Earnings Call Transcript - FINV Q2 2021

Operator, Operator

Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2021 Earnings Conference Call for FinVolution Group. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead.

Jimmy Tan, Head of Investor Relations

Hello, everyone, and welcome to our second 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 presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company's filings with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Finally, we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Feng Zhang, CEO

Thanks, Jimmy. Hello, everyone, and thank you so much for joining us today. We continue to provide value for both users and institutional partners in different aspects. Leveraging our cutting-edge technology, we have been providing value for users across multiple segments such as consumer finance, small business owners and different types of financial institutions. Through our platform, users are able to enjoy the convenience of finance at their fingertips, accessing credit lines in a timely and efficient manner. On the other hand, our institutional partners are able to access and evaluate quality borrowers with efficiency. Along with the value created, we're thrilled to be reporting another set of record-breaking operational and financial results in the second quarter as we harness our technological capabilities effectively to acquire new and better quality borrowers and constantly increase our acquisition channels. Our total number of new borrowers acquired globally once again crossed the 1 million mark to a new record high of 1.18 million, an increase of over 500% year-over-year and 18% quarter-over-quarter. More specifically, the number of new borrowers acquired in China reached 812,000, representing an increase of over 380% year-over-year and 31% sequentially. The number of new borrowers acquired in the international markets reached 371,000, approximately a 13-fold increase compared to the same quarter last year. Another clear indication that we are resuming high-quality growth is that our total transaction volume for the quarter reached a new record high to RMB 33.4 billion, a 153% jump year-over-year and a sequential increase of 25%. Specifically, transaction volume in China climbed 148% year-over-year and 25% quarter-over-quarter to RMB 32.5 billion, while transaction volume for international markets grew exponentially by 1,780% year-over-year and 23% sequentially to RMB 940 million. Simultaneously, our outstanding loan balance further expanded to RMB 39.4 billion, representing year-over-year growth of 87% and a 21% sequential increase. In order to better support the healthy growth of our facilitation operation, we have been making consistent investments in acquiring new better quality borrowers through an array of online and offline channels. We have diversified our online channels and have also established an offline team of over 600 employees, covering around 80% of China's provinces. In the second quarter, our offline channels contributed to around 10% of total new transaction volume. Offline acquisition is not only an alternative channel, but also validates our technologies can be seamlessly integrated in different scenarios to enhance efficiency. Going forward, we intend to expand the offline team to be on 1,000 employees in a year or so. Since 2020, we made our services available to small business owners in China, aiming to capitalize on the significant opportunity presented by this group's underserved needs for operational funds. In the second quarter, growth momentum for our small business owner segment remained robust, with transaction volume increasing 41% sequentially to RMB 6.2 billion. Notably, the total number of small business owners served in the quarter exceeded 408,000 compared to just 220,000 in total for the full-year 2020. We believe serving the needs of small business owners is in line with national policies and plays a part in meeting the needs of these segments of society. Going forward, we will maintain our strategic focus on serving this segment and expect this portion of our business to account for around 20% of total transaction volume in the second half of 2021. In line with regulatory directives, we actively continue to lower borrowing rates in the second quarter to 26.2% for our borrowers. And more recently, in August, the rate was further reduced to 25.4%. We're also pleased to share that this recent percentage of transaction volume with borrowing rates at or below 24% has risen to around 60%. We plan to continue acquiring better quality borrowers, expanding new funding sources across regions and enhancing operational efficiency to provide more attractive rates and terms for our borrowers, while maintaining a healthy take rate and operating margin. On the international front, with our state-of-the-art technologies and swift execution, we have continued delivering strong performances. In particular, we successfully launched a pilot testing operation in Vietnam, which demonstrates encouraging growth prospects. More excitingly, this marks the fourth country in our global roadmap in addition to our international presence: Indonesia, the Philippines, and Singapore. We're very pleased with the accelerating pace in broadening our global footprint and thrilled that our recent entry in Vietnam is already demonstrating great potential with positive user feedback. We attribute our success in building out our first-mover advantage in emerging markets to our fundamental capabilities, talented and efficient team with global perspective, proprietary technologies, operational expertise, and deep-rooted corporate value. Our technologies support us in successfully navigating our business transition in China and also play a crucial role in our expansion across different international markets. We're confident in our global roadmap and remain firmly committed to our mission to make financial services more accessible and inclusive for borrowers around the world. Going forward, we will continue to advance our technological capabilities and solidify our operations in these countries while working with our local partners to explore new opportunities that will enable us to diversify our business models. Leveraging our technologies, operational expertise, and in-depth understanding of our institutional partners, we are able to provide diversified products and solutions for them in multiple scenarios. In particular, through cooperation with eight different institutional partners, we increased the portion of the capital-light model on our platform from 2.3% in the previous quarter to 13% in this quarter. All these achievements are further testament to the solid trust and confidence that our founding partners have in FinVolution as we remain committed to building credibility and a strong corporate reputation amid ever-evolving market dynamics. Supported by our enhanced credit management model built on targeting higher-quality borrowers, our delinquencies have shown further improvements across multiple risk metrics. For example, our day one delinquency rate remained stable at 5.4% in August compared with 7.5% in the same period last year. We expect vintage delinquency rates to continue improving to a level below 2.3% in the second quarter, while our 90-day-plus delinquency ratio reached a historical low of 1.01% from 7.13% in the same period last year. Our loan collection recovery rate also stabilized at around 91%. As we look ahead, our primary objectives for 2021 and beyond are to continue pursuing high-quality growth in China, leveraging technologies to strengthen our first-mover advantage in international markets and diversify our business models, continue empowering financial institutions through business-as-a-service solutions, and empower a variety of businesses globally through our digitization capabilities to create long-term value for our stakeholders. During the past several years, we have encountered and overcome many difficult challenges, such as executing the P2P business, shifting our funding sources, and moving towards better quality borrowers and many more. We have the technological know-how, capabilities, and resources to deliver better results and achievements in this rapidly evolving environment. Our dynamic business model and operating stress, coupled with our strategic investments in multiple sectors, will drive our success with sustainable growth and sustainable return for all our stakeholders in their own town. Last, but not least, I would also like to report our progress on corporate social responsibilities. During the past several years, we have consistently fulfilled our duties as a responsible corporate citizen. For example, during the recent flood in Hunan, we donated RMB 10 million as post-disaster aid and activated our local employees to distribute food supplies for those in need. Together with our institutional partners, a low-interest loan program for small business owners has also been introduced. Our third annual ESG report was also published recently. And for those who are interested in having more information, do visit our website for a copy. In summary, leveraging our technologies and digitalization capabilities to create long-term value for our stakeholders, we are confident in our ability to maintain our position as the leading fintech platform in China while capturing tremendous growth opportunities ahead globally. With that, I will now turn the call over to Jiayuan Xu, who will discuss our financial results for the quarter.

