Earnings Call Transcript - FINV Q4 2022

Operator, Operator

Hello, everyone, thank you for joining the Fourth Quarter and Full Year 2022 Earnings Conference Call for FinVolution Group. I will now hand the call over to Mr. Jimmy Tan, Head of Investor Relations for the company. Thank you, Jimmy, please proceed.

Jimmy Tan, Head of Investor Relations

Hello, everyone, and welcome to our fourth quarter and full year 2022 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 for the company e-mail alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Tiezheng Li, 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 view 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. 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. Tiezheng Li. Please go ahead, sir.

Tiezheng Li, CEO

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. I'm Tiezheng Li, Co-Founder of the company and it's a pleasure to speak with all of you today. I'm deeply honored to take on the role of Chief Executive Officer and excited to explore the great opportunities and the prospects ahead for FinVolution. We are happy to speak with you today following the conclusion of another turbulent year on a strong note. 2022 was a complicated year given the complex macro environment. The situation in the domestic market has been challenging with the pandemic resurgence throughout the year, leading to varying degrees of lockdown across multiple cities. The Shanghai lockdown was particularly difficult for us as most of our core teams are based here. However, despite all these challenges, we continue to build on our priority technologies in industry-leading digital capabilities, delivering resilient growth each quarter and ultimately producing another set of record-breaking operational and financial results to close out the year. We have invested wisely in the technologies throughout the year and are pleased to share that as of December 2022. We have successfully registered 212 software copyrights and filed 162 patents in fintech-related areas. For the full year 2022, we achieved our total transaction volume target with RMB 175.4 billion in total transactions, representing a year-over-year increase of 28%. Our total transaction volume in the fourth quarter reached RMB 48.6 billion, representing a year-over-year increase of 25% and a sequential increase of 7%. Notably, our full year domestic loan volume grew to RMB 171 billion, a year-over-year increase of 28%, and the fourth quarter volume rose to RMB 47 billion, a year-over-year increase of 24% and a sequential increase of 6%. Thanks to our effective local focus, global outlook strategy, international loan volume for the full year also climbed to RMB 4.3 billion, representing a year-over-year increase of 16% where loan volume for the fourth quarter reached RMB 1.4 billion, representing an increase of 41% year-over-year. Concurrently, our total outstanding loan balance stands at RMB 64.6 billion, a year-over-year increase of 28%. Our outstanding loan finance in China totaled RMB 63.8 billion, an increase of 28% year-over-year. In the international markets, this number has soared to RMB 0.8 billion, representing a year-over-year increase of 167%. Solid management experience as well as excellent execution throughout the year helped us to overcome the year's challenging period, leveraging our cutting-edge technologies such as RTA for new borrower acquisition, our Octopus system for advertisement targeting high-quality borrowers, our Magic Mirror for credit risk assessment, and our Ming Mirror for fraud detection. We delivered robust operational and financial results, fostered by our prudent approach to risk management and our advanced credit risk assessment model. Our vintage delinquency rates remained stable and healthy between 2.3% to 2.4% throughout 2022. In 2023, as China reopens, we expect further improvements in these metrics. We also maintained a strong loan collection recovery rate of approximately 90% in the fourth quarter, even in some turbulence surrounding the easing of the Zero COVID policy in December 2022. With our ongoing efforts to acquire better quality borrowers, our proportion of category A and B borrowers in the domestic market further increased to 77% of our total borrowers in the fourth quarter from 63% in the same period last year. Coupled with a larger proportion of better quality borrowers, we have also completely paid our price transition. Our average borrowing rate was 23% in the fourth quarter, reaffirming our commitment to financial inclusion while bolstering our compliance level and alignment with regulatory directives. Looking ahead, we expect borrowing rates to be in the range of 22% to 23% in 2023 due to the increase in the proportion of category A and B borrowers. Notably, the transition to better quality borrowers has also helped us to reduce our funding costs, which dipped below 7% in the fourth quarter of 2022 compared with 7.8% in the same period last year. We have cumulatively partnered with 75 financial institutions and our pipeline of potential partners remains