FinVolution Group Q3 FY2021 Earnings Call

Hello, ladies and gentlemen. Thank you for participating in the Third Quarter 2021 Earnings Conference Call for FinVolution Group. 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 your host Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead.

Thank you, Andrew. Hello, everyone, and welcome to our third quarter 2021 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company'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 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 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. Additionally, we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Thanks, Jimmy. Hello everyone and thank you for joining us today. I hope you and your families remain safe and healthy in the new norm COVID-19 environment. Thanks to our advanced technologies, industry-leading digital capabilities, and strong corporate strategy execution, we continue to expand our business with robust momentum across each of our segments, both domestically and internationally. Given our stronger than expected results, greater confidence in business trends, and successful strategy execution, we have raised our total transaction volume outlook for 2021. We now expect transaction volume for the year to reach between RMB130 billion and RMB135 billion, representing a year-over-year increase of 103% to 111%, above our prior guidance of RMB100 billion to RMB120 billion. Let me now outline some of our third quarter highlights. Total transaction volume maintained its strong growth trajectory reaching a new record high of RMB38.1 billion, representing an increase of 120% year-over-year and 14% sequentially. Notably, our total outstanding loan balance expanded to RMB45 billion in the quarter, representing an increase of 101% compared with the same period last year. This growth was primarily driven by a new fast-growing and a higher-quality customer base. We gained over 1.18 million new individual customers in Q3 making the third consecutive quarter during which we have exceeded 1 million new borrowers globally. Our domestic business demonstrated progressive growth on the clear regulatory guidance. Looking at our transaction volume composition, China accounted for RMB37.1 billion, up 118% year-over-year and 14% sequentially. We are also pleased to share that in October, as we continued to acquire better quality borrowers, our percentage of loans facilitated at or below an internal rate of return of 24% further increased to 80% compared to just 29% in Q2, while our average IRR borrowing cost further reduced to 24.3% compared with 26.2% in Q2, indicating a higher compliance level and reflects our commitment towards greater financial inclusion for society. Our take rate for the third quarter remained stable at 4.2%, and we are confident that the cap rate's future impacts on our financials will be minimal. Our high-quality borrower base is expanding rapidly with 827,000 new customers acquired during the quarter. Our diversified borrower acquisition strategy is working efficiently and we are well positioned to leverage this strategy for further business expansion. We have established partnerships with multiple leading traffic platforms and expect to further diversify our online acquisition channels. Our offline customer acquisition team also expanded to over 700 employees in 20 different cities covering around 80% of China's provinces. We expect our offline team to reach around 1,000 employees by the end of this year. As we refined our risk management systems and enhanced our asset quality, our 90-day plus delinquency rate remained low at 1.04%. And vintage delinquency for the third quarter is expected to decrease to below 2.3%. Moving to our operations for small business owners, during the quarter transaction volume for small business owners grew rapidly to RMB7.9 billion, accounting for 21% of total transaction volume for the period. The total number of small business owners we served grew to 488,000, an increase of 20% from the previous quarter. With huge market potential and a more supportive regulatory environment, we believe small business owners present a very promising opportunity for our long-term growth. Going forward, we expect transaction volume for small business owners alone will comprise approximately 20% of total transaction volume for the full year. With respect to our global expansion, we are thrilled to explore new product offerings and have made impressive strides in strengthening our international partnerships. For example, we entered into a strategic cooperation with PT Bank Jago in Indonesia, which increases our local loan facilitation capabilities and broadens our presence across different market segments in the country, including retail, mass market, and others, opening up new potential areas for cooperation. In addition to our facilitation business, we teamed up with local e-commerce and e-wallet partners, such as JD Indonesia and DANA to launch operations in the Buy-Now-Pay-Later sector. Our customers’ and partners’ initial feedback has been overwhelmingly positive, and we are confident that we can achieve greater success in this area. Along with our venture into the BNPL sector, we are also shifting towards better quality customers to achieve high quality growth. With this objective in mind, we have been increasing our investment in areas such as technologies, talent development, and customer acquisition for our global expansion. We have also taken the initiatives to groom local talents for management duties reflecting our long-term commitment and confidence in this business. Despite the recent resurgence of COVID-19 cases in Southeast Asia, we were still able to generate over RMB1.05 billion in transaction volume, up 233% year-over-year and 12% sequentially. Concurrently, our outstanding loan balance for the quarter was RMB480 million, up 269% year-over-year and 