Jiayuan Xu, CFO

With continued improvement across multiple operational metrics in the second quarter, we delivered our non-GAAP operating income of RMB 726 million, an increase of 26% year-over-year and a sequential increase of 8%, further validating the viability of our business model. Our robust balance sheet with RMB 4.9 billion in unrestricted cash and short-term investments, coupled with our strong technology capabilities, positions us well to explore opportunities both in domestic and international markets. Now, turning to the financial results for the second quarter. In the interest of time, I will not walk through each item line by line on this call. Please refer to our earnings release for more details. Net revenue increased by 32% to RMB 2.4 billion for the second quarter of 2021 from RMB 1.8 billion in the same period of 2020, primarily due to an increase in transaction volume and partially offset by the decrease in guarantee income as a result of improved asset quality. Loan facilitation services fees increased by 135% to RMB 952 million for the second quarter of 2021 from RMB 405 million in the same period of 2020, primarily due to the increase in transaction volume, which was partially offset by the decrease in the average rate of transaction fee. Post-facilitation service fees increased by 96% to RMB 300 million for the second quarter of 2021 from RMB 153 million in the same period of 2020, primarily due to the increase in outstanding loans serviced by the company and the low impact of deferred transaction fees. Guarantee income was RMB 666 million for the second quarter of 2021 compared to RMB 821 million in the same period of 2020 as a result of improved asset quality. Net interest income decreased by 7% to RMB 309 million for the second quarter of 2021 from RMB 333 million in the same period of 2020, mainly due to the reduction in the outstanding loan balance of consolidated trusts, partially offset by the higher transaction volume in the international markets. Other revenue increased by 61% to RMB 158 million for the second quarter of 2021 from RMB 98 million in the same period of 2020, mainly due to increased customer referral fees to other third-party platforms. Non-GAAP adjusted operating income, which excludes share-based compensation expenses before tax, was RMB 726 million for the second quarter of 2021, representing an increase of 26% from RMB 576 million in the same period of 2020. Net profit was RMB 620 million for the second quarter of 2021, representing an increase of 37% compared to RMB 454 million in the same period of 2020. We have a well-capitalized balance sheet, and our leverage ratio remains low. The leverage ratio across our business was only 3.8 times. Our strong liquidity position, consisting of RMB 4.9 billion of cash and short-term investments as of the end of June 2021, positions us well in the evolving environment and gives us significant flexibility. With the COVID-19 recent resurgence in China and other regions around the world, the company will continue to closely monitor the situation of the pandemic and remain vigilant in its business operations. As such, the company holds a cautious view of its operations and anticipates steady growth in its transaction volume for the third quarter of 2021, which is expected to be in the range of RMB 35 billion to RMB 37 billion. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Thomas Chong with Jeffries. Please go ahead.

