FinVolution Group Q3 FY2023 Earnings Call

Hello, ladies and gentlemen. Thank you for participating in the Third Quarter 2023 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 is being recorded. I'll now turn the call over to your host, Jimmy Tan, Head of Investor Relations for the Company. Please go ahead.

Hello, everyone, and welcome to our third quarter 2023 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. Tiezheng Li, our Chief Executive Officer; and 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's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the Company filings with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Finally, we posted a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Tiezheng Li. Please go ahead, sir.

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Tiezheng Li, CEO of FinVolution Group. We are happy to speak with you today. During the third quarter, we steadily executed our local focus, global outlook strategy. We are strengthening our efforts to build our business throughout the Pan-Asian region. Cumulatively, we are proud to serve over 29 million borrowers in China, Indonesia, and the Philippines. As we continue to expand our presence in these countries, we have tapped more deeply into our leading results and are now successfully deploying from our regional funding partners which can support our loan facilitation operations across different countries, greatly improving our capability to serve more borrowers in our markets. We plan to leverage and replicate this success as we expand into additional countries while strengthening our presence in existing markets. China's post-COVID economic recovery continued to progress gradually during the third quarter, with macro data reflecting uneven improvement in different areas. For instance, in September, the consumer confidence index came up slightly to 87 points but is still hovering at relatively low levels. Also, according to data from the national statistical bureau, the employment rate officially peaked at 5.3% in July before trending down to 5% in September, although there has been some moderate recovery in the consumption market. The bulk of the recovery has been in children's education, medical care, domestic travel, and other offline activities. Purchase intention for big-ticket items such as property, cars, and luxury goods remains relatively weak. Meanwhile, the overall macro environment in Indonesia, our largest overseas market, remained robust as the region is in a faster stage of development. For instance, Indonesia's consumer confidence index from August to October remained high at about 125 points, a positive indicator for increasing consumer spending. Its unemployment rate in September also declined to 5.3% compared with 5.9% in the same period last year, its lowest level since the first quarter of 2020. Thus far, our tactical approach of maintaining prudent progressive growth in the China market while pursuing rapid growth in the international market has proven very effective in the current uneven macro conditions we have observed. We are waiting for China's economy to recover at a faster rate. We have been constantly investing in R&D to further streamline our processes, enhance customer experience, and achieve operational efficiency improvements. Since 2018, we have deployed around RMB2.4 billion to develop cutting-edge technologies and implement them throughout our business operations. In particular, we made notable progress with BLU, our AI-powered chatbot, which now supports operations in six different countries with five language options: Chinese, English, Tagalog, Bahasa, and Spanish. Furthermore, by integrating BLU with our human loan collection personnel for data and reminder calls, we have achieved cost savings of up to 80%, while maintaining our operational efficiency levels. BLU's effectiveness showcases our R&D progress as well as our ability to improve operational efficiency. It's a programmatic yet innovative type that can be seamlessly applied in our operations across different markets. With the beginning of AI, we continue to leverage AIGC to boost social media engagement for our overseas business, increasing our campaigns' audience targeting accuracy and achieving greater visibility on leading social media platforms. Thanks to our AIGC-driven advertisement and the inventive use of technology, our followers on Facebook surpassed the 1 million milestone. Our followers on TikTok grew to around 740,000. As always, we continue to promote financial inclusion, a mission that reflects our commitment to social responsibility and supports our business goals. Our average borrowing rate in China maintained stability sequentially, making our products and services accessible to even more borrowers. I'm pleased to report that despite all the macro uncertainties, FinVolution Group's total transaction volume for the third quarter grew to RMB51 billion. While our outstanding loan balance grew to RMB66 billion, representing a year-over-year increase of 13% and 9%, respectively. These results clearly demonstrate that our local focus, global outlook strategy is not only viable but also scalable, which is a critical factor for our future growth. On a related note, I would like to share a brief update on our recent ESG initiatives. Our dedication to sustainability and giving back to society remains at the heart of our corporate values and forms a core part of our identity. Over the last couple of years, the Company has made several charitable trips to the local area. This year, we donated 350 renewable energy streetlamps to improve infrastructure for the local villages. We also organized a unique school event for children at FinVolution kindergarten, another of our long-standing community projects in the area. Going forward, we will continue to align our ESG and business goals to maximize our positive societal impact and create value for all our stakeholders. To summarize, the third quarter of 2023 was not without challenges, but our firm and focused execution of our local focus, global outlook strategy alongside tech innovation empowered our steady progress and strengthened our foundation supporting long-term sustainable growth. We will continue to embrace inclusion, accessibility, and technology as we seek to serve borrowers throughout the Pan-Asian region with better financial services. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results.