robust. Looking ahead, we are confident we can achieve progressive improvements in our funding costs as our proportion of category A and B borrowers continues to rise. Moving on to our second growth driver, our international expansion. We are thrilled to report that during the fourth quarter, improvement across multiple operational fronts has led to a revenue contribution of RMB 395 million from this segment, representing a 13% contribution to total revenue as well as an increase of 122% from the same period last year and a sequential increase of 13% from the previous quarter. For the full year 2022, revenue from the international segment was RMB 1.15 billion or 10.3% of total revenue, a remarkable accomplishment given that the international contribution to total revenue just reached a double-digit level for the first time in the third quarter. Indonesia continued to be the major international market in 2022; although pandemic-related rules and restrictions have relaxed in many countries, we remain cautious and will adjust our strategy according to local circumstances. Since 2021, we have been targeting better quality borrowers with attractive interest rates in Indonesia, and our efforts have been recognized by well-known local financial institutions such as Bank Jago, Bank Permata, and OCBC NISP, among others. Growing fruitful collaboration with these local partners has led to a rapid increase in our proportion of loans funded by local banks to 63% in the fourth quarter of 2022 compared to 48% in the previous quarter and merely 10% in the same period last year. Our success in the Indonesian market is inspiring and has strengthened our confidence as we expand into additional countries. For example, our outstanding loan financing in the Philippines during the fourth quarter grew over 110% year-over-year. Going forward, we plan to accelerate our pace of penetration in Indonesia and the Philippines, while evaluating other potential opportunities in the region. Based on our current assessment, we believe revenue contributions from the international markets will continue to climb in 2023, rising to between 15% to 20% of total revenue, further diversifying our revenue sales. Last but not least, I'd like to briefly update you on our ESG performance. We published our fourth annual ESG report in 2022, providing a snapshot of our forward-looking thinking efforts and initiatives aimed at driving sustainability and enhancing value creation for our stakeholders. We also joined the United Nations Global Compact program, a voluntary initiative to implement universal sustainability practices, demonstrating our corporate value and long-standing dedication to fulfilling our social responsibilities. Furthermore, we were proud to receive a low-risk ESG rating from Sustainalytics for the second consecutive year, a powerful testament to our vision for the future of ESG as well as our current accessibility policies and practices. Going forward, we will strive to promote all aspects of ESG in our operations, including corporate governance and behavior, data privacy and security, human capital development, environmental protection, and corporate social responsibility. To ensure alignment with international best practices and enhance our holistic approach to ESG, we plan to expand our cooperation with additional independent ESG rating platforms in 2023. In summary, our outstanding overall performance in 2022 underscores our strength and stability as well as our team's ability to overcome challenges. We have built a firm foundation that will empower us to drive long-term sustainable quality growth as we forge ahead in 2023. We will continue to embrace our local focus and global outlook strategy, building on our domestic strength and success with an emphasis on serving better quality borrowers while evaluating more countries and regions to advance our global expansion. Meanwhile, we will remain dedicated to expanding our healthy customer base, optimizing our product mix, and leveraging our technological capabilities to further refine our risk assessment and management framework. With these advantages, we believe that we are well situated to capitalize on the massive opportunities that lie ahead and create greater value for our customers, shareholders, and all of our stakeholders. Next, I would like to say a few words about the management transition we announced today. Zhang is stepping down as our CEO to pursue other interests after 8 years with the company. On behalf of the Board, I would like to take this opportunity to express my sincerest gratitude to Zhang Feng for his outstanding contributions to the company throughout the year. Concurrently, the Board has selected Mr. Yuxiang Wang to serve as the company's Chief Operating Officer while retaining his current role as Chief Technology Officer, a role he has held since 2019. From June 2015 to March 2023, Mr. Wang also served as the Chief Product Officer. Together with the rest of the Board and the team, Mr. Wang and I look forward to propelling the company to even greater heights.