Thomas Chong, Analyst

Hi, management. Thanks for taking my question. Congratulations on the strong results. So first, I have two questions here. So first, could you please share some updates about the regulatory environment? And how much of our loans already have an APR below 24%? And how should we think about the trend in APR going forward? And my second question is, what about our outlook on loan origination volume in the second half and 2022? Thank you.

Jiayuan Xu, CFO

Okay. Let me translate for Mr. Xu. From what we understand, the 24% APR cap is a guideline from the CBIRC for consumer finance companies, but its implementation varies across the country with different timelines for different institutions. For instance, some have set that all loans above 24% must be reduced to zero by the end of next June, while others state that new loans above 24% can't be initiated by then. This aligns with our expectations, and we have proactively lowered interest rates for our borrowers. In our earlier call, our CEO, Mr. Feng Zhang, noted that our borrowing rate was 26.2% in the first quarter, decreased to 26.8% in the second quarter, and was further reduced to 25.4% in August. Additionally, loans facilitated at or below 24% reached 60% in August. We have been preparing to move our loans under 24%, and based on our stress test assumptions, we anticipate an impact of about 0.5% to 1%. Our take rate is expected to fall to around 3.5% from the current 4.4% once the cap is fully implemented. Please note, this is based on static assumptions. We are confident in our ability to improve our funding costs, delinquency rates, and operational efficiency, which should enhance our take rate moving forward. We believe there is a grace period, and based on these assumptions, we are very positive about meeting our full-year guidance set earlier this year and potentially exceeding the upper limit of our guidance, which is RMB 120 billion.

Operator, Operator

The next question comes from Alex Ye at UBS. Please proceed.

Alex Ye, Analyst

Hi, management. Thanks for taking my question. I have a few questions. First one on - also on the margin outlook, the impact from the price. So, after you have implemented a lower price recently in August, how has that affected your take rate so far? And what is the outlook for the next year? My second question is on your sales and marketing trends. So, I saw that it has continued to go up quite substantially and outpace your overall loan growth. I'm wondering if you could share more color on the driver behind your sales and marketing trend? And when could we sort of start to expect some sort of stabilized trend in terms of the sales and marketing as a percentage of your loan volume? And my third question is about your overseas market strategy. It's always quite encouraging to see further progress on that front, and it currently accounts for around 3% of your total loan volume. So, I'm wondering if you could share with us your targeted loan volume contribution from overseas markets over the next two to three years? Thanks.

