Earnings Call Transcript - FINV Q2 2023

Jimmy Tan, Head of Investor Relations

Hello, everyone, and welcome to our second 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 email 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'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'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.

Tiezheng Li, CEO

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. Since our expansion into the Indonesian market back in 2018, we have continued to execute our local focus, global outlook strategy in the Pan-Asian region with unwavering determination. To date, we have cumulatively served our 28 million borrowers in China, Indonesia and the Philippines. By integrating our local business focus with an international perspective, we are able to leverage our expertise and insights derived from diverse markets to drive growth and foster innovation within our organization. We expect this strategy to produce further benefits as we expand into additional countries and strengthen our presence in our existing markets. As China transitions into the post-COVID era, our recent July macroeconomic data continue to be challenging, with pockets of improvement in certain areas. However, macroeconomic data from the Asian markets in which we operate currently paints a more positive picture, reflecting growth across different operational metrics. Given these circumstances, we are adopting a strategy of progressive growth in the China market while pursuing rapid growth in the international market. While we await the domestic macro environment recovery from the current challenges, we have been continuously investing in R&D. We have substantially enhanced our technology, enabling us to streamline our processes, upgrade our customer experience and achieve improvements across the various markets in which we operate. We are pleased to share that FinVolution's total transaction volume in the second quarter increased to RMB 47.3 billion, while our outstanding loan balance reached RMB 63.7 billion, up 14% and 13%, respectively, year-over-year. This growth validates our company's ability to efficiently adapt to the challenging economic landscape. We are continuing to meet the needs of our customers across our markets in the Pan-Asian region. Technological innovation continues to be the core of our mission and the primary source of our competitive advantage. In July, we hosted the Eighth FinVolution Technological Competition. Our annual event showcases and cultivates technological talent and creativity. This year's event focused on the development of automatic speech recognition, ASR, to improve the technology's growth in the Chinese language, aiming to increase chatbots' efficiency and accuracy when communicating with customers from different regions. Our commitment to innovation was recently recognized at the 2023 World Artificial Intelligence Conference, whereas the paper on Unifying Random Dropping for Graph Neural Networks was nominated for the outstanding thesis award. Our investment in AI and machine learning began years ago, spanning across different product categories such as self-help services, chatbots, data analytics and credit risk assessment. Over the past several years we have been training our model utilizing billions of dollars of transaction data, steadily increasing their accuracy. We currently employ a fully automated loan approval process with all of our funding partners, and our automated chatbot resolves about 80% of customer inquiries on average. We consistently embrace new technologies and deploy them into our daily operations to deliver a more personalized and tailored experience for our users. Along with the use of chatbots in customer service and to address early-stage delinquencies in the loan collection process, we have also upgraded and streamlined the user experience by automating self-help functions and providing instant responses for our users. In addition, we have incorporated AITC into our advertisements for our overseas business, increased our campaign audience targeting accuracy and achieved greater visibility on leading social media platforms such as Facebook, Instagram and TikTok. As a result, during the month of July, our followers on TikTok rose to around 700,000, while followers on Facebook and Instagram reached 967,000 and 220,000, respectively. Furthermore, we strove to advance our commitment to promoting financial inclusion during the quarter. Aligning our ESG efforts with our business goals through better borrowing rates, we further optimized our average borrowing rate in China to 22.3%, ensuring our services are accessible and affordable for our borrowers. On a related note, I would like to share some updates on our ESG progress. We recently released our 2022 ESG Report, the fifth in our company's history, demonstrating our dedication to transparency and sustainability. Responsible ESG reporting allows us to showcase our strong governance practices and our actions addressing the environmental and social issues affecting our industry. We are also empowering ourselves to design effective future initiatives. For instance, since the launch of our entry-free loan for eligible small business owners in China, we have cumulatively supported over 11,000 small business owners in pursuit of their dreams. Our subsidiaries in the Indonesian and Philippine markets are also proactively engaging in ESG efforts, such as conducting cost management workshops to educate borrowers and launching a large-scale integrated tree planting project to improve people's livelihoods in their local communities, along with other activities. We firmly believe that aligning our ESG and business goals will ultimately create long-term value for our stakeholders while achieving a positive societal impact. Before we move on to additional operational and financial metrics with our CFO, I'd like to share that FinVolution celebrated its 16th anniversary during the second quarter, a milestone that affords us a glimpse of our future outlook as an enterprise with sustainable growth. As we have grown and built the business throughout the years, we have accumulated a suite of technologies, skill sets and capabilities that enable us to navigate and succeed in all the markets in which we operate. We will remain committed to our vision of leveraging innovative technology to make financial services better, propelling FinVolution's long-term sustainable growth along the way. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results for the year.