Thank you, Li, and hello, everyone. Welcome to our Third Quarter 2023 Earnings Call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details. As Li mentioned, the domestic macro recovery has been gradual and reflects uneven improvements in certain areas. For instance, the official manufacturing purchasing managers' index, PMI, from August through October fluctuated between 49.7, 49.2, and 49.5 points according to data released by the National Bureau of Statistics on October 31, 2023. Meanwhile, total social financing data in October increased to RMB1.8 trillion, up 9% from the same period last year. Total retail consumption in October increased to RMB4.3 trillion, up 7.6% compared with the same period last year. Our stable and better-quality borrower base empowered us to maintain strong and resilient operational metrics domestically in the third quarter despite the uneven macro environment. Cumulatively, we have served around 25 million borrowers in China with the number of unique borrowers remaining stable at around 2.3 million. Additionally, our domestic transaction volume reached RMB49 billion, up 11% year-over-year and 8% sequentially. Meanwhile, our outstanding loan balance reached RMB64.6 billion as of September 30, 2023, up 8% year-over-year and 3% sequentially. All these achievements demonstrate our solid standing in the China market and highlight our unwavering commitment to serving our customers. We continue to employ prudent risk management tactics and effective fraud detection technologies, resulting in only minor fluctuations in our risk levels during the quarter. The day one delinquency rate was 5.7%, while the vintage delinquency rate is expected to be around 2.4% to 2.5% for the quarter. Going forward, we will continue to monitor the credit risk performance closely and make timely adjustments when necessary. Finally, boosted by the AI-powered chatbot Li mentioned earlier. Our loan collection team captured the loan collection recovery rate at around 89%. Furthermore, we continue to add new funding partners, bringing our cumulative number to 88 financial institutions with a strong pipeline of potential future partners in place. These operational achievements enabled us to maintain a healthy take rate of around 3.1% during the third quarter. Recognizing the critical role that small businesses play in our economy, we also upheld our commitment to small business owners during this bumpy recovery period. During the third quarter, we served around 448,000 small business owners and facilitated RMB12.3 billion of loans for them, representing an increase of 9% compared with the same period last year and 7% sequentially. Now let me move on to our international expansion efforts. As Li shared, Indonesia, our largest overseas market, enjoyed ongoing growth in its macro economy during the third quarter. Sales of motorcycles, the most popular mode of transportation in Indonesia, have also accelerated. During the first nine months of 2023 motorbike sales were up 31% compared with the same period of 2022, reaching around 4.7 million units, a positive indication of growing customer spending. Given these promising trends and the data points, we anticipate the Indonesia's domestic consumption will remain robust. We were pleased to record another quarter of significant improvement in our overseas markets across multiple operational and financial metrics. Cumulatively, we have served over 4 million borrowers in Indonesia and the Philippines and continue to rapidly attract new borrowers in these regions. The number of unique borrowers during the quarter reached another new high at 928,000, up 27% year-over-year and 18% sequentially. Furthermore, we continue to increase the population of institutional funding in Indonesia, and we strengthened our local presence and broaden our local network. For the third quarter, the percentage of loans facilitated for our local financial institutions reached 74% compared with 55% for the same period last year. As a result, international transaction volume surged by 99% year-over-year and 21% sequentially to RMB2.2 billion for the third quarter. We also set new records in outstanding loan balance at RMB1.3 billion, up 102% year-over-year and 16% sequentially, as well as revenue contribution of RMB585 million, up 67% year-over-year and representing around 18% of total revenue. Leveraging our experience of shifting to better quality borrowers in China, we also take a proactive approach to acquiring better quality borrowers in the Indonesian market. Apart from the online lending business, we are also pilot testing an offline business model with different consumption scenarios to provide more holistic service for our borrowers. In addition, we are also actively exploring the acquisition of additional licenses to better support our local operations driven by our dedication to R&D innovation as well as our successful execution of our local focus, global outlook strategy. Net revenues for the third quarter grew to RMB3.2 billion, up 8% year-over-year and a sequential increase of 4%. Sales and marketing expense increased by 13% sequentially to RMB530 million as we increased our efforts to acquire better quality borrowers through diversified channels. The number of new borrowers in the China market increased by 7% year-over-year and 12% sequentially to 406,000. Notably, the number of new borrowers in the international market increased by 27% year-over-year and 36% sequentially to 423,000. In total, we acquired around 829,000 new borrowers during the third quarter, up 16% year-over-year and 23% sequentially. Net income for the third quarter was RMB575 million, a sequential decrease of 2.6%. Our leverage ratio, which we define as risk-bearing loans divided by shareholders' equity, remained stable at 4.1x, indicating future growth potential as the overall macro economy recovers to a healthier state. Our strong balance sheet and liquidity position continues to enhance shareholders' confidence while providing us optimal flexibility to execute our strategy. In particular, our cash position remains robust with over RMB8.5 billion of cash and short-term liquidity as of the end of September 2023, representing an increase of 58% year-over-year and 4% quarter-over-quarter. We believe our current cash position is sufficient to support our business expansion and return value to our shareholders. Before I conclude, let me briefly update you on our share repurchase program. For the first nine months of the year, we have deployed around USD 66 million to repurchase our shares in the market. As of September 30, 2023, we have cumulatively returned USD 511 million to our shareholders in the form of share repurchase and dividend distribution, reflecting our strong commitment to enhancing shareholder value. In summary, our solid results for the third quarter are a testament to the effectiveness of our local focus, global outlook strategy, as well as our business model and technological advantages. We have used our time wisely during China's uneven post-COVID recovery and are poised to be at the forefront of the industry when recovery accelerates. Looking ahead, we will remain focused on developing and implementing cutting-edge technology while expanding our healthy customer base, driving growth and creating greater value by improving financial services.