Jiayuan Xu, CFO

Okay. This question pertains to the previous inquiry about interest rates being capped at 24%. Our current rate is approximately 4.4%. According to the static stress test, we anticipate that our take rate will decrease by 0.5% to 1%, bringing it down to around 3.5%. We still need to engage with our partners to establish the appropriate pace for this reduction. While challenges for the take rate lie ahead, I want to highlight that we have made significant strides in our ABS application, which we believe will help diversify our funding sources in the future. In the second quarter, our customer acquisition cost was approximately RMB 400. The CPS in China was about RMB 470 in the second quarter, compared to RMB 450 in the first quarter, while our CPS in the international market stood at around RMB 230 in the second quarter. Moving forward, we expect this trend to stabilize. In China, we project customer acquisition costs to range between RMB 400 and RMB 450, and for the international market, around RMB 200 and above. I would also like to provide an update on our various customer acquisition channels. For instance, our information feeds contribute approximately 60% to 70% of new customer acquisitions, app stores account for about 15%, and our offline customer acquisition team is making rapid progress, contributing roughly 10% of new customer acquisitions today. In the second quarter, our loan origination for international markets reached around RMB 940 million, reflecting about 24% growth quarter-on-quarter. Additionally, we have expanded operations into our fourth country, Vietnam. Although we have seen a resurgence of COVID-19 in Southeast Asia recently, we remain confident that we can achieve about four times growth compared to last year, which would amount to around RMB 4 billion in loan volume within the Southeast Asia market.

Feng Zhang, CEO

This is Feng. I would just add that the Southeast Asia market, in terms of total population size, is roughly half of Mainland China. However, in terms of GDP growth and the financial market, it is at an early stage. Our business is also at a much earlier stage compared to where we are in Mainland China. If we look at a three to five years horizon, we definitely expect our growth rates in Southeast Asian markets to be faster than the domestic market. It is hard to predict because it depends on how much growth we see in the domestic market, which does have uncertainties given the regulatory environment. Still, we hope that within three to five years, our international business can account for maybe in the range of 20% of our total transaction volume.

Operator, Operator

The next question is from Eric Lu with China Renaissance.

Eric Lu, Analyst

Congrats on a great performance in the second quarter. The first question is about overseas expansion. So, we know the company has expanded in four countries in Southeast Asia. Can you please provide more color about the business model in each country, for example, the funding source, asset quality, and product nature? And the second question is about the capitalized loan facilitation model. Can you please provide some color about the future plan of adopting a capital-light business model?

Jiayuan Xu, CFO

The unit economics for our international business differ significantly from our operations in China regarding pricing and risk performance. In the international market, the take rate is approximately 10% to 12%. We have reached the breakeven point for our international business. However, our main focus isn't on making a profit but on acquiring more customers to drive faster growth. Our CEO highlighted that we have made notable advancements in our capital-light model, increasing from 2.3% in the previous quarter to 13% this quarter, contributing around RMB 4.3 billion. During the quarter, we collaborated with eight different institutions under this model, and we have another six institutional partners ready to work with us on this model in our pipeline. When comparing the capital-light model to the capital-heavy model, there is an additional cost of 1%. For the remainder of the year, our emphasis on the capital-light model will be to improve the quality of cooperation, meaning we will continue to engage with more partners.

Operator, Operator

The next question is from Hans Fan with CLSA.

Hans Fan, Analyst

I have two questions. One is on regulation and the other one is on asset quality. Regarding regulation, I want to ask about the loan facilitation in terms of breaking up the link between the fintech platform and the bank. There was a regulation asking fintech platforms to pass data through the licensed credit scoring companies first, who can then pass data to banks. Based on this regulation, how do we plan to be compliant and what are the impacts on our business, especially on the take rates? What are the potential changes in the model? That's question one. Number two is on asset quality. We noticed that our asset quality trends have been very good, so I wonder, looking at the most recent two months, what trends do we see? Are we expecting continuous improvements in delinquency ratios?

Jiayuan Xu, CFO

The regulator's perspective on data collection focuses on minimum required standards. Our company has aligned its efforts accordingly. From past evaluations, we believe we have met these requirements. Our app has received security certifications from the China National Computer Virus Emergency Response Center. I want to emphasize that our core strength lies in data utilization rather than the volume of data collected. The regulation's minimum standards will not significantly impact us. We understand that disconnecting the link means all credit-related activities must be overseen by licensed regulatory bodies, which will necessitate partial processing through licensed institutions, with credit bureaus being one of those channels. Moving forward, we will enhance our collaboration with credit bureau agencies. Since 2018, we have been working with Baihang to develop products together. All credit-related activities will be supervised by licensed regulatory bodies, and we are considering the possibility of acquiring a stake in a credit bureau agency. In summary, we believe that indirect data transfer simply alters the process protocol. While it may incur some costs, they will not be substantial enough to affect our business outcomes or risk assessment results. As data management becomes increasingly standardized and transparent, we see an opportunity to secure higher quality data sources to boost our operational efficiency. Over the year, we have seen gradual improvements in asset quality, and we anticipate our vintage delinquency rates to be approximately 2.3% in the second quarter. Looking ahead, we are confident in maintaining our delinquency rates at this level. Additionally, reducing pricing will help improve our risk levels, as we have noticed during our P2P transition.