Jiayuan Xu, CFO

Thank you, Li, and hello, everyone. Welcome to our second 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 environment continued to be challenging with pockets of improvements in certain areas. The official manufacturing Purchasing Managers' Index came in at 49.3 points in July compared to 49 points in June, and 48.8 points in May, according to data released by the National Bureau of Statistics on July 31, 2023. Meanwhile, total social financing data in July increased by just RMB 528 billion, below market expectations. Total retail consumption in July only increased by 2.5% compared with the same period last year. However, despite the challenging macro environment, we are encouraged by the strong operational and financial results we delivered in the second quarter of 2023. Driven by our stable and better quality borrower base, we achieved solid operational metrics in the second quarter in the China market. Cumulatively, we have served over 24 million borrowers in China, with the number of unique borrowers at around 2.3 million, up 5% sequentially. Additionally, our transaction volume in China reached RMB 45.5 billion, while our outstanding loan balance reached RMB 62.6 billion as of June 30, 2023, both up 12% on a year-over-year basis. Bolstered by our prudent approach to risk management with proven fraud detection technologies, we have maintained a stable risk level. In the second quarter of 2023, our day 1 delinquency rate was around 5.6%, and the vintage delinquency rate is expected to be around 2.3% for the quarter. Finally, thanks to our loan collection team's impressive efforts, our loan collection recovery rate maintained stability at around 90%. As we continue to fine-tune our strategy of serving bad quality borrowers, our proportion of category A and B borrowers in the China market further expanded to 80% of our total borrowers in the second quarter compared to 74% in the same period last year. Furthermore, our transaction to bad quality borrowers helped us to further optimize our funding costs during the quarter. We have also expanded our number of cumulative funding partners to 82 financial institutions and our pipeline of potential partners remains robust. All these operational improvements enable us to maintain a healthy take rate of around 3.1% during the second quarter. As a company deeply committed to social responsibility, we continue to support small business owners during this challenging period. We have also noticed that our Small Business Owners segment has been recovering at a healthy pace. Most of the borrowers from this segment focus on wholesale, retail, food, and beverage industries. During the quarter, we served around 459,000 small business owners and facilitated RMB 11.5 billion of loans for them, representing an increase of around 11% compared to the same period last year and up 12% sequentially. Now I'd like to share some additional details on our international expansion efforts. Indonesia, our largest overseas market, recorded continued growth in its macro economy during the second quarter. Notably, on a monthly basis, the manufacturing PMI grew by 2.2 points to 52.5 points, and the business confidence index reached 99%. The Indonesian economy continued to remain robust in the second quarter and has maintained growth of 5% over the past several quarters. Going forward, the Indonesian economy is expected to maintain growth of around 5% in 2023. We anticipate that its domestic consumption will remain robust. We are excited about the progress we have made 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 demonstrate significant growth in these countries. With the number of unique borrowers served during this quarter reaching a new high at 786,000, up 22% from the same period last year. International transaction volumes soared by 100% year-over-year during the second quarter, reaching RMB 1.8 billion, while we set a new record in our outstanding loan balance at RMB 1.1 billion, up 131% year-over-year. Our operations in the Philippines have also exhibited stronger-than-expected growth across numerous operating metrics. On a year-over-year basis, the number of unique borrowers, transaction volume, and outstanding loan balance all grew by several times compared with the same period last year. Alongside these impressive operational metrics, international revenue maintained its robust growth trajectory, reaching RMB 503 million, an increase of 112% year-over-year, and contributed around 16% of total revenue in the second quarter. We have consistently strengthened our relationships with both local traditional financial institutions such as Bank Permata and OCBC Bank, as well as innovative Internet banks such as Bank Jago and SeaBank. Thanks to these flourishing partnerships and our partners' validation of our technologies and operational capabilities, our percentage of loans facilitated by these institutions reached 65% compared to 39% in the same period last year. Going forward, we will further deepen our relationships with these institutions to increase our proportion of facilitation by local institutions and expand our network of local partners in the region. Driven by our ongoing investments in technology and our strategy shift towards serving bad quality borrowers, our net revenues for the second quarter rose to RMB 3.1 billion, up 15% year-over-year. Net income for the second quarter reached RMB 590 million, up 1% year-over-year. Our leverage ratio, which is defined as risk-bearing loans divided by shareholders' equity, remained stable at 4.3x. In recent times of uncertainty, our strong balance sheet and liquidity position continue to provide confidence to all our stakeholders and support business growth in all our markets. In particular, our cash position remains robust, with over RMB 8.2 billion of cash and short-term liquidity as of the end of June 2023, representing an increase of 58% year-over-year and 6% quarter-over-quarter. We also remain committed to optimizing shareholder value through our annual dividend policy and share repurchase policy. We believe the current macro environment offers an attractive opportunity to return value to shareholders. As such, during the first half of the year, we deployed around USD 46 million to repurchase our stock from the secondary market. As of June 30, 2023, we have cumulatively returned USD 491 million to our shareholders through our dividend and stock repurchase programs. Our Board of Directors has also approved a new share repurchase program of USD 150 million, reflecting our strong commitment to enhancing shareholder value. On a related note, our Chairman, CEO and other senior management have also expressed their confidence in the company through personal share repurchases totaling around 630,000 ADS in the first half of 2023. Given favorable macroeconomic conditions in our international markets and the progress we have made across numerous operational metrics for our international business, the company has increased its international transaction volume guidance for the full year of 2023 to RMB 7.7 billion, representing year-over-year growth of around 80%. Taking the current China macro environment into consideration, the company's 2023 guidance for its China market remains unchanged at between RMB 189 billion to RMB 205 billion, representing year-over-year growth of between 10% to 20%. Before I conclude my remarks, let me provide some additional insight into our outlook for the third quarter of 2023. Despite some uncertainties in the macro environment, our business trajectory remains solid. We expect our transaction volume in China for the third quarter of 2023 to be around RMB 49 billion, representing an increase of around 10.4% year-over-year. We expect our transaction volume in international markets for the third quarter to be around RMB 1.9 billion, representing an increase of around 73% year-over-year. In summary, our outstanding performance in the second quarter of 2023 underscores our dynamic business model, technological know-how, and our dedication to advancing our international initiatives. Entering into the second half of 2023, we remain focused on refining our risk assessment and management framework, expanding our healthy customer base, and optimizing our product mix. Looking ahead, we believe that we are well positioned to capitalize on the massive opportunities in both China and international markets, driving growth while creating greater value for our customers, shareholders and all of our stakeholders. With that, I will conclude my prepared remarks. We will now open the call to questions.