17% sequentially. Going forward, we will continue to leverage our technological capabilities to strengthen our foothold in countries where we have established our presence while exploring potential cooperation with local financial institutions, e-commerce platforms, and other players. Using our multi-level approach, we believe we can acquire better quality customers and further diversify our business models, making financial services more accessible and inclusive for borrowers from around the world. The global financial technology industry is evolving rapidly. And over the past several years, we have successfully demonstrated our capabilities and achieved tremendous growth in this dynamic industry. We have advanced multiple strategic initiatives, grown our customer base while improving the quality of our customers. Looking ahead, we will continue to pursue premium quality growth in China while capturing massive growth opportunities in international markets. Last but not least, I would like to highlight some of our successful corporate social responsibility initiatives. Since 2016, we have performed our duty diligently as a responsible corporate citizen as we supported various social welfare organizations, donated school supplies to children, built kindergartens in rural mountain areas, and donated cumulatively over RMB18 million to regions in need. Also together with our funding partners, we have provided low-interest loans for small business owners, increasing access to quality financial services for the underserved segment of business society. To build on our effort to help small business owners as they recover from the pandemic, FinVolution will provide over RMB100 million of interest-free loans for small business owners. We are proud to support the backbone of China's economy and do our part for society during this challenging time. 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. We are pleased that FinVolution delivered respectable financial and operational results for the third quarter of 2021. As a result of our continued efforts to transform our business and the technology to meet the needs of the credit service industry, our net revenues grew to about RMB2.5 billion, up 6% quarter-over-quarter. Our profitability also continues to improve during this quarter, and our leverage ratio across our business is relatively low at 3.9 times. While our balance sheet remains solid with RMB5.1 billion in unrestricted cash and short-term investments. In September, we successfully issued our first asset-backed security on China's Shenzhen Stock Exchange, marking an important milestone in our transition towards better quality borrowers. Funding on our platform continues to be ample and stable. We have cumulatively cooperated with around 60 licensed financial institutions and will constantly maintain a strong and robust pipeline of potential partners. We expect future improvements in funding efficiency as we continue to diversify our funding partners. These results are also a testament to our effective business strategy and the skill for execution. We are confident that we will gain momentum as we continue to accelerate our overseas expansion, strengthen our services for small business owners, and increase investment in technology advances. We will also continue to invest in our core capabilities and infrastructure, big data insights, AI capabilities, and our people to better serve our customers, partners, and the communities around the world. Now turning to the financial results for the third 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 increased by 41% to RMB2.5 billion in the third quarter of 2021 from RMB1.8 billion in the same period of 2020, primarily due to an increase in loan facilitation service fees and post-loan facilitation service fees. Loan facilitation service fees increased by 100% and 21% to RMB1.1 billion in the third quarter of 2021 from RMB486 million in the same period of 2020, primarily due to increasing transaction volume. Post-facilitation service fees increased by 124% to RMB361 million in the third quarter of 2021 from RMB61 million in the same period of 2020, primarily due to the increase in outstanding loan service by the company and the low impact of deferred transaction fees. Guarantee income was RMB645 million in the third quarter of 2021 compared to RMB747 million in the same period of 2020, as a result of improved asset quality. Net interest income increased by 28% to RMB333 million in the third quarter of 2021, from RMB261 million in the same period of 2020, mainly due to increasing transaction volume in the international markets. As the revenue decreased by 19% to RMB112 million in the third quarter of 2021 from RMB138 million in the same period of 2020, primarily due to the decrease in customer referral fees for third-party platforms. Non-GAAP adjusted operating income, which excludes share-based compensation expenses before tax, was RMB751 million for the third quarter of 2021, representing an increase of 8% from RMB698 million in the same period of 2020. Non-profit was RMB632 million in the third quarter of 2021, representing an increase of 6% compared to RMB597 million in the same period of 2020. With the recent resurgence of COVID-19 in China and other regions around the world, the company will continue to closely monitor the pandemic situation and remain vigilant in its business operations. As much as the company holds our culture's view on operations, we anticipate transaction volume guidance for the full year 2021 to be between RMB130 billion and RMB135 billion, representing a year-over-year increase of 103% to 111%, above our prior guidance of RMB100 billion to RMB120 billion. Going forward, we are confident to maintain healthy growth in 2022 and resume robust growth for the year ahead. That concludes 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 Eric Lu with China Renaissance. Please go ahead.