Jiayuan Xu, CFO

Thank you, Tiezheng, and hello, everyone. Welcome to our fourth quarter and full year 2022 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 Tiezheng mentioned, we are heartened by the strong financial results we achieved in 2022 despite the unique challenges we encountered. Even more encouragingly, our second growth driver, the International segment, continued to gain progressive momentum and contribute over 10% of our total revenue in 2022. Notably, net revenues in the fourth quarter reached around RMB 3 billion, up 25% year-over-year, with full year net revenues exceeding the RMB 10 billion mark for the first time to reach RMB 11 billion, up 17% year-over-year. Thanks to our ongoing investment in research and development, skillful deployment of our technological capabilities across the business, and the robust execution of our overall strategy. We also delivered a healthy non-GAAP operating profit of RMB 638 million in the fourth quarter and maintained a solid balance sheet with RMB 12 billion in total shareholders' equity. We are very comfortable with our balance sheet and liquidity position. In particular, our cash position remains strong with over RMB 7 billion of cash and short-term liquidity as of the end of December 2022, an increase of 26% year-over-year. Our leverage ratio, which we define as risk-bearing loan balance divided by the shareholders' equity, remained stable at 4.5x, indicating future growth potential. During these times of uncertainty, our strong capital and liquidity position, coupled with our low leverage ratio, is an important source of confidence for all our shareholders, including our employees, institutional partners, and suppliers. We also continued to return value to our shareholders through share buybacks throughout the year. In the full year 2022, we deployed around USD 182 million for our share repurchase programs. Our Board has also declared a dividend for our shareholders of USD 0.215 per ADS, with the payout ratio increasing to 18.5% of net income after tax for fiscal year 2022. This is our fifth consecutive annual dividend declaration, which reaffirms our confidence in our core capabilities, business growth, and long-term market potential. The historical trend of the company's average dividend payout ratio for fiscal years 2018 to 2021 was about 15% of the company's net income after tax in the same period. Between 2018 and 2022, we cumulatively deployed around USD 263 million for dividend distributions. In total, we have returned USD 445 million to our shareholders through our share repurchase programs and the dividend policy. Last but not least, I would like to thank all our employees and partners for their tireless efforts in keeping our company strong throughout the COVID outbreak of 2022. Our culture is stronger than ever, and we will continue to innovate as we broadly grow our business both domestically and internationally. Before I conclude my remarks, let me provide some additional color on our business outlook for 2023. Although we view the reversal of the Zero COVID policy in China as a positive driver for 2023, we still plan to adopt an optimistic yet prudent approach for the first half of the year in the domestic market while pursuing a more aggressive strategy internationally. The company will continue to closely monitor the situation and reassess our strategy accordingly. Despite the challenging macro environment, our business continues to grow and gain momentum as we focus on our efforts on strengthening our international initiatives, preparing for technological innovation, and the constant acquisition of higher-quality borrowers. As a result, we expect our transaction volume in the China market for the full year 2023 to be in the range of RMB 189 billion to RMB 205 billion, representing an increase of around 10% to 20% year-over-year. We also expect our transaction volume in the international market for the full year 2023 to be around RMB 6.4 billion, representing an increase of around 15%. We are excited about the progress we have made in 2022 and look forward to continued success in 2023. With that, I will conclude my prepared remarks. We will now open the call to the questions.

Operator, Operator

Thank you. Your first question comes from Alex Ye from UBS.

Alex Ye, Analyst

So my first question is on your consumer credit demand trend so far in Q1. So how is the underlying demand you have been observing? And how is the loan volume run rate you are doing in Q1 versus, say, last quarter? Secondly, on the asset quality trend, could you give us an update about the early security indicators in recent months, February and March? Or how does it compare to your historical level?