Operator, Operator

Our first question will come from Yada Li of CICC.

Yada Li, Analyst

I'll then now do my translation. This is Yada with CICC. And my first question today is about the asset quality trend. Considering the current macroeconomic conditions, what is the latest trend of leading indicators like day 1 vintage delinquency in July and August, and what can we expect going forward and how to affect our provision strategies? And my second question is related to the international business. And could you please give us more color on the updates such as the progress of business expansion in new countries, business model and long-term strategic focus?

Jiayuan Xu, CFO

The discussion today is focused on the trend of asset quality. In light of the current macroeconomic conditions, what is the latest trend regarding key indicators like the day 1 vintage delinquency in July and August, and what can we anticipate moving forward, particularly in terms of our provision strategies? Additionally, I would like to ask about the international business. Could you provide more details on updates, including the progress of business expansion in new countries, the business model, and our long-term strategic focus?

Jimmy Tan, Head of Investor Relations

This is Jimmy. Let me do the translation for Alexis. Your first question is related to our risk assessment performance. As mentioned, our vintage delinquency performance is around 2.3% and it has always been around at 2.3% levels over the past few years, and our 30-day loan collection recovery rate is around 90%. And over the last few quarters, this metric has been relatively stable. Our vertical delinquencies are at 1.68%, which is also at a low level. From observation, the current macro environment is relatively weak with recovery below expectation. The credit market is doing okay, and we expect that it is going to maintain stability going forward, with risk performance staying stable as well. We have been through multiple credit cycles, including the COVID-19 pandemic and the lockdowns, and we have proved that throughout all these cycles we have successfully navigated them and succeeded after all these cycles.

Jiayuan Xu, CFO

The current macro environment is relatively weak with recovery below expectation. The credit market is doing okay, and we expect it to maintain stability going forward, with risk performance staying stable as well. We have been through multiple credit cycles, including the COVID-19 pandemic and the lockdowns, and we have proved that we have successfully navigated and succeeded through all these cycles.