First question will be from Alex Ye of UBS.

So I'm asking about the security outlook for both domestic and international markets. So for the China's market, we have seen your payment delinquency tick up a bit in Q3. Could you share more color on the drivers and the outlook for the coming one to two quarters? Also, a few more questions for your Indonesia market. Any color on the security trend and outlook?

I'm asking about the security outlook for both domestic and international markets. For China's market, we have noticed a slight increase in payment delinquency in Q3. Could you provide more details on the drivers behind this and your outlook for the next one to two quarters? Additionally, I have a few more questions regarding the security trends and outlook for your Indonesia market.

Hello, Alex. This is Jimmy. Let me translate for Alexis. The overall economy in China, such as the PMI and total social financing are recovering very slowly. And being affected by these factors, our risk metrics have had some fluctuations during the third quarter. For example, during the third quarter, day one delinquency was around 5.7%, and day one to 30 days loan collection recovery rate was around 89%, while 90-day particular delinquency was around 1.67%. We have actually done several things such as increasing the accuracy and updating the model of our pre-loan models, utilizing accurate data mining and analyzing user behaviors to enhance the credit limit accuracy, and we have also assessed the user repayment willingness and probability of default rates. For post-loan models, we have deployed different tools such as WeChat, IVR, and automated loan collection robots to design a combination of model strategies. Such combined strategies have proven to be effective with a reduction in delinquency rate of up to 0.5% in absolute terms. For borrowers who may possibly miss payments due to carelessness, we will also remind them in advance. Leveraging our collection scores, we segment borrowers into different categories based on repayment behavior, remaining loan balances, and changes in borrowers' debt levels. Using all these strategies, our repayment rate actually increased by around 2%. The slow recovery in the economy and weak consumer confidence continues to be an important metric for us. Based on all these strategies we have deployed, our day one metric in the fourth quarter has also remained at a similar level with the third quarter.