Jimmy Tan, Head of Investor Relations

Okay, Alex, let me do the translation for Mr. Xu. The first question is actually related to user demand. At the end of last year, the macro environment has changed a lot due to the reopening, and before the Chinese New Year, we have seen that demand has increased a lot, up by around 10% to 20% on a year-over-year basis. After the Chinese New Year, we have seen the trend declining, but the overall trend is still positive. We think that the demand is still growing, and it is mostly due to a compensatory recovery. Going forward, we believe that this trend will continue to grow. As for the asset quality trend, actually similar to the demand trend, both had some fluctuations. During the reopening period, early indicators such as day 1 delinquency increased rapidly, but it has fallen back to 5.3% right now. We have also seen the day 1 to 30 collection recovery rate having some fluctuations as well, but right now, it expects 91%. We have also seen some vintage delinquency remaining stable at 2.3%. Our existing loan books for those loans disbursed during the COVID reopening period have been optimized by 10%. The current loans disbursed is now below 2.2%.

Operator, Operator

Your next question comes from Yada Li from CICC.

Yada Li, Analyst

Hello, management, this is Yada from CICC. My first question today is, from the perspective of the choice of lending model, what is the trend of capital-light and capital-heavy in the future? And would there be any plans to inject capital into the small loan license? My second question is, during the COVID pandemic, the growth of our SME segment actually slowed down due to the macroeconomic impact. And I was wondering about the positioning of the SME business in our overall strategy in 2023 and 2024, and what is the proportion in the future?

Jimmy Tan, Head of Investor Relations

Let me translate for Mr. Xu. Your first question is about the comparison between capital-light and capital-heavy models. For the full year, our capital-light model accounted for 16%, and we have made significant progress. We now have 17 funding partners collaborating with us under this business model. This demonstrates our ability to operate effectively within the capital-light framework and the confidence our funding partners have in our credit risk assessment methods. We will continue to observe the regulators' stance on the capital-light model. At present, both capital-heavy and capital-light models are seen as acceptable by them. We will also take into account the preferences of our funding partners. Let me address this question as well. We are focusing on individuals who possess business certificates or licenses. The loans we provide are intended for their everyday needs. Throughout the pandemic, we observed an increase in demand for loans aimed at small business owners. Data collected during the pandemic indicates that the delinquency rate for these loans was approximately 10% higher than that of our consumption loans. With the pandemic reopening, conditions have returned to normal, and as COVID policies gradually ease, we anticipate that risks in this segment will stabilize and improve compared to our consumption loans. Looking ahead to 2023, we expect our focus on this segment to comprise between 20% and 30% of our total loan volume.

Operator, Operator

Your next question comes from Thomas Chong from Jefferies.

Thomas Chong, Analyst

My question is about our international business. Given the progress that we are making in Indonesia and the Philippines, which other countries should we expect will we further explore opportunities in the future? And another question is on the spending in overseas business. How much more spending should we expect for this year? And would that affect the bottom line?

Jimmy Tan, Head of Investor Relations

Hello, Thomas, let me do the translation for Mr. Xu. We are actually expanding very fast in the international markets, as you can see. In Indonesia, we have actually completed the transition to better-quality borrowers, and this is actually much faster than our expectation. After the transition completion, our growth has resumed above 20% quarter-over-quarter since the third quarter, and our outstanding loan balance has grown to RMB 800 million by the end of December, growing 167% year-over-year. This has led to a larger revenue contribution. For example, it has contributed 13% of total revenue in the fourth quarter, and for the full year of 2022, it contributed more than 10%. Apart from Indonesia, we are also focusing our efforts in the Philippines, which is also growing rapidly, and we believe we will continue to contribute more to our revenue and other operational metrics. In the meantime, we will continue to evaluate most of these countries, and we believe we can duplicate our successful Indonesia business model into more countries. International expansion is a long-term strategy for our company. We began our investment in Indonesia 5 to 6 years ago, and you can see that all of these international investments are starting to bear fruit. We will not sacrifice our short-term earnings for short-term gains but will also look for longer-term investments. We will constantly keep a balance between our investment and our earnings on a longer-term basis.

Operator, Operator

Thank you. If there are no further questions, now I would like to turn the call back over to the management team for closing remarks.

Jimmy Tan, Head of Investor Relations

Thank you all for joining our Q4 and 2022 earnings conference call. If you have any further questions, please feel free to reach out to the IR team at FinVolution. Thank you very much.

Operator, Operator

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