Good evening, management. Thanks for giving me this opportunity to ask questions and congrats on the solid results in the third quarter. So, my question is about the outlook for 2022. Can you please give us some color about 2022 in terms of the loan pricing target, for example, the target IRR by the end of June 2022, also about the loan origination plan and development plan in the overseas market? Thanks.

Specific numbers for 2022 are still preliminary at this point. We will provide guidance for 2022 later. We also plan to share our thoughts with the market. We believe the macro environment this year has been quite favorable, while next year is expected to experience some volatility and is unlikely to surpass this year's performance. Regulatory directions have been somewhat clarified, but we still need to wait and execute the orders on the ground. Platform companies will face a heavier workload when carrying out these orders. Overall, we will adopt a more cautious approach in 2022. We have achieved strong results this year. In 2020, we successfully transitioned to a P2P model and focused on quality goals, which led to our transaction volume growing over 100% year-on-year. Our key operational metrics have significantly improved. For instance, our 90-day plus delinquency rates dropped around 70% to 1.04% this quarter, compared to 3.4% in the same period last year. Additionally, our funding costs decreased by 7% to 7.6% in this quarter from 8.2% last year. As a leading technology platform, we are confident in maintaining our outstanding operational metrics and achieving stronger growth than our competitors. Our goal is to ensure long-term sustainable development. Our average pricing in the third quarter was 25.3%, and in October, our borrowing costs further fell to 24.3%. For next year, we anticipate our borrowing costs will be below 23%. We are making progress in reducing borrowing risk to 24%, ahead of our peers, and we are well prepared. We have essentially achieved this goal regarding the 24%. Thank you.

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

Thank you, management, for answering my questions. Congratulations on your impressive third quarter results. I have two inquiries. First, regarding the funding source and cost, what is the current status of ABS self-registration? Additionally, how should we project the funding cost as a portion of ABS funding to increase? Second, I would like to know more about the international business, specifically updates on the FinVolution business and the overall growth outlook for international operations moving forward. Thank you.

As of late September, we have issued our first asset-backed security totaling RMB200 million with a coupon interest rate of 5.5%. This marks a significant milestone for the company. Our asset-backed security shelf registration is currently active, and it is a top priority for us in 2022. We believe we are progressing well, and the process has been smooth. Once the shelf registration is completed, asset-backed securities will become a vital part of our funding sources. Let me share some market insights. The countries where we already have a presence present substantial opportunities. For instance, Indonesia, the Philippines, and Vietnam together have a population of approximately 500 million, surpassing that of the U.S. and being significant compared to China. The loan to GDP ratio in these countries is about 8.3%, with a low credit card penetration rate of around 3% to 4%. In contrast, China has a loan to GDP ratio of about 14.8% and a credit card penetration rate of around 21%. The U.S. figures are even higher, with a loan to GDP ratio of about 20% and a credit card penetration rate of 66%. Our approach differs from that of smaller platforms. We aim for a quick return in the country and state, focusing on long-term sustainable development. We believe that developing countries will gradually reduce their interest rate caps over time. We are already in the process of moving toward higher quality borrowers. Before launching operations in a new country, we prioritize compliance by obtaining the necessary licenses and forming the right partnerships. Operationally, we plan to enter markets with simpler products and eventually transition to higher quality offerings, similar to our strategy in China. Our successful business model in China can be adapted in these new markets. For example, our CEO, Mr. Zhang, mentioned that we have initiated a buy now, pay later program in Indonesia and are collaborating with partners like DANA and JD Indonesia. We will provide more updates on our results in upcoming quarters. Furthermore, we are exploring business models in partnership with banks and other entities. For instance, we have started a loan facilitation model with Bank Jago in Indonesia and have secured an additional USD 30 million in funding for our loan facilitation business there. We are confident in our international business and have increased our investment in this area. We have established an international team with over 900 employees dedicated to operations and marketing. Notably, 86% of these employees are locals, and we plan to continue investing in our international business going forward.