We segment borrowers into different categories based on repayment behavior, remaining loan balances, and changes in borrowers' debt levels. Using all these strategies, our repayment rate actually increased by around 2%. The slow recovery in the economy and weak consumer confidence continues to be an important metric for us. Based on all these strategies we have deployed, our day one metric in the fourth quarter has also remained at a similar level with the third quarter.

Hello, Alex, let me do the translation for Alexis. The overall macro economy in Indonesia is much more robust compared to the China market in terms of employment rate, consumer confidence index, etc. The risk metrics for our Indonesia market has been stable over the last year. In the third quarter, I believe you have also noticed that we have acquired many new borrowers to maintain rapid growth, which grants us more flexibility for our risk metrics. Additionally, we also segment our borrowers to achieve better and more accurate risk profiling. Also, the U.S. interest rate increase is expected to end soon, which will be very beneficial for our international business.

The risk metrics for our Indonesia market has been stable over the last year. In the third quarter, we have acquired many new borrowers to maintain rapid growth, granting us more flexibility for our risk metrics. Additionally, we segment our borrowers to achieve better and more accurate risk profiling. The expected end of the U.S. interest rate increase will be very beneficial for our international business.

Hello, Alex. Let me do the translation for the team. As Alexis has mentioned earlier, China's economy is recovering slowly and thus experienced fluctuations in the risk metrics. In Q3, there's a sort of small mini credit cycle ongoing. Looking forward to 2024, we believe the credit risk will improve. For FinVolution, our asset quality has been better than most, which we believe will support us well when the economy recovers.

Next question will be from Yada Li of CICC.

Hello management, this is Yada with CICC. My first question is about loan demand. Are we seeing any recovery in user demand during the fourth quarter of 2023? Looking ahead to the end of next year, how do you perceive the overall growth trend? What factors could cause us to either speed up or slow down our loan growth? My second question pertains to international business. What will be the volume, revenue, and profit contributions from the overseas branches this year and next? Will Indonesia continue to experience high growth? How should we assess the profitability and prospects of other branches, like those in the Philippines and Vietnam? That's all.

Looking ahead to the end of next year, how do you perceive the overall growth trend? What factors might cause us to speed up or slow down our loan growth? Additionally, regarding international business, what will be the volume, revenue, and profit contributions from our overseas branches this year and next? Will Indonesia continue its strong growth trend? Furthermore, how should we assess the profitability and outlook of our other branches, such as those in the Philippines and Vietnam? That's all.

Hello, Yada. Let me translate. From an internal perspective, we believe that demand is steady. We are continuing to invest in acquiring new borrowers and actively working to reactivate inactive repeat borrowers. We can share a few data points: from internal demand, the application rate for repeat borrowers has maintained a steady growth of around 3%, while the application rate for new borrowers showed an increase of between 4% to 7%. We believe consumers still recognize our brand and are becoming more active. However, given the current weaknesses in the macro environment, we need to exercise patience regarding the overall recovery. Our priority remains focused on risk, and we plan to balance risk metrics with consumer loan demand to achieve high-quality growth.

The application rate for repeat borrowers has consistently grown by approximately 3%, while new borrowers have seen an increase of around 4% to 7%. We believe that consumers continue to identify with our brand and are becoming more engaged. However, due to the existing challenges in the macro environment, we must be patient about the overall recovery. Our main focus is on risk management, and we aim to align risk metrics with consumer loan demand to foster high-quality growth.