Jimmy Tan, Head of Investor Relations

Let me do the translation for Alexis. As you know, we are already in leading positions in the Indonesian and Philippine markets. Apart from these two countries, we are also looking at opportunities in other Southeast Asian countries, as well as high-growth opportunities in regions such as Africa and Latin America. Our business model is not only restricted to online lending; we are also looking at opportunities for offline consumption scenarios, specifically in Indonesia where the population is young, and we are working with leading mobile phone brands in the Indonesian market to target these borrowers for offline mobile consumption.

Jiayuan Xu, CFO

Okay, Yada, do you have any further questions?

Tiezheng Li, CEO

Our business model is not only focused on online lending; we are also exploring opportunities for offline consumption, particularly in Indonesia where the population is young. We are collaborating with prominent mobile phone brands in the Indonesian market to reach these borrowers for offline mobile consumption. Do you have any further questions?

Jimmy Tan, Head of Investor Relations

Let me translate for Mr. Tiezheng. As you know, FinVolution was established 16 years ago, and we are very experienced in different business models such as online and offline lending and have very good working relationships with different partners. Some of the business models might not work in the China market, but these experiences are very useful for us as we penetrate into other countries. We are also not the earliest company to venture into overseas markets, but we are in leading positions in Indonesia and the Philippines because of our tech capabilities, operational capabilities, and a huge base of talent pools. With these advantages, we are able to leverage the capabilities in our overseas markets. We are confident and expect further success in all these international markets.

Operator, Operator

Our next question will come from Frank Zheng of Credit Suisse.

Frank Zheng, Analyst

The first one is a follow-up on the international market. From a medium-term perspective, for example, in one year’s time, how would you foresee the profitability of international market operations? The second question is on the domestic market. Do we have plans to further tap into prime customers with APR less than 18% in order to further expand the volume as well as improve the risk performance?

Jiayuan Xu, CFO

Our next question will come from Frank Zheng of Credit Suisse. The first one is a follow-up on the international market. From a medium-term perspective, for example, in one year’s time, how would you foresee the profitability of international market operations? The second question is on the domestic market. Do we have plans to further tap into prime customers with APR less than 18% in order to further expand the volume as well as improve the risk performance?

Jimmy Tan, Head of Investor Relations

Let me do the translation for Alexis. In the midterm, regarding our international market profitability, our international business is already profitable in the second quarter, but it is relatively small compared to the China market. There are several reasons for this. Number one, it is affected by the rapid growth of our international business as we need to invest continuously. For example, our percentage of new borrowers in the Indonesian market is around 37%. It has also been affected by the deferred revenue because all of these loans are conducted as installment loans.

Jiayuan Xu, CFO

Our international business became profitable in the second quarter, although it remains relatively small compared to the China market. This is due to several factors. First, we are experiencing rapid growth in our international business, which requires ongoing investments. For instance, approximately 37% of our new borrowers are in the Indonesian market. Additionally, deferred revenue impacts our profitability because these loans are structured as installment loans.

Jimmy Tan, Head of Investor Relations

Let me translate for Alexis for this question. In the second quarter, we further optimized our pricing to 22.3% from 22.7% in the first quarter. As you have seen, we are continually trying to explore acquiring better quality borrowers. Through our historical experience, lower pricing has helped us to attract better quality borrowers, and better quality borrowers will have a higher level of stickiness on our platform. Our ROE is also higher compared to the industry average, at about 3.7% in the second quarter. We have also optimized our funding cost structure by around 30 bps in the second quarter, and going forward, we will consider a balance between pricing and our ROE.

Operator, Operator

The next question will come from Alex Ye of UBS.

Alex Ye, Analyst

So my question is on the shareholders' return. So we are happy to see management announced a USD 150 million share buyback plan, which showcases management's focus on improving shareholder value. So if we look back at your track record on this buyback, how should we consider your pace on deploying such capital going forward? Should we consider the $150 million quota to be deployed over your authorization period? And also, is there any target payout ratio if we take into account both your dividend and buyback?

Jiayuan Xu, CFO

We are pleased to see management announce a $150 million share buyback plan, which demonstrates a commitment to enhancing shareholder value. Considering your history with buybacks, how should we interpret your strategy for utilizing this capital in the future? Will the $150 million be distributed throughout the entire authorization period? Additionally, is there a target payout ratio when factoring in both dividends and buybacks?