Operator, Operator

The next question comes from Henry Lin with Gold Dragon.

Unidentified Participant, Analyst

Congrats on the very strong results. Just two very quick questions to follow-up. The first one is, can you provide more color on the breakdown for your international business, like loan facilitation volume for different countries? The second question is, like I know that we just talked about the cap of your profitability under 24%. Do you have concrete guidance or rough earnings estimate on how much earnings downside/upside we will have next year when everything is under 24%?

Feng Zhang, CEO

This is Feng. Just quickly, in terms of the breakdown by country, our international market's country breakdown shows our Indonesia market accounts for about three quarters of our volume and profit. The Philippines and Vietnam together account for the rest. Vietnam is just starting, so it is at a very early stage. Now, in terms of the profit impact from the regulatory change regarding the pricing shift, we can do a quick math. As we mentioned, currently, our average APR is about 25.4%. The loans facilitated by us have an outstanding balance of about RMB 40 billion. If we do the math, RMB 40 billion times if we reduce to 24%, that's a drop of roughly 1.5%. So, that's about RMB 600 million pre-tax profit impact. In reality, we may maintain some of our volumes at a rate below 24%. So, the actual impact may be a little bit more than that. However, we believe the impact will be manageable for the short term. Based on all these aspects, we are optimistic about improving our funding costs in the marketplace and gaining better negotiation power with our funding partners. And lastly, as we increase our business volume, the fixed cost component—which is a significant portion of our total costs—will diminish as a smaller percentage of our total revenue.

Unidentified Participant, Analyst

Basically, under that math, it looks like we will still have a very material growth. Like if everything holds constant, we will still have material growth in earnings for 2022 from last year's level. But this year is still above 24%. So, next year versus last year, it will still show material growth.

Feng Zhang, CEO

We certainly hope so. However, I think people may have a different understanding of what material means. I do think that the 24% cap is going to have some impact in the short term in terms of profitability. However, the key message here is that we believe the impact is going to be manageable for the short term. If we look at the medium to long term, we anticipate it could be beneficial for both our industry and our company.

Unidentified Participant, Analyst

Just one very quick follow-up. On the international business, have we been considering the US as a potential area to enter? Given how strong Upstart has been doing both in business and share price in that market, are we under any future plans to enter that and share some insights?

Feng Zhang, CEO

We have been paying some attention. However, as of now, we do not have a concrete plan to enter the US market. I think we mostly are focusing on developing markets. One other thing, Upstart has a very high valuation, but it is still something we are trying to figure out. When looking at the medium to long term, we are pretty happy with our position in the mainland market and the developing world, particularly the Southeast Asian market. We believe it's big enough for us to explore for the years to come.

Operator, Operator

The next question comes from Harry Wu with China Securities.

Unidentified Participant, Analyst

Would there be any further changes to the regulatory policies on user privacy, particularly regarding user data collection, and how would the company respond to ensure that its business remains unaffected?

Jiayuan Xu, CFO

Last Friday, a paper was introduced concerning personal data protection and a consultation on cross-border data transfer. In terms of personal data protection, there have not been many alterations, as the emphasis remains on the minimum required standard. We have obtained the App Security Certification and the App Information Security Certification at Level 3 from the China National Computer Virus Emergency Response Center. Regarding cross-border data transfer, we have ensured that all information collected in China stays within the country, while data collected in international markets is kept in their respective locations. This regulation is still relatively new and evolving, and we will continue to monitor these developments closely.

Operator, Operator

As there are no further questions, now I would like to turn the conference back over to the company for any 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 our IR team. Have a nice day. Good night.

Operator, Operator

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