Yes, let me do the translation for the second question. The macro environment in Indonesia and the Philippines is significantly more robust than in the Chinese market. All these positive macro environment factors support our rapid development in these countries. Our transaction volume during the third quarter was about CNY 2.21 billion, while our outstanding loan balance was around CNY 1.29 billion. The outstanding balance was up 102% year-over-year, and the transaction volume was up 99% year-over-year. Moreover, the number of new borrowers reached a record high of 423,000, which is an increase of 27% year-over-year and 36% quarter-over-quarter. This marks the first time that the number of international new borrowers has exceeded that of new borrowers in China. We believe there is a huge market potential. In the Indonesian market, there are over 100 P2P players, and we are currently ranked number three in terms of outstanding loan balance with a market share of around 6%. Briefly touching on the Philippines market, we believe it has strong growth potential, with transaction volume expected to grow around threefold this year. In Indonesia, the household debt ratio is significantly lower than that of developed countries, showcasing ample potential. Regarding profitability, we are in a stage of rapid development with healthy loan-to-value ratios (LTV). Our main priority now is rapid growth and increasing market share, as profitability is influenced by factors such as our ongoing investment in customer acquisition and the accounting time differences. We believe that as long as we maintain healthy development, profits will naturally result from our operations.

Next question will be from Cindy Wang of China Renaissance.

I have two questions. The first is about Indonesia. With one of your competitors facing restrictions on buy now pay later services in Indonesia, do you see an opportunity to increase your market share? Also, could you share any insights into the mid to long-term strategy for your business in Indonesia and the outlook for new loan facilitation? My second question is about marketing expenses. We've noticed a rise in marketing expenses recently. What is the reason for this increase? Can you also provide a breakdown of the customer acquisition costs for domestic and international markets and your expectations for these costs moving forward?

Is there an opportunity to further gain market share from this? Additionally, do you have any insights into the mid to long-term strategy for the Indonesia business and the new loan facilitation outlook? The second question regards marketing expenses. We've seen a sequential uptick in marketing expenses. What is the reasoning behind this? Can you also break down the domestic and international customer acquisition costs and share your expectations for customer acquisition costs going forward?

Hello, Cindy, let me translate. Indonesia presents huge opportunities for growth on multiple fronts. As regulations tighten, weaker players will be affected, and we believe the market will start to consolidate around better quality players. From the Company perspective, the entry barrier will also increase with stricter regulations. For example, the registered capital for new players has increased to IDR 25 billion from just IDR 1 billion. Currently, we are expanding our efforts to include offline customer acquisitions, diversified products, installment loans, electronics, and buy now pay later, coupled with various scenarios such as mobile phones, electric bikes, home electronics, and furniture to reach borrowers. Indonesia has a significant young population that tends to change mobile phones frequently, so we have initiated operations with Oppo, a well-known mobile phone manufacturer, to provide such services.

We are expanding our efforts to include offline customer acquisitions, diversified products, installment loans, electronics, and buy now pay later options, focusing on various scenarios such as mobile phones, electric bikes, home electronics, and furniture to reach borrowers. Indonesia has a significant young population that frequently changes mobile phones, so we have started operations with Oppo, a well-known mobile phone manufacturer, to provide these services.

For sales and marketing costs, about 70% of them are for China, while about 20% to 30% is for the international markets. From a cost per acquisition (CPS) perspective in Q3, the overall CPS optimized by about 6%, while the China market optimized about 7%. The international CPS remained stable. Going forward, depending on the macro environment and the Company's strategies, we believe our sales and marketing costs will remain stable. We anticipate that our strategies of upgrading the models on customer acquisition will lead to further optimization of these costs.

There are no further questions. We'll conclude our question-and-answer session now and turn the call back over to management for closing remarks. Thank you.

Thank you all for joining the call. If you have any further questions, please reach out to the FinVolution Investor Relations team. Thank you all.

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