Jimmy Tan, Head of Investor Relations

Hello, Alex. Let me do the translation. Our share repurchase and buyback programs began in 2018, and we already have a few years of track record. We have returned about USD 260 million in the form of dividends to our shareholders and USD 230 million for share repurchases, totaling about USD 500 million returned to our shareholders. The payout ratio, if you calculate it, is around 30% to 40%. In terms of absolute amount, we are ahead of our peers. In the first half of 2023, our buyback amount is close to USD 50 million, and the payout ratio for our annual dividend was 18.5%. So the payout ratio for 2023 is likely to be higher than our average historical years. As long as the market conditions allow and are favorable, we will continue to return value to our shareholders as validated by our past historical performance.

Operator, Operator

And our next question will come from Thomas Chong of Jefferies.

Thomas Chong, Analyst

My question is about the competitive landscape in overseas markets. Can management share your thoughts about the future outlook? Additionally, on marketing spending, given we talked about Facebook as one of our channels, can you comment about the customer acquisition cost in overseas versus the domestic market?

Jiayuan Xu, CFO

Jimmy Tan, Head of Investor Relations

Hello, Thomas. Let me do the translation. As you know, our operations are mainly in the Indonesian and Philippine markets, and the macro environment in these countries is relatively positive. For example, in Indonesia, the GDP growth has been over 5% for the last 7 quarters, and in 2023, the GDP growth is expected to maintain around 5%. The Philippines market is slightly slower compared to Indonesia but still growing at around 4.3%. We are able to maintain our leading status positions in these countries because we have deployed our technology and operational capabilities into these regions. Our number of unique borrowers has also reached a new high at 786,000, and we are constantly among the top three players. These huge markets are at early stages for us, so we will continue to invest and maintain leading positions in these countries as supported by our technologies and operational capabilities. Our efforts have also been recognized by local financial institutions; for example, this is validated by the increase in the proportion of loans funded by local partners from 65% in the second quarter compared to only 39% in the same period last year. For sales and marketing, the amount we spent is around RMB 80 million invested into sales and marketing in the second quarter. Apart from Facebook, we are also investing in TikTok. We believe these channels will be good for acquiring new borrowers moving forward.

Jiayuan Xu, CFO

Do you have any other questions?

Thomas Chong, Analyst

Thanks, management, for taking my second question. My question is about AI. In the prepared remarks, we talked about our investment in AI for many years and applying AI in different scenarios. Given that LLM is such a hot topic in the Internet sector these days, and people are discussing LLM or industry LLM, I just want to get some thoughts from management regarding this area, whether we are thinking of developing our own LLM or seeking partnerships with top players.

Tiezheng Li, CEO

Jimmy Tan, Head of Investor Relations

Hello, Thomas. Let me do the translation for Mr. Tiezheng. Honestly, the generative data model is not suitable for a company of our size as it needs to be at a country level where huge resources are required for development. Our focus is on the implementation of AI models into our operations to increase efficiency. We will also be looking at specific opportunities that are suitable for us for deployment into our business and consider working with other partners to enhance our efficiency.

Operator, Operator

And the next question will come from Cindy Wang of China Renaissance.

Cindy Wang, Analyst

This is Cindy from China Renaissance. So I have two questions. The first question is related to overseas institutional funding. So we've seen the institutional funding testing going up pretty quickly. So in the midterm, what percentage contribution will be from the institutional funding? The second question is related to provisions. We see the asset quality has been improving in the second quarter; however, the provision compared to the first quarter has been slightly up. Can we talk about the difference here and whether we have any write-backs in the second quarter? How do we foresee the provision in the second half of this year?

Jiayuan Xu, CFO

Given the recent increase in institutional funding, what percentage contribution do we expect from institutional funding in the midterm? Additionally, while we have noticed an improvement in asset quality in the second quarter, the provision has risen slightly compared to the first quarter. Can we discuss the reasons for this difference and whether we anticipate any write-backs in the second quarter? How do we project provisions for the second half of this year?

Jimmy Tan, Head of Investor Relations

Let me do the translation. As mentioned, we have around 65% of funds, or 65% of the loans in Q2, funded by local Indonesian partners, and we expect this amount to be around 80% by the end of the year. Going forward, we see opportunity to further increase this proportion. However, our next focus will be on optimizing our funding cost for the international markets. Regarding provisions, we need to divide them into domestic and international provisions. The main reason is our international business is growing at a rapid rate. In the first quarter, there was a write-back. As you take a look at the domestic China recovery, the recovery is still weak and slightly below expectations. We currently do not have plans to write back, but this will change when the economy recovers at a faster pace. We believe there will be opportunities for write-backs going forward.

Operator, Operator

At this time, I would like to turn the call back over to the Company for closing remarks.

Jimmy Tan, Head of Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact me or my Investor Relations team. Thank you so much.

Operator, Operator

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