in the Southeast Asia market, particularly in Indonesia. It has outperformed all local competitors post-COVID, and even our peers who have a larger business in Mainland China have not achieved the same level of success in overseas markets as we have. Can you share what core advantages or competitive edges we possess that enable us to lead in the Southeast Asia market? Additionally, could you outline your plans for overseas expansion and the long-term total addressable market? Thank you.

Thanks, Henry. This is Feng. I'll try to give a brief view on your question. I think it's a really good question. Our core capability, or strength, lies in two main areas. First, after many years, we have become adept at utilizing data and technology to enhance efficiencies in business processes, particularly in our core loan tech operations. Secondly, our company is built on a strong value system that is evident in our operations. We have a robust culture that places significant emphasis on risk management. We don’t compromise on risk for short-term gains; instead, we focus on long-term perspectives. These two core strengths have helped the company navigate various challenges. Before our IPO, we experienced rapid growth, but post-IPO, we faced a difficult regulatory landscape and external challenges, leading to some tough years. Nonetheless, our internal fundamentals helped us weather that period, and our performance during both prosperous and challenging times highlights those fundamentals. Regarding your second question, we remain optimistic about the Southeast Asian market, which is approximately half the size of Mainland China. In countries like Indonesia and the Philippines, despite being early in our development and relatively small, we are growing quickly and see immense potential. We are eager to explore further market opportunities as they arise. It's also important to note that our strengths and fundamentals extend beyond just the loan facilitation model. We are continuously utilizing data and technology to enhance efficiencies, which aligns with our long-term value system and opens up many avenues for improvement. We are examining ways to apply these core capabilities to new markets and sectors, and we will keep the market informed of any significant developments, as many initiatives are currently in the incubation stage within the company. Thank you, Henry.

Just a quick follow-up, can we expect to receive a significant update on the overseas business regarding both its top line and bottom-line contributions by the end of this year and into next year?

Yeah. Possibly, yeah. I think as the business size continues to grow, some of our new businesses, particularly the international business, will show more results. And we are very careful because, for example, this is the first time we disclosed the international business. However, we decided to do so until we feel very comfortable with what we are presenting. As the business becomes a more meaningful part of our entire business, we will share more color, insights, and numbers with the team. Thank you.

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 FinVolution Investor Relations team. Good night.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.