May I ask a follow-up question about the shareholder return plan? Do we have a detailed policy regarding future dividend payouts? Any comments would be appreciated. Thank you.

We have been distributing annual dividends over the last three years, and we are now actively exploring an annual dividend policy that we will share with the market during our next earnings quarter. Since 2018, we have cumulatively distributed around RMB143 million in dividends.

Very helpful. Thank you.

Thank you, Hanyang.

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

Hi, management. Thanks for taking my question. I have two. First one is on take rates. You have mentioned that the take rate has remained stable in Q3. I am wondering how you managed to achieve that even though your APR has been decreasing over the quarter? Could you also share with us some color on how the take rate for your new loans priced under 24% versus the portfolio? This would give us some insight into your forward-looking trend. Given you're already 80% of the new loans priced under 24% as of November, when should we expect your take rate to stabilize going forward? That's on first. And secondly, some of your peers have been discussing their collaboration regarding data transfer with the banks after the credit regulation was rolled out. I am also wondering if you could share with us some details of the current progress from your side? Thank you.

Okay. In the third quarter, our average pricing was approximately 25.3% with a take rate of 4.2%. In October, our average pricing decreased to 24.3%, which is very close to 24%, and our take rate was around 4%. Looking ahead to next year, we anticipate our average pricing will be about 23%, and we expect our take rate to be around 3.6%. This projection assumes there will be no improvement in funding costs or our credit risk performance. However, we are optimistic about potential improvements in these two areas. We have observed that borrowers priced at or below 24% exhibit better credit performance. For instance, the day one delinquency ratio for this group was 4.6%, compared to 5.6% for the overall segment. We have actively pursued reductions in our pricing, but it is important to note that our total transaction volume for loan origination has remained unaffected. In fact, in October, our loan origination volume reached RMB12.5 billion, marking another record high for us. The direct linkage between financial institutions is a top priority for us. We have been in constant communication with our peers. At the moment, we believe the work progress for most platforms regarding direct linkage between financial institutions and platforms is at about the same pace. The regulator has given a clear direction, but some degree of complexity remains in the ground level execution, which needs to be further addressed. The regulator has given us sufficient grace period until the end of June 2023 to implement the changes. We believe the final proposal from the different platforms will largely be similar. We have two different proposals: first, we will proactively cooperate with credit rating agencies to determine the plan; second, we will explore the possibilities of using our financial licenses to conduct our business. For example, we have eight micro-lending companies in our portfolio, and we will also explore the possibility of setting up new co-lending companies.

That's all from me. Thank you.

Thank you, Alex.

The next question comes from Thomas Chong with Jefferies. Please go ahead.

Thanks to management for taking my questions. I have two questions. First, how do macro headwinds and the property sector outlook affect our business trends? My second question is that, how do data security and privacy laws affect our business? Thank you.

Okay. As we mentioned earlier, we will take a cautious approach. We have observed some volatility recently, and we will implement control measures such as managing the approval rate. We will provide further guidance later on, and overall, we remain confident in achieving stronger operational metrics than our peers. From a data perspective, the company places a high priority on user data privacy protection and has set up a dedicated cross-departmental compliance team to assess and design safety measures for the entire lifecycle of user data, including collection, transmission, processing, storage, and destruction. Our internal R&D team has created a management platform to enhance database access control. We have also implemented a system to detect unauthorized access and prevent it. The company collaborates with various security agencies to enforce mandatory policies with each update and provide compliance protection for data. Thank you. Thank you.

Thank you for joining our third quarter earnings conference call. If you have any further questions, please feel free to reach out to our IR team. Have a nice day. Thank you.

This concludes this conference call. You may now disconnect your lines. Thank you.